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EX-32 - EXHIBIT 32 - POTLATCHDELTIC CORPpch20150930ex32.htm
EX-31 - EXHIBIT 31 - POTLATCHDELTIC CORPpch20150930ex31.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________ 
Form 10-Q

(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2015
or 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from             to             
Commission File Number 1-32729
 

 POTLATCH CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
82-0156045
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
601 West First Avenue, Suite 1600
 
 
Spokane, Washington
 
99201
(Address of principal executive offices)
 
(Zip Code)
(509) 835-1500
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
 
Accelerated filer
o
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
The number of shares of common stock of the registrant outstanding as of October 26, 2015 was 40,677,586.
 




POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Table of Contents
 
 
 
 
Page  Number
PART I. - FINANCIAL INFORMATION
 
ITEM 1.
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
PART II. - OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 6.





Part I

ITEM 1. FINANCIAL STATEMENTS
 
Potlatch Corporation and Consolidated Subsidiaries
Consolidated Statements of Income
Unaudited (Dollars in thousands, except per share amounts)
 

 
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
  
 
 
2015
 
2014
 
2015
 
2014
Revenues
$
174,475

 
$
177,215

 
$
437,347

 
$
460,713

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
136,072

 
121,574

 
353,285

 
322,016

Selling, general and administrative expenses
10,689

 
10,772

 
35,010

 
32,794

 
146,761

 
132,346

 
388,295

 
354,810

Operating income
27,714

 
44,869

 
49,052

 
105,903

Interest expense, net
(8,335
)
 
(5,506
)
 
(24,420
)
 
(16,475
)
Income before income taxes
19,379

 
39,363

 
24,632

 
89,428

Income tax benefit (provision)
2,419

 
(6,209
)
 
3,533

 
(19,654
)
Net income
$
21,798

 
$
33,154

 
$
28,165

 
$
69,774

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.53

 
$
0.81

 
$
0.69

 
$
1.71

Diluted
$
0.53

 
$
0.81

 
$
0.69

 
$
1.71

Distributions per share
$
0.375

 
$
0.35

 
$
1.125

 
$
1.05

Weighted-average shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
40,846

 
40,745

 
40,831

 
40,733

Diluted
40,985

 
40,889

 
40,967

 
40,861

The accompanying notes are an integral part of these condensed consolidated financial statements.



2



 
Potlatch Corporation and Consolidated Subsidiaries
Consolidated Statements of Comprehensive Income
Unaudited (Dollars in thousands)
 

 
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
  
 
 
2015
 
2014
 
2015
 
2014
Net income
$
21,798

 
$
33,154

 
$
28,165

 
$
69,774

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Pension and other postretirement employee benefits:
 
 
 
 
 
 
 
Amortization of prior service credit included in net periodic cost, net of tax of $(850), $(867), $(2,547) and $(2,601)
(1,327
)
 
(1,357
)
 
(3,983
)
 
(4,069
)
Amortization of actuarial loss included in net periodic cost, net of tax of $2,009, $1,621, $5,846 and $4,866
3,139

 
2,538

 
9,142

 
7,612

Other comprehensive income, net of tax
1,812

 
1,181

 
5,159

 
3,543

Comprehensive income
$
23,610

 
$
34,335

 
$
33,324

 
$
73,317

Amortization of prior service credit and amortization of actuarial loss are included in the computation of net periodic cost (benefit). See Note 6: Pension and Other Postretirement Employee Benefits for additional information.
The accompanying notes are an integral part of these condensed consolidated financial statements.



3



 
Potlatch Corporation and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited (Dollars in thousands, except per share amounts)
 

 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
1,306

 
$
4,644

Short-term investments
40

 
26,368

Receivables, net
29,645

 
9,928

Inventories
40,379

 
31,490

Deferred tax assets, net
6,168

 
6,168

Other assets
16,754

 
15,065

Total current assets
94,292

 
93,663

Property, plant and equipment, net
74,716

 
65,749

Timber and timberlands, net
822,353

 
828,420

Deferred tax assets, net
36,715

 
37,228

Other assets
11,499

 
10,361

Total assets
$
1,039,575

 
$
1,035,421

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
66,233

 
$
49,324

Current portion of long-term debt
27,500

 
22,870

Total current liabilities
93,733

 
72,194

Long-term debt
602,675

 
606,473

Liability for pension and other postretirement employee benefits
114,542

 
115,936

Other long-term obligations
13,586

 
15,752

Total liabilities
824,536

 
810,355

Commitments and contingencies


 


Stockholders' equity:
 
 
 
Common stock, $1 par value
40,678

 
40,605

Additional paid-in capital
348,847

 
346,441

Accumulated deficit
(61,253
)
 
(43,588
)
Accumulated other comprehensive loss
(113,233
)
 
(118,392
)
Total stockholders’ equity
215,039

 
225,066

Total liabilities and stockholders' equity
$
1,039,575

 
$
1,035,421

The accompanying notes are an integral part of these condensed consolidated financial statements.



4



 
Potlatch Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited (Dollars in thousands)
 
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
28,165

 
$
69,774

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
28,154

 
19,326

Basis of real estate sold
3,389

 
7,289

Change in deferred taxes
(2,786
)
 
1,127

Employee benefit plans
4,774

 
616

Equity-based compensation expense
3,589

 
3,058

Other, net
(675
)
 
(1,805
)
Funding of qualified pension plan

 
(3,550
)
Working capital and operating-related activities, net
(9,462
)
 
11,829

Net cash from operating activities
55,148

 
107,664

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Change in short-term investments
26,328

 
(12,793
)
Transfer to company owned life insurance (COLI)

 
(25,476
)
Property, plant and equipment
(16,240
)
 
(9,174
)
Timberlands reforestation and roads
(11,155
)
 
(7,840
)
Acquisition of timber and timberlands
(9,320
)
 
(3,143
)
Other, net
644

 
1,126

Net cash from investing activities
(9,743
)
 
(57,300
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Distributions to common stockholders
(45,761
)
 
(42,621
)
Employee tax withholdings on equity-based compensation
(1,445
)
 
(1,092
)
Change in book overdrafts
(1,440
)
 
(2,919
)
Other, net
(97
)
 
(1,019
)
Net cash from financing activities
(48,743
)
 
(47,651
)
Change in cash
(3,338
)
 
2,713

Cash at beginning of period
4,644

 
5,586

Cash at end of period
$
1,306

 
$
8,299

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amounts capitalized
$
18,067

 
$
11,164

Income taxes, net
$
1,528

 
$
12,192

The accompanying notes are an integral part of these condensed consolidated financial statements.


5





NOTE 1. BASIS OF PRESENTATION
For purposes of this report, any reference to “Potlatch,” “the company,” “we,” “us,” and “our” means Potlatch Corporation and all of its wholly-owned subsidiaries, except where the context indicates otherwise.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements; certain disclosures normally provided in accordance with generally accepted accounting principles in the United States have been omitted. This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on February 13, 2015. We believe that all adjustments necessary for a fair statement of the results of such interim periods have been included and all such adjustments are of a normal recurring nature.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Interest - Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU No. 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU No. 2015-03 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a significant effect on our consolidated financial statements or financial covenants.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory. The amendments in ASU No. 2015-11 apply to inventory measures using first-in, first-out (FIFO) or average cost and will require entities to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the normal course of business, minus the cost of completion, disposal and transportation. Replacement cost and net realizable value less a normal profit margin will no longer be considered. ASU No. 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The adoption of this guidance is not expected to have a significant effect on our consolidated financial statements.

6



NOTE 3. EARNINGS PER SHARE
The following table details the number of shares used in calculating basic and diluted earnings per share:
 
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
(Dollars in thousands, except per share amounts)
2015
 
2014
 
2015
 
2014
Net income
$
21,798


$
33,154

 
$
28,165

 
$
69,774

 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
40,846,315

 
40,744,667

 
40,831,296

 
40,732,704

Incremental shares due to:
 
 
 
 
 
 
 
Performance shares
118,149

 
114,579

 
115,534

 
98,877

Restricted stock units
20,624

 
27,816

 
20,039

 
27,416

Stock options

 
2,218

 

 
1,981

Diluted weighted-average shares outstanding
40,985,088

 
40,889,280

 
40,966,869

 
40,860,978

 
 
 
 
 
 
 
 
Basic net income per share
$
0.53

 
$
0.81

 
$
0.69

 
$
1.71

Diluted net income per share
$
0.53

 
$
0.81

 
$
0.69

 
$
1.71

For the three months ending September 30, 2015, there were 36 incremental stock-based awards that were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the nine months ended September 30, 2015, and the three and nine months ending September 30, 2014, there were no incremental anti-dilutive stock-based awards. Anti-dilutive stock-based awards could be dilutive in future periods.

NOTE 4. INVENTORIES
The following table details the composition of our inventories:
(Dollars in thousands)
September 30, 
 2015
 
December 31, 
 2014
Inventories:
 
 
 
Wood Products finished goods inventory
$
17,192

 
$
17,286

Logs
15,232

 
7,930

Materials and supplies
7,955

 
6,274

 
$
40,379

 
$
31,490




7



NOTE 5. EQUITY-BASED COMPENSATION
As of September 30, 2015, we had two stock incentive plans under which performance shares, restricted stock units (RSUs), and deferred compensation stock equivalent units were outstanding. These plans have received shareholder approval. We were originally authorized to issue up to 1.6 million shares and 1.0 million shares under our 2005 Stock Incentive Plan and 2014 Stock Incentive Plan, respectively. At September 30, 2015, approximately 1.1 million shares were authorized for future use under the two plans. We issue new shares of common stock to settle performance shares, restricted stock units and deferred compensation stock equivalent units.
The following table details compensation expense and the related income tax benefit:
 
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Employee equity-based compensation expense:
 
 
 
 
 
 
 
Performance shares
$
1,090

 
$
882

 
$
2,912

 
$
2,577

Restricted stock units
240

 
144

 
677

 
481

Total employee equity-based compensation expense
$
1,330

 
$
1,026

 
$
3,589

 
$
3,058

 
 
 
 
 
 
 
 
Deferred compensation stock equivalent units expense (income)
$
(1
)
 
$
62

 
$
165

 
$
217

 
 
 
 
 
 
 
 
Total tax benefit recognized for share-based expense
$
89

 
$
111

 
$
241

 
$
125


PERFORMANCE SHARES
The following table presents the key inputs used in the Monte Carlo simulation method to calculate the fair value of the performance share awards in 2015 and 2014, and the resulting fair values:
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
Shares granted
78,974

 
87,441

Stock price as of valuation date
$
40.00

 
$
39.76

Risk-free rate
1.07
%
 
0.72
%
Fair value of a performance share
$
36.71

 
$
45.57


8



The following table summarizes outstanding performance share awards as of September 30, 2015, and changes during the nine months ended September 30, 2015:
(Dollars in thousands, except grant date fair value)
Shares
 
Weighted-Avg.
Grant Date
Fair Value
 
Aggregate
Intrinsic Value
Unvested shares outstanding at January 1
160,233

 
$
53.86

 
 
Granted
78,974

 
$
36.71

 
 
Forfeited
(1,079
)
 
$
41.29

 
 
Unvested shares outstanding at September 30
238,128

 
$
48.23

 
$
6,690

As of September 30, 2015, there was $4.1 million of unrecognized compensation cost related to unvested performance share awards, which is expected to be recognized over a weighted-average period of 1.8 years.
RESTRICTED STOCK UNITS
The following table summarizes outstanding RSU awards as of September 30, 2015, and changes during the nine months ended September 30, 2015:
(Dollars in thousands, except grant date fair value)
Shares
 
Weighted-Avg.
Grant Date
Fair Value
 
Aggregate
Intrinsic Value
Unvested shares outstanding at January 1
32,455

 
$
42.24

 
 
Granted
27,820

 
$
39.99

 
 
Vested
(4,700
)
 
$
43.22

 
 
Forfeited
(359
)
 
$
40.27

 
 
Unvested shares outstanding at September 30
55,216

 
$
41.03

 
$
1,590

The fair value of each RSU equaled our common share price on the date of grant. The total fair value of RSU awards vested during the nine months ended September 30, 2015 was $0.2 million. As of September 30, 2015, there was $1.2 million of total unrecognized compensation cost related to unvested RSU awards, which is expected to be recognized over a weighted-average period of 1.4 years.


9




NOTE 6. PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS
The following tables detail the components of net periodic cost (benefit) of our pension plans and other postretirement employee benefits (OPEB):
 
Quarter Ended September 30,
 
Pension
 
OPEB
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Service cost
$
1,559

 
$
1,270

 
$
5

 
$
7

Interest cost
4,241

 
4,796

 
364

 
435

Expected return on plan assets
(5,220
)
 
(6,128
)
 

 

Amortization of prior service cost (credit)
151

 
187

 
(2,328
)
 
(2,411
)
Amortization of actuarial loss
4,636

 
3,613

 
512

 
546

Net periodic cost (benefit)
$
5,367

 
$
3,738

 
$
(1,447
)
 
$
(1,423
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Pension
 
OPEB
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Service cost
$
4,620

 
$
3,810

 
$
16

 
$
19

Interest cost
12,759

 
14,388

 
1,092

 
1,306

Expected return on plan assets
(15,603
)
 
(18,384
)
 

 

Amortization of prior service cost (credit)
454

 
561

 
(6,984
)
 
(7,231
)
Amortization of actuarial loss
13,452

 
10,839

 
1,536

 
1,639

Net periodic cost (benefit)
$
15,682

 
$
11,214

 
$
(4,340
)
 
$
(4,267
)
During the nine months ended September 30, 2015, we paid non-qualified supplemental pension benefits of $1.4 million.


10



The following tables detail the changes in accumulated other comprehensive loss (AOCL):
 
Quarter Ended September 30, 2015
(Dollars in thousands)
Pension
 
OPEB
 
Total
AOCL at July 1
 
 
 
 
$
115,045

Amortization of defined benefit items, net of tax:1
 
 
 
 
 
Prior service credit (cost)
$
(93
)
 
$
1,420

 
1,327

Actuarial loss
(2,828
)
 
(311
)
 
(3,139
)
Total reclassification for the period
$
(2,921
)
 
$
1,109

 
(1,812
)
AOCL at September 30
 
 
 
 
$
113,233

 
 
 
 
 
 
 
Quarter Ended September 30, 2014
(Dollars in thousands)
Pension
 
OPEB
 
Total
AOCL at July 1
 
 
 
 
$
96,358

Amortization of defined benefit items, net of tax:1
 
 
 
 
 
Prior service credit (cost)
$
(114
)
 
$
1,471

 
1,357

Actuarial loss
(2,204
)
 
(334
)
 
(2,538
)
Total reclassification for the period
$
(2,318
)
 
$
1,137

 
(1,181
)
AOCL at September 30
 
 
 
 
$
95,177

 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
(Dollars in thousands)
Pension
 
OPEB
 
Total
AOCL at January 1
 
 
 
 
$
118,392

Amortization of defined benefit items, net of tax:1
 
 
 
 
 
Prior service credit (cost)
$
(277
)
 
$
4,260

 
3,983

Actuarial loss
(8,206
)
 
(936
)
 
(9,142
)
Total reclassification for the period
$
(8,483
)
 
$
3,324

 
(5,159
)
AOCL at September 30
 
 
 
 
$
113,233

 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
(Dollars in thousands)
Pension
 
OPEB
 
Total
AOCL at January 1
 
 
 
 
$
98,720

Amortization of defined benefit items, net of tax:1
 
 
 
 
 
Prior service credit (cost)
$
(342
)
 
$
4,411

 
4,069

Actuarial loss
(6,612
)
 
(1,000
)
 
(7,612
)
Total reclassification for the period
$
(6,954
)
 
$
3,411

 
(3,543
)
AOCL at September 30
 
 
 
 
$
95,177

 
 
 
 
 
 
1 Amortization of prior service credit (cost) and amortization of actuarial loss are included in the computation of net periodic cost (benefit).



11



NOTE 7. FINANCIAL INSTRUMENTS
The following table presents the estimated fair values of our financial instruments:
 
September 30, 2015
 
December 31, 2014
(Dollars in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and short-term investments (Level 1)
$
1,346

 
$
1,346

 
$
31,012

 
$
31,012

Derivative asset related to interest rate swaps (Level 2)
$
1,522

 
$
1,522

 
$
793

 
$
793

Long-term debt, including fair value adjustments related to fair value hedges (Level 2)
$
630,175

 
$
653,029

 
$
629,343

 
$
657,943

Company owned life insurance asset (COLI) (Level 3)
$
1,906

 
$
1,906

 
$
877

 
$
877

For cash and short-term investments, the carrying amount approximates fair value due to the short-term nature of these financial instruments. The fair value of these interest rate swaps were determined by discounting the expected cash flows of each derivative. The analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate forward curves. The fair value of our long-term debt is estimated based upon the quoted market prices for the same or similar debt issues, or estimated based on average market prices for comparable debt when there is no quoted market price. Contract value of our COLI, the amount at which it could be redeemed, is used as a practical expedient to estimate fair value because market prices are not readily available.
BALANCE SHEET AND INCOME EFFECTS OF DERIVATIVES
We have seven interest rate swaps to convert interest payments on fixed rate debt to variable rate 3-month LIBOR plus a spread, with the objective of managing exposure to fluctuations in market interest rates on our debt balances.
The following table presents the gross fair values of derivative instruments on our Condensed Consolidated Balance Sheets:
(Dollars in thousands)
Location
 
September 30,
2015
 
December 31,
2014
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate contracts
Current assets
 
$
112

 
$
372

Interest rate contracts
Non-current assets
 
1,410

 
421

Total derivatives designated as hedging instruments
 
 
$
1,522

 
$
793

The following table details the effect of derivatives on our Consolidated Statements of Income:
 
 
 
Gain Recognized in Income
 
Location
 
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
(Dollars in thousands)
 
 
2015
 
2014
 
2015
 
2014
Derivatives designated in fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Realized gain on interest rate contract 1
Interest expense
 
$
385

 
$
239

 
$
1,173

 
$
740

Net gain recognized in income from fair value hedges
 
 
$
385

 
$
239

 
$
1,173

 
$
740

 
1 Realized gain on hedging instrument consists of net cash settlements and interest accruals on the interest rate swaps during the periods. Net cash settlements are included in the supplemental cash flow information within interest, net of amounts capitalized in the Condensed Consolidated Statements of Cash Flows.
No net unrealized gain or loss associated with the interest rate swaps was recognized in income for any of the periods presented because we recognized no hedge ineffectiveness.


12




NOTE 8. INCOME TAXES
As a real estate investment trust (REIT), we generally are not subject to federal and state corporate income taxes on income of the REIT that we distribute to our shareholders. We are, however, subject to corporate income taxes on built-in gains (the excess of fair market value over tax basis on January 1, 2006) on sales of real property by the REIT during the first ten years following our REIT conversion, which ends on December 31, 2015. The sale of standing timber is not subject to built-in gains tax. The Small Business Jobs Act of 2010 modified the built-in gains provisions to exempt sales of real properties in 2011, if five years of the recognition period had elapsed before January 1, 2011. The reduced five-year holding period was extended each year through 2014. Accordingly, the built-in gains tax did not apply to our sales of real property through 2014; however, the built-in gains tax applies to REIT sales of real property in 2015.
We conduct certain activities through our taxable REIT subsidiaries (TRS), which are subject to corporate level federal and state income taxes. These taxable activities are principally comprised of our wood products manufacturing operations and certain real estate investments. Therefore, income taxes are primarily due to income of the TRS.

NOTE 9. COMMITMENTS AND CONTINGENCIES
In January 2007, the Environmental Protection Agency (EPA) notified us that we are a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Clean Water Act for cleanup of a site known as Avery Landing in northern Idaho. We own a portion of the land at the Avery Landing site, which we acquired in 1980 from the Milwaukee Railroad. The land we own at the site and adjacent properties were contaminated with petroleum as a result of the Milwaukee Railroad's operations at the site prior to 1980. On July 5, 2011, the EPA issued an Action Memorandum for the Avery Landing Site selecting contaminant extraction and off-site disposal as the remedial alternative. On May 23, 2012, we signed a consent order with the EPA pursuant to which we agreed to provide $1.75 million in funding for EPA cleanup on a portion of our property (including the adjacent riverbank owned by the Idaho Department of Lands). The EPA cleanup was completed in October 2012. On April 4, 2013, the EPA issued a unilateral administrative order requiring us to remediate the portion of the Avery Landing site that we own. Our remediation was completed in October 2013. On September 25, 2015 the EPA sent us a letter asserting that the EPA and the Department of Transportation (the current owner of a portion of the adjacent property remediated by the EPA) had incurred $9.8 million in unreimbursed response costs associated with the site and that we were liable for such costs. We believe we have meritorious defenses to this claim and we intend to defend ourselves vigorously. We have reserved all of our rights to seek reimbursement for the costs of remediation from all parties potentially responsible. We have executed a tolling agreement with the EPA and DOT suspending the statute of limitations on the claim until June 2016 in order to facilitate negotiations of a final settlement and release. We have not recorded a liability related to this matter and while it is reasonably possible that we may incur some liability in respect of this claim, we are unable to estimate at this time the amount of charges, if any, that may be required for this matter in the future.


13



NOTE 10. SEGMENT INFORMATION
The following table summarizes information by business segment:
 
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Resource
$
102,322

 
$
91,919

 
$
200,388

 
$
183,336

Wood Products
82,868

 
99,213

 
256,292

 
287,589

Real Estate
7,828

 
6,176

 
21,684

 
36,352

 
193,018

 
197,308

 
478,364

 
507,277

Elimination of intersegment revenues - Resource
(18,543
)
 
(20,093
)
 
(41,017
)
 
(46,564
)
Total consolidated revenues
$
174,475

 
$
177,215

 
$
437,347

 
$
460,713

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
Resource
$
36,389

 
$
34,080

 
$
60,164

 
$
61,122

Wood Products
(5,422
)
 
15,743

 
(3,875
)
 
43,320

Real Estate
4,234

 
4,646

 
14,354

 
25,295

Eliminations and adjustments
(564
)
 
(1,994
)
 
2,950

 
(364
)
 
34,637

 
52,475

 
73,593

 
129,373

Corporate
(6,923
)
 
(7,606
)
 
(24,541
)
 
(23,470
)
Operating income
27,714

 
44,869

 
49,052

 
105,903

Interest expense, net
(8,335
)
 
(5,506
)
 
(24,420
)
 
(16,475
)
Income before income taxes
$
19,379

 
$
39,363

 
$
24,632


$
89,428

 
 
 
 
 
 
 
 
Depreciation, depletion and amortization:1
 
 
 
 
 
 
 
Resource
$
10,262

 
$
6,101

 
$
21,313

 
$
12,745

Wood Products
1,693

 
1,543

 
4,930

 
4,587

Real Estate
14

 
15

 
44

 
44

 
11,969

 
7,659

 
26,287

 
17,376

Corporate
588

 
665

 
1,867

 
1,950

Total depreciation, depletion and amortization
$
12,557

 
$
8,324

 
$
28,154

 
$
19,326

 
 
 
 
 
 
 
 
Basis of real estate sold:
 
 
 
 
 
 
 
Real Estate
$
2,450

 
$
519

 
$
3,631

 
$
7,928

Eliminations and adjustments
(69
)
 
(64
)
 
(242
)
 
(639
)
Total basis of real estate sold
$
2,381

 
$
455

 
$
3,389

 
$
7,289

1
The presentation of depreciation, depletion, and amortization in Segment Information and the Condensed Consolidated Statements of Cash Flows includes amortization of bond discounts and deferred loan fees. Bond discounts and deferred loan fees are recorded in Interest expense, net in the Consolidated Statements of Income.


14



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information
This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, recognition of compensation costs relating to our performance shares and RSUs, U.S. housing market conditions, housing starts and recovery, real estate demand and pricing, log prices, lumber demand and prices, prevalence of stumpage sales in the south, fluctuations of stumpage prices depending on mix, business conditions for our business segments, fluctuation of sawlog, pulpwood and stumpage prices due to local market conditions, Resource segment results, Wood Products segment results, Real Estate segment results, and similar matters. Words such as “anticipate,” “expect,” “will,” “intend,” “plan,” “target,” “project,” “believe,” “seek,” “schedule,” “estimate,” “could,” “can,” “may” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements reflect our current views regarding future events based on estimates and assumptions and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. Our actual results of operations could differ materially from our historical results or those expressed or implied by forward-looking statements contained in this report. For a nonexclusive listing of forward-looking statements and potential factors affecting our business, refer to “Cautionary Statement Regarding Forward-Looking Information” on page 1 and “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.
Forward-looking statements contained in this report present our views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of our views to reflect events or circumstances occurring after the date of this report.

Results of Operations
Our business is organized into three business segments: Resource, Wood Products and Real Estate. Sales between segments are recorded as intersegment revenues based on prevailing market prices. Our Resource segment supplies our Wood Products segment with a portion of its wood fiber needs. Therefore, intersegment revenues typically represent a significant portion of the Resource segment’s total revenues. Our other segments generally do not generate intersegment revenues.
In the period-to-period discussions of our consolidated results of operations, our revenues are reported after elimination of intersegment revenues. In the discussions by business segments, each segment's revenues are presented before the elimination of intersegment revenues.

Overview
The operating results of our Resource, Wood Products and Real Estate business segments have been and will continue to be influenced by a variety of factors, including cyclical fluctuations in the forest products industry, changes in timber prices and in harvest levels from our timberlands, competition, timberland valuations, demand for our non-strategic timberland for higher and better use purposes, changes in lumber prices, the efficiency and level of capacity utilization of our wood products manufacturing operations, changes in our principal expenses such as log costs, asset dispositions or acquisitions and other factors.
In the three and nine months ended September 30, 2015, our Resource and Wood Products segment results were affected by lower lumber prices resulting primarily from excess supply in the lumber markets due to several factors, including lower log and lumber volume exports from North America to China and a strong U.S. dollar relative to the Canadian dollar. Resource segment results reflect activity from our acquisition of Alabama and Mississippi timberlands in December 2014. Higher log prices in the Lake States and additional logging, hauling, depletion, and employee costs increased operating expenses.

15



Consolidated Results Comparing the Quarters Ended September 30, 2015 and 2014
The following table sets forth period-to-period changes in items included in our Consolidated Statements of Income for the quarters ended September 30:
(Dollars in thousands)
2015
2014
 
Change
Revenues
$
174,475

$
177,215

 
$
(2,740
)
(2
)%
Costs and expenses:
 
 
 
 
 
Cost of goods sold
136,072

121,574

 
14,498

12
 %
Selling, general and administrative expenses
10,689

10,772

 
(83
)
(1
)%
 
146,761

132,346

 
14,415

11
 %
Operating income
27,714

44,869

 
(17,155
)
(38
)%
Interest expense, net
(8,335
)
(5,506
)
 
(2,829
)
51
 %
Income before income taxes
19,379

39,363

 
(19,984
)
(51
)%
Income tax benefit (provision)
2,419

(6,209
)
 
8,628

(139
)%
Net income
$
21,798

$
33,154

 
$
(11,356
)
(34
)%
Revenues - Revenues decreased in the third quarter of 2015, compared with the same period last year, primarily due to lower lumber prices in Wood Products, partially offset by an increase in Resource revenues related to harvest volumes from the timberland that we acquired in Alabama and Mississippi in December 2014. Our Business Segment Results provide a more detailed discussion of our segments.
Cost of goods sold - Cost of goods sold increased in the third quarter of 2015, compared with the same period last year, primarily due to additional logging, hauling, and depletion expense in our Resource segment relating to our Alabama and Mississippi timberlands acquired in December 2014. Fiber and manufacturing costs in our Wood Products segment also contributed to an increase in cost of goods sold. Our Business Segment Results provide a more detailed discussion of our segments.
Selling, general and administrative expenses - Selling, general and administrative expenses decreased slightly in the third quarter of 2015, compared with the same period last year, due to lower employee salary and benefit costs, offset by higher pension expense related to the adoption of updated mortality tables and a reduction in the discount rate at the end of 2014.
Interest expense, net - The increase in net interest expense in the third quarter of 2015, compared with the same period last year, is due to the addition of $310 million in term loans in December 2014 to fund the acquisition of timberlands in Alabama and Mississippi.
Income tax provision - Income taxes are primarily due to income or loss from Potlatch TRS. For the third quarter of 2015, the income tax benefit of $2.4 million is the result of Potlatch TRS’s loss before income tax of $5.9 million. For the third quarter of 2014, the income tax expense of $6.2 million was the result of Potlatch TRS’s income before income tax of $17.2 million.


16



Business Segment Results Comparing the Quarters Ended September 30, 2015 and 2014
Resource Segment
 
 
Quarter Ended September 30,
 
 
 
(Dollars in thousands)
2015
2014
 
Change
Revenues1
$
102,322

$
91,919

 
$
10,403

11
 %
Cost of goods sold:
 
 
 
 
 
Logging and hauling
46,335

42,468

 
3,867

9
 %
Depreciation, depletion and amortization
10,215

6,009

 
4,206

70
 %
Other
7,345

7,734

 
(389
)
(5
)%
 
63,895

56,211

 
7,684

14
 %
Selling, general and administrative expenses
2,038

1,628

 
410

25
 %
Operating income
$
36,389

$
34,080

 
$
2,309

7
 %
 
 
 
 
 
 
Harvest Volumes (in tons)
 
 
 
 
 
Northern region
 
 
 
 
 
 
Sawlog
762,813

720,460

 
42,353

6
 %
 
Pulpwood
69,329

62,340

 
6,989

11
 %
 
Stumpage
2,604

1,862

 
742

40
 %
 
  Total
834,746

784,662

 
50,084

6
 %
 
 
 
 
 
 
 
Southern region
 
 
 
 
 
 
Sawlog
246,566

200,838

 
45,728

23
 %
 
Pulpwood
375,097

229,635

 
145,462

63
 %
 
Stumpage
137,094

1,095

 
135,999

n/m

 
  Total
758,757

431,568

 
327,189

76
 %
 
 
 
 
 
 
 
Total harvest volume
1,593,503

1,216,230

 
377,273

31
 %
 
 
 
 
 
 
 
Sales Price/Unit ($ per ton)
 
 
 
 
 
Northern region
 
 
 
 
 
 
Sawlog 2
$
92

$
96

 
$
(4
)
(4
)%
 
Pulpwood 2
$
41

$
45

 
$
(4
)
(9
)%
 
Stumpage
$
13

$
11

 
$
2

18
 %
 
 
 
 
 
 
 
Southern region
 
 
 
 
 
 
Sawlog 2
$
48

$
50

 
$
(2
)
(4
)%
 
Pulpwood 2
$
34

$
35

 
$
(1
)
(3
)%
 
Stumpage
$
21

$
19

 
$
2

11
 %

1 Prior to elimination of intersegment fiber revenues of $18.5 million in 2015 and $20.1 million in 2014.
2 Sawlog and pulpwood sales prices are on a delivered basis, which includes contracted logging and hauling costs.

Resource segment revenues increased 11% in the third quarter of 2015, compared with the same period last year, primarily due to increased harvest volumes in our Southern region as a result of our acquisition of Alabama and Mississippi timberlands in December 2014. Total harvest volumes increased 31%.


17



Volumes in our Northern region increased 6% in the third quarter of 2015, compared with the same period last year, due to prior year contractor production constraints that affected harvest volumes. Lower Northern sawlog prices were the result of lower lumber prices as a significant portion of our sawlog sales in our Northern region are indexed to lumber prices on a one to three month lag. The decline in pulpwood prices reflects abundant supply of residuals and chips in the Northwest relative to demand.

Southern sawlog prices per ton decreased 4% primarily due to lower hardwood prices. As a result of our Alabama and Mississippi timberlands acquisition, stumpage sales (cutting contracts) will be more common in our Southern region. Stumpage prices fluctuate based on the mix of pulpwood and sawlog volume.

Logging, hauling, and depletion expense increased due to higher harvest volumes. This was partially offset by lower fuel costs. Selling, general and administrative expenses increased due to higher forest inventory verification costs, which increase the accuracy of information used to develop our harvest plans.

Wood Products Segment
 
Quarter Ended September 30,
 
 
 
(Dollars in thousands)
2015
2014
 
Change
Revenues
$
82,868

$
99,213

 
$
(16,345
)
(16
)%
Cost of goods sold:1




 
 
 
Fiber costs
47,084

45,914

 
1,170

3
 %
Manufacturing costs
33,603

30,016

 
3,587

12
 %
Finished goods inventory change
(18
)
(776
)
 
758

(98
)%
Other 2
6,416

7,274

 
(858
)
(12
)%
 
87,085

82,428

 
4,657

6
 %
Selling, general and administrative expenses
1,205

1,042

 
163

16
 %
Operating income (loss)
$
(5,422
)
$
15,743

 
$
(21,165
)
(134
)%
 
 
 
 
 
 
Lumber shipments (MBF)
155,388

171,818

 
(16,430
)
(10
)%
Lumber sales prices ($ per MBF)
$
335

$
408

 
$
(73
)
(18
)%
1 Prior to elimination of intersegment fiber costs of $18.5 million in 2015 and $20.1 million in 2014.
2 Other cost of goods sold is primarily customer freight.

Revenues were $16.3 million lower in the third quarter of 2015, compared with the same period last year, primarily due to lower lumber prices and shipments. Decreased shipments were mainly due to mill downtime for large capital project installations.

Cost of goods sold fluctuated based on the following factors:
Fiber costs increased $1.2 million due to higher log costs in Michigan as a result of strong demand by pulp and paper manufacturers in that region.
Manufacturing costs increased primarily due to higher payroll and maintenance expense, largely the result of overtime and temporary labor associated with projects at the mills, as well as higher pension costs related to the adoption of updated mortality tables and a reduction in the discount rate at the end of 2014.
Inventory will fluctuate based on a combination of volume and fiber and manufacturing costs.

18



Real Estate Segment
 
Quarter Ended September 30,
 
 
(Dollars in thousands)
2015
2014
 
Change
Revenues
$
7,828

$
6,176

 
$
1,652

27
 %
Cost of goods sold:



 
 
 
Basis of real estate sold
2,450

519

 
1,931

372
 %
Other
625

513

 
112

22
 %
 
3,075

1,032

 
2,043

198
 %
Selling, general and administrative expenses
519

498

 
21

4
 %
Operating income
$
4,234

$
4,646

 
$
(412
)
(9
)%
 
 
 
 
 
 
  
2015
 
2014
  
Acres Sold
Average
Price/Acre
 
Acres Sold
Average
Price/Acre
Higher and better use (HBU)
1,750

$
2,420

 
1,876

$
2,096

Rural real estate
2,596

$
1,328

 
1,721

$
1,245

Non-strategic timberland
189

$
770

 
202

$
610

Total
4,535

 
 
3,799

 
In the third quarter of 2015, we sold 736 more acres at a higher average sales price, resulting in increased revenues of $1.7 million, compared with the same period last year. The average land basis per acre was higher than the prior year largely due to an HBU sale of recently acquired real estate in the South.
Consolidated Results Comparing the Nine Months Ended September 30, 2015 and 2014
The following table sets forth period-to-period changes in items included in our Consolidated Statements of Income for the nine months ended September 30:
(Dollars in thousands)
2015
2014
 
Change
Revenues
$
437,347

$
460,713

 
$
(23,366
)
(5
)%
Costs and expenses:
 
 
 
 
 
Cost of goods sold
353,285

322,016

 
31,269

10
 %
Selling, general and administrative expenses
35,010

32,794

 
2,216

7
 %
 
388,295

354,810

 
33,485

9
 %
Operating income
49,052

105,903

 
(56,851
)
(54
)%
Interest expense, net
(24,420
)
(16,475
)
 
(7,945
)
48
 %
Income before income taxes
24,632

89,428

 
(64,796
)
(72
)%
Income tax benefit (provision)
3,533

(19,654
)
 
23,187

(118
)%
Net income
$
28,165

$
69,774

 
$
(41,609
)
(60
)%
Revenues - Revenues decreased in the first nine months of 2015, compared with the same period last year, primarily due to lower lumber prices and shipments in Wood Products and fewer acres sold in Real Estate, partially offset by an increase in Resource revenues related to harvest volumes from the timberland we acquired in Alabama and Mississippi in December 2014. Our Business Segment Results provide a more detailed discussion of our segments.

19



Cost of goods sold - Cost of goods sold increased in the first nine months of 2015, compared with the same period last year, primarily due to additional logging, hauling, and depletion expense in our Resource segment relating to our Alabama and Mississippi timberlands acquired in December 2014. Fiber and manufacturing costs in our Wood Products segment also contributed to an increase in cost of goods sold. These increases were partially offset by fewer acres sold in our Real Estate segment. Our Business Segment Results provide a more detailed discussion of our segments.
Selling, general and administrative expenses - Selling, general and administrative expenses increased in the first nine months of 2015, compared with the same period last year, primarily due to increased pension expense related to the adoption of updated mortality tables and a reduction in the discount rate at the end of 2014.
Interest expense, net - The increase in net interest expense in the third quarter of 2015, compared with the same period last year, is due to the addition of $310 million in term loans in December 2014 to fund the acquisition of timberlands in Alabama and Mississippi.
Income tax provision - Income taxes are primarily due to income or loss from Potlatch TRS. For the first nine months of 2015, the income tax benefit of $3.5 million is the result of Potlatch TRS’s loss before income tax of $8.5 million. For the first nine months of 2014, the income tax expense of $19.7 million was the result of Potlatch TRS’s income before income tax of $55.5 million.



20



Business Segment Results Comparing the Nine Months Ended September 30, 2015 and 2014
Resource Segment
 
 
Nine Months Ended September 30,
 
 
 
(Dollars in thousands)
2015
2014
 
Change
Revenues1
$
200,388

$
183,336

 
$
17,052

9
 %
Cost of goods sold:
 
 
 
 
 
Logging and hauling
94,060

86,244

 
7,816

9
 %
Depreciation, depletion and amortization
21,133

12,408

 
8,725

70
 %
Other
20,070

19,096

 
974

5
 %
 
135,263

117,748

 
17,515

15
 %
Selling, general and administrative expenses
4,961

4,466

 
495

11
 %
Operating income
$
60,164

$
61,122

 
$
(958
)
(2
)%
 
 
 
 
 
 
Harvest Volumes (in tons)
 
 
 
 
 
Northern region
 
 
 
 
 
 
Sawlog
1,502,340

1,443,375

 
58,965

4
 %
 
Pulpwood
148,453

153,043

 
(4,590
)
(3
)%
 
Stumpage
22,784

15,305

 
7,479

49
 %
 
  Total
1,673,577

1,611,723

 
61,854

4
 %
 
 
 
 
 
 
 
Southern region
 
 
 
 
 
 
Sawlog
543,403

438,603

 
104,800

24
 %
 
Pulpwood
822,960

598,600

 
224,360

37
 %
 
Stumpage
230,231

7,022

 
223,209

n/m

 
  Total
1,596,594

1,044,225

 
552,369

53
 %
 
 
 
 
 
 
 
Total harvest volume
3,270,171

2,655,948

 
614,223

23
 %
 
 
 
 
 
 
 
Sales Price/Unit ($ per ton)
 
 
 
 
 
Northern region
 
 
 
 
 
 
Sawlog 2
$
89

$
91

 
$
(2
)
(2
)%
 
Pulpwood 2
$
42

$
43

 
$
(1
)
(2
)%
 
Stumpage
$
9

$
11

 
$
(2
)
(18
)%
 
 
 
 
 
 
 
Southern region
 
 
 
 
 
 
Sawlog 2
$
44

$
46

 
$
(2
)
(4
)%
 
Pulpwood 2
$
34

$
33

 
$
1

3
 %
 
Stumpage
$
19

$
15

 
$
4

27
 %

1 Prior to elimination of intersegment fiber revenues of $41 million in 2015 and $46.6 million in 2014.
2 Sawlog and pulpwood sales prices are on a delivered basis, which includes contracted logging and hauling costs.

21



Resource segment revenues increased $17.1 million in the first nine months of 2015, compared with the same period last year, primarily as a result of increased harvest volumes in our Southern region resulting from our acquisition of Alabama and Mississippi timberlands December 2014. Total harvest volumes increased 23%.

Volumes in our Northern region increased 4% in the first nine months of 2015, compared with the same period last year, due to prior year contractor production constraints that affected harvest volumes. Lower Northern region sawlog prices were the result of lower lumber prices as a significant portion of our sawlog sales in the Northern region are indexed to lumber prices on a one to three month lag.

Southern sawlog sale prices per ton decreased 4% due to lower hardwood prices. As a result of our Alabama and Mississippi timberlands acquisition, stumpage sales (cutting contracts) will be more common in our Southern region. Stumpage prices fluctuate based on the mix of pulpwood and sawlog volume.

Logging, hauling and depletion expense increased due to higher harvest volumes. This was partially offset by lower fuel costs. Selling, general and administrative expenses increased due to higher forest inventory verification costs, which increase the accuracy of information used to develop our harvest plans.

Wood Products Segment
 
Nine Months Ended September 30,
 
 
 
(Dollars in thousands)
2015
2014
 
Change
Revenues
$
256,292

$
287,589

 
$
(31,297
)
(11
)%
Cost of goods sold:1
 


 
 
 
Fiber costs
139,114

134,558

 
4,556

3
 %
Manufacturing costs
96,336

88,181

 
8,155

9
 %
Finished goods inventory change
1,763

(1,899
)
 
3,662

(193
)%
Other 2
19,228

20,177

 
(949
)
(5
)%
 
256,441

241,017

 
15,424

6
 %
Selling, general and administrative expenses
3,726

3,252

 
474

15
 %
Operating income
$
(3,875
)
$
43,320

 
$
(47,195
)
(109
)%
 
 
 
 
 
 
Lumber shipments (MBF)
461,665

503,460

 
(41,795
)
(8
)%
Lumber sales prices ($ per MBF)
$
357

$
404

 
$
(47
)
(12
)%
1 Prior to elimination of intersegment fiber costs of $41 million in 2015 and $46.6 million in 2014.
2 Other cost of goods sold is primarily customer freight.

Revenues were $31.3 million lower in the first nine months of 2015, compared with the same period last year, primarily due to lower lumber prices and shipments. Decreased shipments were mainly due to mill downtime for large capital project installations at each of our four lumber mills.

Cost of goods sold fluctuated based on the following factors:
Fiber costs increased $4.6 million primarily due to higher log costs in Michigan as a result of strong demand by pulp and paper manufacturers in that region, partially offset by lower production volumes.
Manufacturing costs increased primarily due to higher payroll and maintenance expense, largely the result of overtime and temporary labor associated with projects at the mills, as well as higher pension costs related to the adoption of updated mortality tables and a reduction in the discount rate at the end of 2014.
Inventory will fluctuate based on a combination of volume, fiber costs and manufacturing costs.

22



Real Estate Segment
 
Nine Months Ended September 30,
 
 
(Dollars in thousands)
2015
2014
 
Change
Revenues
$
21,684

$
36,352

 
$
(14,668
)
(40
)%
Cost of goods sold:


 
 
 
Basis of real estate sold
3,631

7,928

 
(4,297
)
(54
)%
Other
1,917

1,517

 
400

26
 %
 
5,548

9,445

 
(3,897
)
(41
)%
Selling, general and administrative expenses
1,782

1,612

 
170

11
 %
Operating income
$
14,354

$
25,295

 
$
(10,941
)
(43
)%
 
 
 
 
 
 
  
2015
 
2014
  
Acres Sold
Average
Price/Acre
 
Acres Sold
Average
Price/Acre
Higher and better use (HBU)
2,507

$
4,386

 
3,368

$
2,080

Rural real estate
6,998

$
1,358

 
25,745

$
1,103

Non-strategic timberland
1,323

$
861

 
1,268

$
773

Total
10,828

 
 
30,381

 
Real Estate revenues decreased $14.7 million and operating income decreased $10.9 million in the first nine months of 2015, compared with the same period last year, primarily due to fewer acres sold in 2015. In the first nine months of 2015, we sold a total of 10,828 acres, including two HBU commercial real estate sites , which increased our average price per acre. In the first nine months of 2014, we sold 30,381 acres, including a first quarter 11,000 acre sale of rural real estate in Idaho and a second quarter 9,400 acre sale of rural real estate in Minnesota.

Liquidity and Capital Resources
Overview
At September 30, 2015, our financial highlights included:
Cash and short-term investments of $1.3 million;
Credit agreement borrowing capacity of $248.6 million; and
Long-term debt of $630.2 million.
Net Cash from Operations
Net cash provided from operating activities was:
$55.1 million in 2015 and
$107.7 million in 2014.
Net cash from operations decreased $53 million for the nine months ended September 30, 2015, compared with the same period last year, primarily due to the following:
Lower customer receipts of $36 million resulting from lower revenues in Wood Products and Real Estate, partially offset by higher revenues in Resource;
Higher Resource costs for logging, hauling and other costs of $8 million;
Higher Wood Products manufacturing costs of $6 million; and
An increase in inventories of $9 million, primarily related to logs.


23



Net Cash Flows from Investing Activities
Net cash used in investing activities was $9.7 million and $57.3 million for the nine months ended September 30, 2015 and 2014, respectively. Short-term investments decreased $26.3 million in 2015, compared with an increase of $12.8 million in 2014 due to less cash provided by operations. Cash used in 2015 for property, plant and equipment, timberland reforestation and roads, and the acquisition of timber and timberlands increased $16.6 million in 2015 over 2014, due to the completion of large capital project installations at each of our four lumber mills and the purchase of timber and timberlands in Arkansas. In 2014, we transferred $25.5 million in cash to our COLI in order to generate a higher return.
Net Cash Flows from Financing Activities
Net cash used in financing activities was $48.7 million and $47.7 million for the nine months ended September 30, 2015 and 2014, respectively. Net cash used in financing activities is primarily attributable to paying our quarterly distribution to shareholders.
Credit and Term Loan Agreement
As of September 30, 2015, approximately $1.4 million was utilized by outstanding letters of credit, resulting in $248.6 million available for additional borrowings under our credit agreement.
In January 2015, a financial covenant in the credit agreement was amended to increase the maximum allowable acres that may be sold during the term of the agreement due to the acquisition of additional timberlands in Alabama and Mississippi in December 2014. The following table sets forth the financial covenants in the credit and term loan agreements and our status with respect to these covenants as of September 30, 2015:
 
Credit Facility Covenant Requirements
 
Term Loan Covenant Requirements
 
Actuals at
September 30, 2015
Minimum Interest Coverage Ratio
3.00 to 1.00
 
3.00 to 1.00
 
3.86 to 1.00
Maximum Leverage Ratio
40%
 
40%
 
25%
Maximum Allowable Acres that may be Sold
480,000
 
475,407
 
17,651
Senior Notes
The terms of our senior notes limit our ability and the ability of any subsidiary guarantors to enter into restricted transactions, which include the ability to borrow money, pay dividends, redeem or repurchase capital stock, enter into sale and leaseback transactions and create liens. However, such restricted transactions are permitted if the balance of our cumulative Funds Available for Distribution (FAD), and a FAD basket amount, provide sufficient funds to cover such restricted payments. At September 30, 2015, our cumulative FAD was $81.6 million and the FAD basket was $90.1 million.
Contractual Obligations
There have been no material changes to our contractual obligations in the nine months ended September 30, 2015 outside the ordinary course of business.
Off-Balance Sheet Arrangements
We currently are not a party to off-balance sheet arrangements that would require disclosure under this section.


24



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposures to market risk have not changed materially since December 31, 2014. For quantitative and qualitative disclosures about market risk, see Item 7A – “Quantitative and Qualitative Disclosure about Market Risk” in our 2014 Annual Report on Form 10-K.
Quantitative Information about Market Risks
The following table summarizes our outstanding long-term debt, weighted-average interest rates, and interest rate swaps as of September 30, 2015:
  
EXPECTED MATURITY DATE
(Dollars in thousands)
2015
2016
2017
2018
2019
THEREAFTER
TOTAL
Variable rate debt: