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POTLATCHDELTIC CORP - Quarter Report: 2014 March (Form 10-Q)



 
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, 2014
Or 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from             to             
Commission File Number 1-32729
 

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

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


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
 
Accelerated filer
o
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
The number of shares of common stock of the registrant outstanding as of April 21, 2014 was 40,590,655.
 



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




Part I

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

 
 
Three Months Ended 
 March 31,
  
 
 
 
2014
 
2013
Revenues
 
$
139,579

 
$
139,253

Costs and expenses:
 
 
 
 
Cost of goods sold
 
98,593

 
98,299

Selling, general and administrative expenses
 
9,677

 
13,596

Environmental remediation charge
 
—

 
750

 
 
108,270

 
112,645

Operating income
 
31,309

 
26,608

Interest expense, net
 
(5,460
)
 
(6,336
)
Income before income taxes
 
25,849

 
20,272

Income tax provision
 
(5,499
)
 
(4,785
)
Net income
 
$
20,350

 
$
15,487

 
 
 
 
 
Net income per share:
 
 
 
 
Basic
 
$
0.50

 
$
0.38

Diluted
 
0.50

 
0.38

Distributions per share
 
$
0.35

 
$
0.31

Weighted average shares outstanding (in thousands):
 
 
 
 
Basic
 
40,561

 
40,436

Diluted
 
40,682

 
40,613

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



2


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

 
 
Three Months Ended 
 March 31,
  
 
 
 
2014
 
2013
Net income
 
$
20,350

 
$
15,487

Other comprehensive income, 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 $(867) and $(870)
 
(1,356
)
 
(1,362
)
Amortization of actuarial loss included in net periodic cost, net of tax of $1,677 and $2,246
 
2,622

 
3,513

Other comprehensive income, net of tax
 
1,266

 
2,151

Comprehensive income
 
$
21,616

 
$
17,638

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



3


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

 
March 31,
2014
 
December 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
9,364

 
$
5,586

Short-term investments
66,950

 
52,251

Receivables, net
12,593

 
16,572

Inventories
34,231

 
36,275

Deferred tax assets
7,724

 
7,724

Other assets
8,239

 
11,961

Total current assets
139,101

 
130,369

Property, plant and equipment, net
60,071

 
59,976

Timber and timberlands, net
451,109

 
455,871

Deferred tax assets
20,833

 
21,576

Other assets
12,766

 
12,738

Total assets
$
683,880

 
$
680,530

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current installments on long-term debt
$
—

 
$
—

Accounts payable and accrued liabilities
49,462

 
50,318

Total current liabilities
49,462

 
50,318

Long-term debt
320,014

 
320,092

Liability for pensions and other postretirement employee benefits
82,448

 
83,619

Other long-term obligations
20,658

 
22,353

Stockholders’ equity
211,298

 
204,148

Total liabilities and stockholders' equity
$
683,880

 
$
680,530

 
 
 
 
Shares outstanding (in thousands)
40,589

 
40,537

Working capital
$
89,639

 
$
80,051

Current ratio
2.8:1

 
2.6:1

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


4


 
Potlatch Corporation and Consolidated Subsidiaries
Consolidated Condensed Statements of Cash Flows
Unaudited (Dollars in thousands)
 

 
Three Months Ended 
 March 31,
 
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
20,350

 
$
15,487

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
6,104

 
6,867

Basis of real estate sold
4,622

 
457

Change in deferred taxes
(164
)
 
215

Employee benefit plans
(178
)
 
2,799

Employee equity-based compensation expense
908

 
1,072

Other, net
(581
)
 
(41
)
Working capital and operating related activities
8,923

 
1,078

Net cash from operating activities
39,984

 
27,934

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Change in short-term investments
(14,699
)
 
7,639

Additions to property, plant and equipment
(2,168
)
 
(2,321
)
Additions to timber and timberlands
(1,469
)
 
(2,311
)
Other, net
108

 
(373
)
Net cash from investing activities
(18,228
)
 
2,634

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Distributions to common stockholders
(14,206
)
 
(12,552
)
Repayment of long-term debt
—

 
(27,650
)
Issuance of common stock
—

 
667

Employee tax withholdings on equity-based compensation
(1,068
)
 
(1,685
)
Change in book overdrafts
(2,636
)
 
(2,030
)
Other, net
(68
)
 
(24
)
Net cash from financing activities
(17,978
)
 
(43,274
)
Change in cash
3,778

 
(12,706
)
Cash at beginning of period
5,586

 
16,985

Cash at end of period
$
9,364

 
$
4,279

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amount capitalized
$
693

 
$
1,550

Income taxes, net
11

 
112

Certain 2013 amounts have been reclassified to conform to the 2014 presentation.
The accompanying notes are an integral part of these consolidated financial statements.

5



INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Page Number
Note 1.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.

NOTE 1. BASIS OF PRESENTATION
For purposes of this report, any reference to “Potlatch,” “the company,” “we,” “us,” and “our” means Potlatch Corporation and all of its wholly owned subsidiaries, except where the context indicates otherwise.
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements; certain disclosures normally provided in accordance with generally accepted accounting principles in the United States have been omitted. This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on February 14, 2014. We believe that all adjustments necessary for a fair statement of the results of such interim periods have been included.

NOTE 2. INCOME TAXES
As a real estate investment trust (REIT), we generally are not subject to federal and state corporate income taxes on income of the REIT that we distribute to our shareholders. We are, however, subject to corporate taxes on built-in gains (the excess of fair market value over tax basis on January 1, 2006) on sales of real property held by the REIT during the first ten years following the REIT conversion. The sale of standing timber is not subject to built-in gains tax. The Small Business Jobs Act of 2010 modified the built-in gains provisions to exempt sales of real properties in 2011, if five years of the recognition period had elapsed before January 1, 2011. The American Taxpayer Relief Act of 2012 extended the reduced five-year holding period for sales occurring in 2012 and 2013. Accordingly, the built-in gains tax did not apply to sales of real property that occurred in 2011, 2012 and 2013.
We conduct certain activities through our taxable REIT subsidiaries (TRS), which are subject to corporate level federal and state income taxes. These activities are principally comprised of our wood products manufacturing operations and certain real estate investments held for development and resale.
For the three months ended March 31, 2014 and 2013, we recorded income tax provisions of $5.5 million and $4.8 million, respectively, primarily due to pre-tax income of the TRS.











6


NOTE 3. EARNINGS PER SHARE
The following table reconciles the number of shares used in calculating the basic and diluted earnings per share for the three months ended March 31:
 
Three Months Ended 
 March 31,
 
(Dollars in thousands, except per-share amounts)
2014
 
2013
Net income
$
20,350

 
$
15,487

 
 
 
 
Basic weighted average shares outstanding
40,561,017

 
40,435,608

Incremental shares due to:
 
 
 
Performance shares
60,517

 
95,523

Restricted stock units
57,740

 
63,607

Stock options
2,834

 
18,236

Diluted weighted average shares outstanding
40,682,108

 
40,612,974

 
 
 
 
Basic net income per share
$
0.50

 
$
0.38

Diluted net income per share
$
0.50

 
$
0.38

 
 
 
 
Antidilutive shares excluded from the calculation:
 
 
 
Performance shares
69,054

 
64,905

Restricted stock units
—

 
4,264

Total antidilutive shares excluded from the calculation
69,054

 
69,169



NOTE 4. EQUITY-BASED COMPENSATION
As of March 31, 2014, we had three stock incentive plans under which performance share grants, restricted stock unit (RSU) grants and stock options were outstanding, with approximately 196,000 shares authorized for future use under the 2005 Stock Incentive Plan.
The following table details our equity-based compensation expense and director deferred compensation expense for the three months ended March 31:
 
Three Months Ended 
 March 31,
 
(Dollars in thousands)
2014
 
2013
Employee equity-based compensation expense:
 
 
 
Performance shares
$
734

 
$
862

Restricted stock units
174

 
210

Total employee equity-based compensation expense
$
908

 
$
1,072

 
 
 
 
Total tax benefit recognized from equity-based plans
$
74

 
$
76

 
 
 
 
Director deferred compensation (income) expense
$
(441
)
 
$
1,290


7


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 2014 and 2013, and the resulting fair values:
 
2014
 
2013
Shares granted
87,441

 
83,111

Stock price as of valuation date
$
39.76

 
$
45.31

Risk-free rate
0.72
%
 
0.40
%
Fair value of a performance share
$
45.57

 
$
62.78

The following table summarizes outstanding performance share awards as of March 31, 2014, and changes during the three months ended March 31, 2014:
(Dollars in thousands, except grant date fair value)
Shares
 
Weighted Avg.
Grant Date
Fair Value
 
Aggregate
Intrinsic Value
Unvested shares outstanding at January 1
155,814

 
$
48.73

 
 
Granted
87,441

 
45.57

 
 
Forfeited
—

 
—

 
 
Unvested shares outstanding at March 31
243,255

 
47.60

 
$
9,412

As of March 31, 2014, there was $7.2 million of unrecognized compensation cost related to unvested performance share awards, which is expected to be recognized over a weighted average period of 1.8 years.
RESTRICTED STOCK UNITS
The following table summarizes outstanding RSU awards as of March 31, 2014, and changes during the three months ended March 31, 2014:
(Dollars in thousands, except grant date fair value)
Shares
 
Weighted Avg.
Grant Date
Fair Value
 
Aggregate
Intrinsic Value
Unvested shares outstanding at January 1
37,461

 
$
38.69

 
 
Granted
13,349

 
39.66

 
 
Vested
(3,350
)
 
44.08

 
 
Forfeited
—

 
—

 
 
Unvested shares outstanding at March 31
47,460

 
38.58

 
$
2,643

For RSU awards granted during the period, the fair value of each unit 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, 2014 was $0.1 million. As of March 31, 2014, there was $1.1 million of total unrecognized compensation cost related to unvested RSU awards, which is expected to be recognized over a weighted average period of 1.6 years.

8


STOCK OPTIONS
The following table summarizes outstanding stock options as of March 31, 2014, and changes during the three months ended March 31, 2014:
(Dollars in thousands, except exercise prices)
Shares
 
Weighted Avg.
Exercise Price
 
Aggregate
Intrinsic Value
Outstanding at January 1
12,859

 
$
30.92

 
 
Shares exercised
—

 
—

 
 
Shares canceled or expired
—

 
—

 
 
Outstanding and exercisable at March 31
12,859

 
30.92

 
$
100

There were no unvested options outstanding during the three months ended March 31, 2014. Cash received from stock options exercised during the three months ended March 31, 2013 was $0.7 million.
The following table summarizes outstanding stock options as of March 31, 2014:
 
Options Outstanding and Exercisable
Exercise Price
Outstanding
 
Weighted Avg.
Remaining
Contractual Life
$30.9204
12,859

 
0.67 years

NOTE 5. INVENTORIES
The following table details the composition of our inventories:
(Dollars in thousands)
March 31, 
 2014
 
December 31, 2013
Inventories:
 
 
 
Lumber and other manufactured wood products
$
19,859

 
$
15,967

Logs
9,006

 
14,975

Materials and supplies
5,366

 
5,333

 
$
34,231

 
$
36,275



NOTE 6. PENSION PLANS AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS
The following tables detail the components of net periodic cost (benefit) of our pension plans and other postretirement employee benefits (OPEB) for the three months ended March 31:
 
Pension Plans
 
Other Postretirement
Employee Benefits
(Dollars in thousands)
2014
 
2013
 
2014
 
2013
Service cost
$
1,201

 
$
1,413

 
$
23

 
$
23

Interest cost
4,809

 
4,454

 
499

 
458

Expected return on plan assets
(6,130
)
 
(6,524
)
 
—

 
—

Amortization of prior service cost (credit)
187

 
195

 
(2,410
)
 
(2,427
)
Amortization of actuarial loss
3,620

 
4,944

 
679

 
815

Net periodic cost (benefit)
$
3,687

 
$
4,482

 
$
(1,209
)
 
$
(1,131
)
During the three months ended March 31, 2014, we made non-qualified supplemental pension plan payments of $0.4 million.

9


The following tables detail the changes in accumulated other comprehensive loss (AOCL) by component for the three months ended March 31:
 
2014
(Dollars in thousands)
Pension Plans
 
Other Postretirement
Employee Benefits
 
Total
AOCL at January 1
 
 
 
 
$
98,720

Amortization of defined benefit items, net of tax(a)
 
 
 
 
 
Prior service cost (credit)
$
(114
)
 
$
1,470

 
1,356

Actuarial loss
(2,208
)
 
(414
)
 
(2,622
)
Total reclassification for the period
$
(2,322
)
 
$
1,056

 
(1,266
)
AOCL at March 31
 
 
 
 
$
97,454

 
 
 
 
 
 
 
2013
(Dollars in thousands)
Pension Plans
 
Other Postretirement
Employee Benefits
 
Total
AOCL at January 1
 
 
 
 
$
140,898

Amortization of defined benefit items, net of tax(a)
 
 
 
 
 
Prior service cost (credit)
$
(119
)
 
$
1,481

 
1,362

Actuarial loss
(3,016
)
 
(497
)
 
(3,513
)
Total reclassification for the period
$
(3,135
)
 
$
984

 
(2,151
)
AOCL at March 31
 
 
 
 
$
138,747

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


NOTE 7. FINANCIAL INSTRUMENTS
The following table presents the estimated fair values of our financial instruments as of the balance sheet dates:
 
March 31, 2014
 
December 31, 2013
(Dollars in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and short-term investments (Level 1)
$
76,314

 
$
76,314

 
$
57,837

 
$
57,837

Derivative asset related to interest rate swaps (Level 2)
1,679

 
1,679

 
1,830

 
1,830

Long-term debt, including fair value adjustments related to fair value hedges (Level 2)
320,014

 
352,515

 
320,092

 
347,869

FAIR VALUE HEDGES OF INTEREST RATE RISK
The following table presents the gross fair values of derivative instruments on our Consolidated Condensed Balance Sheets as of the balance sheet dates:
(Dollars in thousands)
Balance Sheet Location
 
March 31,
2014
 
December 31,
2013
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate contracts
Other noncurrent assets
 
$
1,679

 
$
1,830

Total derivatives designated as hedging instruments
 
 
$
1,679

 
$
1,830



10


The following table details the effect of derivatives on the Consolidated Statements of Income for the three months ended March 31:
 
Location of Gain Recognized in Income
 
Gain Recognized in Income
 
 
 
Three Months Ended 
 March 31,
 
 
 
(Dollars in thousands)
 
 
2014
 
2013
Derivatives designated in fair value hedging relationships:
 
 
 
 
 
Realized gain on interest rate contract(1)
Interest expense
 
$
254

 
$
246

Net gain recognized in income from fair value hedges
 
 
$
254

 
$
246

 
(1) 
Realized gain on hedging instrument consists of net cash settlements and interest accruals on the interest rate swaps during the periods.
No net unrealized gain or loss associated with the interest rate swaps was recognized in income for any of the periods presented because we recognized no hedge ineffectiveness.


NOTE 8. COMMITMENTS AND CONTINGENCIES
There have been no material changes to our commitments and contingencies as reported in "Note 15: Commitments and Contingencies" in the Notes to Consolidated Financial Statements in our 2013 Annual Report on Form 10-K.




















11




NOTE 9. SEGMENT INFORMATION
The following table summarizes information by business segment for the three months ended March 31:
 
Three Months Ended 
 March 31,
 
(Dollars in thousands)
2014
 
2013
Revenues:
 
 
 
Resource
$
51,905

 
$
54,968

Wood Products
87,804

 
91,544

Real Estate
14,439

 
4,635

 
154,148

 
151,147

Elimination of intersegment revenues - Resource
(14,569
)
 
(11,894
)
Total consolidated revenues
$
139,579

 
$
139,253

 
 
 
 
Operating income:
 
 
 
Resource
$
16,224

 
$
15,525

Wood Products
12,707

 
18,910

Real Estate
8,271

 
3,083

Eliminations and adjustments
842

 
489

 
38,044

 
38,007

Corporate
(6,735
)
 
(11,399
)
Operating income
31,309

 
26,608

Interest expense
(5,460
)
 
(6,336
)
Income before income taxes
$
25,849


$
20,272

 
 
 
 
Depreciation, depletion and amortization:
 
 
 
Resource
$
3,916

 
$
4,592

Wood Products
1,529

 
1,509

Real Estate
15

 
13

 
5,460

 
6,114

Corporate
644

 
753

Total depreciation, depletion and amortization
$
6,104

 
$
6,867

 
 
 
 
Basis of real estate sold:
 
 
 
Real Estate
$
5,167

 
$
616

Eliminations and adjustments
(545
)
 
(159
)
Total basis of real estate sold
$
4,622

 
$
457



12


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, U.S. housing market conditions, housing starts and recovery, real estate demand and pricing, log prices, lumber demand and prices, business conditions for our business segments, Resource segment results, Wood Products segment results, Real Estate segment results, and similar matters. Words such as “anticipate,” “expect,” “will,” “intend,” “plan,” “target,” “project,” “believe,” “seek,” “schedule,” “estimate,” “could,” “can,” “may” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements reflect our current views regarding future events based on estimates and assumptions and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. Our actual results of operations could differ materially from our historical results or those expressed or implied by forward-looking statements contained in this report. For a nonexclusive listing of forward-looking statements and potential factors affecting our business, refer to “Cautionary Statement Regarding Forward-Looking Information” on page 1 and “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.
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, Wood Products and Real Estate 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 and fuel costs, asset dispositions or acquisitions, and other factors.
In our Resource segment, we pulled forward a portion of the harvest planned for the second half of 2013 into the first quarter of 2013 to take advantage of market conditions. Consequently, harvest volumes decreased during the first quarter of 2014 compared to the previous period. However, increased Northern sawlog prices resulted in higher operating income in the first quarter of 2014. Adverse winter weather conditions affected transportation and wood products shipments from our manufacturing facilities during the first quarter of 2014. We had one large rural recreation real estate transaction that resulted in strong Real Estate earnings for the first quarter of 2014.
 
Results of Operations
Our business is organized into three reporting segments: Resource, Wood Products and Real Estate. Sales 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 typically represent a significant portion of the Resource segment’s total revenues. Our other segments generally do not generate intersegment revenues.
In the analysis of our consolidated results of operations, revenues are reported after elimination of intersegment revenues. In the analysis by business segments, each segment's revenues are presented before elimination of intersegment revenues.




13


Consolidated Results Comparing the Three Months Ended March 31, 2014 and 2013
The following table sets forth period-to-period changes in items included in our Consolidated Statements of Income for the three months ended March 31:
(Dollars in thousands)
2014

2013

 
Amount of Change

Percent Change

Revenues
$
139,579

$
139,253

 
$
326

—
 %
Costs and expenses:
 
 
 
 
 
Cost of goods sold
98,593

98,299

 
294

—
 %
Selling, general and administrative expenses
9,677

13,596

 
(3,919
)
(29
)%
Environmental remediation charge
—

750

 
(750
)
(100
)%
 
108,270

112,645

 
(4,375
)
(4
)%
Operating income
31,309

26,608

 
4,701

18
 %
Interest expense, net
(5,460
)
(6,336
)
 
876

14
 %
Income before income taxes
25,849

20,272

 
5,577

28
 %
Income tax provision
(5,499
)
(4,785
)
 
(714
)
(15
)%
Net income
$
20,350

$
15,487

 
$
4,863

31
 %
Revenues – Revenues increased slightly in the first three months of 2014 over the same period in 2013 as a result of increased revenues due primarily to a large rural recreation real estate transaction, partially offset by decreased revenues from our Wood Products and Resource segments due to lower shipment volumes. A more detailed analysis of revenues follows in the operating results by business segments.
Cost of goods sold – Cost of goods sold increased slightly in the first three months of 2014 over the same period in 2013, due to the higher cost of logs consumed in our Wood Products segment, primarily related to increased prices for sawlogs in Idaho, and increased land basis of sales from our Real Estate segment, partially offset by decreased logging and hauling costs and depletion expenses in our Resource segment due to decreased harvest volumes.
Selling, general and administrative expenses – Selling, general and administrative expenses decreased in the first three months of 2014 from the same period in 2013 primarily due to non-cash mark-to-market adjustments related to our deferred compensation plans and lower incentive plan expenses.
Environmental remediation charge – In the first quarter of 2013 we recorded a pre-tax charge of $0.8 million to reflect increased remediation costs associated with our Avery Landing site in Idaho.
Interest expense, net – Net interest expense decreased in the first three months of 2014 from the same period in 2013 due to debt redemptions in 2013.
Income tax provision – Our consolidated effective tax rate for the first three months of 2014 was 21.3% compared to 23.6% in the first three months of 2013. The decrease between periods resulted from proportionately higher operating income in the REIT compared to the TRS.



14


Business Segment Results Comparing the Three Months Ended March 31, 2014 and 2013
Resource Segment
 
 
 Three Months Ended March 31,
 
 
 
(Dollars in thousands)
2014

2013

 
Increase
(Decrease)

Percent Change

Revenues (before elimination of intersegment revenues)
$
51,905

$
54,968

 
$
(3,063
)
(6
)%
Operating income
$
16,224

$
15,525

 
$
699

5
 %
 
 
 
 
 
 
Harvest Volumes (in tons)
 
 
 
 
 
Northern region
 
 
 
 
 
 
Sawlog
443,084

507,346

 
(64,262
)
(13
)%
 
Pulpwood
60,579

72,359

 
(11,780
)
(16
)%
 
Stumpage
10,968

20,470

 
(9,502
)
(46
)%
 
  Total
514,631

600,175

 
(85,544
)
(14
)%
 
 
 
 
 
 
 
Southern region
 
 
 
 
 
 
Sawlog
121,910

153,280

 
(31,370
)
(20
)%
 
Pulpwood
197,829

182,918

 
14,911

8
 %
 
Stumpage
4,975

—

 
4,975

n/m

 
  Total
324,714

336,198

 
(11,484
)
(3
)%
 
 
 
 
 
 
 
Total harvest volume
839,345

936,373

 
(97,028
)
(10
)%
 
 
 
 
 
 
 
Sales Price/Unit ($ per ton)




 
 
 
Northern region
 
 
 
 
 
 
Sawlog
$
83

$
77

 
$
6

8
 %
 
Pulpwood
$
41

$
36

 
$
5

14
 %
 
 
 
 
 
 
 
Southern region
 
 
 
 
 
 
Sawlog
$
41

$
40

 
$
1

3
 %
 
Pulpwood
$
32

$
32

 
$
—

—
 %
Revenues decreased in the first three months of 2014 from the same period in 2013 due to lower harvest volumes, primarily in Idaho, partially offset by increased prices. The decrease in harvest volume accounted for a negative $5.6 million revenue variance, which was partially offset by a positive pricing variance of $2.5 million.
In our Northern region, improved log prices in Idaho in the first quarter of 2013 resulted in pulling forward a portion of the harvest planned for the second half of 2013 into the first quarter to take advantage of the pricing opportunity. We had comparatively lower harvest volumes in 2014. Sawlog prices continued to increase in the first quarter of 2014 due to improved wood products prices. Pulpwood prices increased in the first quarter of 2014 over the same period in 2013 due to improved markets.
In our Southern region, sawlog volumes decreased as we shifted to harvest regions that contained less pine sawlog volumes. However, pulpwood volumes increased due to additional pine plantation thinnings. Prices for both sawlogs and pulpwood were basically unchanged between quarters.
Expenses for the segment decreased $3.8 million, or 10%, in the first quarter of 2014 from the same period in 2013, primarily due to lower logging and hauling costs and depletion expense resulting from the decreased harvest volumes.



15


Wood Products Segment
 
 Three Months Ended March 31,
 
 
 
(Dollars in thousands)
2014

2013

 
Increase
(Decrease)

Percent Change

Revenues
$
87,804

$
91,544

 
$
(3,740
)
(4
)%
Operating income
$
12,707

$
18,910

 
$
(6,203
)
(33
)%
 
 
 
 
 
 
Lumber shipments (MBF)
155,596

152,862

 
2,734

2
 %
Lumber sales prices ($ per MBF)
$
402

$
412

 
$
(10
)
(2
)%
Revenues for the segment decreased in the first three months of 2014 compared to the same period in 2013 due to lower average lumber prices realized, partially offset by a small increase in shipments. Expenses for the segment increased $2.5 million, or 3%, due primarily to the higher cost of logs consumed, primarily related to increased prices for sawlogs in Idaho.
Real Estate Segment
 
Three Months Ended March 31,
 
 
(Dollars in thousands)
2014

2013

 
Increase
(Decrease)

Percent Change

Revenues
$
14,439

$
4,635

 
$
9,804

n/m

Operating income
$
8,271

$
3,083

 
$
5,188

n/m

 
 
 
 
 
 
  
2014
 
2013
  
Acres Sold

Average
Price/Acre

 
Acres Sold

Average
Price/Acre

Higher and better use (HBU)
68

$
2,783

 
229

$
2,802

Rural real estate
13,203

$
1,066

 
2,278

$
1,416

Non-strategic timberland
228

$
793

 
979

$
785

Total
13,499

 
 
3,486

 
Revenues increased $9.8 million, expenses increased $4.6 million and operating income increased $5.2 million in the first three months of 2014 compared to the same period of 2013, due primarily to the sale of 11,000 acres of rural recreation real estate in Idaho in a transaction that closed in the first quarter of 2014.

Liquidity and Capital Resources
Overview
At March 31, 2014, our financial position included long-term debt of $320.0 million. Stockholders’ equity increased $7.2 million during the first three months of 2014 primarily due to net income of $20.3 million, partially offset by our quarterly cash distributions to common stockholders totaling $14.2 million. Cash and short-term investments totaled $76.3 million at March 31, 2014 compared to $57.8 million at December 31, 2013.
Net Cash from Operations
Net cash provided from operating activities was:
•
$40.0 million in 2014 and
•
$27.9 million in 2013.
Net cash from operations increased primarily due to approximately $11 million in cash received on a large rural recreation real estate sale, offset by lower sales volumes. See Note 9: Segment Information for additional information.


16


Net Cash Flows from Investing Activities
Net cash used for investing activities was $18.2 million for the quarter ending March 31, 2014, compared to net cash provided by investing activities of $2.6 million for the same period in 2013. In 2014, we increased short-term investments $14.7 million, compared to a decrease of $7.6 million in 2013.
Net Cash Flows from Financing Activities
Net cash used for financing activities was $18.0 million and $43.3 million for the first three months of 2014 and 2013, respectively. In 2014, net cash used for financing activities was primarily attributable to paying our quarterly distribution to shareholders of $14.2 million. Net cash used for financing activities in 2013 was primarily for our quarterly distribution to shareholders of $12.6 million and debt redemptions of $27.7 million.
Unsecured Credit Agreement
As of March 31, 2014, there were no borrowings outstanding under our revolving line of credit, and approximately $1.3 million of the letter of credit subfacility was being used to support several outstanding letters of credit. Available borrowing capacity at March 31, 2014 was $248.7 million.
The following table sets forth the financial covenants in the bank credit facility and our status with respect to these covenants as of March 31, 2014:
 
Covenant Requirements
 
Actual Ratios at
March 31, 2014
Minimum Interest Coverage Ratio
3.00 to 1.00
 
 
6.67 to 1.00
Minimum Timberland Coverage Ratio
3.00 to 1.00
 
 
5.89 to 1.00
Maximum Leverage Ratio
5.00 to 1.00
*
 
2.16 to 1.00
* Commencing January 1, 2015, the Maximum Leverage Ratio will decrease to 4.50 to 1.00.

Senior Notes
Our cumulative Funds Available for Distribution (FAD), as defined in our senior notes' covenants, less our dividends paid was $68.9 million at March 31, 2014. The remaining balance of the basket above FAD available for the payment of future dividends pursuant to the covenants was $90.1 million at March 31, 2014.
Contractual Obligations
There have been no material changes to our contractual obligations in the three months ended March 31, 2014 outside the ordinary course of business.
Off-Balance Sheet Arrangements
We currently are not a party to off-balance sheet arrangements that would require disclosure under this section.

















17


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposures to market risk have not changed materially since December 31, 2013. For quantitative and qualitative disclosures about market risk, see Item 7A – “Quantitative and Qualitative Disclosure about Market Risk” in our 2013 Annual Report on Form 10-K.
Quantitative Information about Market Risks
The following table summarizes our outstanding debt, interest rate swaps and average interest rates as of March 31, 2014:
(Dollars in thousands)
2014
2015
2016
2017
2018
THEREAFTER
TOTAL
Fixed rate debt:
 
 
 
 
 
 
 
Principal due
$
—

$
22,500

$
5,000

$
11,000

$
14,250

$
267,335

$
320,085

Average interest rate
—

6.95
%
8.80
%
5.64
%
8.88
%
6.80
%
6.90
%
Fair value at 3/31/2014
 
 
 
 
 
 
$
352,515

Interest rate swaps:(1)
 
 
 
 
 
 
 
Fixed to variable
$
—

$
648

$
152

$
220

$
659

$
—

$
1,679

Fair value at 3/31/2014
 
 
 
 
 
 
$
1,679

(1)
Interest rate swaps are included in long-term debt and the offsetting derivative asset is included in other noncurrent assets on the Consolidated Condensed Balance Sheets. See Note 7: Financial Instruments for additional information.

ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, or the Exchange Act), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) as of March 31, 2014. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of March 31, 2014.
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 three months ended March 31, 2014 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.



18


Part II
ITEM 1. LEGAL PROCEEDINGS
We do not believe there is any pending or threatened litigation that could 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, 2013.

ITEM 6. EXHIBITS
Exhibits are listed in the exhibit index.

19


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/ Jerald W. Richards
 
 
 
Jerald W. Richards
 
 
 
Vice President and Chief Financial Officer
 
 
 
(Duly Authorized; Principal Financial Officer and Principal Accounting Officer)
 
 
 
 
Date:
April 23, 2014
 
 



20


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 8K 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)(a)*
 
Potlatch Corporation Severance Program for Executive Employees, amended and restated effective February 14, 2014, filed as Exhibit (10)(b)1 to the 2013 Annual Report on Form 10-K.

 
 
 
(10)(b)*
 
Potlatch Corporation Benefits Protection Trust Agreement, amended and restated effective February 14, 2014, filed as Exhibit (10)(h)1 to the 2013 Annual Report on Form 10-K.

 
 
 
(10)(c)*
 
Potlatch Corporation Salaried Supplemental Benefit Plan II, effective December 5, 2008 and amended and restated as of February 14, 2014, filed as Exhibit (10)(t)1 to the 2013 Annual Report on Form 10-K.

 
 
 
(10)(d)*
 
Potlatch Corporation Annual Incentive Plan, amended and restated effective January 1, 2014, filed as Exhibit (10)(w)1 to the 2013 Annual Report on Form 10-K.
 
 
 
(10)(e)*
 
Potlatch Corporation Management Deferred Compensation Plan, effective June 1, 2008, amended and restated on February 14, 2014, filed as Exhibit (10)(x)1 to 2013 Annual Report on Form 10-K.
 
 
 
(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, 2014, filed on April 23, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Income for the quarters ended March 31, 2014 and 2013, (ii) the Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2014 and 2013, (iii) the Consolidated Condensed Balance Sheets at March 31, 2014 and December 31, 2013, (iv) the Consolidated Condensed Statements of Cash Flows for the quarters ended March 31, 2014 and 2013, and (v) the Notes to Consolidated Financial Statements.

 * Incorporated by reference


21