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POTLATCHDELTIC CORP - Quarter Report: 2011 June (Form 10-Q)

Form 10-Q
Table of Contents

 

 

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 June 30, 2011

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   ¨
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  x

The number of shares of common stock of the registrant outstanding as of July 21, 2011 was 40,187,407.

 

 

 


Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Index to Form 10-Q

 

         Page Number  

PART I.

  FINANCIAL INFORMATION   

ITEM 1.

  Financial Statements   

Consolidated Condensed Statements of Operations and Comprehensive Income for the quarters and six months ended June 30, 2011 and 2010

     2   

Consolidated Condensed Balance Sheets at June 30, 2011 and December 31, 2010

     3   

Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2011 and 2010

     4   

Notes to Consolidated Condensed Financial Statements

     5 - 13   

ITEM 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations     
14 - 20
  

ITEM 3.

  Quantitative and Qualitative Disclosures About Market Risk      20   

ITEM 4.

  Controls and Procedures      20   

PART II.

  OTHER INFORMATION   

ITEM 1.

  Legal Proceedings      21   

ITEM 1A.

  Risk Factors      21   

ITEM 6.

  Exhibits      21   

SIGNATURES

     22   

EXHIBIT INDEX

     23   


Table of Contents

Part I

ITEM 1.

Financial Statements

 

 

 

Potlatch Corporation and Consolidated Subsidiaries

Consolidated Condensed Statements of Operations and Comprehensive Income

Unaudited (Dollars in thousands, except per-share amounts)

 

 

      Quarter Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Revenues

   $ 112,370      $ 128,978      $ 234,603      $ 234,396   
                                

Costs and expenses:

        

Cost of goods sold

     85,906        97,295        179,054        182,789   

Selling, general and administrative expenses

     8,704        9,401        20,631        17,846   
                                
     94,610        106,696        199,685        200,635   
                                

Earnings from continuing operations before interest and taxes

     17,760        22,282        34,918        33,761   

Interest expense, net

     (6,612     (7,089     (14,491     (14,177
                                

Earnings from continuing operations before taxes

     11,148        15,193        20,427        19,584   

Income tax provision

     (2,699     (3,365     (4,282     (6,372
                                

Earnings from continuing operations

     8,449        11,828        16,145        13,212   

Discontinued operations, net of tax

     —          (85     —          (274
                                

Net earnings

   $ 8,449      $ 11,743      $ 16,145      $ 12,938   
                                

Other comprehensive income, net of tax

     843        450        1,840        7,075   
                                

Comprehensive income

   $ 9,292      $ 12,193      $ 17,985      $ 20,013   
                                

Earnings per common share from continuing operations:

        

Basic

   $ 0.21      $ 0.29      $ 0.40      $ 0.33   

Diluted

     0.21        0.29        0.40        0.33   

Loss per common share from discontinued operations:

        

Basic

   $ —        $ —        $ —        $ (0.01

Diluted

     —          —          —          (0.01

Net earnings per common share:

        

Basic

   $ 0.21      $ 0.29      $ 0.40      $ 0.32   

Diluted

     0.21        0.29        0.40        0.32   

Distributions per common share

   $ 0.51      $ 0.51      $ 1.02      $ 1.02   

Average shares outstanding (in thousands):

        

Basic

     40,174        39,972        40,127        39,930   

Diluted

     40,378        40,211        40,339        40,164   

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

 

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Potlatch Corporation and Consolidated Subsidiaries

Consolidated Condensed Balance Sheets

Unaudited (Dollars in thousands, except per-share amounts)

 

 

     June 30,
2011
     December 31,
2010
 

ASSETS

     

Current assets:

     

Cash

   $ 7,368       $ 5,593   

Short-term investments

     67,758         85,249   

Receivables, net

     19,874         21,278   

Inventories

     21,469         24,375   

Other assets

     22,213         25,299   
                 

Total current assets

     138,682         161,794   

Property, plant and equipment, net

     65,385         67,174   

Timber and timberlands, net

     466,598         475,578   

Deferred tax assets

     43,595         49,054   

Other assets

     27,144         28,111   
                 
   $ 741,404       $ 781,711   
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Current installments on long-term debt

   $ 21,660       $ 5,011   

Accounts payable and accrued liabilities

     59,075         61,021   
                 

Total current liabilities

     80,735         66,032   

Long-term debt

     342,704         363,485   

Liability for pensions and other postretirement employee benefits

     115,786         129,124   

Other long-term obligations

     19,048         18,631   

Stockholders’ equity

     183,131         204,439   
                 
   $ 741,404       $ 781,711   
                 

Stockholders’ equity per common share

   $ 4.56       $ 5.11   

Working capital

   $ 57,947       $ 95,762   

Current ratio

     1.7:1         2.5:1   

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

 

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Potlatch Corporation and Consolidated Subsidiaries

Consolidated Condensed Statements of Cash Flows

Unaudited (Dollars in thousands)

 

 

     Six Months Ended
June 30,
 
     2011     2010  

CASH FLOWS FROM CONTINUING OPERATIONS

    

Net earnings

   $ 16,145      $ 12,938   

Adjustments to reconcile net earnings to net operating cash flows from continuing operations:

    

Depreciation, depletion and amortization

     13,824        14,358   

Basis of real estate sold

     10,573        4,713   

Change in deferred taxes

     4,283        7,268   

Loss (gain) on disposition of property, plant and equipment

     (54     1,105   

Employee benefit plans

     (83     (2,859

Loss from discontinued operations

     —          274   

Equity-based compensation expense

     2,047        1,864   

Funding of qualified pension plans

     (9,400     —     

Working capital changes

     836        (7,268
                

Net cash provided by operating activities from continuing operations

     38,171        32,393   
                

CASH FLOWS FROM INVESTING

    

Decrease in short-term investments

     17,491        18,901   

Additions to property, plant and equipment

     (2,993     (2,248

Additions to timber and timberlands

     (4,110     (3,633

Proceeds from disposition of property, plant and equipment

     133        3,100   

Other, net

     (852     (1,088
                

Net cash provided by investing activities from continuing operations

     9,669        15,032   
                

CASH FLOWS FROM FINANCING

    

Distributions to common stockholders

     (40,963     (40,759

Change in long-term debt

     (5,008     (10

Issuance of common stock

     1,230        1,432   

Change in book overdrafts

     647        (1,287

Deferred financing costs

     (343     (176

Employee tax withholdings on equity-based compensation

     (1,605     (1,967

Other, net

     (23     62   
                

Net cash used for financing activities from continuing operations

     (46,065     (42,705
                

Cash flows provided by continuing operations

     1,775        4,720   

Cash flows used for discontinued operations

     —          (594
                

Increase in cash

     1,775        4,126   

Cash at beginning of period

     5,593        1,532   
                

Cash at end of period

   $ 7,368      $ 5,658   
                

SUPPLEMENTAL CASH FLOW INFORMATION

    

Cash paid (received) during the year for:

    

Interest, net of amount capitalized

   $ 12,627      $ 13,246   

Income taxes, net

     (5,993     1,582   

Non-cash investing activity:

    

Additions to timber and timberlands

     341        —     

Certain 2010 amounts have been reclassified to conform to the 2011 presentation.

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

 

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Potlatch Corporation and Consolidated Subsidiaries

Notes to Consolidated Condensed Financial Statements

Unaudited (Dollars in thousands)

 

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 Consolidated Condensed Statements of Operations and Comprehensive Income for the quarters and six months ended June 30, 2011 and 2010, the Consolidated Condensed Balance Sheets at June 30, 2011 and December 31, 2010, and the Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2011 and 2010 have been prepared in conformity with accounting principles generally accepted in the United States of America. We believe that all adjustments necessary for a fair statement of the results of such interim periods have been included.

In March 2010, we sold our Idaho particleboard manufacturing facility’s buildings and equipment. As a result of the sale, we recorded pre-tax charges totaling $0.4 million, primarily related to severance benefits. All other adjustments were of a normal recurring nature.

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, 2010, as filed with the Securities and Exchange Commission on February 23, 2011.

NOTE 2.

Recent Accounting Pronouncements

We did not adopt any new accounting standards during the six months ended June 30, 2011. We reviewed all new accounting standards issued in the period and concluded that they did not have a material effect on our business.

NOTE 3.

Income Taxes

As a real estate investment trust, or REIT, if we meet certain requirements, we generally are not subject to federal and state corporate income taxes on our income from investments in real estate that we distribute to our shareholders. We are, however, subject to corporate taxes on built-in gains (the excess of fair market value at January 1, 2006 over tax basis on that date) with respect to the REIT’s sale of any real property owned at such date within the first ten years following our conversion to a REIT, except for sales occurring in 2011. The Small Business Jobs Act of 2010 modifies the built-in gains provisions to exempt sales of real properties by a REIT in 2011, if five years of the recognition period has elapsed before January 1, 2011. If applicable, the built-in gains tax is eliminated or deferred if sale proceeds are reinvested in like-kind property in accordance with the like-kind exchange provisions of the Internal Revenue Code. The built-in gains tax is not applicable to the sale of timber pursuant to a stumpage sale agreement or timber deed.

For the quarters ended June 30, 2011 and 2010, we recorded income tax provisions related to our taxable REIT subsidiary, or Potlatch TRS, of $2.7 million and $3.7 million, respectively, due to pre-tax income. For the six months ended June 30, 2011 and 2010, we recorded income tax provisions related to Potlatch TRS of $4.3 million and $3.5 million, respectively, due to pre-tax income.

For the six months ended June 30, 2011 and 2010, we recorded income tax expense of $0 and $0.3 million, respectively, related to the sale of REIT properties that were not deferred in accordance with the like-kind exchange provisions of the Internal Revenue Code.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Reconciliation Act of 2010 included a change in the deductibility of drug expenses reimbursed under the Medicare Part D retiree drug subsidy program beginning after 2012. As a result of this legislation, deferred taxes associated with our retiree health care liabilities based on prior law were required to be adjusted, resulting in a $3.0 million net charge to earnings in the first three months of 2010. During the quarter ended June 30, 2010, we recorded an income tax benefit related to continuing operations of Potlatch TRS of $0.3 million attributable to the Part D reimbursements received during the quarter that were non-taxable.

We reviewed our tax positions at June 30, 2011, and determined that no uncertain tax positions were taken during the first six months of 2011, and that no new information was available that would require derecognition of previously taken positions.

 

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We reflect accrued interest related to tax obligations, as well as penalties, in our provision for income taxes. During the quarters and six months ended June 30, 2011 and 2010, we recognized a net benefit of less than $0.1 million related to interest and penalties in our tax provision. At June 30, 2011 and December 31, 2010, we had less than $0.1 million accrued for the payment of interest. At June 30, 2011 and December 31, 2010, we had $0 and $0.8 million, respectively, accrued as a receivable for interest with respect to open tax refunds.

NOTE 4.

Earnings per Common Share

The following table reconciles the number of common shares used in calculating the basic and diluted earnings per share from continuing operations for the quarters and six months ended June 30:

 

     Quarter Ended
June 30,
     Six Months Ended
June 30,
 

(Dollars in thousands, except per-share amounts)

   2011      2010      2011      2010  

Earnings from continuing operations

   $ 8,449       $ 11,828       $ 16,145       $ 13,212   
                                   

Basic average common shares outstanding

     40,174,164         39,972,087         40,126,550         39,930,065   

Incremental shares due to:

           

Common stock options

     58,435         110,450         58,462         102,361   

Performance shares

     115,310         95,597         123,251         99,859   

Restricted stock units

     30,088         32,835         30,788         31,450   
                                   

Diluted average common shares outstanding

     40,377,997         40,210,969         40,339,051         40,163,735   
                                   

Basic earnings per common share from continuing operations

   $ 0.21       $ 0.29       $ 0.40       $ 0.33   
                                   

Diluted earnings per common share from continuing operations

   $ 0.21       $ 0.29       $ 0.40       $ 0.33   
                                   

Anti-dilutive shares excluded from the calculation:

           

Performance shares

     77,767         81,162         77,767         81,162   

Restricted stock units

     —           750         16,553         750   
                                   

Total anti-dilutive shares excluded from the calculation

     77,767         81,912         94,320         81,912   
                                   

NOTE 5.

Equity-Based Compensation

As of June 30, 2011, we had three stock incentive plans under which stock option, performance share or restricted stock unit, or RSU, grants were outstanding, with approximately 354,000 shares authorized for future use under the 2005 Stock Incentive Plan.

The following table details our compensation expense for the quarters and six months ended June 30:

 

     Quarter Ended
June 30,
     Six Months Ended
June 30,
 

(Dollars in thousands)

   2011     2010      2011      2010  

Employee equity-based compensation expense:

          

Performance shares

   $ 942      $ 831       $ 1,765       $ 1,562   

Restricted stock units

     155        158         282         302   
                                  

Total employee equity-based compensation expense

   $ 1,097      $ 989       $ 2,047       $ 1,864   
                                  

Related net income tax benefit

   $ —        $ —         $ —         $ —     
                                  

Director deferred compensation expense (income)

   $ (545   $ 307       $ 857       $ 930   
                                  

 

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For the six months ended June 30, 2011 and 2010, there were no realized tax benefits related to the excess of the deductible amount over the compensation cost recognized in the Consolidated Condensed Statements of Cash Flows.

STOCK OPTIONS

The following table summarizes outstanding stock options as of June 30, 2011, and changes during the six months ended June 30, 2011:

 

(Dollars in thousands, except exercise prices)

   Shares     Weighted Avg.
Exercise Price
     Aggregate
Intrinsic Value
 

Outstanding at January 1

     222,130      $ 21.64      

Shares exercised

     (65,382     18.81       $ 1,316   

Shares canceled or expired

     —          —        
             

Outstanding and exercisable at June 30

     156,748        22.82         1,951   
             

There were no unvested stock options outstanding during the six months ended June 30, 2011. The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2010 was $1.0 million.

The following table summarizes outstanding stock options as of June 30, 2011:

 

     Options Outstanding and Exercisable  

Range of Exercise Prices

   Outstanding      Weighted Avg.
Remaining
Contractual Life
     Weighted Avg.
Exercise Price
 

$13.8594 to $16.6452

     47,908         1.18 years       $ 14.89   

$19.2569

     42,995         2.42 years         19.26   

$30.9204

     65,845         3.42 years         30.92   
              

$13.8594 to $30.9204

     156,748         2.46 years         22.82   
              

Cash received from stock option exercises for the six months ended June 30, 2011 and 2010 was $1.2 million and $1.4 million, respectively. No tax benefits were realized for tax deductions from option exercises for the six months ended June 30, 2011 and 2010.

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 2011 and 2010, and the resulting fair values:

 

     2011     2010  

Shares granted

     77,767        81,162   

Stock price as of valuation date

   $ 39.10      $ 31.88   

Risk-free rate

     1.26     1.29

Fair value of a performance share

   $ 55.84      $ 45.30   

The following table summarizes outstanding performance share awards as of June 30, 2011, and changes during the six months ended June 30, 2011:

 

(Dollars in thousands, except grant date fair value)

   Shares     Weighted Avg.
Grant Date
Fair Value
     Aggregate
Intrinsic Value
 

Unvested shares outstanding at January 1

     184,601      $ 38.45      

Granted

     77,767        55.84      

Forfeited

     (809     41.48      
             

Unvested shares outstanding at June 30

     261,559        43.61       $ 8,866   
             

As of June 30, 2011, there was $6.0 million of unrecognized compensation cost related to non-vested performance share awards, which is expected to be recognized over a weighted average period of 1.4 years.

 

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RESTRICTED STOCK UNITS

The following table summarizes outstanding RSU awards as of June 30, 2011, and changes during the six months ended June 30, 2011:

 

(Dollars in thousands, except grant date fair value)

   Shares     Weighted Avg.
Grant Date
Fair Value
     Aggregate
Intrinsic Value
 

Unvested shares outstanding at January 1

     41,715      $ 29.37      

Granted

     16,553        39.06      

Vested

     (904     40.95      

Forfeited

     (269     29.72      
             

Unvested shares outstanding at June 30

     57,095        31.99       $ 2,014   
             

For RSU awards granted during the period, the fair value of each share was determined on the date of grant using the grant date market price. The total fair value of RSU awards vested during the six months ended June 30, 2011 was less than $0.1 million.

As of June 30, 2011, there was $1.0 million of total unrecognized compensation cost related to non-vested RSU awards, which is expected to be recognized over a weighted average period of 1.5 years.

NOTE 6.

Detail of Certain Balance Sheet Accounts

The following tables detail certain accounts as of the balance sheet dates:

 

(Dollars in thousands)

   June 30, 2011      December 31, 2010  

Inventories:

     

Lumber and other manufactured wood products

   $ 15,168       $ 13,115   

Materials and supplies

     3,979         3,641   

Logs

     2,322         7,619   
                 
   $ 21,469       $ 24,375   
                 

Current Other Assets:

     

Deferred tax assets

   $ 13,346       $ 13,346   

Basis of real estate held for sale

     5,677         9,268   

Prepaid expenses

     1,923         1,118   

Deferred charges

     1,267         1,567   
                 
   $ 22,213       $ 25,299   
                 

Noncurrent Other Assets:

     

Noncurrent investments

   $ 21,647       $ 21,292   

Deferred charges

     5,068         6,277   

Other

     429         542   
                 
   $ 27,144       $ 28,111   
                 

 

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NOTE 7.

Pension Plans and Other Postretirement Employee Benefits

The following table details the components of net periodic cost (benefit) of our pension plans and other postretirement employee benefits, or OPEB, for the quarters and six months ended June 30:

 

Quarters ended June 30:                         
     Pension Plans     Other Postretirement
Employee Benefits
 

(Dollars in thousands)

   2011     2010     2011     2010  

Service cost

   $ 1,016      $ 1,104      $ 111      $ 75   

Interest cost

     5,305        5,405        815        911   

Expected return on plan assets

     (8,106     (8,268     —          —     

Amortization of prior service cost (credit)

     171        200        (2,134     (2,135

Amortization of actuarial loss

     2,445        2,029        898        829   
                                

Net periodic cost (benefit)

   $ 831      $ 470      $ (310   $ (320
                                
Six months ended June 30:                         
     Pension Plans     Other Postretirement
Employee Benefits
 

(Dollars in thousands)

   2011     2010     2011     2010  

Service cost

   $ 2,228      $ 2,316      $ 223      $ 208   

Interest cost

     10,663        10,825        1,743        1,986   

Expected return on plan assets

     (15,902     (16,567     —          —     

Amortization of prior service cost (credit)

     342        406        (4,268     (4,286

Amortization of actuarial loss

     4,958        4,087        1,983        2,316   

Curtailment loss (gain)

     —          64        —          (320
                                

Net periodic cost (benefit)

   $ 2,289      $ 1,131      $ (319   $ (96
                                

During the first quarter of 2011, we made contributions of $5.0 million to our qualified salaried pension plan and $4.4 million to our qualified non-represented pension plan, with $5.8 million being discretionary funding. We do not anticipate additional contributions to any of our qualified pension plans in 2011. During the six months ended June 30, 2011, we made contributions of $0.9 million to our non-qualified supplemental pension plan.

 

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NOTE 8.

Comprehensive Income

The following table details the components of comprehensive income for the quarters and six months ended June 30:

 

     Quarter Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in thousands)

   2011     2010     2011     2010  

Net earnings

   $ 8,449      $ 11,743      $ 16,145      $ 12,938   
                                

Other comprehensive income (loss), net of tax

        

Defined benefit pension plans and other postretirement employee benefits:

        

Amortization of prior service credit included in net periodic cost, net of tax of $(766), $(755), $(1,531) and $(1,513)

     (1,197     (1,180     (2,395     (2,367

Amortization of actuarial loss included in net periodic cost, net of tax of $1,303, $1,115, $2,706 and $2,498

     2,040        1,743        4,235        3,905   

Curtailment gain, net of tax of $0, $0, $0 and $(100)

     —          —          —          (156

Recognition of deferred taxes related to actuarial gain on OPEB obligations

     —          (113     —          5,693   
                                

Other comprehensive income, net of tax

     843        450        1,840        7,075   
                                

Comprehensive income

   $ 9,292      $ 12,193      $ 17,985      $ 20,013   
                                

Other comprehensive income, net of tax, related to:

        

Defined benefit pension plans

   $ 1,596      $ 1,360      $ 3,233        2,779   

OPEB obligations

     (753     (910     (1,393     4,296   
                                

Other comprehensive income, net of tax

   $ 843      $ 450      $ 1,840      $ 7,075   
                                

NOTE 9.

Financial Instruments

The following table presents the estimated fair values of our financial instruments as of the balance sheet dates:

 

     June 30, 2011      December 31, 2010  

(Dollars in thousands)

   Carrying
Amount
     Fair
Value
     Carrying
Amount
    Fair
Value
 

Cash, restricted cash and short-term investments (Level 1)

   $ 75,126       $ 75,126       $ 91,183      $ 91,183   

Net derivative asset (liability) related to interest rate swaps (Level 2)

     513         513         (216     (216

Derivative asset (liability) related to lumber hedge (Level 2)

     97         97         (2,876     (2,876

Long-term debt (including fair value adjustments related to fair value hedges) (Level 2)

     364,364         371,592         368,496        369,351   
                                  

FAIR VALUE HEDGES OF INTEREST RATE RISK

As of June 30, 2011, we had eight separate interest rate swap agreements with notional amounts totaling $63.25 million, associated with our $22.5 million debentures and $40.75 million of our medium-term notes. The swaps convert interest payments with fixed rates between 6.95% and 8.89% to variable rates of three-month LIBOR plus spreads between 4.738% and 7.805%. The interest rate swaps terminate at various dates between January 2012 and February 2018.

As of June 30, 2011, we had a derivative asset within non-current other assets of $0.5 million, resulting in a cumulative net increase to the carrying amount of our debt of $0.5 million recorded on our Consolidated Condensed Balance Sheets.

For the three months ended June 30, 2011, we recognized a total of $1.2 million of net gains recorded in interest expense due to changes in fair value of the derivatives, which was offset by a cumulative net decrease to the carrying amount of debt of $1.2 million. For the six months ended June 30, 2011, we recognized a total of $0.7 million of net gains recorded in interest expense due to changes in fair value of the derivatives, which was offset by a cumulative net decrease to the

 

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carrying amount of debt of $0.7 million. Consequently, no net unrealized gain or loss was recognized in income for the quarter or six months ended June 30, 2011. For the quarter ended June 30, 2011, we recognized a net gain, resulting in a reduction in interest expense, of $0.3 million, which includes realized net gains and losses from net cash settlements and interest accruals on the derivatives. For the six months ended June 30, 2011, we recognized a net gain, resulting in a reduction in interest expense, of $0.5 million, which includes realized net gains and losses from net cash settlements and interest accruals on the derivatives. We recognized no hedge ineffectiveness during the quarter or six months ended June 30, 2011.

NON-DESIGNATED LUMBER HEDGE

On October 13, 2010, we entered into a commodity swap contract for 33,000 mbf (thousand board feet) of eastern spruce/pine with an effective date of April 1, 2011 and a termination date of September 30, 2011. Under the contract, 5,500 mbf cash settles each month. During the quarter ended June 30, 2011, the three monthly cash settlements resulted in a cash receipt of $0.3 million. Realized gains of $0.3 million were recognized in both the quarter and six months ended June 30, 2011. In February 2011, the remaining 7,150 mbf of southern yellow pine from our commodity swap contract entered into on October 18, 2010 cash settled, resulting in a cash payment of $0.2 million. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in net earnings. As such, unrealized gains of $2.1 million and $2.8 million were recognized in the quarter and six months ended June 30, 2011, respectively.

The following table presents the fair values of derivative instruments as of the balance sheet dates:

 

December 31, December 31, December 31,

(Dollars in thousands)

  

Balance Sheet Location

   June 30,
2011
     December 31,
2010
 

Fair Value of Derivative Assets:

        

Derivatives designated as hedging instruments:

        

Interest rate contracts

   Other non-current assets    $ 513       $ 62   
                    

Total derivatives designated as hedging instruments

      $ 513       $ 62   
                    

Derivatives not designated as hedging instruments:

        

Lumber contracts

   Other current assets    $ 97       $ —     
                    

Total derivatives not designated as hedging instruments

      $ 97       $ —     
                    

Fair Value of Derivative Liabilities:

        

Derivatives designated as hedging instruments:

        

Interest rate contracts

   Other long-term obligations    $ —         $ 278   
                    

Total derivatives designated as hedging instruments

      $ —         $ 278   
                    

Derivatives not designated as hedging instruments:

        

Lumber contracts

   Accrued liabilities    $ —         $ 2,876   
                    

Total derivatives not designated as hedging instruments

      $ —         $ 2,876   
                    

 

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The following table details the effect of derivatives on the Consolidated Condensed Statements of Operations and Comprehensive Income for the quarters and six months ended June 30, 2011 and 2010:

 

000000 000000 000000 000000 000000
    

Location of Gain

Recognized in Income

   Gain Recognized in Income  
          Quarter Ended
June 30,
     Six Months Ended
June 30,
 

(Dollars in thousands)

        2011      2010      2011      2010  

Derivatives designated in fair value hedging relationships:

              

Interest rate contracts

              

Realized gain on hedging instrument (1)

   Interest expense    $ 263       $ —         $ 536       $ —     
                                      

Net gain recognized in income from fair value hedges

      $ 263       $ —         $ 536       $ —     
                                      

Derivatives not designated as hedging instruments:

              

Lumber contracts

              

Unrealized gain on derivative

   Cost of goods sold    $ 2,110       $ —         $ 2,751       $ —     

Realized gain on derivative

   Cost of goods sold      253         —           249         —     
                                      

Net gain recognized in income from derivatives not designated as hedging instruments

      $ 2,363       $ —         $ 3,000       $ —     
                                      

 

(1)

Realized gain on hedging instrument consists of net cash settlements and interest accruals on the interest rate swaps during the periods.

NOTE 10.

Commitments and Contingencies

In January 2007, the Environmental Protection Agency, or EPA, notified us that we are a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, and the Clean Water Act for clean-up 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. We entered into a consent order with the EPA in August 2008 to conduct an Engineering Evaluation/Cost Analysis, or EE/CA, study to determine the best means of addressing the contamination at the site. In January 2010, we submitted our draft EE/CA report to the EPA outlining various alternatives for addressing the contamination at the entire site. The range of cost estimates for the various alternatives set forth in the report to address the contamination at the entire site was from $0.7 million to $8.2 million. In April 2010, we were notified by the EPA that they determined the EE/CA report submitted by us contained deficiencies and that the EPA would complete the EE/CA report for the Avery Landing site and produce the Biological Assessment and Cultural Resources Evaluation reports. The EPA published its draft report on January 26, 2011 for public comment. The EPA’s report focused on a more limited number of remedial alternatives which range in cost from approximately $7.9 million to $10.5 million. The public comment period closed March 11, 2011. 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 at an estimated cost of approximately $9.5 million. Currently we are under no legal obligation to implement any remedy selected by the EPA. We believe we have valid defenses available to limit our potential liability for contamination at the site and we will pursue those defenses in either settlement negotiations with the EPA or in litigation to limit our liability. As of June 30, 2011, we have accrued $4.8 million for this matter.

 

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NOTE 11.

Segment Information

The following table summarizes information by business segment for the quarters and six months ended June 30:

 

     Quarter Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in thousands)

   2011     2010     2011     2010  

Segment Revenues

        

Resource

   $ 34,265      $ 50,455      $ 85,817      $ 95,268   

Real Estate

     19,018        10,456        31,999        13,903   

Wood Products

     66,632        77,166        135,104        144,935   
                                
     119,915        138,077        252,920        254,106   

Elimination of intersegment revenues

     (7,545     (9,099     (18,317     (19,710
                                

Total consolidated revenues

   $ 112,370      $ 128,978      $ 234,603      $ 234,396   
                                

Intersegment revenues

        

Resource

   $ 7,545      $ 9,099      $ 18,317      $ 19,710   
                                

Total intersegment revenues

   $ 7,545      $ 9,099      $ 18,317      $ 19,710   
                                

Operating Income

        

Resource

   $ 7,549      $ 15,026      $ 21,610      $ 24,947   

Real Estate

     11,000        5,117        19,366        7,015   

Wood Products

     2,758        5,956        5,652        11,184   

Eliminations and adjustments

     1,981        2,136        2,526        2,573   
                                
     23,288        28,235        49,154        45,719   

Corporate

     (12,140     (13,042     (28,727     (26,135
                                

Earnings from continuing operations before taxes

   $ 11,148      $ 15,193      $ 20,427      $ 19,584   
                                

Depreciation, depletion and amortization

        

Resource

   $ 2,514      $ 4,508      $ 7,332      $ 9,003   

Wood Products

     1,997        2,046        3,981        4,170   
                                
     4,511        6,554        11,313        13,173   

Corporate

     647        593        2,511        1,185   
                                

Total depreciation, depletion and amortization

   $ 5,158      $ 7,147      $ 13,824      $ 14,358   
                                

Basis of real estate sold

        

Real Estate

   $ 6,958      $ 4,145      $ 10,573      $ 4,713   
                                

Total basis of real estate sold

   $ 6,958      $ 4,145      $ 10,573      $ 4,713   
                                

 

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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, statements regarding recognition of compensation costs relating to our performance shares and RSUs, contributions to our qualified pension plans, U.S. housing market and housing starts, North American log exports to China, harvest deferrals, harvest levels, log and lumber prices, business conditions for our business segments, Real Estate segment results, closing of the third phase of the Idaho land sale, 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, 2010.

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.

OVERVIEW

The operating results of our Resource, Real Estate and Wood Products business segments have been and will continue to be influenced by a variety of factors, including the cyclical nature of the forest products industry, which is largely dependent on the economy and U.S. housing starts, 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, 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. Economic conditions remain difficult. The U.S. housing market remains weak and housing starts are expected to show little to no improvement during the remainder of the year. The business conditions for both our Resource and Wood Products segments continue to be challenging. Counterbalancing lower housing starts is the strong demand from China for North American logs and lumber, which helps support industry fundamentals, and in particular benefits the Northern region of our Resource segment.

Favorable logging conditions in Idaho during the first quarter of 2011 allowed our Resource segment to roll forward some of our planned harvest for the year in order to capture better than anticipated pricing that resulted from increased demand by West Coast customers as more of their traditional log supply was exported to China. However, in the second quarter of 2011, seasonal factors negatively affected our logging operations in Idaho. A late spring breakup delayed the start of logging operations by approximately three to four weeks compared to normal, which resulted in decreased harvest levels for the quarter. We expect to harvest much of this deferred volume during the third quarter. In the South, extremely dry weather conditions in late 2010 resulted in favorable logging conditions which led to relatively high log inventories and less favorable pricing during the first six months of 2011. For this reason, we deferred approximately 0.1 million tons of our planned quarterly sawlog harvest in the South. We expect to move this harvest volume to our Northern region to capture better pricing opportunities. In total, we still expect our 2011 harvest to be approximately 4.2 million tons. In addition, wet weather in the South during the second quarter of 2010, combined with low inventory levels throughout the wood products supply chain, resulted in a sharp increase in prices for both logs and lumber in the second quarter of 2010, leading to unfavorable price comparisons in 2011 compared to 2010. Our Wood Products segment benefitted from relatively strong lumber prices in January and February, but prices were lower for the remainder of the first half of 2011. We expect lumber prices to remain relatively level in the third quarter and modestly decline by the end of the year due to typical seasonal factors. Our Real Estate segment had solid results for the first six months of 2011, completing the first two phases of a non-strategic and rural real estate land sale transaction in Idaho and another non-strategic land sale in Idaho, along with a continued steady flow of other higher and better use, or HBU, and rural real estate sales. Results for our Real Estate segment are expected to remain strong, with continued demand for our non-strategic and rural real estate properties. The final phase of the Idaho land sale is planned to close in the third quarter.

 

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RESULTS OF OPERATIONS

We are a real estate investment trust, or REIT, with approximately 1.5 million acres of timberlands in Arkansas, Idaho and Minnesota. Through wholly owned taxable subsidiaries, which we refer to in this report as Potlatch TRS, we operate a real estate sales and development business and five manufacturing facilities that produce lumber and plywood.

Our business is organized into three reporting segments: Resource; Real Estate; and Wood Products. Sales or transfers between segments are recorded as intersegment revenues based on prevailing market prices. Because our Resource segment supplies our Wood Products segment with a portion of its wood fiber needs, intersegment revenues can 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 discussion of our results of operations below, when we discuss our consolidated revenues, contributions by each of the segments to our revenues are reported after elimination of intersegment revenues. In the “Discussion of Business Segments” section below, segment revenues are presented before elimination of intersegment revenues.

Quarter Ended June 30, 2011 Compared to Quarter Ended June 30, 2010

The following table sets forth period-to-period changes in items included in our Consolidated Condensed Statements of Operations and Comprehensive Income for the quarters ended June 30:

 

     Quarter Ended
June 30,
       

(Dollars in thousands)

   2011     2010     Increase
(Decrease)
 

Revenues

   $ 112,370      $ 128,978      $ (16,608
                        

Costs and expenses

      

Cost of goods sold

     85,906        97,295        (11,389

Selling, general and administrative expenses

     8,704        9,401        (697
                        
     94,610        106,696        (12,086
                        

Earnings from continuing operations before interest and taxes

     17,760        22,282        (4,522

Interest expense, net

     (6,612     (7,089     (477
                        

Earnings from continuing operations before taxes

     11,148        15,193        (4,045

Income tax provision

     (2,699     (3,365     (666
                        

Earnings from continuing operations

     8,449        11,828        (3,379

Discontinued operations, net of tax

     —          (85     85   
                        

Net earnings

   $ 8,449      $ 11,743      $ (3,294
                        

Revenues – Revenues decreased $16.6 million, or 13%, in the quarter ended June 30, 2011, from the same period in 2010, as a result of decreased revenues from the Resource segment due to seasonal factors and the Wood Products segment due to market conditions, partially offset by two real estate sales in Idaho affecting non-strategic timberland and rural real estate lands. A more detailed discussion of revenues follows in “Discussion of Business Segments.”

Cost of goods sold – Cost of goods sold decreased $11.4 million, or 12%, in the quarter ended June 30, 2011 from the same period in 2010, primarily due to lower logging and hauling costs and depletion expense in the Resource segment as a result of decreased harvest levels and decreased log costs in the Wood Products segment from both lower prices and decreased volumes, partially offset by a higher basis of real estate sold in the second quarter of 2011 due to the increased acreage sold.

Selling, general and administrative expenses – Selling, general and administrative expenses decreased $0.7 million, or 7%, in the second quarter of 2011 from the same quarter in 2010, primarily due to lower compensation-related expenses.

Interest expense, net – Net interest expense decreased $0.5 million, or 7%, in the quarter ended June 30, 2011, from the same period in 2010, primarily due to a reduction in interest expense associated with the interest rate swaps entered into in June 2010 and the $5.0 million medium-term note maturity in January 2011.

Income tax provision – We recorded income tax provisions related to our continuing operations of $2.7 million and $3.4 million for the quarters ended June 30, 2011 and 2010, respectively, primarily due to pre-tax income of Potlatch TRS.

Discontinued operations – The results of discontinued operations for the quarter ended June 30, 2010 included amounts associated with the Clearwater Paper businesses spun off in December 2008 and the Prescott mill closed in May 2008.

 

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DISCUSSION OF BUSINESS SEGMENTS

 

     Quarter Ended
June 30,
        

(Dollars in thousands)

   2011      2010      Increase
(Decrease)
 

Segment Revenues

        

Resource

   $ 34,265       $ 50,455       $ (16,190

Real Estate

     19,018         10,456         8,562   

Wood Products

     66,632         77,166         (10,534
  

 

 

    

 

 

    

 

 

 

Total segment revenues, before eliminations

   $ 119,915       $ 138,077       $ (18,162
  

 

 

    

 

 

    

 

 

 

Operating Income

        

Resource

   $ 7,549       $ 15,026       $ (7,477

Real Estate

     11,000         5,117         5,883   

Wood Products

     2,758         5,956         (3,198
  

 

 

    

 

 

    

 

 

 

Total segment operating income, before eliminations and adjustments, and corporate items

   $ 21,307       $ 26,099       $ (4,792
  

 

 

    

 

 

    

 

 

 

Resource Segment – Revenues for the segment decreased $16.2 million, or 32%, during the second quarter of 2011 from the same period in 2010. Lower sales volumes accounted for approximately $11.7 million of the variance, while approximately $3.8 million was due to sales prices. Total harvest volumes decreased 24% in the second quarter of 2011 compared to the same quarter in 2010. The results for the second quarter of 2010 include sales volumes and prices from our Wisconsin and Arkansas properties that were sold in late 2010. In our Northern region, total harvest volumes decreased 35% in the second quarter of 2011 from the same period in 2010. Sawlog sales volumes decreased 34%, primarily due to a late spring breakup period in Idaho that resulted in a later than normal start to logging operations, while sawlog prices increased 3%, primarily due to a general improvement in demand for all sawlog species. Northern pulpwood sales volumes decreased 50% primarily due to the late start of logging operations in Idaho and the inclusion of Wisconsin harvests in the 2010 data. Pulpwood prices increased 8% due to increased customer demand in Idaho and better market conditions in Minnesota. In our Southern region, total harvest volumes decreased 12% in the second quarter of 2011 from the same period in 2010. Sawlog sales volumes decreased 30%, primarily due to the previously mentioned harvest deferral, and prices decreased 14% as a result of the sharp increase in prices that occurred in the second quarter of 2010. Southern pulpwood sales volumes increased 13%, due to thinning operations on our pine plantations, while prices decreased 21% due to the availability of fiber in the region. Expenses for the segment decreased $8.7 million, or 25%, during the second quarter of 2011 from the second quarter of 2010, primarily related to lower logging and hauling costs and depletion expense due to the decreased harvest levels. Operating income for our Resource segment decreased $7.5 million, or 50%, in the second quarter of 2011 from the same period of 2010.

Real Estate Segment – Revenues increased $8.6 million, expenses increased $2.7 million and operating income increased $5.9 million in the second quarter of 2011 compared to the same period in 2010 as a result of an increase in non-strategic timberland acres sold, combined with higher average prices per acre in all land categories. The results for the second quarter of 2011 primarily resulted from the sale of 5,372 acres of non-strategic timberland and rural real estate in the second of a three-phase land sale transaction in Idaho for approximately $8.2 million and another sale in Idaho of 5,469 acres of non-strategic timberland for approximately $6.1 million.

The following table summarizes our real estate sales for the quarters ended June 30:

 

     2011      2010  
     Acres Sold      Average
Price/Acre
     Acres Sold      Average
Price/Acre
 

Higher and better use (HBU)

     665       $ 2,068         1,872       $ 2,014   

Rural real estate

     2,118         1,325         3,294         1,097   

Non-strategic timberland

     11,965         1,240         3,500         877   
  

 

 

       

 

 

    

Total

     14,748            8,666      
  

 

 

       

 

 

    

Wood Products – Revenues for the segment decreased $10.5 million, or 14%, in the second quarter of 2011 from the same period in 2010 as a result of both decreased prices and volumes. Lumber prices decreased 11% from the previous year primarily due to a sharp increase in prices that occurred in the second quarter of 2010. Lumber volumes decreased 4% from the previous year due to decreased demand in the second quarter of 2011. Expenses for the segment decreased $7.3 million, or 10%, in the second quarter of 2011 from the same quarter of 2010, primarily as a result of decreased log

 

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costs, due to both prices and volumes, and a positive $2.4 million adjustment related to our lumber hedge. The Wood Products segment reported operating income of $2.8 million for the second quarter of 2011 compared to $6.0 million in the same quarter of 2010.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

The following table sets forth period-to-period changes in items included in our Consolidated Condensed Statements of Operations and Comprehensive Income for the six months ended June 30:

 

     Six Months Ended
June 30,
       

(Dollars in thousands)

   2011     2010     Increase
(Decrease)
 

Revenues

   $ 234,603      $ 234,396      $ 207   
                        

Costs and expenses

      

Cost of goods sold

     179,054        182,789        (3,735

Selling, general and administrative expenses

     20,631        17,846        2,785   
                        
     199,685        200,635        (950
                        

Earnings from continuing operations before interest and taxes

     34,918        33,761        1,157   

Interest expense, net

     (14,491     (14,177     314   
                        

Earnings from continuing operations before taxes

     20,427        19,584        843   

Income tax provision

     (4,282     (6,372     (2,090
                        

Earnings from continuing operations

     16,145        13,212        2,933   

Discontinued operations, net of tax

     —          (274     274   
                        

Net earnings

   $ 16,145      $ 12,938      $ 3,207   
                        

Revenues – Revenues increased $0.2 million in the six months ended June 30, 2011, over the same period in 2010, primarily due to three sales of non-strategic timberlands and rural real estate in Idaho, offset by decreased revenues from the Wood Products segment due to market conditions and the Resource segment as a result of seasonal factors. A more detailed discussion of revenues follows in “Discussion of Business Segments.”

Cost of goods sold – Cost of goods sold decreased $3.7 million, or 2%, in the six months ended June 30, 2011 from the same period in 2010, primarily due to lower logging and hauling costs and depletion expense as a result of decreased harvest levels and decreased log costs due to both lower prices and decreased volumes, partially offset by a higher basis of real estate sold in the first six months of 2011 due to increased acreage sold.

Selling, general and administrative expenses – Selling, general and administrative expenses increased $2.8 million, or 16%, in the six months ended June 30, 2011, over the same period in 2010, primarily due to higher compensation-related expenses, attributable mainly to our deferred compensation and incentive plans.

Interest expense, net – Net interest expense increased $0.3 million, or 2%, in the six months ended June 30, 2011, over the same period in 2010, primarily due to a $1.2 million non-cash charge for deferred costs related to the reduction in our revolving credit facility, partially offset by a reduction in interest expense associated with the interest rate swaps entered into in June 2010 and the $5.0 million medium-term note maturity in January 2011.

Income tax provision – We recorded income tax provisions related to our continuing operations of $4.3 million and $6.4 million for the six months ended June 30, 2011 and 2010, respectively. The income tax provision in 2011 resulted from pre-tax income of Potlatch TRS. The income tax provision in 2010 resulted from pre-tax income of Potlatch TRS, an adjustment of our deferred taxes associated with our retiree health care liability as a result of health care legislation, and built-in gains taxes on land sales.

Discontinued operations – The results of discontinued operations for the six months ended June 30, 2010 included amounts associated with the Clearwater Paper businesses spun off in December 2008 and the Prescott mill closed in May 2008.

 

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DISCUSSION OF BUSINESS SEGMENTS

 

     Six Months Ended
June 30,
        

(Dollars in thousands)

   2011      2010      Increase
(Decrease)
 

Segment Revenues

        

Resource

   $ 85,817       $ 95,268       $ (9,451

Real Estate

     31,999         13,903         18,096   

Wood Products

     135,104         144,935         (9,831
  

 

 

    

 

 

    

 

 

 

Total segment revenues, before eliminations

   $ 252,920       $ 254,106       $ (1,186
  

 

 

    

 

 

    

 

 

 

Operating Income

        

Resource

   $ 21,610       $ 24,947       $ (3,337

Real Estate

     19,366         7,015         12,351   

Wood Products

     5,652         11,184         (5,532
  

 

 

    

 

 

    

 

 

 

Total segment operating income, before eliminations and adjustments, and corporate items

   $ 46,628       $ 43,146       $ 3,482   
  

 

 

    

 

 

    

 

 

 

Resource Segment – Revenues for the segment decreased $9.5 million, or 10%, during the first six months of 2011 from the same period in 2010. Lower sales volumes accounted for approximately $8.1 million of the variance, while approximately $0.5 million was due to sales prices. Total harvest volumes decreased 9% in the first six months of 2011 compared to the same period in 2010. The results for the six months ended June 30, 2010, include sales volumes and prices from our Wisconsin and certain Arkansas properties that were sold in late 2010. In our Northern region, total harvest volumes decreased 13% in the first six months of 2011 from the same period in 2010. Sawlog sales volumes decreased 10%, primarily due to the late start of logging operations in Idaho, while sales prices increased 8%, primarily due to a general improvement in demand for all sawlog species, coupled with a favorable cedar mix in the first quarter of 2011. Northern pulpwood sales volumes decreased 27% in the first six months of 2011 compared to the same period in 2010, primarily due to the late start of logging operations in Idaho and the inclusion of Wisconsin harvests in the 2010 data, while pulpwood sales prices increased 5% due to increased customer demand. In our Southern region, total harvest volumes decreased 4% in the first six months of 2011 from the same period in 2010. Sawlog sales volumes and prices decreased 14% and 7%, respectively, primarily due to fiber availability and reduced demand. Southern pulpwood sales volumes increased 9%, due to thinning operations on our plantations, while prices decreased 16% due to fiber availability. Expenses for the segment decreased $6.1 million, or 9%, during the first six months of 2011 from the same period in 2010, which was primarily related to lower logging and hauling costs and depletion expense due to the decreased harvest levels. Operating income for our Resource segment decreased $3.3 million, or 13%, for the first six months of 2011 from the same period in 2010.

Real Estate Segment – Revenues increased $18.1 million, expenses increased $5.7 million and operating income increased $12.4 million in the first six months of 2011 compared to the same period in 2010, primarily due to three non-strategic timberland and rural real estate sales in Idaho that totaled 16,748 acres. The product type sale prices per acre were relatively consistent between the six months ended June 30, 2011 and 2010, with the exception of the aforementioned non-strategic timberland and rural real estate sales.

The following table summarizes our real estate sales for the six months ended June 30:

 

     2011      2010  
     Acres Sold      Average
Price/Acre
     Acres Sold      Average
Price/Acre
 

Higher and better use (HBU)

     1,160       $ 1,997         2,064       $ 2,004   

Rural real estate

     4,631         1,262         5,729         1,169   

Non-strategic timberland

     18,247         1,307         3,500         877   
  

 

 

       

 

 

    

Total

     24,038            11,293      
  

 

 

       

 

 

    

Wood Products – Revenues for the segment decreased $9.8 million, or 7%, in the six months ended June 30, 2011 from the same period in 2010. Lumber sales prices decreased 5% in the first half of 2011 from the same period in 2010 primarily due to a sharp increase in prices that occurred in the second quarter of 2010. Sales volumes decreased 3% as a result of decreased demand in the first six months of 2011. Expenses for the segment decreased $4.3 million, or 3%, in the first six months of 2011 from the same period in 2010, primarily as a result of decreased log costs due to both prices

 

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and volumes. Also included in the 2011 results is a positive $3.0 million adjustment related to our lumber hedge. The Wood Products segment reported operating income of $5.7 million for the first six months of 2011 compared to $11.2 million in the same period in 2010.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2011, our financial position included long-term debt of $364.4 million, including current installments on long-term debt, compared to $368.5 million at December 31, 2010. Stockholders’ equity for the first six months of 2011 decreased $21.3 million primarily due to our regular quarterly cash distributions to common stockholders totaling $41.0 million, partially offset by net earnings of $16.1 million. The ratio of long-term debt to stockholders’ equity was 2.0 to 1 at June 30, 2011, compared to 1.8 to 1 at December 31, 2010.

Working capital totaled $57.9 million at June 30, 2011, a decrease of $37.9 million from the December 31, 2010 balance of $95.8 million. The significant changes in the components of working capital are as follows:

 

 

The current portion of long-term debt increased $16.6 million due to the scheduled maturity of $21.6 million of long-term debt in the first half of 2012, partially offset by the maturity of $5.0 million of medium-term notes in January 2011.

 

 

Cash and short-term investments decreased $15.7 million primarily due to the payment of the regular quarterly cash distributions to common stockholders totaling $41.0 million and the contribution of $9.4 million to our qualified pension plans, partially offset by earnings from real estate sales and other operating activities.

 

 

Other current assets decreased $3.1 million primarily due to a decrease in the basis of real estate held for sale as a result of land sales during the first six months of 2011.

 

 

Inventories decreased $2.9 million, primarily due to seasonality. Log inventories decreased $5.3 million as our wood products manufacturing facilities used their log inventories when weather conditions limited access to timberlands for logging. This was partially offset by a $2.1 million increase in lumber and other manufactured wood products inventories in order to prepare for home building and repair and remodeling activities that tend to increase going into the second half of the year.

Cash Flows Summary

The following table presents information regarding our cash flows for the six months ended June 30:

 

(Dollars in thousands)

   2011     2010  

Cash flows from continuing operations

    

Net cash provided by operations

   $ 38,171      $ 32,393   

Net cash provided by investing

     9,669        15,032   

Net cash used for financing

     (46,065     (42,705
                

Cash flows provided by continuing operations

     1,775        4,720   

Cash flows used for discontinued operations

     —          (594
                

Increase in cash

     1,775        4,126   

Cash at beginning of period

     5,593        1,532   
                

Cash at end of period

   $ 7,368      $ 5,658   
                

Net cash provided by operating activities from continuing operations for the first six months of 2011 totaled $38.2 million, compared to $32.4 million for the same period in 2010. The increase was due to higher operating earnings and cash from working capital changes, partially offset by the $9.4 million contribution to our qualified pension plans in the first six months of 2011.

Net cash provided by investing activities from continuing operations totaled $9.7 million and $15.0 million for the six months ended June 30, 2011 and 2010, respectively. In the first six months of 2011, a $17.5 million decrease in short-term investments was partially offset by $7.1 million of capital expenditures. In the first six months of 2010, an $18.9 million decrease in short-term investments and $3.1 million of proceeds from the disposition of property, plant and equipment was partially offset by $5.9 million of capital expenditures. Capital expenditures in both periods were primarily for reforestation activities and routine general replacement projects for our wood products manufacturing facilities.

Net cash used for financing activities from continuing operations totaled $46.1 million and $42.7 million for the six months ended June 30, 2011 and 2010, respectively. Net cash used for financing activities in the first six months of 2011 was primarily for payment of our regular quarterly cash distributions to common stockholders of $41.0 million and a debt maturity of $5.0 million. Net cash used for financing activities in the first six months of 2010 was primarily for payment of our regular quarterly cash distributions to common stockholders of $40.8 million.

Pursuant to an amendment effective February 4, 2011, we reduced the available borrowing capacity under our bank credit facility from $250 million to $150 million. As of June 30, 2011, there were no borrowings outstanding under the revolving

 

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line of credit, and approximately $2.3 million of the letter of credit subfacility was being used to support several outstanding letters of credit. Available borrowing capacity at June 30, 2011 was $147.7 million. Effective June 28, 2011, we reduced the amount of timberlands securing our bank credit facility from 640,900 acres to 351,900 acres, primarily due to the decrease in our bank credit facility from $250 million to $150 million.

The following table sets forth the most restrictive covenants in the bank credit facility and our status with respect to these covenants as of June 30, 2011:

 

     Covenant Requirement   Actual Ratio at
June 30, 2011
  

 

 

 

Minimum Interest Coverage Ratio

   2.75 to 1.00 *   5.58 to 1.00

Minimum Collateral Coverage Ratio

   3.00 to 1.00   3.27 to 1.00

Maximum Funded Indebtedness to Capitalization Ratio

   70.0%   55.4%

 

* Commencing October 1, 2011, the Minimum Interest Coverage Ratio will increase to 3.00 to 1.00.

Our senior notes contain covenants that limit certain of our abilities, such as the payment of dividends and repurchase of our capital stock, unless certain financial conditions are met. Our cumulative Funds Available for Distribution, or FAD, as defined in the covenant, less our dividends paid was $30.5 million at June 30, 2011. The remaining balance available for the payment of future dividends pursuant to the covenant was $90.1 million at June 30, 2011.

On July 22, 2011, Moody’s upgraded our rating outlook to positive from stable, and affirmed our corporate and debt ratings of Ba1.

Contractual Obligations

There have been no material changes to our contractual obligations in the six months ended June 30, 2011 outside the ordinary course of business.

Off-Balance Sheet Arrangements

We currently are not a party of off-balance sheet arrangements that would require disclosure under this section.

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

Our exposures to market risk have not changed materially since December 31, 2010. For quantitative and qualitative disclosures about market risk, see Item 7A – “Quantitative and Qualitative Disclosure about Market Risk” in our 2010 Annual Report on Form 10-K.

ITEM 4.

Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act). Based on that evaluation, our management, including our CEO and CFO, concluded that as of June 30, 2011, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Internal Control Over Financial Reporting

In the six months ended June 30, 2011, there were no changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect our internal control over financial reporting.

 

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Part II

ITEM 1.

Legal Proceedings

Other than the potentially material environmental proceedings described in Note 10 to the consolidated condensed financial statements included in this report, we believe there is no pending or threatened litigation that would have a material adverse effect on our financial position, operations or liquidity.

ITEM 1A.

Risk Factors

There have been no material changes in the risk factors previously disclosed in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 6.

Exhibits

The exhibit index is located on page 23 of this Form 10-Q.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

POTLATCH CORPORATION

    (Registrant)

By

 

/s/ Eric J. Cremers

  Eric J. Cremers
 

Vice President, Finance and

Chief Financial Officer

  (Duly Authorized; Principal Financial Officer)

By

 

/s/ Terry L. Carter

  Terry L. Carter
  Controller and Treasurer
  (Duly Authorized; Principal Accounting Officer)

Date: August 1, 2011

 

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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

EXHIBIT INDEX

 

EXHIBIT
NUMBER

 

DESCRIPTION

(3)(a)*   Second Restated Certificate of Incorporation of the Registrant, effective February 3, 2006, filed as Exhibit 99.2 to the Current Report on Form 8-K filed by the Registrant on February 6, 2006.
(3)(b)*   Bylaws of the Registrant, as amended through February 18, 2009, filed as Exhibit (3)(b) to the Current Report on Form 8-K filed by the Registrant on February 20, 2009.
(4)   Registrant undertakes to furnish to the Commission, upon request, any instrument defining the rights of holders of long-term debt.
(10.1)(a)   Partial Satisfaction of Mortgage dated as of June 28, 2011 executed by Bank of America, N.A. in its capacity as Collateral Agent (Mortgage recorded as Instrument 526335 in the records of Latah County, Idaho).
(10.1)(b)   Full Satisfaction of Mortgage dated as of June 28, 2011 executed by Bank of America, N.A. in its capacity as Collateral Agent (Mortgage recorded as Instrument 117552 in the records of Adams County, Idaho).
(10.1)(c)   Full Satisfaction of Mortgage dated as of June 28, 2011 executed by Bank of America, N.A. in its capacity as Collateral Agent (Mortgage recorded as Instrument 221601 in the records of Boise County, Idaho).
(10.1)(d)   Full Satisfaction of Mortgage dated as of June 28, 2011 executed by Bank of America, N.A. in its capacity as Collateral Agent (Mortgage recorded as Instrument 337167 in the records of Valley County, Idaho).
(10.1)(e)   Full Satisfaction of Mortgage dated as of June 28, 2011 executed by Bank of America, N.A. in its capacity as Collateral Agent (Mortgage recorded as Instrument 464537 in the records of Idaho County, Idaho).
(10.1)(f)   Partial Satisfaction of Mortgage dated as of June 28, 2011 executed by Bank of America, N.A. in its capacity as Collateral Agent (Mortgage recorded as Instrument 210366 in the records of Clearwater County, Idaho).
(10.1)(g)   Partial Satisfaction of Mortgage dated as of June 28, 2011 executed by Bank of America, N.A. in its capacity as Collateral Agent (Mortgage recorded as Instrument 252716 in the records of Benewah County, Idaho).
(10.1)(h)   Partial Satisfaction of Mortgage dated as of June 28, 2011 executed by Bank of America, N.A. in its capacity as Collateral Agent (Mortgage recorded as Instrument 449098 in the records of Shoshone County, Idaho).
(31)   Rule 13a-14(a)/15d-14(a) Certifications.
(32)   Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350.
101   The following financial information from Potlatch Corporation’s Quarterly Report on Form 10-Q for the quarter and six months ended June 30, 2011, filed on July 29, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Condensed Statements of Operations and Comprehensive Income for the quarters and six months ended June 30, 2011 and 2010, (ii) the Consolidated Condensed Balance Sheets at June 30, 2011 and December 31, 2010, (iii) the Consolidated Condensed Statements of Cash Flows for the quarters and six months ended June 30, 2011 and 2010, and (iv) the Notes to Consolidated Condensed Financial Statements.

 

* Incorporated by reference

 

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