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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 September 30, 2018

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

PotlatchDeltic 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, if any, every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

                    

 

Smaller reporting company

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act).    

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 October 29, 2018 was 62,754,582.

 

 

 

 


POTLATCHDELTIC CORPORATION AND CONSOLIDATED SUBSIDIARIES

Table of Contents

 

 


 

Part I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

 

 

Nine Months Ended September 30,

 

(Dollars in thousands, except per share amounts)

 

2018

 

 

 

 

2017

 

 

 

 

2018

 

 

 

 

2017

 

Revenues

 

$

289,199

 

 

 

 

$

190,441

 

 

 

 

$

757,329

 

 

 

 

$

503,351

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

195,584

 

 

 

 

 

124,727

 

 

 

 

 

515,645

 

 

 

 

 

348,581

 

Selling, general and administrative expenses

 

 

14,901

 

 

 

 

 

13,240

 

 

 

 

 

45,449

 

 

 

 

 

37,687

 

Deltic merger-related costs

 

 

972

 

 

 

 

 

27

 

 

 

 

 

21,245

 

 

 

 

 

27

 

Environmental charges for Avery Landing

 

 

 

 

 

 

 

4,978

 

 

 

 

 

 

 

 

 

 

4,978

 

Loss (gain) on lumber price swap

 

 

 

 

 

 

 

2,080

 

 

 

 

 

 

 

 

 

 

(1,185

)

 

 

 

211,457

 

 

 

 

 

145,052

 

 

 

 

 

582,339

 

 

 

 

 

390,088

 

Operating income

 

 

77,742

 

 

 

 

 

45,389

 

 

 

 

 

174,990

 

 

 

 

 

113,263

 

Interest expense, net

 

 

(10,109

)

 

 

 

 

(7,336

)

 

 

 

 

(25,125

)

 

 

 

 

(19,654

)

Non-operating pension and other postretirement employee benefit costs

 

 

(1,942

)

 

 

 

 

(1,596

)

 

 

 

 

(5,707

)

 

 

 

 

(4,788

)

Income before income taxes

 

 

65,691

 

 

 

 

 

36,457

 

 

 

 

 

144,158

 

 

 

 

 

88,821

 

Income taxes

 

 

(5,355

)

 

 

 

 

(2,757

)

 

 

 

 

(23,077

)

 

 

 

 

(13,956

)

Net income

 

$

60,336

 

 

 

 

$

33,700

 

 

 

 

$

121,081

 

 

 

 

$

74,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.96

 

 

 

 

$

0.83

 

 

 

 

$

2.06

 

 

 

 

$

1.83

 

Diluted

 

$

0.93

 

 

 

 

$

0.82

 

 

 

 

$

2.03

 

 

 

 

$

1.82

 

Dividends per share

 

$

0.40

 

 

 

 

$

0.375

 

 

 

 

$

1.20

 

 

 

 

$

1.125

 

Weighted-average shares outstanding (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

62,986

 

 

 

 

 

40,829

 

 

 

 

 

58,765

 

 

 

 

 

40,814

 

Diluted

 

 

64,722

 

 

 

 

 

41,250

 

 

 

 

 

59,542

 

 

 

 

 

41,183

 

 

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

 

2


 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

60,336

 

 

$

33,700

 

 

$

121,081

 

 

$

74,865

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other postretirement employee benefits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in net income, net of tax benefit of $(565), $(838), $(1,695) and $(2,513)

 

 

(1,608

)

 

 

(1,309

)

 

 

(4,824

)

 

 

(3,929

)

Amortization of actuarial loss included in net income, net of tax expense of $1,164, $1,562, $3,491 and $4,686

 

 

3,311

 

 

 

2,443

 

 

 

9,934

 

 

 

7,330

 

Cash flow hedge, net of tax expense (benefit) of $166, $0, $386 and $(87)

 

 

1,591

 

 

 

 

 

 

1,850

 

 

 

(137

)

Other comprehensive income, net of tax

 

 

3,294

 

 

 

1,134

 

 

 

6,960

 

 

 

3,264

 

Comprehensive income

 

$

63,630

 

 

$

34,834

 

 

$

128,041

 

 

$

78,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

3


 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

(Dollars in thousands)

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

137,535

 

 

$

120,457

 

Customer receivables, net

 

 

39,029

 

 

 

11,240

 

Inventories

 

 

73,864

 

 

 

50,132

 

Other current assets

 

 

18,988

 

 

 

11,478

 

Total current assets

 

 

269,416

 

 

 

193,307

 

Property, plant and equipment, net

 

 

340,146

 

 

 

77,229

 

Investment in real estate held for development and sale

 

 

76,523

 

 

 

 

Timber and timberlands, net

 

 

1,684,049

 

 

 

654,476

 

Deferred tax assets, net

 

 

 

 

 

19,796

 

Trade name and customer relationships intangibles, net

 

 

19,241

 

 

 

 

Other long-term assets

 

 

23,696

 

 

 

8,271

 

Total assets

 

$

2,413,071

 

 

$

953,079

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Distribution payable

 

$

222,000

 

 

$

 

Accounts payable and accrued liabilities

 

 

80,258

 

 

 

55,201

 

Current portion of long-term debt

 

 

 

 

 

14,263

 

Current portion of pension and other postretirement employee benefits

 

 

6,088

 

 

 

5,334

 

Total current liabilities

 

 

308,346

 

 

 

74,798

 

Long-term debt

 

 

783,899

 

 

 

559,056

 

Pension and other postretirement employee benefits

 

 

89,035

 

 

 

103,524

 

Deferred tax liabilities, net

 

 

38,575

 

 

 

 

Other long-term obligations

 

 

14,147

 

 

 

15,159

 

Total liabilities

 

 

1,234,002

 

 

 

752,537

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $1 par value

 

 

62,755

 

 

 

40,612

 

Additional paid-in capital

 

 

1,483,750

 

 

 

359,144

 

Accumulated deficit

 

 

(256,280

)

 

 

(104,363

)

Accumulated other comprehensive loss

 

 

(111,156

)

 

 

(94,851

)

Total stockholders’ equity

 

 

1,179,069

 

 

 

200,542

 

Total liabilities and stockholders' equity

 

$

2,413,071

 

 

$

953,079

 

 

 

 

 

 

 

 

 

 

 

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

 

4


 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

121,081

 

 

$

74,865

 

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

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

53,685

 

 

 

21,908

 

Basis of real estate sold

 

 

10,673

 

 

 

6,351

 

Change in deferred taxes

 

 

13,879

 

 

 

(925

)

Pension and other postretirement employee benefits

 

 

12,221

 

 

 

9,863

 

Equity-based compensation expense

 

 

6,518

 

 

 

3,536

 

Other, net

 

 

(1,220

)

 

 

(1,467

)

Change in working capital and operating-related activities, net

 

 

(13,289

)

 

 

20,489

 

Real estate development expenditures

 

 

(3,081

)

 

 

 

Funding of qualified pension plans

 

 

(52,099

)

 

 

(5,275

)

Net cash from operating activities

 

 

148,368

 

 

 

129,345

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(18,496

)

 

 

(9,445

)

Timberlands reforestation and roads

 

 

(12,464

)

 

 

(11,577

)

Acquisition of timber and timberlands

 

 

(166

)

 

 

(22,033

)

Other, net

 

 

655

 

 

 

(106

)

Cash and cash equivalents acquired in Deltic merger

 

 

3,419

 

 

 

 

Net cash from investing activities

 

 

(27,052

)

 

 

(43,161

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Dividends to common stockholders

 

 

(75,305

)

 

 

(45,686

)

Proceeds from Potlatch revolving line of credit

 

 

100,000

 

 

 

 

Repayment of Potlatch revolving line of credit

 

 

(100,000

)

 

 

 

Revolving line of credit repayment attributable to Deltic

 

 

(106,000

)

 

 

 

Proceeds from issue of long-term debt

 

 

100,000

 

 

 

 

Repayment of long-term debt

 

 

(14,250

)

 

 

(5,000

)

Debt issuance costs

 

 

(2,434

)

 

 

 

Other, net

 

 

(2,541

)

 

 

(1,279

)

Net cash from financing activities

 

 

(100,530

)

 

 

(51,965

)

Change in cash, cash equivalents and restricted cash

 

 

20,786

 

 

 

34,219

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

120,457

 

 

 

82,584

 

Cash, cash equivalents and restricted cash at end of period

 

$

141,243

 

 

$

116,803

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest, net of amounts capitalized

 

$

23,183

 

 

$

17,381

 

Income taxes, net

 

$

10,335

 

 

$

13,923

 

 

 

 

 

 

 

 

 

 

NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Equity issued as consideration for our merger with Deltic

 

$

1,142,775

 

 

$

 

Earnings and profits distribution payable

 

$

222,000

 

 

$

 

 

 


5


 

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows.

 

(Dollars in thousands)

 

September 30, 2018

 

 

September 30, 2017

 

Cash and cash equivalents

 

$

137,535

 

 

$

116,803

 

Restricted cash included in other long-term assets1

 

 

3,708

 

 

 

 

Total cash, cash equivalents, and restricted cash

 

$

141,243

 

 

$

116,803

 

 

 

 

 

 

 

 

 

 

 

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

 

1

Amounts included in restricted cash represent proceeds held by a qualified intermediary that are intended to be reinvested in timber and timberlands.  

 

6


 

Notes to Condensed Consolidated Financial Statements

 

For purposes of this report, any reference to “PotlatchDeltic,” “Potlatch,” “the company,” “we,” “us” and “our” means PotlatchDeltic Corporation and all of its wholly-owned subsidiaries, except where the context indicates otherwise.

We are a leading timberland real estate investment trust (REIT) with operations in seven states where we own nearly 2 million acres of timberland, six sawmills, an industrial grade plywood mill, a medium density fiberboard (MDF) plant and real estate development projects.

NOTE 1. BASIS OF PRESENTATION

Our unaudited condensed consolidated financial statements provide an overall view of our results and financial condition and include the results of Deltic Timber Corporation (Deltic) beginning February 21, 2018, the first full business day following the merger of Deltic into Portland Merger, LLC, a wholly-owned subsidiary of Potlatch. See Note 3: Merger with Deltic. Potlatch was renamed PotlatchDeltic Corporation immediately after consummation of the merger.

Intercompany transactions and accounts have been eliminated in consolidation.

The accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Except as otherwise disclosed in these Notes to Condensed Consolidated Financial Statements, such adjustments are of a normal, recurring nature. The 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 accounting principles generally accepted 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, 2017, as filed with the Securities and Exchange Commission on February 16, 2018. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year.

RECLASSIFICATIONS

Components of prior year pension plan and other postretirement benefit plan costs were reclassified to non-operating pension and other postretirement benefit costs to conform to the 2018 presentation. See Note 2: Recent Accounting Pronouncements.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

New Accounting Standards – Recently Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014‑09, Revenue from Contracts with Customers: Topic 606, 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 No. 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. We adopted ASU No. 2014-09 on January 1, 2018 using the cumulative effect method. There was no adjustment to accumulated deficit upon adoption. Adoption of this ASU resulted in expanded disclosures, but did not have a material impact on our condensed consolidated financial statements, processes or internal controls. See Note 5: Revenue Recognition for our expanded disclosures.

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. We adopted this ASU retrospectively on January 1, 2018, and have reclassified non-service costs from operating income to non-operating costs. There was no change to income before income taxes. The adjustments made to the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 are as follows:

 

 

For the Three Months Ended

September 30, 2017

 

 

For the Nine Months Ended

September 30, 2017

 

(Dollars in thousands)

Previously

Reported

 

 

Effect of

Change

 

 

As

Adjusted

 

 

Previously

Reported

 

 

Effect of

Change

 

 

As

Adjusted

 

Operating income

$

43,793

 

 

 

1,596

 

 

$

45,389

 

 

$

108,475

 

 

 

4,788

 

 

$

113,263

 

 

7


 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. We adopted this ASU on January 1, 2018 on a modified retrospective basis through a $1.3 million cumulative-effect adjustment directly to accumulated deficit as of January 1, 2018.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash, which requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The ASU does not define the terms restricted cash and restricted cash equivalents. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The company adopted ASU 2016-18 during the first quarter of 2018, applying the standard retrospectively to all periods presented. The adoption of this standard did not have an impact on our historical condensed consolidated financial statements. At September 30, 2018 we had restricted cash of $3.7 million included in other long-term assets related to proceeds held by a qualified intermediary that are intended to be reinvested in timberlands.

In January 2017, the FASB issued ASU No. 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business. The standard provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or a business. We adopted this ASU on January 1, 2018 and accounted for the merger with Deltic as an acquisition of a business.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 requires that when a hedge is deemed effective, hedge accounting must be applied to the entire change in fair value of the hedging instrument eliminating the notion of ineffective portions of the hedge relationship. The entire change in the fair value of the hedging instrument will be recorded in the same income statement line item as the hedged item and the ineffective portion will no longer be separately recognized in earnings. This ASU is effective for public entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted in any interim period. ASU 2017-12 is required to be adopted using a modified retrospective approach with the presentation and disclosure requirements only required on a prospective basis. We adopted ASU 2017-12 effective April 1, 2018, which resulted in no material impact to our condensed consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-2, Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the December 22, 2017, H.R. 1, Tax Cuts and Jobs Act (the Act). This ASU is effective for us on January 1, 2019, with early adoption permitted. We adopted this ASU on January 1, 2018 and reclassified the income tax effects of the Act on pension and other postretirement employee benefits and a cash flow hedge within accumulated other comprehensive loss to accumulated deficit. In future periods, our accounting policy will be to release income tax rate change effects from accumulated other comprehensive loss to accumulated deficit. Upon adoption, accumulated other comprehensive loss was increased by $23.3 million, with a corresponding decrease to accumulated deficit. See Note 11: Components of Accumulated Other Comprehensive Loss.

New Accounting Standards – Recently Issued

In August 2018, the FASB issued ASU No. 2018-15 Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years after December 15, 2019, including interim periods within those years; early application is permitted. We expect to adopt the standard on January 1, 2020 and are currently evaluating the impact of the standard on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years after December 15, 2020, including interim periods within those years; early application is permitted. We expect to adopt the standard on January 1, 2021 and are currently evaluating the impact of the standard on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value

8


 

measurements. ASU 2018-13 is effective for fiscal years after December 15, 2019, including interim periods within those years; early application is permitted. We expect to adopt the standard on January 1, 2020 and are currently evaluating the impact of the standard on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07 Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. ASU 2018-07 is effective for fiscal years after December 15, 2018, including interim periods within those years. Early application of the amendment is permitted. We expect to adopt the standard on January 1, 2019. We are currently evaluating the impact of our pending adoption of ASU 2018-07 on our consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The objective of the new standard is to establish principles for lessees and lessors to report information about the amount, timing and uncertainty of cash flows arising from a lease and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. For leases with a term of 12 months or less, the lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities. The standard, along with subsequent amendments, is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; early application is permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparable period presented in the financial statements as its date of initial application.  

 

We expect to adopt ASU 2016-02, along with subsequent amendments, on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides several optional practical expedients in transition and for an entity’s ongoing accounting. We continue to assess and document the effect of this ASU and subsequent amendments either made or being contemplated by the FASB. This assessment and documentation includes reviewing all forms of leases, performing a completeness assessment over our lease population and analyzing the practical expedients. We currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets and lease liabilities, which includes not recognizing ROU assets or lease liabilities for short-term leases of those assets in transition.

 

We expect the adoption of this ASU will result in minor refinements to our controls over financial reporting and will significantly expand financial statement disclosures as we have operating leases covering office space, equipment and vehicles expiring at various dates through 2033. We currently expect our right-of use assets and lease liabilities recorded upon adoption will approximate the present value of our current future minimum lease payments required under our operating leases in effect upon adoption. Lease costs will generally continue to be recognized on a straight-line basis. As of December 31, 2017, the undiscounted cash flows of our operating leases were $14.4 million.

NOTE 3. MERGER WITH DELTIC

On February 20, 2018 (merger date), Deltic Timber Corporation (Deltic) merged into Portland Merger, LLC, a wholly-owned subsidiary of Potlatch. Deltic owned approximately 530,000 acres of timberland, operated two sawmills and a medium density fiberboard plant and was engaged in real estate development primarily in Arkansas. The merger creates a combined company with a diversified timberland base of nearly 2 million acres, including approximately 930,000 acres in Arkansas. It uniquely positions us to expand our integrated model of timberland ownership and lumber manufacturing, provide significant tax savings on Deltic’s timber harvest earnings and increase our exposure to the fast-growing Texas housing market.

Under the merger agreement, each issued and outstanding share of Deltic common stock was exchanged for 1.80 shares of Potlatch common stock, with cash paid in lieu of any fractional shares. Upon consummation of the merger, all outstanding Deltic stock options (which fully vested as of the merger date) and restricted stock units (RSUs) were converted into Potlatch stock options and RSUs, after giving effect to the 1.80 exchange ratio. Because the Deltic stock options are fully vested and relate to services rendered to Deltic prior to the merger, the replacement stock options are also fully vested and their fair value is included in the consideration transferred. A portion of the replacement RSUs relate to services to be performed post-merger and therefore are not included in consideration transferred. See additional details about replacement share-based payment awards in Note 12: Equity-Based Compensation.

9


 

The following table summarizes the total consideration transferred in the merger:

(Dollars in thousands, except share and per share amounts)

 

 

 

Number of shares of Deltic common stock outstanding1

 

12,121,223

 

Number of Deltic performance awards2

 

90,515

 

 

 

12,211,738

 

Exchange ratio3

 

1.80

 

Potlatch shares issued

 

21,981,128

 

Price per Potlatch common share4

$

51.95

 

Aggregate value of Potlatch common shares issued

$

1,141,920

 

Cash paid in lieu of fractional shares

14

 

Fair value of stock options and RSUs5

841

 

Consideration transferred

$

1,142,775

 

 

 

 

 

1

Number of shares of Deltic common stock issued and outstanding as of February 20, 2018, net of fractional shares.

2

Number of shares of Deltic performance awards for pre-combination services rendered that vested upon closing of the merger.

3

Exchange ratio per the merger agreement.

4

Closing price of Potlatch common shares on February 20, 2018.

5

Fair value of Deltic stock options for pre-combination services rendered that vested upon closing of the merger, as well as RSUs for pre-combination services rendered.

On August 30, 2018, the board of directors approved a special distribution of $222.0 million, payable on November 15, 2018, to stockholders of record on September 27, 2018. The special distribution amount equals the company’s determination of the accumulated earnings and profits of Deltic as of merger date and must be distributed by the company prior to December 31, 2018 in order to maintain the company’s qualification as a REIT for U.S. federal income tax purposes. Common stockholders can elect to receive payment of the special distribution in the form of stock or cash, with the total cash payment to all stockholders limited to no more than 20%, or $44.4 million (Cash Amount), of the total distribution. If the aggregate amount of stockholder cash elections exceeds the Cash Amount, then the payment of such cash elections will be made on a pro rata basis to stockholders who made the cash election such that the aggregate amount paid in cash to such stockholders equals the Cash Amount, with the balance paid in shares of common stock. The declaration of this special distribution created a $222.0 million unconditional obligation for the company as of August 30, 2018 which is recorded as distribution payable on the Condensed Consolidated Balance Sheets at September 30, 2018. See Note: 3 Earnings Per Share for further discussion on the impact of the special distribution on diluted earnings per share.

The company entered into a two-year consulting agreement for $1.85 million with Deltic’s former Chief Executive Officer. While the agreement was terminated in the first quarter of 2018, payments are required to be made through the end of the two year term. This agreement was considered a separate transaction from the business combination, therefore the $1.85 million was recorded as merger costs in the first quarter of 2018.

We expensed approximately $1.0 million and $21.2 million of merger-related costs during the three and nine months ended September 30, 2018, respectively. See Note 13: Merger, Integration and other Costs for the components of merger-related costs. These costs are included in Deltic merger-related costs in our Condensed Consolidated Statements of Income.

The amount of revenue and income before income taxes from acquired Deltic operations included in our Condensed Consolidated Statement of Income for February 21, 2018 through September 30, 2018 are as follows:

(Dollars in thousands)

Three Months Ended

September 30, 2018

 

 

Nine Months Ended

September 30, 2018

 

Net sales

$

83,385

 

 

$

192,244

 

Income before income taxes

$

17,180

 

 

$

25,869

 

 


10


 

Summarized unaudited pro forma information that presents combined amounts as if this merger occurred at the beginning of 2017 is as follows:

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

(Dollars in thousands, except per share amounts)

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

$

289,199

 

 

$

252,097

 

 

$

795,992

 

 

$

673,575

 

Net earnings attributable to PotlatchDeltic common shareholders

$

61,327

 

 

$

30,099

 

 

$

142,314

 

 

$

63,862

 

Basic earnings per share attributable to PotlatchDeltic common Shareholders

$

0.91

 

 

$

0.44

 

 

$

2.13

 

 

$

0.95

 

Diluted earnings per share attributable to PotlatchDeltic common shareholders

$

0.91

 

 

$

0.44

 

 

$

2.12

 

 

$

0.95

 

Pro forma net earnings attributable to PotlatchDeltic common shareholders excludes $1.0 million and $26.7 million of non-recurring merger-related costs incurred by both companies during the three and nine months ended September 30, 2018, respectively, of which $5.4 million were incurred by Deltic prior to the merger.

Pro forma basic and diluted earnings per share assumes issuance of approximately 22.0 million shares that were issued at the merger date as of the beginning of 2017. Pro forma basic and diluted earnings per share also assumes the issuance of 4.2 million shares as of the beginning of 2017, which is the estimated number of shares from the special distribution required to settle the estimated stock portion of the liability at September 30, 2018. Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.

PotlatchDeltic has accounted for the merger transaction as the acquirer and has applied the acquisition method of accounting. Under the acquisition method, the assets acquired and liabilities assumed from Deltic were generally recorded as of the date of the merger at their respective estimated fair values.

Our September 30, 2018 Condensed Consolidated Balance Sheet includes the assets and liabilities of Deltic, which have been measured at fair value as of the merger date. The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches, as applicable. The fair value measurements were generally based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in ASC 820, Fair Value Measurements and Disclosures, except for certain long-term debt instruments assumed in the acquisition that can be valued using observable market inputs and are therefore Level 2 measurements. The income approach and cost approach were primarily used to value acquired timber and timberlands. The income approach was primarily used to value the acquired real estate held for development and sale. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flows are discounted at rates of return that reflect the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. The market approach was primarily used to value long-term debt instruments. The market approach estimates fair value for an asset based on values of recent comparable transactions.

11


 

The following table summarizes the preliminary fair value measurements of assets acquired and liabilities assumed as of merger date:

(Dollars in thousands)

February 20, 2018

 

 

Measurement Period Adjustments

 

 

As Adjusted

February 20, 2018

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

3,419

 

 

$

 

 

$

3,419

 

Customer receivables, net

 

12,709

 

 

 

 

 

 

12,709

 

Inventories

 

17,316

 

 

 

 

 

 

17,316

 

Other current assets

 

8,276

 

 

 

524

 

 

 

8,800

 

Real estate held for development and sale

 

79,000

 

 

 

(2,000

)

 

 

77,000

 

Property, plant and equipment

 

265,901

 

 

 

(5,132

)

 

 

260,769

 

Timber and timberlands

 

1,060,000

 

 

 

913

 

 

 

1,060,913

 

Mineral rights

 

 

 

 

6,236

 

 

 

6,236

 

Trade name and customer relationships intangibles

 

19,000

 

 

 

500

 

 

 

19,500

 

Other long-term assets

 

2,010

 

 

 

1,546

 

 

 

3,556

 

Total assets acquired

 

1,467,631

 

 

 

2,587

 

 

 

1,470,218

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

12,604

 

 

 

3,418

 

 

 

16,022

 

Current portion of pension and other postretirement employee benefits

 

754

 

 

 

 

 

 

754

 

Long-term debt

 

229,968

 

 

 

 

 

 

229,968

 

Pension and other postretirement employee benefits

 

36,155

 

 

 

 

 

 

36,155

 

Deferred tax liabilities, net

 

44,439

 

 

 

(831

)

 

 

43,608

 

Other long-term liabilities

 

936

 

 

 

 

 

 

936

 

Total liabilities assumed

 

324,856

 

 

 

2,587

 

 

 

327,443

 

Net assets acquired

$

1,142,775

 

 

$

 

 

$

1,142,775

 

 

 

 

 

 

 

 

 

 

 

 

 

The real estate held for development and sale adjustment of $2.0 million was based on continued refinement of information as of the merger date factored into the valuation. The property, plant and equipment adjustment of $ 5.1 million related to further refinement and review of the inputs associated with valuation of the acquired buildings and equipment including items such as estimated useful lives, maintenance expenditures and market comparables. The $ 0.9 million adjustment to timber and timberlands is a combination of the separation of the mineral rights value previously included in the timber and timberlands, offset by further revisions to the underlying valuation assumptions. The mineral rights measurement period adjustment of $6.2 million related to certain oil and gas royalty payments from third party extractive activities on the acquired land. This amount is included in other long-term assets in the Condensed Consolidated Balance Sheets. The other long-term asset measurement period adjustment of $1.5 million was related to sales and use tax credits from the State of Arkansas. The accounts payable and accrued liabilities measurement period adjustment of $3.4 million was primarily for estimated 2017 Deltic taxes payable estimated at merger date and adjusted with the 2017 tax return filing. Other measurement changes were not significant and mainly a result of continued refinement of information as of the merger date that have been factored into the valuation. As a result of these adjustments, during the three and nine months ended September 30, 2018 we recorded approximately $0 and $0.2 million, respectively, of additional depreciation, depletion and amortization expense as measurement period adjustments.

These estimated fair values are preliminary in nature and subject to adjustments, which could be material. We have not identified any material unrecorded pre-merger contingencies where the related asset, liability or impairment is probable and the amount can be reasonably estimated. We are currently in the process of finalizing our valuations related to the following:

 

Timber and timberlands

 

Mineral rights

 

Property, plant and equipment

 

Real estate held for development and sale

 

Intangible assets, which includes trade names and customer relationships

 

Other contractual rights and obligations

 

Income taxes

12


 

Our valuations will be finalized when certain information arranged to be obtained has been received, our review of that information has been completed and our review of the underlying assumptions within the valuation models has been completed. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation.

NOTE 4. EARNINGS PER SHARE

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands, except per share amounts)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

60,336

 

 

$

33,700

 

 

$

121,081

 

 

$

74,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

 

62,985,517

 

 

 

40,829,399

 

 

 

58,765,381

 

 

 

40,814,135

 

Incremental shares due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance shares

 

 

269,998

 

 

 

378,149

 

 

 

262,648

 

 

 

331,082

 

Restricted stock units

 

 

37,535

 

 

 

42,909

 

 

 

32,736

 

 

 

37,578

 

Stock portion of earnings and profits distribution

 

 

1,428,607

 

 

 

 

 

 

481,435

 

 

 

 

Diluted weighted-average shares outstanding

 

 

64,721,657

 

 

 

41,250,457

 

 

 

59,542,200

 

 

 

41,182,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.96

 

 

$

0.83

 

 

$

2.06

 

 

$

1.83

 

Diluted net income per share

 

$

0.93

 

 

$

0.82

 

 

$

2.03

 

 

$

1.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In February 2018 we issued 22.0 million shares in connection with the Deltic merger. Further, on August 30, 2018, the board of directors approved a special distribution of $222.0 million to be paid on November 15, 2018 in connection with the acquisition in order to maintain the company’s qualification as a REIT. Using a volume weighted average price of our common stock for final three trading days in September, we estimated 4.2 million shares would be required to settle the 80% stock portion of the $222.0 million special distribution accrual at September 30, 2018. The weighted average shares for the dilutive effect on earnings per share from the stock portion of the special distribution was based on the August 30, 2018 declaration date. See Note 3: Merger with Deltic for further discussion on the merger.

For the three and nine months ended September 30, 2018, there were 15,966 and 38,320 stock-based awards that were excluded from the calculation of diluted earnings per share because they were anti-dilutive. Anti-dilutive stock-based awards could be dilutive in future periods. For the three and nine months ended September 30, 2017, there were 0 and 167 stock-based awards that were excluded from the calculation of diluted earnings per share because they were anti-dilutive.

 

NOTE 5. REVENUE RECOGNITION

The majority of our revenues are derived from the sale of delivered logs, manufactured wood products, residual wood product by-products and real estate. We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

Performance Obligations

A performance obligation, as defined in ASC 606, is a promise in a contract to transfer a distinct good or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue at the point in time, or over the period, in which the performance obligation is satisfied.

Performance obligations associated with delivered log and residual sales are typically satisfied when the logs and residuals are delivered to our customers’ mills. Performance obligations associated with the sale of wood products are typically satisfied when the products are shipped (FOB shipping point) or upon delivery to our customer (FOB destination) depending on the terms of the customer contract. Shipping and handling costs for all wood product and residual sales are accounted for as cost of goods sold.

ASC Topic 606 requires entities to consider significant financing components of contracts with customers, but allows for the use of a practical expedient when the period between satisfaction of a performance obligation and payment receipt is one year or less. Given the nature of our revenue transactions, we have elected to utilize this practical expedient.

13


 

Substantially all of our performance obligations are satisfied as of a point in time. We have also elected to use the practical expedient to not disclose unsatisfied or partially satisfied performance obligations as all unsatisfied contracts are expected to be satisfied in less than one year.

Performance obligations associated with real estate sales are generally satisfied at a point in time when all conditions of closing have been met.

Contract Estimates

The transaction price for log and residual sales is determined using contractual rates applied to delivered volumes. The contractual rates are generally based on prevailing market prices and payment is generally due from customers within one month or less of delivery. For log and residual sales subject to long-term supply agreements, the transaction price is variable but is known at the time of delivery. For wood products sales, the transaction price is generally the amount billed to the customer based on the prevailing market price for the products shipped but may be reduced slightly for estimated cash discounts.

There are no significant contract estimates related to the real estate business.

Contract Balances

In general, a customer receivable is recorded as we ship and/or deliver wood products, logs and residuals. We generally receive payment shortly after products have been received by our customers. As of September 30, 2018 and December 31, 2017 we recorded $4.7 million and $1.7 million, respectively, for contract liabilities related to hunting lease rights. These contract liabilities are being amortized over the term of the contracts, which is typically less than twelve months. Other contract asset and liability balances, such as prepayments, are immaterial. For real estate sales, we typically receive the entire consideration in cash at closing.

14


 

Major Products

The following table represents our revenues by major product. For additional information regarding our segments, see Note 16: Segment Information.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

2018

 

 

2017

 

 

2018

 

 

2017

 

Resource

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sawlogs

$

69,658

 

 

$

68,699

 

 

$

168,869

 

 

$

139,043

 

Pulpwood

 

1,575

 

 

 

1,272

 

 

 

4,654

 

 

 

4,718

 

Stumpage

 

39