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POTLATCHDELTIC CORP - Quarter Report: 2011 March (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 March 31, 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 April 21, 2011 was 40,141,528.

 

 

 


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 three months ended March 31, 2011 and 2010

     2   

Consolidated Condensed Balance Sheets at March 31, 2011 and December 31, 2010

     3   

Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2011 and 2010

     4   

Notes to Consolidated Condensed Financial Statements

     5 - 12   

ITEM 2.

 

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

     13 - 17   

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     17   

ITEM 4.

 

Controls and Procedures

     17   

PART II.

  OTHER INFORMATION   

ITEM 1.

 

Legal Proceedings

     18   

ITEM 1A.

 

Risk Factors

     18   

ITEM 6.

 

Exhibits

     18   

SIGNATURES

     19   

EXHIBIT INDEX

     20   


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)

 

 

     Three Months Ended
March 31,
 
     2011     2010  

Revenues

   $ 122,233      $ 105,418   
                

Costs and expenses:

    

Cost of goods sold

     93,148        85,494   

Selling, general and administrative expenses

     11,927        8,445   
                
     105,075        93,939   
                

Earnings from continuing operations before interest and taxes

     17,158        11,479   

Interest expense, net

     (7,879     (7,088
                

Earnings from continuing operations before taxes

     9,279        4,391   

Income tax provision

     (1,583     (3,007
                

Earnings from continuing operations

     7,696        1,384   

Discontinued operations, net of tax

     —          (189
                

Net earnings

   $ 7,696      $ 1,195   
                

Other comprehensive income, net of tax

     997        6,625   
                

Comprehensive income

   $ 8,693      $ 7,820   
                

Earnings per common share from continuing operations:

    

Basic

   $ 0.19      $ 0.03   

Diluted

     0.19        0.03   

Loss per common share from discontinued operations:

    

Basic

     —          —     

Diluted

     —          —     

Net earnings per common share:

    

Basic

     0.19        0.03   

Diluted

     0.19        0.03   

Average shares outstanding (in thousands):

    

Basic

     40,078        39,887   

Diluted

     40,293        40,100   

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)

 

 

     March 31,
2011
     December 31,
2010
 

ASSETS

     

Current assets:

     

Cash

   $ 6,589       $ 5,593   

Short-term investments

     74,185         85,249   

Receivables, net

     20,507         21,278   

Inventories

     21,841         24,375   

Other assets

     21,737         25,299   
                 

Total current assets

     144,859         161,794   

Property, plant and equipment, net

     65,640         67,174   

Timber and timberlands, net

     473,068         475,578   

Deferred tax assets

     46,828         49,054   

Other assets

     27,019         28,111   
                 
   $ 757,414       $ 781,711   
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Current installments on long-term debt

   $ 16,511       $ 5,011   

Accounts payable and accrued liabilities

     62,484         61,021   
                 

Total current liabilities

     78,995         66,032   

Long-term debt

     346,627         363,485   

Liability for pensions and other postretirement employee benefits

     118,281         129,124   

Other long-term obligations

     21,316         18,631   

Stockholders’ equity

     192,195         204,439   
                 
   $ 757,414       $ 781,711   
                 

Stockholders’ equity per common share

   $ 4.79       $ 5.11   

Working capital

   $ 65,864       $ 95,762   

Current ratio

     1.8:1         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)

 

 

     Three Months Ended
March 31,
 
     2011     2010  

CASH FLOWS FROM CONTINUING OPERATIONS

    

Net earnings

   $ 7,696      $ 1,195   

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

    

Depreciation, depletion and amortization

     8,666        7,138   

Basis of real estate sold

     3,615        568   

Change in deferred taxes

     1,589        3,621   

Gain on disposition of property, plant and equipment

     (34     (686

Employee benefit plans

     2,608        (1,553

Loss from discontinued operations

     —          189   

Other, net

     950        886   

Funding of qualified pension plans

     (9,400     —     

Working capital changes

     4,531        587   
                

Net cash provided by operating activities from continuing operations

     20,221        11,945   
                

CASH FLOWS FROM INVESTING

    

Decrease in short-term investments

     11,064        13,161   

Additions to property, plant and equipment

     (1,000     (1,038

Additions to timber and timberlands

     (2,131     (1,516

Proceeds from disposition of property, plant and equipment

     112        1,700   

Other, net

     38        (629
                

Net cash provided by investing activities from continuing operations

     8,083        11,678   
                

CASH FLOWS FROM FINANCING

    

Change in book overdrafts

     (19     (818

Issuance of common stock

     185        838   

Change in long-term debt

     (5,000     73   

Distributions to common stockholders

     (20,468     (20,366

Deferred financing costs

     (325     —     

Employee tax withholdings on equity-based compensation

     (1,605     (1,967

Other, net

     (76     (77
                

Net cash used for financing activities from continuing operations

     (27,308     (22,317
                

Cash flows provided by continuing operations

     996        1,306   

Cash flows used for discontinued operations

     —          (461
                

Increase in cash

     996        845   

Cash at beginning of period

     5,593        1,532   
                

Cash at end of period

   $ 6,589      $ 2,377   
                

SUPPLEMENTAL CASH FLOW INFORMATION

    

Cash paid (received) during the period for:

    

Interest, net of amount capitalized

   $ 1,385      $ 315   

Income taxes, net

     (1,052     1,418   

Non-cash investing activity:

    

Additions to timber and timberlands

     341        —     

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 Balance Sheets at March 31, 2011 and December 31, 2010 and the Consolidated Condensed Statements of Operations and Comprehensive Income and the Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 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 three months ended March 31, 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 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. 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 three months ended March 31, 2011, we recorded an income tax provision related to Potlatch TRS of $1.6 million due to pre-tax income. For the three months ended March 31, 2010, we recorded an income tax benefit of $0.3 million due to pre-tax losses.

For the three months ended March 31, 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.

We reviewed our tax positions at March 31, 2011, and determined that no uncertain tax positions were taken during the first three months of 2011, and that no new information was available that would require derecognition of previously taken positions.

We reflect accrued interest related to tax obligations, as well as penalties, in our provision for income taxes. During the three months ended March 31, 2011 and 2010, we recognized a net benefit of less than $0.1 million related to interest and penalties in our tax provision. At March 31, 2011 and December 31, 2010, we had less than $0.1 million accrued for

 

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the payment of interest. At March 31, 2011 and December 31, 2010, we had $0.8 million 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 three months ended March 31:

 

(Dollars in thousands, except per-share amounts)

   2011      2010  

Earnings from continuing operations

   $ 7,696       $ 1,384   
                 

Basic average common shares outstanding

     40,078,169         39,886,666   

Incremental shares due to:

     

Common stock options

     84,199         107,980   

Performance shares

     103,565         78,709   

Restricted stock units

     26,796         26,642   
                 

Diluted average common shares outstanding

     40,292,729         40,099,997   
                 

Basic earnings per common share from continuing operations

   $ 0.19       $ 0.03   
                 

Diluted earnings per common share from continuing operations

   $ 0.19       $ 0.03   
                 

Anti-dilutive shares excluded from the calculation:

     

Performance shares

     77,767         81,162   

Restricted stock units

     16,553         14,809   
                 

Total anti-dilutive shares excluded from the calculation

     94,320         95,971   
                 

NOTE 5.

Equity-Based Compensation

At March 31, 2011, we had three stock incentive plans under which stock option, performance share or restricted stock unit, or RSU, grants were outstanding. At March 31, 2011, approximately 354,000 shares were authorized for future use under the 2005 Stock Incentive Plan.

The following table details our compensation expense for the three months ended March 31:

 

(Dollars in thousands)

   2011      2010  

Employee equity-based compensation expense:

     

Performance shares

   $ 823       $ 731   

Restricted stock units

     127         144   
                 

Total employee equity-based compensation expense

   $ 950       $ 875   
                 

Related net income tax benefit

   $ —         $ 11   
                 

Director deferred compensation expense

   $ 1,402       $ 623   
                 

There were no cash flows representing the realized tax benefit related to the excess of the deductible amount over the compensation cost recognized as a financing cash inflow in the Consolidated Condensed Statements of Cash Flows during either period presented above.

 

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STOCK OPTIONS

The following table summarizes outstanding stock options as of March 31, 2011, and changes during the three months ended March 31, 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

     (11,263     16.43       $ 245   

Shares canceled or expired

     —          —        
             

Outstanding and exercisable at March 31

     210,867        21.92         3,855   
             

There were no unvested stock options outstanding during the three months ended March 31, 2011. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2010 was $0.4 million.

The following table summarizes outstanding stock options as of March 31, 2011:

 

     Options Outstanding and Exercisable  

Range of Exercise Prices

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

$13.8594 to $16.6452

     53,595         1.35 years       $ 15.08   

$19.2569

     89,949         2.67 years         19.26   

$30.9204

     67,323         3.67 years         30.92   
              

$13.8594 to $30.9204

     210,867         2.65 years         21.92   
              

Cash received from stock option exercises for the three months ended March 31, 2011 and 2010 was $0.2 million and $0.8 million, respectively. The actual tax benefits realized for tax deductions from option exercises totaled $0 and less than $0.1 million for the three months ended March 31, 2011 and 2010, respectively.

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 March 31, 2011, and changes during the three months ended March 31, 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 March 31

     261,559        43.61       $ 10,105   
             

As of March 31, 2011, there was $6.9 million of unrecognized compensation cost related to non-vested performance share awards, which is expected to be recognized over a weighted average period of 1.7 years.

 

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RESTRICTED STOCK UNITS

The following table summarizes outstanding RSU awards as of March 31, 2011, and changes during the three months ended March 31, 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

     (954     39.43      

Forfeited

     (269     29.72      
             

Unvested shares outstanding at March 31

     57,045        32.01       $ 2,293   
             

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 three months ended March 31, 2011 was less than $0.1 million.

As of March 31, 2011, there was $1.1 million of total unrecognized compensation cost related to non-vested RSU awards, which is expected to be recognized over a weighted average period of 1.7 years.

NOTE 6.

Detail of Certain Balance Sheet Accounts

Certain balance sheet accounts consist of the following:

 

(Dollars in thousands)

   March 31, 2011      December 31, 2010  

Inventories:

     

Lumber and other manufactured wood products

   $ 14,521       $ 13,115   

Materials and supplies

     3,983         3,641   

Logs

     3,337         7,619   
                 
   $ 21,841       $ 24,375   
                 

Current Other Assets:

     

Basis of real estate held for sale

   $ 5,837       $ 9,268   

Deferred charges

     1,260         1,567   

Prepaid taxes

     13,346         13,346   

Prepaid expenses

     1,294         1,118   
                 
   $ 21,737       $ 25,299   
                 

Noncurrent Other Assets:

     

Noncurrent investments

   $ 21,526       $ 21,292   

Deferred charges

     5,340         6,277   

Restricted cash

     —           341   

Derivative asset associated with interest rate swaps

     47         62   

Other

     106         139   
                 
   $ 27,019       $ 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 three months ended March 31:

 

     Pension Plans     Other Postretirement
Employee Benefits
 

(Dollars in thousands)

   2011     2010     2011     2010  

Service cost

   $ 1,212      $ 1,212      $ 112      $ 133   

Interest cost

     5,358        5,420        928        1,075   

Expected return on plan assets

     (7,796     (8,299     —          —     

Amortization of prior service cost (credit)

     171        206        (2,134     (2,151

Amortization of actuarial loss

     2,513        2,058        1,085        1,487   

Curtailment loss (gain)

     —          64        —          (320
                                

Net periodic cost (benefit)

   $ 1,458      $ 661      $ (9   $ 224   
                                

The curtailment loss (gain) is related to the sale of our Idaho particleboard facility.

During the three months ended March 31, 2011, we made contributions of $5.0 million to our qualified salaried pension plan, $4.4 million to our qualified non-represented pension plan and $0.4 million to our non-qualified supplemental pension plan, with $5.8 million being discretionary funding. We do not anticipate additional contributions to any of our qualified pension plans in 2011.

NOTE 8.

Comprehensive Income

The following table details the components of comprehensive income for the three months ended March 31:

 

(Dollars in thousands)

   2011     2010  

Net earnings

   $ 7,696      $ 1,195   
                

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 $(765) and $(759)

     (1,198     (1,186

Amortization of actuarial loss included in net periodic cost, net of tax of $1,403 and $1,383

     2,195        2,161   

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

     —          (156

Recognition of deferred taxes related to actuarial gain on OPEB obligations

     —          5,806   
                

Other comprehensive income, net of tax

     997        6,625   
                

Comprehensive income

   $ 8,693      $ 7,820   
                

Other comprehensive income, net of tax, related to:

    

Defined benefit pension plans

   $ 1,637      $ 1,420   

OPEB obligations

     (640     5,205   
                

Other comprehensive income, net of tax

   $ 997      $ 6,625   
                

 

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NOTE 9.

Financial Instruments

Estimated fair values of our financial instruments are as follows:

 

     March 31, 2011      December 31, 2010  

(Dollars in thousands)

   Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

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

   $ 80,774       $ 80,774       $ 91,183       $ 91,183   

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

     647         647         216         216   

Derivative liability related to lumber hedge (Level 2)

     2,013         2,013         2,876         2,876   

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

     363,138         368,710         368,496         369,351   

FAIR VALUE HEDGES OF INTEREST RATE RISK

As of March 31, 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 ranging between 6.95% and 8.89% to a variable rate of three-month LIBOR plus a spread between 4.738% and 7.805%. The interest rate swaps terminate at various dates ranging from January 2012 to February 2018.

As of March 31, 2011, we had a derivative asset within non-current other assets of less than $0.1 million, derivative liabilities within other long-term obligations of $0.7 million and a cumulative net decrease to the carrying amount of our debt of $0.6 million recorded on our Consolidated Condensed Balance Sheets.

For the three months ended March 31, 2011, we recognized a total of $0.4 million of net gains recorded in interest expense due to changes in fair value of the derivatives. This net gain was offset by a cumulative net decrease to the carrying amount of debt of $0.4 million. Consequently, no net unrealized gain or loss was recognized in income. For the three months ended March 31, 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. We recognized no hedge ineffectiveness during the three months ended March 31, 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 will cash settle each month. 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, an unrealized gain of $0.6 million was recognized in the quarter ended March 31, 2011.

The following table presents the fair values of derivative instruments as of March 31, 2011 and December 31, 2010:

 

    

DERIVATIVE ASSETS

    

DERIVATIVE LIABILITIES

 
          March 31,
2011
     December 31,
2010
          March 31,
2011
     December 31,
2010
 

(Dollars in thousands)

  

BALANCE SHEET
LOCATION

   FAIR VALUE      FAIR VALUE     

BALANCE SHEET
LOCATION

   FAIR VALUE      FAIR VALUE  

Derivatives designated as hedging instruments:

                 

Interest rate contracts

   Other assets
(non-current)
   $ 47       $ 62      

Other long-term

obligations

   $ 694       $ 278   
                                         

Total derivatives designated as hedging instruments

      $ 47       $ 62          $ 694       $ 278   
                                         

Derivatives not designated as hedging instruments:

                 

Lumber contracts

      $ —         $ —         Accrued
liabilities
   $ 2,013       $ 2,876   
                                         

Total derivatives not designated as hedging instruments

      $ —         $ —            $ 2,013       $ 2,876   
                                         

 

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The following table details the effect of derivatives on the Consolidated Condensed Statements of Operations for the three months ended March 31:

 

    

LOCATION OF GAIN

RECOGNIZED IN
INCOME

   AMOUNT OF GAIN
RECOGNIZED IN INCOME
 

(Dollars in thousands)

        2011      2010  

Derivatives designated in fair value hedging relationships:

        

Interest rate contracts

        

Realized gain on hedging instrument (1)

   Interest expense    $ 273       $ —     
                    

Net gain recognized in income from fair value hedges

      $ 273       $ —     
                    

Derivatives not designated as hedging instruments:

        

Lumber contracts

        

Unrealized gain on derivative

   Cost of goods sold    $ 624       $ —     
                    

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

      $ 624       $ —     
                    

 

(1) 

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

NOTE 10.

Commitments and Contingencies

In January 2007, the EPA notified us that we are a potentially responsible party under 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 focuses 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. The EPA will select a remedy for the site and determine which potentially responsible parties should implement the remedy following public comment. 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 March 31, 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 three months ended March 31:

 

(Dollars in thousands)

   2011     2010  

Segment Revenues

    

Resource

   $ 51,552      $ 44,813   

Real Estate

     12,981        3,447   

Wood Products

     68,472        67,769   
                
     133,005        116,029   

Elimination of intersegment revenues

     (10,772     (10,611
                

Total consolidated revenues

   $ 122,233      $ 105,418   
                

Intersegment revenues or transfers

    

Resource

   $ 10,772      $ 10,611   
                

Total intersegment revenues or transfers

   $ 10,772      $ 10,611   
                

Operating Income

    

Resource

   $ 14,061      $ 9,921   

Real Estate

     8,366        1,898   

Wood Products

     2,894        5,228   

Eliminations and adjustments

     545        437   
                
     25,866        17,484   

Corporate

     (16,587     (13,093
                

Earnings from continuing operations before taxes

   $ 9,279      $ 4,391   
                

 

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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, tax refunds, U.S. housing starts, U.S. log exports to China, domestic remodeling and repair activity, log and lumber prices, business conditions for our business segments 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 only modest improvement during the year. The business conditions for both our Resource and Wood Products segments continue to be challenging. Counterbalancing lower housing starts is the continued growth of U.S. log exports to China and an expected increase in domestic repair and remodel activities.

During the first quarter of 2011, favorable logging conditions in Idaho allowed our Resource segment to roll forward some of our planned harvest for the year in order to capture better than anticipated pricing that is resulting from increased demand by West Coast customers as more of their traditional log supply is exported to China. In the South, extremely dry weather conditions resulted in favorable logging conditions which led to relatively high log inventories and less favorable pricing. Our Wood Products segment benefitted from relatively strong lumber prices in January and February; however, we expect lumber prices to remain soft for the remainder of the year. Our Real Estate segment had another solid quarter, completing the first phase of a non-strategic and rural real estate land sale transaction in Idaho along with a continued steady flow of other HBU and rural real estate sales.

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.

 

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The following table sets forth period-to-period changes in items included in our Consolidated Condensed Statements of Operations and Comprehensive Income for the three months ended March 31:

 

     Three Months Ended
March 31,
       

(Dollars in thousands)

   2011     2010     Increase
(Decrease)
 

Revenues

   $ 122,233      $ 105,418      $ 16,815   

Costs and expenses:

      

Cost of goods sold

     93,148        85,494        7,654   

Selling, general and administrative expenses

     11,927        8,445        3,482   
                        
     105,075        93,939        11,136   
                        

Earnings from continuing operations before interest and taxes

     17,158        11,479        5,679   

Interest expense, net

     (7,879     (7,088     791   
                        

Earnings from continuing operations before taxes

     9,279        4,391        4,888   

Income tax provision

     (1,583     (3,007     (1,424
                        

Earnings from continuing operations

     7,696        1,384        6,312   

Discontinued operations, net of tax

     —          (189     189   
                        

Net earnings

   $ 7,696      $ 1,195      $ 6,501   
                        

Revenues – Revenues increased $16.8 million, or 16%, in the three months ended March 31, 2011, over the same period in 2010, primarily due to a non-strategic and rural real estate sale in Idaho and increased sawlog sales volumes and prices in our Northern region. A more detailed discussion of revenues follows in “Discussion of Business Segments.”

Cost of goods sold – Cost of goods sold increased $7.7 million, or 9%, in the three months ended March 31, 2011 over the same period in 2010. The higher expenses were primarily due to a higher basis of real estate sold in 2011, higher logging and hauling costs primarily due to increased harvest levels and the increased cost of logs.

Selling, general and administrative expenses – Selling, general and administrative expenses increased $3.5 million, or 41%, in the first three months of 2011 over the same period in 2010, primarily due to a non-cash charge for the mark to market adjustment for company stock in our deferred compensation plans and increased compensation-related expenses.

Interest expense, net – Net interest expense increased $0.8 million, or 11%, in the three months ended March 31, 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 an income tax provision related to our continuing operations of $1.6 million and $3.0 million for the three months ended March 31, 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 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, net of a tax benefit associated with pre-tax losses from Potlatch TRS.

Discontinued operations – The results of discontinued operations for the three months ended March 31, 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

 

     Three Months Ended
March 31,
        

(Dollars in thousands)

   2011      2010      Increase
(Decrease)
 

Segment Revenues:

        

Resource

   $ 51,552       $ 44,813       $ 6,739   

Real Estate

     12,981         3,447         9,534   

Wood Products

     68,472         67,769         703   
                          

Total segment revenues, before eliminations

   $ 133,005       $ 116,029       $ 16,976   
                          

Operating Income:

        

Resource

   $ 14,061       $ 9,921       $ 4,140   

Real Estate

     8,366         1,898         6,468   

Wood Products

     2,894         5,228         (2,334
                          

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

   $ 25,321       $ 17,047       $ 8,274   
                          

Resource Segment – Revenues for the segment increased $6.7 million, or 15%, during the first three months of 2011 over the same period in 2010. Higher sales prices accounted for approximately $4.2 million of the variance, while approximately $2.5 million was due to increased sales volumes. The data for the three months ended March 31, 2010, includes harvest information from our Wisconsin and certain Arkansas properties that were sold in late 2010. In our Northern region, sawlog sales volumes and prices increased 12% and 16%, respectively. Volumes were higher primarily due to favorable logging conditions in Idaho in 2011, while prices were higher due to stronger customer demand, primarily in Idaho, coupled with a favorable cedar product mix. Northern pulpwood sales prices increased 4%, primarily due to increased customer demand, while sales volumes decreased 14% primarily due to the inclusion of Wisconsin harvests in the 2010 data, partially offset by increased sales in Idaho due to increased demand. In our Southern region, sawlog sales volumes increased 4%, primarily due to favorable logging conditions in 2011, and prices increased 1% due to a slight improvement in demand. Southern pulpwood sales volumes increased 4%, due to favorable logging conditions in 2011, while prices decreased 10% due to extremely wet weather in the 2010 period that affected logging and resulted in high prices in that period. Expenses for the segment increased $2.6 million, or 7%, during the first quarter of 2011 over the first quarter of 2010. The increase in expenses was primarily related to higher logging and hauling costs due to the increased harvest levels. Operating income for our Resource segment increased $4.1 million, or 42%, for the first quarter of 2011 over the same period of 2010.

Real Estate Segment – Revenues increased $9.5 million, expenses increased $3.0 million and operating income increased $6.5 million in the first three months of 2011 compared to the same period in 2010 as a result of increased acres sold in each product type, but primarily due to the sale of 5,907 acres of non-strategic timberland and rural real estate in the first of a three-phase land sale transaction in Idaho for approximately $9.0 million. The product type sale prices per acre were relatively consistent between the three months ended March 31, 2011 and 2010, with the exception of the aforementioned non-strategic sale.

The following table summarizes our real estate sales for the three months ended March 31:

 

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

Higher and better use (HBU)

     495       $ 1,901         192       $ 1,902   

Rural real estate

     2,513         1,208         2,435         1,266   

Non-strategic timberland

     6,282         1,433         —           —     
                                   

Total

     9,290            2,627      
                       

Wood Products – Revenues for the segment increased $0.7 million, or 1%, in the three months ended March 31, 2011 over the same period in 2010, primarily due to lumber sales prices 1% higher than the previous year, partially offset by a 2% decrease in sales volumes. Expenses for the segment increased $3.0 million, or 5%, in the first quarter of 2011 over the same quarter of 2010, primarily as a result of increased prices of logs in our Northern region. Also included in the 2011 results is a positive $0.6 million unrealized mark to market adjustment related to our lumber hedge. The Wood

 

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Products segment reported operating income of $2.9 million for the first quarter of 2011 compared to $5.2 million in the same quarter of 2010.

Corporate – Corporate expenses were $16.6 million in the three months ended March 31, 2011 compared to $13.1 million in the same period of 2010. The increase is primarily due to a non-cash charge of $2.3 million for a mark to market adjustment for company stock in our deferred compensation plans and a $1.2 million non-cash charge for deferred costs related to the reduction in our revolving credit facility.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2011, our financial position included long-term debt of $363.1 million, including current installments on long-term debt, compared to $368.5 million at December 31, 2010. Stockholders’ equity for the first three months of 2011 decreased $12.2 million primarily due to our regular quarterly cash distribution to common stockholders of $20.5 million, partially offset by net earnings of $7.7 million. The ratio of long-term debt to stockholders’ equity was 1.9 to 1 at March 31, 2011, compared to 1.8 to 1 at December 31, 2010.

Working capital totaled $65.9 million at March 31, 2011, a decrease of $29.9 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 $11.5 million due to the scheduled maturity of $16.5 million of long-term debt in the first quarter of 2012, partially offset by the maturity of $5.0 million of medium-term notes in January 2011.

 

 

Short-term investments decreased $11.1 million primarily due to the payment of the regular quarterly cash distribution to common stockholders of $20.5 million and the contribution of $9.4 million to our qualified pension plans.

 

 

Other current assets decreased $3.6 million primarily due to a decrease in the basis of real estate held for sale as a result of land sales during the first quarter of 2011.

 

 

Inventories decreased $2.5 million, primarily due to seasonality. Log inventories decreased $4.3 million as our wood products manufacturing facilities used their log inventories when weather conditions did not allow access to the woods. This was partially offset by a $1.4 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 in the spring.

Cash Flows Summary

The following table presents information regarding our cash flows for the three months ended March 31:

 

(Dollars in thousands)

   2011     2010  

Cash flows from continuing operations:

    

Net cash provided by operations

   $ 20,221      $ 11,945   

Net cash provided by investing

     8,083        11,678   

Net cash used for financing

     (27,308     (22,317
                

Cash flows provided by continuing operations

     996        1,306   

Cash flows of discontinued operations

     —          (461
                

Increase in cash

     996        845   

Cash at beginning of period

     5,593        1,532   
                

Cash at end of period

   $ 6,589      $ 2,377   
                

Net cash provided by operating activities from continuing operations for the first three months of 2011 totaled $20.2 million, compared to $11.9 million for the same period in 2010. The increase was due to higher operating earnings, the mark to market adjustment to our deferred compensation plans and cash from working capital changes, partially offset by the $9.4 million contribution to our qualified pension plans, in the first three months of 2011 compared to the same period in 2010.

Net cash provided by investing activities from continuing operations totaled $8.1 million and $11.7 million for the three months ended March 31, 2011 and 2010, respectively. In the first three months of 2011, an $11.1 million decrease in short-term investments was partially offset by $3.1 million of capital expenditures. In the first three months of 2010, a $13.2 million decrease in short-term investments was partially offset by $2.6 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 $27.3 million and $22.3 million for the three months ended March 31, 2011 and 2010, respectively. Net cash used for financing activities in the first three months of 2011 was primarily for payment of our regular quarterly cash distributions to common stockholders of $20.5 million and a

 

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debt maturity of $5.0 million. Net cash used for financing activities in the first three months of 2010 was primarily for payment of our regular quarterly cash distributions to common stockholders of $20.4 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 March 31, 2011, there were no borrowings outstanding under the revolving 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 March 31, 2011 was $147.7 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 March 31, 2011:

 

     Covenant Requirement   Actual Ratio at
March 31, 2011

Minimum Interest Coverage Ratio

   2.75 to 1.00 *   5.61 to 1.00

Minimum Collateral Coverage Ratio

   3.00 to 1.00   5.37 to 1.00

Maximum Funded Indebtedness to Capitalization Ratio

   70.0%   54.6%

 

* 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 limiting the payment of dividends and repurchasing 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 $33.7 million at March 31, 2011. The remaining balance available for the payment of future dividends pursuant to the covenant was $90.1 million at March 31, 2011.

Contractual Obligations

There have been no material changes to our contractual obligations in the three months ended March 31, 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 March 31, 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 quarter ended March 31, 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

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 20 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: April 29, 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.
(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 ended March 31, 2011, filed on April 29, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Condensed Statements of Operations and Comprehensive Income for the quarters ended March 31, 2011 and 2010, (ii) the Consolidated Condensed Balance Sheets at March 31, 2011 and December 31, 2010, (iii) the Consolidated Condensed Statements of Cash Flows for the quarters ended March 31, 2011 and 2010, and (iv) the Notes to Consolidated Condensed Financial Statements, tagged as blocks of text.

 

* Incorporated by reference

 

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