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EX-32 - EX-32 - POTLATCHDELTIC CORPpch-ex32_6.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2017

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)

(IRS 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      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      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

 

 

Accelerated filer

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of common stock of the registrant outstanding as of April 25, 2017 was 40,609,080.

 

 

 

 


POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Table of Contents

 

 

 

 

Page
Number

PART I. - FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements (unaudited)

 

 

Consolidated Statements of Income

2

 

Consolidated Statements of Comprehensive Income

3

 

Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016

4

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

5

 

Notes to Condensed Consolidated Financial Statements

6

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

14

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

19

ITEM 4.

Controls and Procedures

20

 

 

 

PART II. - OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

21

ITEM 1A.

Risk Factors

21

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

21

ITEM 6.

Exhibits

21

 

 

 

SIGNATURE

22

 

 

EXHIBIT INDEX

23

 


 

Part I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

 

Potlatch Corporation and Consolidated Subsidiaries

Consolidated Statements of Income

Unaudited (Dollars in thousands, except per share amounts)

 

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Revenues

 

$

149,681

 

 

$

127,896

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

112,783

 

 

 

109,815

 

Selling, general and administrative expenses

 

 

12,989

 

 

 

13,009

 

 

 

 

125,772

 

 

 

122,824

 

Operating income

 

 

23,909

 

 

 

5,072

 

Interest expense, net

 

 

(4,970

)

 

 

(6,025

)

Income (loss) before income taxes

 

 

18,939

 

 

 

(953

)

Income tax (provision) benefit

 

 

(2,018

)

 

 

1,110

 

Net income

 

$

16,921

 

 

$

157

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.41

 

 

$

 

Diluted

 

$

0.41

 

 

$

 

Dividends per share

 

$

0.375

 

 

$

0.375

 

Weighted-average shares outstanding (in thousands):

 

 

 

 

 

 

 

 

Basic

 

 

40,778

 

 

 

40,875

 

Diluted

 

 

41,071

 

 

 

40,960

 

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)

 

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Net income

 

$

16,921

 

 

$

157

 

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 benefit of $(837) and $(815)

 

 

(1,310

)

 

 

(1,275

)

Amortization of actuarial loss included in net periodic cost, net of tax expense of $1,659 and $1,695

 

 

2,595

 

 

 

2,650

 

Cash flow hedge, net of tax of $31 and $(105)

 

 

48

 

 

 

(164

)

Other comprehensive income, net of tax

 

 

1,333

 

 

 

1,211

 

Comprehensive income

 

$

18,254

 

 

$

1,368

 

See Note 5: Derivative Instruments and Note 7: Pension and Other Postretirement Employee Benefits for additional information. Amortization of prior service credit and amortization of actuarial loss are included in the computation of net periodic cost (benefit).

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)

 

 

 

 

March 31, 2017

 

 

December 31, 2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

101,664

 

 

$

82,584

 

Receivables, net

 

 

16,328

 

 

 

17,284

 

Inventories

 

 

45,347

 

 

 

52,622

 

Other assets

 

 

8,675

 

 

 

11,155

 

Total current assets

 

 

172,014

 

 

 

163,645

 

Property, plant and equipment, net

 

 

74,466

 

 

 

72,820

 

Timber and timberlands, net

 

 

637,319

 

 

 

641,856

 

Deferred tax assets, net

 

 

41,550

 

 

 

42,051

 

Other assets

 

 

7,322

 

 

 

7,309

 

Total assets

 

$

932,671

 

 

$

927,681

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

25,408

 

 

$

11,032

 

Accounts payable and accrued liabilities

 

 

44,209

 

 

 

43,710

 

Current portion of pension and other postretirement employee benefits

 

 

5,839

 

 

 

5,839

 

Total current liabilities

 

 

75,456

 

 

 

60,581

 

Long-term debt

 

 

558,510

 

 

 

572,956

 

Pension and other postretirement employee benefits

 

 

123,939

 

 

 

123,284

 

Other long-term obligations

 

 

15,504

 

 

 

14,586

 

Total liabilities

 

 

773,409

 

 

 

771,407

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $1 par value

 

 

40,608

 

 

 

40,519

 

Additional paid-in capital

 

 

355,174

 

 

 

355,274

 

Accumulated deficit

 

 

(127,109

)

 

 

(128,775

)

Accumulated other comprehensive loss

 

 

(109,411

)

 

 

(110,744

)

Total stockholders’ equity

 

 

159,262

 

 

 

156,274

 

Total liabilities and stockholders' equity

 

$

932,671

 

 

$

927,681

 

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)

 

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

16,921

 

 

$

157

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

6,702

 

 

 

8,605

 

Basis of real estate sold

 

 

4,790

 

 

 

2,034

 

Change in deferred taxes

 

 

(351

)

 

 

(1,110

)

Employee benefit plans

 

 

3,292

 

 

 

2,737

 

Equity-based compensation expense

 

 

1,157

 

 

 

954

 

Other, net

 

 

(528

)

 

 

(531

)

Change in working capital and operating-related activities, net

 

 

9,966

 

 

 

16,047

 

Net cash from operating activities

 

 

41,949

 

 

 

28,893

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(3,636

)

 

 

(932

)

Timberlands reforestation and roads

 

 

(2,645

)

 

 

(2,242

)

Other, net

 

 

(102

)

 

 

116

 

Net cash from investing activities

 

 

(6,383

)

 

 

(3,058

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Dividends to common stockholders

 

 

(15,228

)

 

 

(15,258

)

Repayment of revolving line of credit borrowings

 

 

 

 

 

(30,000

)

Repayment of long-term debt

 

 

 

 

 

(5,000

)

Proceeds from issuance of long-term debt

 

 

 

 

 

27,500

 

Change in book overdrafts

 

 

 

 

 

(2,836

)

Other, net

 

 

(1,258

)

 

 

(342

)

Net cash from financing activities

 

 

(16,486

)

 

 

(25,936

)

Change in cash and cash equivalents

 

 

19,080

 

 

 

(101

)

Cash and cash equivalents at beginning of period

 

 

82,584

 

 

 

7,925

 

Cash and cash equivalents at end of period

 

$

101,664

 

 

$

7,824

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

 

 

 

Interest, net of amounts capitalized

 

$

3,130

 

 

$

2,029

 

Income taxes, net

 

$

148

 

 

$

(1,709

)

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

5


 

Notes to Condensed Consolidated Financial Statements

 

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, 2016, as filed with the Securities and Exchange Commission on February 17, 2017. 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 March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which changes several aspects of the accounting for share-based payment award transactions, including accounting for income taxes, diluted shares outstanding, classification of excess tax benefits on the statement of cash flows, forfeitures and minimum statutory tax withholding requirements. We prospectively adopted the provisions of this ASU on January 1, 2017, which include recording the tax effects related to share-based payments through the income statement. As a Real Estate Investment Trust (REIT), we are generally not subject to federal and state corporate income taxes, except through our taxable REIT subsidiaries. Therefore, the adoption of this guidance was not material to our consolidated financial statements. We will continue to estimate forfeitures each period. We consider many factors when estimating expected forfeitures, including types of awards, employee class and historical experience.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU No. 2014-09), which requires an entity to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 also included other guidance, including the presentation of a gain or loss recognized on the sale of a long-lived asset or a nonfinancial asset. Subsequent ASU’s have been issued that provide clarity, technical corrections and improvements to Topic 606. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date, which deferred the effective date of ASU No. 2014-09 by one year. ASU No. 2014-09 is effective for us on January 1, 2018. For most of our sales, which consist of logs, manufactured wood products, residual by-products and real estate, we expect there will be no change to the timing or amount of revenue recognized because our contracts are legally enforceable, the transaction price is fixed and performance is completed at a point in time, typically when risk of loss and title pass. We are continuing to assess the effect on our other sales, which include stumpage contracts, timber deeds, land use permits, royalties and carbon sequestration credits. We expect our expanded disclosures will disaggregate revenues along the lines of the sales categories mentioned above. The guidance permits a retrospective application of the new standard with certain practical expedients or retrospective application with a cumulative effect adjustment to the beginning balance of retained earnings. While we have not yet determined our transition method, the adoption of this guidance is not expected to have a significant effect on our consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an entity to present service cost within compensation expense and the other components of net benefit cost outside of income from operations. This ASU is effective for us on January 1, 2018. The amendments in this update require retrospective presentation in the income statement. Changes to the capitalized portion of both service cost and the other components of net benefit cost within inventory will be applied prospectively. In 2016, net periodic pension and other postretirement employee benefit cost reported within operating income totaled $15.7 million of which $6.5 million represented service cost.  

6


 

NOTE 3. EARNINGS PER SHARE

The following table reconciles the number of shares used in calculating basic and diluted earnings per share:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands, except per share amounts)

 

2017

 

 

2016

 

Net income

 

$

16,921

 

 

$

157

 

 

 

 

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

 

40,777,901

 

 

 

40,875,179

 

Incremental shares due to:

 

 

 

 

 

 

 

 

Performance shares

 

 

257,021

 

 

 

69,292

 

Restricted stock units

 

 

35,687

 

 

 

15,204

 

Diluted weighted-average shares outstanding

 

 

41,070,609

 

 

 

40,959,675

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.41

 

 

$

 

Diluted net income per share

 

$

0.41

 

 

$

 

 

For the three months ended March 31, 2017 and 2016, there were 81,440 and 90,272 stock-based awards that were excluded from the calculation of diluted earnings per share because they were anti-dilutive. Anti-dilutive awards could be dilutive in future periods.

NOTE 4. CERTAIN BALANCE SHEET COMPONENTS

INVENTORIES

 

(Dollars in thousands)

 

March 31, 2017

 

 

December 31, 2016

 

Logs

 

$

13,855

 

 

$

23,342

 

Lumber, plywood and veneer

 

 

22,542

 

 

 

20,500

 

Materials and supplies

 

 

8,950

 

 

 

8,780

 

Total inventories

 

$

45,347

 

 

$

52,622

 

 

PROPERTY, PLANT AND EQUIPMENT

 

(Dollars in thousands)

 

March 31, 2017

 

 

December 31, 2016

 

Property, plant and equipment

 

$

254,105

 

 

$

250,913

 

Less: accumulated depreciation

 

 

(179,639

)

 

 

(178,093

)

Total property, plant and equipment, net

 

$

74,466

 

 

$

72,820

 

 

TIMBER AND TIMBERLANDS

 

(Dollars in thousands)

 

March 31, 2017

 

 

December 31, 2016

 

Timber and timberlands

 

$

568,554

 

 

$

572,273

 

Logging roads

 

 

68,765

 

 

 

69,583

 

Total timber and timberlands, net

 

$

637,319

 

 

$

641,856

 

 

7


 

NOTE 5. DERIVATIVE INSTRUMENTS

From time to time, we enter into derivative financial instruments to manage certain cash flow and fair value risks.

Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset or liability to a particular risk, such as interest rate risk, are considered fair value hedges. We have five fair value interest rate swaps to convert interest payments on fixed-rate debt to variable-rate 3-month LIBOR plus a spread.

Derivatives designated and qualifying as a hedge of the exposure to variability in the cash flows of a specific asset or liability that is attributable to a particular risk, such as interest rate risk, are considered cash flow hedges. We have one interest rate swap to convert variable-rate debt, comprised of 3-month LIBOR plus a spread, to fixed-rate debt. Our cash flow hedge is expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the hedge. Therefore, changes in the fair value of the interest rate swap are recorded as a component of other comprehensive income and will be recognized in earnings when the hedged interest rate affects earnings. The amounts paid or received on this interest rate hedge will be recognized as adjustments to interest expense. As of March 31, 2017, the amount of net loss expected to be reclassified into earnings in the next 12 months is $0.1 million.

The following table presents the gross fair values of our interest rate contracts designated as hedging instruments on our Condensed Consolidated Balance Sheets:

 

(Dollars in thousands)

 

Asset Derivatives

 

 

 

 

Liability Derivatives

 

Location

 

March 31, 2017

 

 

December 31, 2016

 

 

Location

 

March 31, 2017

 

 

December 31, 2016

 

Other assets, current

 

$

158

 

 

$

32

 

 

Current liabilities

 

$

 

 

$

 

Other assets,

non-current

 

 

1,227

 

 

 

1,363

 

 

Other long-term obligations

 

 

219

 

 

 

91

 

 

 

$

1,385

 

 

$

1,395

 

 

 

 

$

219

 

 

$

91

 

 

The following table details the effect of derivatives on our Consolidated Statements of Income:

 

 

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

Location

 

2017

 

 

2016

 

Derivatives designated in fair value hedging relationships:

 

 

 

 

 

 

 

 

 

 

Realized gain on interest rate contracts1

 

Interest expense

 

$

167

 

 

$

242

 

Derivatives designated in cash flow hedging relationships:

 

 

 

 

 

 

 

 

 

 

Gain (loss) recognized in other comprehensive income, net of tax (effective portion)

 

 

 

$

(2

)

 

$

(164

)

Loss reclassified from accumulated other comprehensive income into interest expense (effective portion)1

 

Interest expense

 

 

50

 

 

 

 

Net effect on other comprehensive income

 

 

 

$

48

 

 

$

(164

)

1

Realized gain and losses on interest rate contracts consist of net cash received or paid and interest accruals on the interest rate swaps during the periods. Net cash received or paid is included in the supplemental cash flow information within interest, net of amounts capitalized in our Condensed Consolidated Statements of Cash Flows.

8


 

NOTE 6. FINANCIAL INSTRUMENTS

The following table presents the estimated fair values of our financial instruments:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

(Dollars in thousands)

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Cash and cash equivalents (Level 1)

 

$

101,664

 

 

$

101,664

 

 

$

82,584

 

 

$

82,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets related to interest rate swaps (Level 2)

 

$

1,385

 

 

$

1,385

 

 

$

1,395

 

 

$

1,395

 

Derivative liabilities related to interest rate swaps (Level 2)

 

$

(219

)

 

$

(219

)

 

$

(91

)

 

$

(91

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including current portion (Level 2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loans

 

$

(349,500

)

 

$

(351,603

)

 

$

(349,500

)

 

$

(350,909

)

Senior notes

 

 

(149,335

)

 

 

(164,250

)

 

 

(149,271

)

 

 

(164,250

)

Revenue bonds

 

 

(65,735

)

 

 

(62,570

)

 

 

(65,735

)

 

 

(62,205

)

Medium-term notes

 

 

(22,250

)

 

 

(23,613

)

 

 

(22,250

)

 

 

(23,926

)

Total long-term debt1

 

$

(586,820

)

 

$

(602,036

)

 

$

(586,756

)

 

$

(601,290

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company owned life insurance asset (COLI) (Level 3)

 

$

649

 

 

$

649

 

 

$

70

 

 

$

70

 

 

1      The carrying amount of long-term debt includes principal and unamortized discounts.

 

For cash and cash equivalents and revolving line of credit borrowings, the carrying amount approximates fair value due to the short-term nature of these financial instruments.

The fair value of the interest rate swaps was determined using discounted cash flow analysis on 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 quoted market prices for similar debt issues or estimated based on average market prices for comparable debt when there is no quoted market price.

The contract value of our COLI, the amount at which it could be redeemed, is used to estimate fair value because market prices are not readily available.

NOTE 7. 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):

 

 

 

Three Months Ended March 31,

 

 

 

Pension

 

 

OPEB

 

(Dollars in thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Service cost

 

$

1,862

 

 

$

1,507

 

 

$

3

 

 

$

5

 

Interest cost

 

 

4,081

 

 

 

4,252

 

 

 

321

 

 

 

355

 

Expected return on plan assets

 

 

(4,603

)

 

 

(4,766

)

 

 

 

 

 

 

Amortization of prior service cost (credit)

 

 

72

 

 

 

130

 

 

 

(2,219

)

 

 

(2,220

)

Amortization of actuarial loss

 

 

3,856

 

 

 

3,917

 

 

 

398

 

 

 

428

 

Net periodic cost (benefit)

 

$

5,268

 

 

$

5,040

 

 

$

(1,497

)

 

$

(1,432

)

During the three months ended March 31, 2017 and 2016, we paid non-qualified supplemental pension benefits of $0.4 million and $0.4 million and OPEB benefits of $0.6 million and $1.3 million, respectively.

9


 

The following tables detail the pension and OPEB changes in accumulated other comprehensive loss (AOCL) on our Condensed Consolidated Balance Sheets, net of tax:

 

 

 

Three Months Ended March 31, 2017

 

(Dollars in thousands)

 

Pension

 

 

OPEB

 

 

Total

 

Balance at January 1

 

$

120,627

 

 

$

(9,182

)

 

$

111,445

 

Amortization of defined benefit items, net of tax:1

 

 

 

 

 

 

 

 

 

 

 

 

Prior service credit (cost)

 

 

(44

)

 

 

1,354

 

 

 

1,310

 

Actuarial loss

 

 

(2,352

)

 

 

(243

)

 

 

(2,595

)

Total reclassification for the period

 

 

(2,396

)

 

 

1,111

 

 

 

(1,285

)

Balance at March 31

 

$

118,231

 

 

$

(8,071

)

 

$

110,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

(Dollars in thousands)

 

Pension

 

 

OPEB

 

 

Total

 

Balance at January 1

 

$

128,244

 

 

$

(13,741

)

 

$

114,503

 

Amortization of defined benefit items, net of tax:1

 

 

 

 

 

 

 

 

 

 

 

 

Prior service credit (cost)

 

 

(79

)

 

 

1,354

 

 

 

1,275

 

Actuarial loss

 

 

(2,389

)

 

 

(261

)

 

 

(2,650

)

Total reclassification for the period

 

 

(2,468

)

 

 

1,093

 

 

 

(1,375

)

Balance at March 31

 

$

125,776

 

 

$

(12,648

)

 

$

113,128

 

1

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

NOTE 8. EQUITY-BASED COMPENSATION

As of March 31, 2017, 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 March 31, 2017, approximately 1.0 million shares were authorized for future use. We issue new shares of common stock to settle performance shares, restricted stock units and deferred compensation stock equivalent units.

The following table details equity-based compensation expense and the related income tax benefit:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2017

 

 

2016

 

Employee equity-based compensation expense:

 

 

 

 

 

 

 

 

Performance shares

 

$

868

 

 

$

754

 

Restricted stock units

 

 

289

 

 

 

200

 

Total employee equity-based compensation expense

 

$

1,157

 

 

$

954

 

 

 

 

 

 

 

 

 

 

Deferred compensation stock equivalent units expense

 

$

161

 

 

$

200

 

 

 

 

 

 

 

 

 

 

Total tax benefit recognized for share-based expense

 

$

93

 

 

$

66

 

10


 

PERFORMANCE SHARES

The following table presents the key inputs used in the Monte Carlo simulation to calculate the fair value of performance share awards in 2017 and 2016:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Stock price as of valuation date

 

$

43.60

 

 

$

25.92

 

Risk-free rate

 

 

1.61

%

 

 

0.88

%

Expected volatility

 

 

24.22

%

 

 

23.82

%

Expected dividends

 

 

3.44

%

 

 

5.79

%

Expected term (years)

 

 

3.00

 

 

 

3.00

 

Fair value

 

$

53.85

 

 

$

30.02

 

 

The following table summarizes outstanding performance share awards as of March 31, 2017, and changes during the three months ended March 31, 2017:

 

(Dollars in thousands, except grant date fair value)

 

Shares

 

 

Weighted-Avg.

Grant Date

Fair Value

 

 

Aggregate

Intrinsic Value

 

Unvested shares outstanding at January 1

 

 

203,788

 

 

$

32.59

 

 

 

 

 

Granted

 

 

78,033

 

 

$

53.85

 

 

 

 

 

Unvested shares outstanding at March 31

 

 

281,821

 

 

$

38.48

 

 

$

10,844

 

 

As of March 31, 2017, there was $6.7 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 March 31, 2017, and changes during the three months ended March 31, 2017:

 

(Dollars in thousands, except grant date fair value)

 

Shares

 

 

Weighted-Avg.

Grant Date

Fair Value

 

 

Aggregate

Intrinsic Value

 

Unvested shares outstanding at January 1

 

 

71,420

 

 

$

31.61

 

 

 

 

 

Granted

 

 

26,007

 

 

$

43.60

 

 

 

 

 

Vested

 

 

(500

)

 

$

25.92

 

 

 

 

 

Unvested shares outstanding at March 31

 

 

96,927

 

 

$

34.86

 

 

$

4,430

 

 

The fair value of each RSU equaled our common share price on the date of grant. The total fair value of RSU awards that vested during the three months ended March 31, 2017 was de minimis. As of March 31, 2017, there was $2.1 million of total unrecognized compensation cost related to unvested RSU awards, which is expected to be recognized over a weighted-average period of 1.9 years.

DEFERRED COMPENSATION STOCK EQUIVALENT UNITS

A long-term incentive award is granted annually to our directors and is payable upon a director's separation from service. Directors may also elect to defer their quarterly retainers, which may be payable in the form of stock. All stock unit equivalent accounts are credited with dividend equivalents. As of March 31, 2017, there were 134,832 shares outstanding that will be distributed in the future to directors as common stock.  

Issuance of restricted stock units awarded to certain officers and select employees may also be deferred.  All stock unit equivalent accounts are credited with dividend equivalents.  As of March 31, 2017, 72,718 RSUs have vested, but issuance of the related stock has been deferred.

11


 

NOTE 9. 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 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 tax expense or benefit is primarily due to income or loss of the TRS, as well as permanent book versus tax differences.

NOTE 10. 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. In 2016, the EPA confirmed that Potlatch had completed the cleanup and subsequent monitoring required by the unilateral order. 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) (DOT) had incurred $9.8 million in unreimbursed response costs associated with the site and that we were liable for such costs. We executed a tolling agreement with the EPA and DOT suspending the statute of limitations on the claim until September 2016 in order to facilitate negotiations of a final settlement and release. In September, the parties agreed to extend the tolling agreement through October 6, 2016. The tolling agreement was further extended through February 22, 2017 and in January 2017, the tolling agreement was extended through May 22, 2017, and the parties are in the process of negotiating a further extension. Settlement negotiations continue. If settlement efforts prove to be unsuccessful, we believe we have meritorious defenses to this claim and we intend to defend ourselves vigorously. We accrued $0.2 million for this matter in the first quarter of 2016 and an additional $0.8 million for this matter in the second quarter of 2016. It is reasonably possible that our liability may exceed our accrual by up to approximately $2 million. We have reserved all of our rights to seek reimbursement for the costs of remediation from all parties potentially responsible.

 

12


 

NOTE 11. SEGMENT INFORMATION

The following table summarizes information by business segment:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

Resource

 

$

51,768

 

 

$

48,710

 

Wood Products

 

 

95,592

 

 

 

83,238

 

Real Estate

 

 

14,504

 

 

 

5,566

 

 

 

 

161,864

 

 

 

137,514

 

Intersegment Resource revenues1

 

 

(12,183

)

 

 

(9,618

)

Total consolidated revenues

 

$

149,681

 

 

$

127,896

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes:

 

 

 

 

 

 

 

 

Resource

 

$

14,929

 

 

$

10,207

 

Wood Products

 

 

8,684

 

 

 

956

 

Real Estate

 

 

8,643

 

 

 

2,075

 

Eliminations and adjustments

 

 

1,059

 

 

 

1,465

 

 

 

 

33,315

 

 

 

14,703

 

Corporate

 

 

(9,406

)

 

 

(9,631

)

Operating income

 

 

23,909

 

 

 

5,072

 

Interest expense, net

 

 

(4,970

)

 

 

(6,025

)

Income (loss) before income taxes

 

$

18,939

 

 

$

(953

)

 

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization:

 

 

 

 

 

 

 

 

Resource

 

$

4,384

 

 

$

6,128

 

Wood Products

 

 

1,827

 

 

 

1,901

 

Real Estate

 

 

1

 

 

 

2

 

 

 

 

6,212

 

 

 

8,031

 

Corporate

 

 

117

 

 

 

208

 

Bond discounts and deferred loan fees

 

 

373

 

 

 

366

 

Total depreciation, depletion and amortization

 

$

6,702

 

 

$

8,605

 

 

 

 

 

 

 

 

 

 

Basis of real estate sold:

 

 

 

 

 

 

 

 

Real Estate

 

$

4,809

 

 

$

2,245

 

Eliminations and adjustments

 

 

(19

)

 

 

(211

)

Total basis of real estate sold

 

$

4,790

 

 

$

2,034

 

1

Intersegment revenues are based on prevailing market prices of logs sold by our Resource segment to the Wood Products segment.