POTLATCHDELTIC CORP - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

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

For the transition period from to

Commission File Number 1-32729

PotlatchDeltic Corporation

(Exact name of registrant as specified in its charter)

Delaware

82-0156045

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

601 West First Avenue, Suite 1600
Spokane, Washington	99201
(Address of principal executive offices)	(Zip Code)

(509) 835-1500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock	PCH	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large Accelerated Filer	☒	Accelerated Filer	☐	Non-accelerated Filer	☐
Smaller Reporting Company	☐	Emerging Growth Company	☐

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

Emerging growth company

☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange act).

Yes ☐ No ☒

The number of shares of common stock of the registrant outstanding as of October 28, 2019 was 67,221,086.

POTLATCHDELTIC CORPORATION AND CONSOLIDATED SUBSIDIARIES

Table of Contents

		Page Number
PART I. - FINANCIAL INFORMATION
ITEM 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Income	2
	Condensed Consolidated Statements of Comprehensive Income	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Cash Flows	5
	Condensed Consolidated Statements of Stockholders’ Equity	7
	Notes to Condensed Consolidated Financial Statements	9
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	38
ITEM 4.	Controls and Procedures	38

PART II. - OTHER INFORMATION
ITEM 1.	Legal Proceedings	39
ITEM 1A.	Risk Factors	39
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
ITEM 6.	Exhibits	40

SIGNATURE		41

Part I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2019			2018			2019			2018
Revenues	$	226,302		$	289,199		$	623,599		$	757,329
Costs and expenses:
Cost of goods sold		182,634			195,584			512,522			515,645
Selling, general and administrative expenses		12,472			14,901			43,994			45,449
Gain on sale of facility		—			—			(9,176	)		—
Deltic merger-related costs		—			972			—			21,245
		195,106			211,457			547,340			582,339
Operating income		31,196			77,742			76,259			174,990
Interest expense, net		(8,475	)		(10,109	)		(21,821	)		(25,125	)
Loss on extinguishment of debt		—			—			(5,512	)		—
Non-operating pension and other postretirement employee benefit costs		(935	)		(1,942	)		(2,804	)		(5,707	)
Income before income taxes		21,786			65,691			46,122			144,158
Income tax expense		(1,221	)		(5,355	)		(1,860	)		(23,077	)
Net income	$	20,565		$	60,336		$	44,262		$	121,081

Net income per share:
Basic	$	0.30		$	0.96		$	0.65		$	2.06
Diluted	$	0.30		$	0.93		$	0.65		$	2.03
Dividends per share	$	0.40		$	0.40		$	1.20		$	1.20
Weighted-average shares outstanding:
Basic		67,446			62,986			67,781			58,765
Diluted		67,545			64,722			67,848			59,542

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

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Net income	$	20,565		$	60,336		$	44,262		$	121,081
Other comprehensive (loss) income, net of tax:
Pension and other postretirement employee benefits:
Amortization of prior service credit included in net income, net of tax benefit of $(562), $(565), $(1,684) and $(1,695)		(1,598	)		(1,608	)		(4,792	)		(4,824	)
Amortization of actuarial loss included in net income, net of tax expense of $943, $1,164, $2,829 and $3,491		2,685			3,311			8,053			9,934
Cash flow hedges, net of tax (benefit) expense of $(387), $166, $(1,300) and $386		(6,978	)		1,591			(25,908	)		1,850
Other comprehensive (loss) income, net of tax		(5,891	)		3,294			(22,647	)		6,960
Comprehensive income	$	14,674		$	63,630		$	21,615		$	128,041

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

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)	September 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	94,747		$	76,639
Customer receivables, net		27,214			21,405
Inventories, net		54,202			60,805
Other current assets		23,492			22,675
Assets held for sale		—			80,674
Total current assets		199,655			262,198
Property, plant and equipment, net		278,587			272,193
Investment in real estate held for development and sale		76,924			79,537
Timber and timberlands, net		1,649,196			1,672,815
Intangible assets, net		17,244			17,828
Other long-term assets		35,448			21,281
Total assets	$	2,257,054		$	2,325,852

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	78,274		$	60,993
Current portion of long-term debt		39,995			39,973
Current portion of pension and other postretirement employee benefits		5,997			5,997
Liabilities held for sale		—			29,321
Total current liabilities		124,266			136,284
Long-term debt		716,350			715,391
Pension and other postretirement employee benefits		110,548			110,659
Deferred tax liabilities, net		14,913			32,009
Other long-term obligations		55,248			16,730
Total liabilities		1,021,325			1,011,073
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 4,000 shares, no shares issued		—			—
Common stock, $1 par value, authorized 100,000 shares, issued and outstanding 67,221 and 67,570 shares		67,221			67,570
Additional paid-in capital		1,664,333			1,659,031
Accumulated deficit		(343,747	)		(282,391	)
Accumulated other comprehensive loss		(152,078	)		(129,431	)
Total stockholders’ equity		1,235,729			1,314,779
Total liabilities and stockholders' equity	$	2,257,054		$	2,325,852

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

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
(in thousands)	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	44,262		$	121,081
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		52,589			53,685
Basis of real estate sold		14,211			10,673
Gain on sale of facility		(9,176	)		—
Loss on extinguishment of debt		5,512			—
Change in deferred taxes		(16,943	)		13,879
Pension and other postretirement employee benefits		8,907			12,221
Equity-based compensation expense		5,362			6,518
Other, net		(2,692	)		(1,220	)
Change in working capital and operating-related activities, net		13,745			(9,429	)
Real estate development expenditures		(5,738	)		(3,081	)
Funding of pension and other postretirement employee benefits		(4,612	)		(55,959	)
Net cash provided by operating activities		105,427			148,368

CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment additions		(25,596	)		(18,496	)
Timberlands reforestation and roads		(13,269	)		(12,464	)
Acquisition of timber and timberlands		(278	)		(166	)
Proceeds on sale of facility		58,793			—
Proceeds on disposition of property, plant and equipment		2,017			11
Other, net		520			644
Cash and cash equivalents acquired in Deltic merger		—			3,419
Net cash provided by (used in) investing activities		22,187			(27,052	)

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to common stockholders		(80,834	)		(75,305	)
Proceeds from Potlatch revolving line of credit		—			100,000
Repayment of Potlatch revolving line of credit		—			(100,000	)
Repayment of Deltic revolving line of credit		—			(106,000	)
Proceeds from issue of long-term debt		150,000			100,000
Repayment of long-term debt		(150,000	)		(14,250	)
Premiums and fees on debt retirement		(4,865	)		—
Repurchase of common stock		(25,173	)		—
Other, net		(393	)		(4,975	)
Net cash used in financing activities		(111,265	)		(100,530	)
Change in cash, cash equivalents and restricted cash		16,349			20,786
Cash, cash equivalents and restricted cash at beginning of period		79,441			120,457
Cash, cash equivalents and restricted cash at end of period	$	95,790		$	141,243

NONCASH INVESTING AND FINANCING ACTIVITIES
Long-term debt assumed by buyer in sale of facility	$	29,000		$	—
Accrued property, plant and equipment additions	$	453		$	785
Accrued timberlands reforestation and roads	$	1,406		$	1,034
Equity issued as consideration for our merger with Deltic	$	—		$	1,142,775
Earnings and profits distribution payable	$	—		$	222,000

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

(in thousands)	September 30, 2019		September 30, 2018
Cash and cash equivalents	$	94,747	$	137,535
Restricted cash included in other short-term and long-term assets¹		1,043		3,708
Total cash, cash equivalents, and restricted cash	$	95,790	$	141,243

¹	Amounts included in restricted cash represent proceeds held by a qualified intermediator that are intended to be reinvested in timber and timberlands.

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

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

	Common Stock						Additional Paid-			Accumulated			Accumulated Other Comprehensive			Total Stockholders'
(in thousands, except per share amounts)	Shares			Amount			in Capital			Deficit			Loss			Equity
Balance, December 31, 2018		67,570		$	67,570		$	1,659,031		$	(282,391	)	$	(129,431	)	$	1,314,779
Net income		—			—			—			6,560			—			6,560
Shares issued for stock compensation		297			297			(297	)		—			—			—
Equity-based compensation expense		—			—			1,617			—			—			1,617
Pension plans and OPEB obligations		—			—			—			—			1,166			1,166
Cash flow hedges		—			—			—			—			(8,513	)		(8,513	)
Common dividends, $0.40 per share		—			—			—			(27,065	)		—			(27,065	)
Repurchase of common stock		(279	)		(279	)		—			(9,879	)		—			(10,158	)
Other transactions, net		—			—			99			(99	)		—			—
Balance, March 31, 2019		67,588		$	67,588		$	1,660,450		$	(312,874	)	$	(136,778	)	$	1,278,386
Net income		—			—			—			17,137			—			17,137
Shares issued for stock compensation		5			5			(5	)		—			—			—
Equity-based compensation expense		—			—			1,832			—			—			1,832
Pension plans and OPEB obligations		—			—			—			—			1,008			1,008
Cash flow hedges		—			—			—			—			(10,417	)		(10,417	)
Common dividends, $0.40 per share		—			—			—			(26,881	)		—			(26,881	)
Repurchase of common stock		(407	)		(407	)		—			(14,608	)		—			(15,015	)
Other transactions, net		—			—			104			(104	)		—			—
Balance, June 30, 2019		67,186		$	67,186		$	1,662,381		$	(337,330	)	$	(146,187	)	$	1,246,050
Net income		—			—			—			20,565			—			20,565
Shares issued for stock compensation		35			35			(35	)		—			—			—
Equity-based compensation expense		—			—			1,913			—			—			1,913
Pension plans and OPEB obligations		—			—			—			—			1,087			1,087
Cash flow hedges		—			—			—			—			(6,978	)		(6,978	)
Common dividends, $0.40 per share		—			—			—			(26,888	)		—			(26,888	)
Other transactions, net		—			—			74			(94	)		—			(20	)
Balance, September 30, 2019		67,221		$	67,221		$	1,664,333		$	(343,747	)	$	(152,078	)	$	1,235,729

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

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

	Common Stock						Additional Paid-			Accumulated			Accumulated Other Comprehensive			Total Stockholders'
(in thousands, except per share amounts)	Shares			Amount			in Capital			Deficit			Loss			Equity
Balance, December 31, 2017		40,612		$	40,612		$	359,144		$	(104,363	)	$	(94,851	)	$	200,542
Net income		—			—			—			14,597			—			14,597
Shares issued for stock compensation		162			162			(162	)		—			—			—
Common stock issued for Deltic merger		21,981			21,981			1,120,794			—			—			1,142,775
Equity-based compensation expense		—			—			3,279			—			—			3,279
Pension plans and OPEB obligations		—			—			—			—			1,725			1,725
Cash flow hedges		—			—			—			—			(990	)		(990	)
Cumulative effects of adoption of accounting standards		—			—			—			24,564			(23,265	)		1,299
Common dividends, $0.40 per share		—			—			—			(25,102	)		—			(25,102	)
Other transactions, net		—			—			(2,653	)		(30	)		—			(2,683	)
Balance, March 31, 2018		62,755		$	62,755		$	1,480,402		$	(90,334	)	$	(117,381	)	$	1,335,442
Net income		—			—			—			46,148			—			46,148
Shares issued for stock compensation		(1	)		(1	)		1			—			—			—
Equity-based compensation expense		—			—			1,610			—			—			1,610
Pension plans and OPEB obligations		—			—			—			—			1,682			1,682
Cash flow hedges		—			—			—			—			1,249			1,249
Common dividends, $0.40 per share		—			—			—			(25,101	)		—			(25,101	)
Other transactions, net		—			—			35			(139	)		—			(104	)
Balance, June 30, 2018		62,754		$	62,754		$	1,482,048		$	(69,426	)	$	(114,450	)	$	1,360,926
Net income		—			—			—			60,336			—			60,336
Shares issued for stock compensation		1			1			(1	)		—			—			—
Equity-based compensation expense		—			—			1,629			—			—			1,629
Pension plans and OPEB obligations		—			—			—			—			1,703			1,703
Cash flow hedges		—			—			—			—			1,591			1,591
Common dividends, $0.40 per share		—			—			—			(25,102	)		—			(25,102	)
Deltic earnings and profits special distribution, $3.54 per share		—			—			—			(222,000	)		—			(222,000	)
Other transactions, net		—			—			74			(88	)		—			(14	)
Balance, September 30, 2018		62,755		$	62,755		$	1,483,750		$	(256,280	)	$	(111,156	)	$	1,179,069

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

Notes to Condensed Consolidated Financial Statements

NOTE 1. BASIS OF PRESENTATION

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

We are primarily engaged in activities associated with timberland management, including the sale of timber, the management of approximately 1.9 million acres of timberlands and the purchase and sale of timberlands. We are also engaged in the manufacture and sale of wood products and the development of real estate.

The accompanying unaudited Condensed Consolidated Financial Statements provide an overall view of our results and financial condition and reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Intercompany transactions and accounts have been eliminated in consolidation. Except as otherwise disclosed in these Notes to Condensed Consolidated Financial Statements, such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. Certain disclosures normally provided in accordance with accounting principles generally accepted in the United States (GAAP) 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, 2018, as filed with the Securities and Exchange Commission on February 27, 2019. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year.

Commitments and Contingencies

At any given time, we are subject to claims and actions incidental to the operations of our business. Based on information currently available, we do not expect that any sums we may receive or have to pay in connection with any legal proceeding would have a materially adverse effect on our consolidated financial position or net cash flow.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

New Accounting Standards Recently Adopted

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

We adopted ASU 2016-02, along with subsequent amendments, on January 1, 2019 and used the effective date as our date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided, for dates and periods before January 1, 2019. The new standard provides several optional practical expedients in transition and for an entity’s ongoing accounting. We elected the following practical expedients as part of our adoption of the standard:

•

to not reassess whether any expired or existing contracts are or contain leases;

•

to not reassess the lease classification for any expired or existing leases;

•

to not reassess initial direct costs for any existing leases;

•

to apply the short-term lease recognition exemption for all leases that qualify;

•

to not separate non-lease components from lease components; and

•

to apply the land easement practical expedient for transition of all existing land easements.

Upon adoption of this ASU we recorded $14.0 million for right of use assets and lease liabilities for our operating leases on our Condensed Consolidated Balance Sheet. The adoption of this ASU did not impact our Condensed Consolidated Statement of Income and our Condensed Consolidated Statement of Cash Flows. See Note 14: Leases for our expanded disclosures.

New Accounting Standards Being Evaluated

In August 2018, the FASB issued ASU No. 2018-15 Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies that implementation costs incurred by customers in cloud computing arrangements are deferred if they would be capitalized by customers in software licensing arrangements under the internal-use software guidance. Additionally, ASU 2018-15 clarifies that all capitalized costs must be presented in the same financial statement line item as the cloud computing arrangement. The standard will be effective, on either a prospective or retrospective basis, for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We are finalizing our evaluation of the impact of this standard on our consolidated financial statements and based on our assessment to date, we do not expect a material impact upon adoption.

In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, including interim periods within those years and requires retrospective adoption; early adoption is permitted. ASU 2018-14 will only impact our pension and other postretirement employee benefits disclosures, and we do not believe there will be a material impact on those disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies certain disclosure requirements related to fair value measurements including (i) requiring disclosures on changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements; and (ii) a requirement to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those years; early adoption is permitted. ASU 2018-13 will only impact our fair value measurement disclosures, and we do not believe there will be a material impact on those disclosures.

NOTE 3. MERGER WITH DELTIC

On February 20, 2018 Deltic Timber Corporation (Deltic) merged with a wholly owned subsidiary of PotlatchDeltic. Deltic owned approximately 530,000 acres of timberland, operated two sawmills, a medium density fiberboard facility (MDF) and was engaged in real estate development primarily in Arkansas.

The acquisition of total assets of $1.4 billion was a noncash investing and financing activity comprised of $1.1 billion in equity consideration transferred to Deltic shareholders and $0.3 billion of liabilities assumed.

We expensed $1.0 million and $21.2 million of merger-related costs during the three and nine months ended September 30, 2018, respectively. Total merger-related costs consisted of:

•

$11.5 million of merger-related costs for professional fees such as investment banker fees, legal, accounting and appraisal services; and

•

$9.7 million of restructuring costs primarily for termination benefits, which included accelerated share-based payment costs, for qualifying terminations.

These costs are included in Deltic merger-related costs in our Condensed Consolidated Statements of Income.

The amount of revenue and income before income taxes from the acquired Deltic operations included in our Condensed Consolidated Statements of Income from February 21, 2018 to September 30, 2018 were as follows:

(in thousands, except per share amounts)	Three Months Ended, September 30, 2018		Nine Months Ended, September 30, 2018
Net sales	$	83,385	$	192,244
Income before income taxes	$	17,180	$	25,869

The following presents the unaudited pro forma consolidated financial information of the company as if the merger with Deltic was completed on January 1, 2017:


(in thousands, except per share amounts)	Three Months Ended, September 30, 2018		Nine Months Ended, September 30, 2018
Net sales	$	289,199	$	795,992
Net earnings attributable to PotlatchDeltic common shareholders	$	61,327	$	142,314
Basic earnings per share attributable to PotlatchDeltic common shareholders	$	0.91	$	2.13
Diluted earnings per share attributable to PotlatchDeltic common shareholders	$	0.91	$	2.12

Pro forma net earnings attributable to PotlatchDeltic common shareholders excludes $1.0 million and $26.7 million of non-recurring merger-related costs incurred by both companies during the three and nine months ended September 30, 2018, of which $5.4 million were incurred by Deltic prior to the merger. Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.

NOTE 4. SALE OF DELTIC MDF FACILITY

On December 20, 2018, we entered into an Asset Purchase and Sale Agreement (the Agreement) with Roseburg Forest Products Co. to sell the Deltic MDF facility for $92.0 million, consisting of $63.0 million in cash and assumption of $29.0 million of revenue bonds. The purchase price was subject to post-closing adjustments for certain changes in working capital as defined in the Agreement. The transaction closed on February 12, 2019 resulting in a $9.2 million pre-tax gain on sale. Cash proceeds received after working capital adjustments, closing costs and other expenses were approximately $58.8 million. A portion of the purchase price is escrowed pending satisfaction of certain covenants as outlined in the Agreement. In addition, we had a carryover tax basis in the facility from the Deltic merger, and as a result, we recorded a reduction to deferred tax liabilities and increase to income taxes payable of $15.8 million at the date of sale.

At December 31, 2018, the assets and liabilities to be disposed met the criteria to be classified as held for sale and were reflected as such at their carrying value. At December 31, 2018, assets held for sale on the Condensed Consolidated Balance Sheet of $80.7 million consists of $72.1 million of property, plant and equipment, $7.7 million related to inventories and $0.9 million of customer list intangibles. The related liabilities held for sale of $29.3 million on the December 31, 2018 Condensed Consolidated Balance Sheet include $29.0 million of revenue bonds. The sale of the MDF facility is not considered a strategic shift that has or will have a major effect on our operations or financial results and therefore does not meet the requirements for presentation as discontinued operations.

NOTE 5. REVENUE RECOGNITION

The majority of our revenues are derived from the sale of delivered logs, manufactured wood products, residual wood by-products and real estate. We recognize revenue in accordance with FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606). Performance obligations associated with real estate sales are generally satisfied at a point in time when all conditions of closing have been met and title transfers to the buyer. Real estate closings are generally facilitated through an escrow process.

At September 30, 2019 and December 31, 2018, we recorded $7.2 million and $4.3 million, respectively, for contract liabilities recorded as deferred revenue. These contract related liabilities predominately relate to hunting and other access rights on our timberlands and member related activities at the Chenal Country Club. These contract liabilities are recognized over the term of the contracts, which is typically twelve months or less, except membership initiation fees at the Chenal Country Club which typically are recognized up to 10 years. Other contract asset and liability balances, such as prepayments, are immaterial. For real estate sales, we typically receive the entire consideration in cash at closing.

The following table represents our revenues by major product. For additional information regarding our segments, see Note 6: Segment Information.

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Timberlands
Northern region
Sawlogs	$	53,152		$	69,658		$	116,118		$	168,869
Pulpwood		1,489			1,575			4,698			4,654
Stumpage		3			39			109			175
Other		1,085			765			1,649			1,233
		55,729			72,037			122,574			174,931
Southern region
Sawlogs		24,053			21,974			63,469			61,194
Pulpwood		15,754			13,700			38,847			36,138
Stumpage		767			653			1,233			2,106
Other		2,506			3,057			7,725			6,069
		43,080			39,384			111,274			105,507
Total Timberlands revenues		98,809			111,421			233,848			280,438

Wood Products
Lumber		108,364			138,281			301,923			367,062
Residuals and Panels		35,279			60,744			112,056			165,363
Total Wood Products revenues		143,643			199,025			413,979			532,425

Real Estate
Rural real estate		9,689			8,238			44,223			29,740
Development real estate		7,674			1,287			12,102			4,249
Other¹		1,500			1,708			5,134			4,230
Total Real Estate revenues		18,863			11,233			61,459			38,219

Total Segment Revenues		261,315			321,679			709,286			851,082
Intersegment Timberlands revenues²		(35,013	)		(32,480	)		(85,687	)		(93,753	)
Total consolidated revenues	$	226,302		$	289,199		$	623,599		$	757,329

¹	Other Real Estate revenues primarily relate to the Chenal Country Club.

²	Intersegment revenues represent logs sold by our Timberlands segment to our Wood Products segment.

NOTE 6. SEGMENT INFORMATION

During the second quarter of 2019, we changed the name of our Resource segment to Timberlands. There were no changes in the segment’s business activities, components or information provided to our chief operating decision makers as a result of the change.

Our businesses are organized into three reportable operating segments: Timberlands, Wood Products and Real Estate. Management activities in the Timberlands segment include planting and harvesting trees and building and maintaining roads. The Timberlands segment also generates revenues from non-timber resources such as hunting leases, recreation permits and leases, mineral rights contracts, oil and gas royalties, biomass production and carbon sequestration. The Wood Products segment manufactures and markets lumber and plywood. The business of our Real Estate segment includes the sale of land holdings deemed non-strategic or identified as having higher and better use alternatives. The Real Estate segment also engages in master planned communities, development activities and includes the Chenal Country Club.

The reportable segments follow the same accounting policies used for our Condensed Consolidated Financial Statements, with the exception of the valuation of inventories. For most of our operations, we use the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s best estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. Inventories not valued under LIFO are recorded at the lower of average cost or net realizable value. All segment inventories are reported using the average cost method. The LIFO reserve and intersegment eliminations are recorded at the corporate level.

Management primarily evaluates the performance of its segments and allocates resources to them based upon Adjusted EBITDDA. EBITDDA is calculated as net income (loss) before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses. Our calculation of Adjusted EBITDDA may not be comparable to that reported by other companies.

The following table summarizes information on revenues, intersegment eliminations, Adjusted EBITDDA, depreciation, depletion and amortization, basis of real estate sold and total assets for each of the company’s reportable segments and includes a reconciliation of Total Adjusted EBITDDA to income before income taxes. Corporate information is included to reconcile segment data to the Condensed Consolidated Financial Statements.

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Revenues:
Timberlands	$	98,809		$	111,421		$	233,848		$	280,438
Wood Products		143,643			199,025			413,979			532,425
Real Estate		18,863			11,233			61,459			38,219
		261,315			321,679			709,286			851,082
Intersegment Timberlands revenues¹		(35,013	)		(32,480	)		(85,687	)		(93,753	)
Consolidated revenues	$	226,302		$	289,199		$	623,599		$	757,329

Adjusted EBITDDA:
Timberlands	$	42,996		$	58,680		$	95,977		$	140,068
Wood Products		5,903			46,446			11,058			126,962
Real Estate		14,678			7,467			48,697			27,769
Corporate		(6,930	)		(8,989	)		(26,930	)		(28,969	)
Eliminations and adjustments		(1,635	)		(1,794	)		3,542			(5,080	)
Total Adjusted EBITDDA		55,012			101,810			132,344			260,750
Basis of real estate sold		(5,228	)		(4,248	)		(14,211	)		(10,673	)
Depreciation, depletion and amortization		(18,786	)		(18,836	)		(51,310	)		(51,982	)
Interest expense, net²		(8,475	)		(10,109	)		(21,821	)		(25,125	)
Loss on extinguishment of debt		—			—			(5,512	)		—
Non-operating pension and other postretirement employee benefits		(935	)		(1,942	)		(2,804	)		(5,707	)
Gain (loss) on fixed assets		198			(12	)		260			(11	)
Gain on sale of facility		—			—			9,176			—
Inventory purchase price adjustment in cost of goods sold³		—			—			—			(1,849	)
Deltic merger-related costs⁴		—			(972	)		—			(21,245	)
Income before income taxes	$	21,786		$	65,691		$	46,122		$	144,158

Depreciation, depletion and amortization:
Timberlands	$	12,627		$	12,730		$	33,361		$	35,974
Wood Products		5,763			5,827			16,666			15,250
Real Estate		152			81			508			198
Corporate		244			198			775			560
		18,786			18,836			51,310			51,982
Bond discounts and deferred loan fees²		392			609			1,279			1,703
Total depreciation, depletion and amortization	$	19,178		$	19,445		$	52,589		$	53,685

Basis of real estate sold:
Real Estate	$	5,283		$	4,267		$	14,326		$	10,886
Eliminations and adjustments		(55	)		(19	)		(115	)		(213	)
Total basis of real estate sold	$	5,228		$	4,248		$	14,211		$	10,673

¹	Intersegment revenues represent logs sold by our Timberlands segment to our Wood Products segment.

²	Bond discounts and deferred loan fees are reported within interest expense, net on the Condensed Consolidated Statements of Income.

³	The effect on cost of goods sold for fair value adjustments to the carrying amounts of inventory acquired in the Deltic merger.

⁴	For integration and restructuring costs related to the merger with Deltic see Note 3: Merger with Deltic.

A reconciliation of our business segment total assets to total assets in the Condensed Consolidated Balance Sheets is as follows:

(in thousands)	September 30, 2019		December 31, 2018
Total assets:
Timberlands¹	$	1,675,064	$	1,693,162
Wood Products		385,792		456,306
Real Estate²		95,804		93,208
		2,156,660		2,242,676
Corporate		100,394		83,176
Total consolidated assets	$	2,257,054	$	2,325,852

¹	We do not report rural real estate separate from Timberlands as we do not report these assets separately to management.

²	Real Estate assets primarily consist of real estate development acquired with the Deltic merger.

NOTE 7. EARNINGS PER SHARE

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2019		2018		2019		2018
Net income	$	20,565	$	60,336	$	44,262	$	121,081

Basic weighted-average shares outstanding		67,446		62,986		67,781		58,765
Incremental shares due to:
Performance shares		65		270		50		263
Restricted stock units		34		37		17		33
Stock portion of earnings and profits distribution		—		1,429		—		481
Diluted weighted-average shares outstanding		67,545		64,722		67,848		59,542

Basic net income per share	$	0.30	$	0.96	$	0.65	$	2.06
Diluted net income per share	$	0.30	$	0.93	$	0.65	$	2.03

For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if later) and assumes the related proceeds were used to repurchase common stock at the average market price during the period. Related proceeds include future compensation cost associated with the stock award.

For the three and nine months ended September 30, 2019, there were approximately 25,000 and 134,000 stock-based awards that were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the three and nine months ended September 30, 2018, there were approximately 16,000 and 38,000 stock-based awards that were excluded from the calculation of diluted earnings per share because they were anti-dilutive. Anti-dilutive stock-based awards could be dilutive in future periods.

Share Issuances Related to the Deltic Merger

In February 2018 we issued 22.0 million shares in connection with the Deltic merger. Further, on August 30, 2018, the board of directors approved a special distribution of $222.0 million, or approximately $3.54 per share. The special distribution amount equaled our determination of the accumulated earnings and profits of Deltic as of the merger date and was distributed in order to maintain the company’s qualification as a REIT for U.S. federal income tax purposes. The special distribution was paid on November 15, 2018, to stockholders of record on September 27, 2018 through the issuance of 4.8 million shares of our common stock and distribution of $44.4 million in cash. The weighted average shares for the dilutive effect on earnings per share from the stock portion of the special distribution was based on the August 30, 2018 declaration date for the three and nine months ended September 30, 2018. See Note 3: Merger with Deltic for further discussion on the merger.

Share Repurchase Program

On August 30, 2018, our board of directors authorized management to repurchase up to $100.0 million of common stock with no time limit set for the repurchase (the 2018 Repurchase Program). We repurchased 0.7 million shares of common stock (at a total consideration of $25.2 million) during the six months ended June 30, 2019, and we repurchased no shares during the three months ended September 30, 2019 under the 2018 Repurchase Program. All common stock purchases under the 2018 Repurchase Programs were made in open-market transactions. No shares were repurchased during the three and nine months ended September 30, 2018. At September 30, 2019, we had remaining authorization of $74.8 million for future stock repurchases under the 2018 Repurchase Program.

We record share repurchases upon trade date as opposed to the settlement date when cash is disbursed. We record a liability to account for repurchases that have not been cash settled. There were no unsettled repurchases as of September 30, 2019. We retire shares upon repurchase. Any excess repurchase price over par is recorded in accumulated deficit.

NOTE 8. CERTAIN BALANCE SHEET COMPONENTS

Inventories

(in thousands)	September 30, 2019			December 31, 2018
Logs	$	26,657		$	37,303
Lumber, panels and veneer		30,390			27,420
Materials and supplies		12,383			11,310
Total inventories		69,430			76,033
Less: LIFO reserve		(15,228	)		(15,228	)
Total inventories, net	$	54,202		$	60,805

Property, plant and equipment

(in thousands)	September 30, 2019			December 31, 2018
Property, plant and equipment	$	492,798		$	472,695
Less: accumulated depreciation		(214,211	)		(200,502	)
Total property, plant and equipment, net	$	278,587		$	272,193

Timber and timberlands

(in thousands)	September 30, 2019		December 31, 2018
Timber and timberlands	$	1,565,890	$	1,590,997
Logging roads		83,306		81,818
Total timber and timberlands, net	$	1,649,196	$	1,672,815

Accounts payable and accrued liabilities

(in thousands)	September 30, 2019		December 31, 2018
Accrued payroll and benefits	$	16,004	$	20,130
Accounts payable		16,565		12,073
Accrued interest		5,818		8,642
Accrued taxes		18,902		7,389
Deferred revenue		7,242		4,282
Operating lease liabilities		4,883		—
Other current liabilities		8,860		8,477
Total accounts payable and accrued liabilities	$	78,274	$	60,993

NOTE 9. DEBT

In January 2019, we refinanced $150.0 million of 7.50% senior notes (Senior Notes) due in 2019 with a $150.0 million term loan that will mature in 2029. The new term loan carries a variable interest rate of one-month LIBOR plus 1.85%. We paid $0.5 million of lender fees on the new term loan. Concurrent with the new term loan, we entered into a $150.0 million interest rate swap to fix the rate at 4.56%. Upon the refinancing, we redeemed and paid all outstanding Senior Notes, including a redemption premium of $4.9 million which is included in the loss on extinguishment of debt in our Condensed Consolidated Statements of Income. Subsequent to the refinancing, $693.5 million was outstanding under our Second Amended and Restated Term Loan Agreement.

As part of the Deltic merger, we assumed the obligations relating to the letter of credit supporting Deltic’s $29.0 million Union County, Arkansas Taxable Industrial Revenue Bonds 1998 Series due October 1, 2027 associated with the Deltic MDF facility. As of December 31, 2018, the bonds were classified as held for sale as part of the sale of the Deltic MDF facility and excluded from long-term debt. As part of the sale of the MDF facility, the bonds were assumed by the buyer and the letter of credit was terminated. See Note 4: Sale of Deltic MDF Facility.

As of September 30, 2019, we were in compliance with all debt and credit agreement covenants and approximately $1.0 million of our $380.0 million credit facility was utilized by outstanding letters of credit.

NOTE 10. DERIVATIVE INSTRUMENTS

From time to time, we enter into derivative financial instruments to manage certain cash flow and fair value risks. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset or liability to a particular risk are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in the cash flows of a specific asset or liability that is attributable to a particular risk, such as interest rate risk, are considered cash flow hedges.

We have a $40.0 million term loan that matures in December 2019. In September 2019, we entered into a $40.0 million interest rate swap, the objective which is to lock in the index component rate on an expected new term loan in December 2019. This cash flow hedge requires settlement in December 2019.

Additionally, at September 30, 2019, we have five interest rate swaps associated with $357.5 million of term loan debt. These cash flow hedges convert variable rates ranging from three-month and one-month LIBOR plus 1.85% to 2.15%, to fixed rates ranging from 3.88% to 4.82%. Our cash flow hedges are expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the hedge. At September 30, 2019, the amount of net losses expected to be reclassified into earnings in the next 12 months is approximately $3.6 million.

The following table presents the gross fair values of derivative instruments on our Condensed Consolidated Balance Sheets:

Asset Derivatives

Liability Derivatives

(in thousands)

Location

September 30, 2019

December 31, 2018

Location

September 30, 2019

December 31, 2018

Derivatives designated in cash flow hedging relationships:

Interest rate contracts

Other assets,

non-current

736

1,510

Other long-term obligations

29,322

2,888

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

		Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	Location	2019			2018			2019			2018
Derivatives designated in fair value hedging relationships:
Interest rate contracts
Realized loss on interest rate contracts¹	Interest expense	$	—		$	(52	)	$	(18	)	$	(138	)
Loss on hedged debt basis adjustment included in debt extinguishment			—			—			(165	)		—
		$	—		$	(52	)	$	(183	)	$	(138	)
Derivatives designated in cash flow hedging relationships:
Interest rate contracts
(Loss) income recognized in other comprehensive income, net of tax		$	(7,384	)	$	1,330		$	(26,576	)	$	1,394
Loss reclassified from accumulated other comprehensive income¹	Interest expense	$	(406	)	$	(261	)	$	(668	)	$	(456	)

Interest expense, net		$	8,475		$	10,109		$	21,821		$	25,125

¹	Realized gain (loss) on hedging instruments consist of net cash settlements and interest accruals on interest rate swaps during the periods.

NOTE 11. FAIR VALUE MEASUREMENTS

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

	September 30, 2019						December 31, 2018
(in thousands)	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Derivative assets related to interest rate swaps (Level 2)	$	736		$	736		$	1,510		$	1,510
Derivative liabilities related to interest rate swaps (Level 2)	$	(29,322	)	$	(29,322	)	$	(2,888	)	$	(2,888	)

Long-term debt, including current portion (Level 2):
Term loans	$	(689,657	)	$	(704,498	)	$	(539,169	)	$	(539,037	)
Senior notes		—			—			(149,786	)		(154,328	)
Revenue bonds		(65,735	)		(68,384	)		(94,735	)		(93,144	)
Medium-term notes		(3,000	)		(3,484	)		(3,000	)		(3,419	)
Total long-term debt¹	$	(758,392	)	$	(776,366	)	$	(786,690	)	$	(789,928	)

Company owned life insurance asset (COLI) (Level 3)	$	4,073		$	4,073		$	3,104		$	3,104

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

The fair value of interest rate swaps are determined using a discounted cash flow analysis on the expected cash flows of each derivative. The analysis reflects the contractual terms of the derivatives, including the period to maturity and uses observable market-based inputs, including interest rate forward curves.

The fair value of our long-term debt is estimated based upon quoted market prices for similar debt issues or estimated based on average market prices for comparable debt when there is no quoted market price.

The contract value of our company owned life insurance is based on the amount at which it could be redeemed and, accordingly, approximates fair value.

We believe that our other financial instruments, including cash and cash equivalents, receivables and payables have net carrying values that approximate their fair values with only insignificant differences. This is primarily due to the short-term nature of these instruments and the allowance for doubtful accounts.

NOTE 12. EQUITY-BASED COMPENSATION

On May 6, 2019 (the Effective Date) the stockholders approved our 2019 Long-Term Incentive Plan (the 2019 Plan). The total amount of PotlatchDeltic common stock authorized for issuance under the 2019 Plan includes, in addition to 1.2 million new shares approved by our stockholders: (i) the total number of shares available for future awards under the Potlatch Corporation 2014 Long-Term Incentive Plan and its predecessor plans (the Prior Plans) as of the Effective Date and (ii) the number of undelivered shares subject to outstanding awards under the Prior Plans that will become available for future issuance as provided for under the 2019 Plan. At September 30, 2019, approximately 1.4 million shares are available for future use under our long-term incentive plans.

Share-based compensation activity during the nine months ended September 30, 2019 included the following:

(Shares in thousands)	Granted		Vested		Forfeited
Performance Share Awards (PSAs)		142		—		6
Restricted Stock Units (RSUs)		102		19		2

A total of 0.3 million shares of common stock were issued during the nine months ended September 30, 2019.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Equity-based compensation expense:
Performance share awards	$	1,186	$	1,074	$	3,417	$	3,084
Restricted stock units		705		536		1,892		1,470
Deferred compensation stock equivalent units expense		22		16		53		197
Accelerated share-based termination benefits in connection with the merger		—		3		—		1,767
Total equity-based compensation expense	$	1,913	$	1,629	$	5,362	$	6,518

Total tax benefit recognized for equity-based expense	$	79	$	74	$	234	$	258

Performance Share Awards

PSAs granted under the stock incentive plans have a three-year performance period and shares are issued at the end of the period if the performance measures are met. The performance measures are based on the percentile ranking of our total shareholder return relative to the total shareholder return performance of both a selected peer group of companies and a larger group of indexed companies over the three-year performance period. The number of shares actually issued, as a percentage of the amount subject to the PSA, could range from 0% to 200%. PSAs granted under our stock incentive plans do not have voting rights unless and until shares are issued upon settlement. If shares are issued at the end of the three-year performance measurement period, the recipients will receive dividend equivalents in the form of additional shares at the time of payment equal to the dividends that would have been paid on the shares earned had the recipients owned the shares during the three-year period. Therefore, the shares are not considered participating securities. The fair value of performance shares granted in 2019 was $37.87 per share.

The following table presents the key inputs used in the Monte Carlo simulation to calculate the fair value of the performance share awards in 2019:

Stock price as of valuation date	$	35.01
Risk-free rate		2.47	%
Expected volatility		25.15	%
Expected dividend yield (assuming full reinvestment)		—
Expected term (years)		3.00

Restricted Stock Units

RSU awards accrue dividend equivalents based on dividends paid during the RSU vesting period. The dividend equivalents will be converted into additional RSUs that will vest in the same manner as the underlying RSUs to which they relate. Therefore, the shares are not considered participating securities. The terms of the awards state that the RSUs will vest in a given time period of one to three years and the terms of certain awards follow a vesting schedule within the given time period. The fair value of RSUs granted equaled our common share price on the date of grant factoring in any required post-vesting holding periods. The weighted average fair value of all RSUs granted during the nine months ended September 30, 2019 was $36.64.

NOTE 13. INCOME TAXES

As a real estate investment trust (REIT), we generally are not subject to federal and state corporate income taxes on income of the REIT that we distribute to our shareholders. We conduct certain activities through our taxable REIT subsidiaries (TRS), which are subject to corporate level federal and state income taxes. These taxable activities are principally comprised of our wood products manufacturing operations and certain real estate investments. Therefore, income tax expense or benefit is primarily due to income or loss of the TRS, as well as permanent book versus tax differences. In addition, we had carryover tax basis in the MDF facility from the Deltic merger and as a result, during the nine months ended September 30, 2019, we recorded a reduction to deferred tax liabilities and increase to income taxes payable of $15.8 million at the date of sale. See Note 4: Sale of Deltic MDF Facility for further details. In addition, during the third quarter of 2018, we recorded a tax benefit of $5.3 million primarily related to deducting contributions to our qualified pension plans at the higher 2017 income tax rate.

NOTE 14. LEASES

We lease certain equipment, office space and land. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. We consider our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. Most leases include one or more options to renew, with renewal terms that can extend the lease term between one to five years. The exercise of lease renewal options is at our sole discretion. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Finance lease assets and liabilities were $1.9 million at September 30, 2019.

For certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Certain leases also include options to purchase the leased equipment. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants and we do not have any significant sublease income.

Balance Sheet Classification

(in thousands)	Classification	September 30, 2019
Assets
Operating lease assets	Other long-term assets	$	16,241

Liabilities
Current operating lease liability	Accounts payable and accrued liabilities	$	4,883
Noncurrent operating lease liability	Other long-term obligations		11,433
Total lease liabilities		$	16,316

Other Operating Lease Information

	Nine Months Ended
(in thousands)	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	4,503
Leased assets exchanged for new operating lease liabilities	$	6,317

	September 30, 2019
Weighted-average remaining terms (years)		4.40
Weighted-average discount rate		4.13	%

Operating lease costs (excluding short-term leases and variable lease costs, which are immaterial) for the three and nine months ended September 30, 2019 were $1.6 million and $4.5 million, respectively.

Maturity of Operating Lease Liabilities

At September 30, 2019, the future minimum lease payment obligations under noncancelable operating leases were as follows:

(in thousands)
2019	$	1,432
2020		5,282
2021		4,263
2022		2,597
2023		1,662
After 2023		2,610
Total lease payments		17,846
Less: interest¹		1,530
Present value of lease liabilities	$	16,316

¹	Calculated using the interest rate for each lease.

Disclosures Related to Periods Prior to Adoption of the New Lease Standard

We did not have any capital leases during 2018. Operating lease rent expense primarily for office space, machinery and equipment was $1.2 million and $3.6 million for the three and nine months ended September 30, 2018, respectively.

At December 31, 2018, future minimum lease payment obligations under noncancelable operating leases were as follows:

(in thousands)
2019	$	5,130
2020		4,135
2021		3,142
2022		1,538
2023		629
2024 and thereafter		575
Total	$	15,149

NOTE 15. PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS

The following tables detail the components of net periodic cost (benefit) of our pension plans and other postretirement employee benefits (OPEB):


	Three Months Ended September 30,
	Pension						OPEB
(in thousands)	2019			2018			2019			2018
Service cost	$	1,942		$	2,181		$	93		$	99
Interest cost		4,618			4,344			397			391
Expected return on plan assets		(5,548	)		(5,095	)		—			—
Amortization of prior service cost (credit)		52			46			(2,211	)		(2,219	)
Amortization of actuarial loss		3,374			4,148			253			327
Net periodic cost (benefit)	$	4,438		$	5,624		$	(1,468	)	$	(1,402	)

	Nine Months Ended September 30,
	Pension						OPEB
(Dollars in thousands)	2019			2018			2019			2018
Service cost	$	5,825		$	6,272		$	278		$	242
Interest cost		13,849			12,648			1,191			1,091
Expected return on plan assets		(16,643	)		(14,938	)		—			—
Amortization of prior service cost (credit)		158			139			(6,633	)		(6,658	)
Amortization of actuarial loss		10,122			12,442			760			983
Net periodic cost (benefit)	$	13,311		$	16,563		$	(4,404	)	$	(4,342	)

During the nine months ended September 30, 2019 and 2018, funding of pension and other postretirement employee benefit plans was $4.6 million and $56.0 million, respectively. $52.1 million of qualified pension benefit contributions during the nine months ended September 30, 2018 were designated for and included as deductions on our 2017 income tax return which allowed us to deduct those payments at a higher rate.

NOTE 16. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS

During 2019, changes in amounts included in our accumulated other comprehensive loss (AOCL) by component on our Condensed Consolidated Balance Sheets, net of tax, are:

				Pension Plans						OPEB
(in thousands)	Gains and losses on cash flow hedges			Actuarial Loss			Prior Service Cost			Actuarial Loss			Prior Service Credit			Total
Balance at December 31, 2018	$	1,560		$	128,849		$	404		$	7,269		$	(8,651	)	$	129,431
Amounts arising during the period		26,576			—			—			—			—			26,576
Amounts reclassified from AOCL to earnings		(668	)		(7,490	)		(117	)		(563	)		4,909			(3,929	)
Net change		25,908			(7,490	)		(117	)		(563	)		4,909			22,647
Balance at September 30, 2019	$	27,468		$	121,359		$	287		$	6,706		$	(3,742	)	$	152,078

Amortization of actuarial loss and prior service (cost) credit are components of net periodic benefit cost (credit), see Note 15: Pension and Other Postretirement Employee Benefits and see Note 10: Derivative Instruments for additional information regarding amounts arising for cash flow hedges during the period.

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, fair value of hedging instruments and swaps, expected return on pension assets, recognition of compensation costs relating to our performance share awards and RSUs, required contributions to pension plans, expected amortization of unrecognized compensation cost of performance share awards and RSUs, amount of net losses on cash flow hedges expected to be reclassified into earnings in the next 12 months, the U.S. housing market, home repair and remodeling activity, the lumber and log markets, sufficiency of cash to meet operating requirements, 2019 capital expenditures 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. Important factors that could cause or contribute to such differences include, but are not limited to, the following:

•

changes in the United States and international economies;

•

changes in interest rates and discount rates;

•

changes in the level of residential and commercial construction and remodeling activity;

•

changes in tariffs, quotas and trade agreements involving wood products;

•

changes in demand for our products and real estate;

•

changes in production and production capacity in the forest products industry;

•

competitive pricing pressures for our products;

•

unanticipated manufacturing disruptions;

•

weather;

•

changes in principle expenses; and

•

transportation disruptions.

For a discussion of some of the factors that may affect our business, results and prospects and a nonexclusive listing of forward-looking statements, 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, 2018.

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.

Our Company

We are a leading timberland real estate investment trust (REIT) with operations in seven states where we own approximately 1.9 million acres of timberland, six sawmills, an industrial grade plywood mill and real estate development projects.

Our business is organized into three business segments: Timberlands, Wood Products and Real Estate. Our Timberlands segment supplies our Wood Products segment with a portion of its wood fiber needs. These intersegment revenues are based on prevailing market prices and typically represent a significant portion of the Timberlands segment’s total revenues. Our other segments generally do not generate intersegment revenues. In the discussion of our consolidated results of operations, our revenues and expenses are reported after elimination of intersegment revenues and expenses. In the business segment discussions, each segment’s revenues and expenses, as applicable, are presented before elimination of intersegment revenues and expenses.

The operating results of our Timberlands, 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, tariffs, quotas and trade agreements, 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, lumber prices, weather conditions, the availability of transportation, 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.

Non-GAAP Measures

To supplement our financial statements presented in accordance with generally accepted accounting principles in the United States (GAAP), we use certain non-GAAP measures on a consolidated basis, including Adjusted EBITDDA and Cash Available for Distribution (CAD), which are defined and further explained and reconciled to the nearest GAAP measure in the Liquidity and Performance Measures section below. Our definitions of these non-GAAP measures may differ from similarly titled measures used by others. These non-GAAP measures should be considered supplemental to and not a substitute for, financial information prepared in accordance with GAAP.

Adjusted EBITDDA is a non-GAAP measure that management uses in evaluating performance, allocate resources between segments, and that investors can use to evaluate the operational performance of the assets under management. It removes the impact of specific items that management believes do not directly reflect the core business operations on an ongoing basis. This measure should not be considered in isolation from and is not intended to represent an alternative to, our results reported in accordance with GAAP. Management believes that this non-GAAP measure, when read in conjunction with our GAAP financial statements, provides useful information to investors by facilitating the comparability of our ongoing operating results over the periods presented, the ability to identify trends in our underlying business and the comparison of our operating results against analyst financial models and operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.

Our definition of EBITDDA and Adjusted EBITDDA may be different from similarly titled measures reported by other companies. We define EBITDDA as net income (loss) before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses. See Note 6: Segment Information in the Notes to the Condensed Consolidated Financial Statements for information related to the use of segment Adjusted EBITDDA.

Business and Economic Trends

The demand for timber is directly affected by the underlying demand for lumber and other wood-products, as well as by the demand for pulp, paper and packaging. Our Timberlands and Wood Products segments are impacted by demand for new homes in the United States and by repair and remodeling activity.

During the first half of 2019, U.S. single family housing starts remained tepid as a result of land and labor shortages and rising construction costs making it difficult for builders to construct more affordable housing units. Further, extended inclement weather across the country for a good portion of the first half of 2019 impacted building conditions and delayed the normal start of the building season. Building conditions have since improved as September 2019 was the second month in a row where seasonally adjusted annual rate of single-family starts were above 0.9 million units. Additionally, as property repair and remodel is often done soon after buying, repair and remodeling activity in 2019 has also seen modest growth.

Lumber prices are significantly below first half of 2018 levels but have seen modest increases since December 2018. Many buyers continue to maintain low inventories due to softening demand and readily available supply. However, we believe the improved seasonally adjusted annual rate of single-family housing starts in August and September 2019, combined with industry production curtailments announced in 2019 will have a positive effect on lumber pricing.

In our Timberlands segment, we index a significant portion of our Idaho sawlogs to the price of lumber under long-term supply agreements. The Northern region experienced a decline in sawlog pricing and volume because of the lower lumber pricing and decreased demand in the first half of 2019. Since then, mills have continued to work through existing higher log cost log inventory.

Southern region log supply has been affected by wet weather in the first half of 2019 restricting log supply and resulting in increased sawlog prices. The onset of drier weather in the third quarter of 2019 resulted in an increase in sawlog supply in the Southern market to take advantage of attractive prices. This has resulted in Southern region mill log inventories shifting to higher levels. Consequently, we scaled back on planned harvest levels in the third quarter of 2019. We expect our harvest volumes to return to normal, higher levels in 2020.

Our Real Estate segment benefited from two large rural land sales in the second quarter of 2019 and increased sales in Chenal Valley during the first three quarters of 2019 compared to the same period in 2018. Residential and commercial sales in Chenal Valley mainly follow the national housing market trends but do experience microeconomic factors for the area including economic growth and the availability of builders, contractors and workforce to support development efforts.

Consolidated Results

The following table sets forth changes in our Condensed Consolidated Statements of Income. Our Business Segment Results provide a more detailed discussion of our segments:

	Three Months Ended September 30,									Nine Months Ended September 30,
(in thousands)	2019			2018			Change			2019			2018			Change
Revenues	$	226,302		$	289,199		$	(62,897	)	$	623,599		$	757,329		$	(133,730	)
Costs and expenses:
Cost of goods sold		182,634			195,584			(12,950	)		512,522			515,645			(3,123	)
Selling, general and administrative expenses		12,472			14,901			(2,429	)		43,994			45,449			(1,455	)
Gain on sale of facility		—			—			—			(9,176	)		—			(9,176	)
Deltic merger-related costs		—			972			(972	)		—			21,245			(21,245	)
		195,106			211,457			(16,351	)		547,340			582,339			(34,999	)
Operating income		31,196			77,742			(46,546	)		76,259			174,990			(98,731	)
Interest expense, net		(8,475	)		(10,109	)		1,634			(21,821	)		(25,125	)		3,304
Loss on extinguishment of debt		—			—			—			(5,512	)		—			(5,512	)
Non-operating pension and other postretirement benefit costs		(935	)		(1,942	)		1,007			(2,804	)		(5,707	)		2,903
Income before income taxes		21,786			65,691			(43,905	)		46,122			144,158			(98,036	)
Income tax expense		(1,221	)		(5,355	)		4,134			(1,860	)		(23,077	)		21,217
Net income	$	20,565		$	60,336		$	(39,771	)	$	44,262		$	121,081		$	(76,819	)
Total Adjusted EBITDDA¹	$	55,012		$	101,810		$	(46,798	)	$	132,344		$	260,750		$	(128,406	)

¹	See Liquidity and Performance Measures for a reconciliation of Total Adjusted EBITDDA to net income, the closest comparable GAAP measure, for each of the periods presented.

Third Quarter 2019 Compared with Third Quarter 2018

Revenues

Revenues were $226.3 million, a decrease of $62.9 million compared with the same period in 2018. Revenues decreased as a result of lower lumber prices and lower sawlog prices in the Northern region indexed to lumber prices. In addition, the third quarter of 2018 included the operations of the Deltic MDF facility which was sold in the first quarter of 2019. These decreases were partially offset by increased lumber shipments, higher harvest volumes and increased rural and development real estate sales.

Cost of goods sold

Cost of goods sold decreased $13.0 million compared with the same period in 2018, primarily due to the inclusion in 2018 of costs related to the Deltic MDF facility. The decrease was partially offset by increased harvest activities and increased lumber shipments.

Selling, general and administrative expenses

Selling, general and administrative expenses for the third quarter of 2019 were $12.5 million compared with $14.9 million during the same period in 2018. The decrease compared to the third quarter of 2018 was primarily due to lower estimated performance-based variable compensation, reductions in workers compensation provisions and lower consultant and professional service fees.

Deltic merger-related costs

Merger-related costs for the third quarter 2018 were $1.0 million. This included $0.9 million in merger costs for various professional fees including legal fees, accounting and appraisal fees. Restructuring costs were $0.1 million, consisting primarily of termination benefits and costs associated with systems integration.

Interest expense, net

Net interest expense was $8.5 million, compared with $10.1 million for the same period in 2018. The decline in interest expense resulted primarily from the refinancing $150.0 million of 7.5% Senior Notes with a new long-term loan and the entry into an interest rate swap to fix the rate at 4.56% in January 2019. See Note 9: Debt in the Notes to Condensed Consolidated Financial Statements for a more detailed discussion of our borrowings.

Income taxes

Income tax expense for the third quarter 2019 was $1.2 million compared with $5.4 million for the prior year period. Income taxes are primarily due to income or loss from our taxable REIT subsidiaries (TRS). For the three months ended September 30, 2019, the TRS’s income before income tax was $4.7 million. For the same period in 2018, the TRS’s income before income tax was $41.5 million. Also, during the third quarter of 2018, we recorded a tax benefit of $5.3 million primarily related to deducting contributions to our qualified pension plans at the higher 2017 income tax rate.

Total Adjusted EBITDDA

Total Adjusted EBITDDA for the third quarter of 2019 was $55.0 million compared to $101.8 million in the third quarter of 2018. The decrease in Total Adjusted EBITDDA was driven primarily by decreased lumber pricing and lower realizations on Idaho sawlogs indexed to lumber pricing. These decreases were partially offset by lower estimated performance-based variable compensation, lower consultant and professional services fees, increased harvest volumes, increased lumber shipments and increased residential and commercial sales at Chenal Valley in the third quarter of 2019 compared to the third quarter of 2018. Refer to the Business Segments Results below for further discussions on activities for each of our segments.

See Liquidity and Performance Measures for a reconciliation of Total Adjusted EBITDDA to net income, the closest comparable GAAP measure, for each of the periods presented.

Year to Date 2019 Compared with Year to Date 2018

Revenues

Revenues were $623.6 million, a decrease of $133.7 million compared with the same period in 2018. Revenues decreased as a result of lower lumber prices and lower sawlog prices indexed to lumber prices in the Northern region. Revenues also declined as full sawmills in the Northern region and inclement weather in the Southern region during the first half of 2019 led to harvest activities shifting to later in 2019. Also, operations in 2019 only included 1.5 months of operations at the Deltic MDF facility compared to 7.5 months in 2018. These declines in revenue were partly offset by higher revenue from increased sawlog and pulpwood prices in the Southern region, increased lumber shipments, two large rural land sales and increased sales in Chenal Valley during the first three quarters of 2019 compared to the same period in 2018.

Cost of goods sold

Cost of goods sold decreased $3.1 million compared with the same period in 2018. This decrease was due to lower logging and hauling costs, lower log costs in the Northern region due to indexed log pricing declines and of operations at the Deltic MDF facility for 1.5 months in 2019 compared to 7.5 months in 2018. These decreases were partially offset by higher lumber shipments primarily as a result of a full nine months of the acquired Deltic sawmill operations and increased log costs in the Southern region.

Selling, general and administrative expenses

Selling, general and administrative expenses for the first nine months of 2019 were $44.0 million compared with $45.4 million during the same period in 2018. The decrease was primarily due to lower estimated performance-based variable compensation and lower consultant and professional service fees.

Deltic merger-related costs

Merger-related costs for the nine months ended September 30, 2018 were $21.2 million. This included $11.5 million in merger costs for investment banking fees, legal fees, accounting and appraisal fees and other costs related to filing the joint proxy/prospectus for the merger. Also included were restructuring costs of $9.7 million, consisting primarily of termination benefits, which included accelerated share-based payment costs for qualifying terminations.

Gain on sale of facility

On December 20, 2018, we entered into an Asset Purchase and Sale Agreement with Roseburg Forest Products Co. to sell the Deltic MDF facility for $92.0 million. The transaction closed on February 12, 2019 resulting in a $9.2 million pre-tax gain on sale. See Note 4: Sale of Deltic MDF Facility in the Notes to Condensed Consolidated Financial Statements.

Interest expense, net

Net interest expense was $21.8 million for the nine months ended September 30, 2019 compared with $25.1 million for the same period in 2018. The decline in interest expense was primarily due to increased patronage dividends from our lenders and reduced interest costs from the refinancing of our $150.0 million Senior Notes in January 2019 described above. These decreases were partly offset by a full nine months of interest expense in 2019 associated with $230.0 million of long-term debt assumed or refinanced in connection with the Deltic merger in 2018.

Loss on extinguishment of debt

As part of the $150.0 million Senior Notes redemption in January 2019 we incurred a redemption premium of $4.9 million and wrote off certain unamortized debt costs. See Note 9: Debt in the Notes to Condensed Consolidated Financial Statements.

Income taxes

Income tax expense for first nine months of 2019 was $1.9 million compared with $23.1 million for the prior year period. Income taxes are primarily due to income or loss from our taxable REIT subsidiaries (TRS). For the nine months ended September 30, 2019, the TRS’s income before income tax was $5.3 million, which includes the gain on sale of the Deltic MDF facility. For the same period last year, the TRS’s income before income tax was $110.6 million. Also, during the third quarter of 2018, we recorded a tax benefit of $5.3 million primarily related to deducting contributions to our qualified pension plans at the higher 2017 income tax rate.

Total Adjusted EBITDDA

Total Adjusted EBITDDA for the first nine months of 2019 was $132.3 million compared to $260.8 million for the same period in 2018. The decrease in Total Adjusted EBITDDA was driven primarily by decreased lumber pricing year over year, lower realizations on Idaho sawlogs indexed to lumber pricing and decreased harvest volumes year on year. These decreases were partially offset by increased lumber shipments, increased sawlog prices in the Southern region, two large rural land sales in Arkansas and increased residential and commercial sales at Chenal Valley. Refer to the Business Segments Results below for further discussions on activities for each of our segments.

See Liquidity and Performance Measures for a reconciliation of Total Adjusted EBITDDA to net income, the closest comparable GAAP measure, for each of the periods presented.

Business Segment Results

Timberlands Segment

	Three Months Ended September 30,							Nine Months Ended September 30,
(in thousands)	2019		2018		Change			2019		2018		Change
Revenues¹	$	98,809	$	111,421	$	(12,612	)	$	233,848	$	280,438	$	(46,590	)
Costs and expenses:
Logging and hauling		45,099		42,077		3,022			108,551		111,282		(2,731	)
Other		9,063		8,497		566			24,257		23,222		1,035
Selling, general and administrative expenses		1,651		2,167		(516	)		5,063		5,866		(803	)
Timberlands Adjusted EBITDDA²	$	42,996	$	58,680	$	(15,684	)	$	95,977	$	140,068	$	(44,091	)

¹	Prior to elimination of intersegment fiber revenues of $35.0 million and $32.5 million for the three months ended September 30, 2019 and 2018, and $85.7 million and $93.8 million for the nine months ended September 30, 2019 and 2018, respectively.

²	Management uses Adjusted EBITDDA to evaluate the performance of the company. See Note 6: Segment Information in the Notes to Condensed Consolidated Financial Statements.

Timberlands Segment Statistics

	Three Months Ended September 30,							Nine Months Ended September 30,
Harvest Volumes (in tons)	2019		2018		Change			2019		2018		Change
Northern region
Sawlog		529,030		500,138		28,892			1,227,451		1,326,556		(99,105	)
Pulpwood		39,371		37,953		1,418			118,534		114,770		3,764
Stumpage		602		3,210		(2,608	)		7,978		13,268		(5,290	)
Total		569,003		541,301		27,702			1,353,963		1,454,594		(100,631	)

Southern region
Sawlog		496,388		469,336		27,052			1,358,140		1,399,216		(41,076	)
Pulpwood		475,313		446,914		28,399			1,190,486		1,185,018		5,468
Stumpage		58,659		61,690		(3,031	)		123,815		187,010		(63,195	)
Total		1,030,360		977,940		52,420			2,672,441		2,771,244		(98,803	)

Total harvest volume		1,599,363		1,519,241		80,122			4,026,404		4,225,838		(199,434	)

Sales Price/Unit ($ per ton)
Northern region¹
Sawlog	$	100	$	139	$	(39	)	$	95	$	127	$	(32	)
Pulpwood	$	38	$	42	$	(4	)	$	40	$	41	$	(1	)
Stumpage	$	5	$	12	$	(7	)	$	14	$	13	$	1

Southern region¹
Sawlog	$	48	$	47	$	1		$	47	$	44	$	3
Pulpwood	$	33	$	31	$	2		$	33	$	31	$	2
Stumpage	$	13	$	11	$	2		$	10	$	11	$	(1	)
													-

¹	Sawlog and pulpwood sales prices are on a delivered basis, which includes contracted logging and hauling costs charged to the customer. Stumpage sales provide our customers the right to harvest standing timber. As such, the customer contracts the logging and hauling and bears such costs.

Timberlands Adjusted EBITDDA

The following table summarizes Timberlands Adjusted EBITDDA variances for the three and nine months ended September 30, 2019 compared with the three and nine months ended September 30, 2018:

(in thousands)	Three Months Ended			Nine Months Ended
Timberlands Adjusted EBITDDA September 30, 2018	$	58,680		$	140,068
Sales price and mix		(17,580	)		(39,766	)
Harvest volume		2,694			(5,631	)
Other revenue		(231	)		2,071
Logging and hauling costs per unit		(501	)		(518	)
Forest management		(658	)		(899	)
Administrative, indirect and overhead costs		592			652
Timberlands Adjusted EBITDDA September 30, 2019	$	42,996		$	95,977

Third Quarter 2019 Compared with Third Quarter 2018

Timberlands Adjusted EBITDDA for the third quarter of 2019 was $43.0 million, a decrease of $15.7 million compared with the same period in 2018. The change in Timberlands Adjusted EBITDDA was primarily the result of the following:

•

Sales Price and Mix: Sawlog prices in the Northern region declined 28.0%, to $100 per ton resulting from the effect of lower lumber price realization on indexed sawlogs in Idaho. Sawlog prices in the Southern region increased 2.1% to $48 per ton due to log shortages from wet weather earlier in the year that were still impacting pricing in the third quarter of 2019.

•

Harvest Volume: We harvested 1.0 million tons in the Southern region, which was up 5.4% compared to the third quarter of 2018 primarily due to lower planned harvest volumes in the third quarter of 2018 as a result of high harvest levels achieved in the first half of 2018. Harvest volume increased in the Northern region as we shifted harvest operations into the second half of 2019 as customers entered the spring break up period with higher than normal inventories.

•

Logging and Hauling Cost per Unit: Log and haul costs per unit were higher primarily due to longer haul distances in the Northern region and increased competition for loggers in the Southern region which drove increased costs.

Year to Date 2019 Compared with Year to Date 2018

Timberlands Adjusted EBITDDA for the first nine months of 2019 was $96.0 million, a decrease of $44.1 million compared with the same period in 2018. The change in Timberlands Adjusted EBITDDA was primarily the result of the following:

•

Sales Price and Mix: Sawlog prices in the Northern region declined 25.2%, to $95 per ton resulting from the effect of lower lumber price realization on Idaho sawlogs. This was partially offset by sawlog prices in the Southern region increasing 6.8% to $47 per ton primarily due to constrained log supply caused by the wet weather.

•

Harvest Volume: We harvested 2.7 million tons in the Southern region, which was down 3.6% compared to the prior year. This decrease was primarily due to extended wet weather hampering logging operations in the first half of 2019 and full mill log inventories in the third quarter of 2019. As Southern mill log inventories have shifted to high levels we scaled back Southern region planned harvesting in the third quarter of 2019. These decreases were partially offset in the Southern region, which included a full 9 months of acquired Deltic timberlands in 2019, compared to only 7.5 months in 2018. Harvest volume in the Northern region decreased 6.9% year on year due to full log yards in the region earlier in the year resulting in portion of our harvest volumes being deferred into the second half of 2019.

•

Other Revenue: Other revenue increased primarily due to the Deltic merger which added more acres generating hunting lease income and natural gas and oil royalties.

•

Logging and Hauling Cost per Unit: Increased log and haul rates, especially in the Southern region where there was increased competition for loggers, drove the $0.5 million unfavorable impact to segment Adjusted EBITDDA.

Wood Products Segment

	Three Months Ended September 30,									Nine Months Ended September 30,
(in thousands)	2019			2018			Change			2019			2018			Change
Revenues	$	143,643		$	199,025		$	(55,382	)	$	413,979		$	532,425		$	(118,446	)
Costs and expenses¹
Fiber costs		67,579			74,233			(6,654	)		205,594			208,197			(2,603	)
Freight, logging and hauling		19,769			25,664			(5,895	)		53,722			61,282			(7,560	)
Manufacturing costs		45,224			50,902			(5,678	)		137,745			137,970			(225	)
Finished goods inventory change		3,426			(368	)		3,794			(453	)		(8,318	)		7,865
Selling, general and administrative expenses		2,082			2,160			(78	)		6,625			6,340			285
Other		(340	)		(12	)		(328	)		(312	)		(8	)		(304	)
Wood Products Adjusted EBITDDA²	$	5,903		$	46,446		$	(40,543	)	$	11,058		$	126,962		$	(115,904	)

¹	Prior to elimination of intersegment fiber costs of $35.0 million and $32.5 million for the three months ended September 30, 2019 and 2018, and $85.7 million and $93.8 million for the nine months ended September 30, 2019 and 2018, respectively.

²	Management uses Adjusted EBITDDA to evaluate the performance of the company. See Note 6: Segment Information in the Notes to Condensed Consolidated Financial Statements.

Wood Products Segment Statistics

	Three Months Ended September 30,							Nine Months Ended September 30,
	2019		2018		Change			2019		2018		Change
Lumber shipments (MBF)¹		298,807		284,566		14,241			809,733		747,960		61,773
Lumber sales prices ($ per MBF)	$	363	$	486	$	(123	)	$	373	$	491	$	(118	)

¹	MBF stands for thousand board feet.

Wood Products Adjusted EBITDDA

The following table summarizes Wood Products Adjusted EBITDDA variances for the three and nine months ended September 30, 2019 compared with the three and nine months ended September 30, 2018:


(in thousands)	Three Months Ended			Nine Months Ended
Wood Products Adjusted EBITDDA September 30, 2018	$	46,446		$	126,962
Lumber:
Price		(34,185	)		(85,459	)
Manufacturing costs per unit		203			(7,182	)
Log costs per unit		1,242			(3,542	)
Inventory charge		(2,650	)		(2,650	)
Residuals, panels and other		(5,373	)		(17,282	)
Administrative, indirect and overhead costs		220			211
Wood Products Adjusted EBITDDA September 30, 2019	$	5,903		$	11,058

Third Quarter 2019 Compared with Third Quarter 2018

Lumber shipments were 298.8 million board feet in the third quarter of 2019, an increase of 14.2 million board feet compared to the third quarter of 2018. This increase was primarily a result of increased production and timing of customer shipments.

Wood Products Adjusted EBITDDA for third quarter 2019 was $5.9 million, a decrease of $40.5 million compared with the third quarter of 2018 primarily due to the following:

•

Lumber Price: Average lumber sales prices decreased to $363 per MBF compared with $486 per MBF during the third quarter of 2018.

•

Log Costs Per Unit: Lower log costs in the Northern region, primarily due to indexed logs in Idaho, favorably impacted log costs per unit compared to the third quarter of 2018.

•

Inventory Charge: Ending inventory at September 30, 2019 and 2018 was written down $3.5 million and $0.8 million, respectively to net realizable value as a result of declines in lumber prices.

•

Residual Sales, Panels and Other: The decline in residuals, panels and other is primarily because the third quarter of 2018 included 3 months of operations at the Deltic MDF facility which was sold in February 2019.

Year to Date 2019 Compared with Year to Date 2018

Lumber shipments increased 61.8 million board feet to 809.7 million board feet during the first nine months of 2019 compared to 748.0 million board feet during the first nine months of 2018. This increase was primarily due to a full nine months of operations at the Deltic mills in 2019.

Wood Products Adjusted EBITDDA for the first nine months of 2019 was $11.1 million, a decrease of $115.9 million compared with the same period in 2018 primarily due to the following:

•

Lumber Price: Average lumber sales prices decreased to $373 per MBF compared with $491 per MBF during the same period in 2018.

•

Manufacturing Costs Per Unit: Cold temperatures in the Northern region and wet weather in the Southern region in the first half of 2019 required us to source smaller diameter logs, which resulted in unfavorable log recoveries and production rates. In addition, we completed significant planned capital and maintenance projects which required more downtime than projects during the first nine months of 2018.

•

Log Costs Per Unit: Increased log costs in the Southern region more than offset the impact of lower indexed logs in Idaho driving the unfavorable log costs per unit year on year.

•

Inventory Charge: Ending inventory at September 30, 2019 and 2018 was written down $3.5 million and $0.8 million, respectively, to net realizable value as a result of declines in lumber prices. Additionally, during the second quarter of 2019 we wrote down lumber inventory $7.4 million to net realizable value. The second quarter 2019 inventory write down is reflected in the year to date Adjusted EBITDDA within the manufacturing costs and log costs per unit variances above.

•

Residual Sales, Panels and Other: The decline in residuals, panels and other is primarily due to 2019 including only 1.5 months of the Deltic MDF facility compared to 7.5 months during 2018.

Real Estate Segment

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019		2018		Change		2019		2018		Change
Revenues	$	18,863	$	11,233	$	7,630	$	61,459	$	38,219	$	23,240
Costs and expenses
Costs of goods sold		2,902		2,578		324		8,943		7,189		1,754
Selling, general and administrative expenses		1,283		1,188		95		3,819		3,261		558
Real Estate Adjusted EBITDDA¹	$	14,678	$	7,467	$	7,211	$	48,697	$	27,769	$	20,928

¹	Management uses Adjusted EBITDDA to evaluate the performance of the company. See Note 6: Segment Information in the Notes to Condensed Consolidated Financial Statements.

Real Estate Segment Statistics

Rural Real Estate	Three Months Ended September 30,
	2019				2018
	Acres Sold		Average Price/Acre		Acres Sold		Average Price/Acre
Higher and better use (HBU)		975	$	3,225		1,136	$	4,615
Recreation real estate		5,037	$	1,261		2,024	$	1,480
Non-strategic timberland		213	$	906		—	$	—
Total		6,225	$	1,557		3,160	$	2,608

	Nine Months Ended September 30,
	2019				2018
	Acres Sold		Average Price/Acre		Acres Sold		Average Price/Acre
Higher and better use (HBU)		4,231	$	6,363		4,065	$	2,937
Recreation real estate		7,817	$	1,281		7,765	$	1,244
Non-strategic timberland		8,894	$	820		9,045	$	900
Total		20,942	$	2,112		20,875	$	1,425


Development Real Estate	Three Months Ended September 30,
	2019				2018
	Lots or Acres Sold		Average $/ Lot or Acres		Lots or Acres Sold		Average $/ Lot or Acres
Residential lots	42		$	110,504	9		$	143,000
Commercial acres	6		$	512,506		—	$	—

	For the Nine Months Ended September 30,
	2019				2018
	Lots or Acres Sold		Average $/ Lot or Acres		Lots or Acres Sold		Average $/ Lot or Acres
Residential lots		93	$	97,519		34	$	101,100
Commercial acres		6	$	512,506		—	$	—

Real Estate Adjusted EBITDDA

The following table summarizes Real Estate Adjusted EBITDDA variances for the three and nine months ended September 30, 2019 compared with the three and nine months ended September 30, 2018:


(in thousands)	Three Months Ended			Nine Months Ended
Real Estate Adjusted EBITDDA September 30, 2018	$	7,467		$	27,769
Rural real estate sales		5,788			18,821
Development real estate sales		1,773			4,351
Selling, general and administrative expenses		(95	)		(556	)
Other costs, net		(255	)		(1,688	)
Real Estate Adjusted EBITDDA September 30, 2019	$	14,678		$	48,697

Third Quarter 2019 Compared with Third Quarter 2018

Real Estate Adjusted EBITDDA for the third quarter of 2019 was $14.7 million, an increase of $7.2 million compared with the same period in 2018. The increase in Real Estate Adjusted EBITDDA was primarily the result of the following:

•

Rural Real Estate Sales: Rural real estate sales can vary quarter-to-quarter with the average price per acre fluctuating based on both the geographic area of the real estate and product mix. During the third quarter of 2019 we sold approximately 3,000 more acres of rural recreational real estate compared to the third quarter of 2018. The average price per acre for all rural recreational real estate during the third quarter of 2019 was $1,261 compared to an average price per acre of $1,480 during the third quarter of 2018.

•

Development Real Estate Sales: Real estate development sales favorably impacted Real Estate Adjusted EBITDDA during the third quarter of 2019 due to increased residential and commercial sales at Chenal Valley. During the third quarter of 2019 we sold 42 lots at an average lot price of approximately $110,500 compared to 9 lots at an average lot price of $143,000 during the third quarter of 2018. Further, we sold approximately 6 acres of commercial land in Chenal Valley for approximately $512,500 per acre during the third quarter of 2019. The average price per lot or acre fluctuates based on a variety of factors including location within the developments.

Year to Date 2019 Compared with Year to Date 2018

Real Estate Adjusted EBITDDA for the first nine months of 2019 was $48.7 million, an increase of $20.9 million compared with the same period in 2018. The increase in Real Estate Adjusted EBITDDA was primarily the result of the following:

•

Rural Real Estate Sales: Total rural real estate acres sold during the first nine months of 2019 were consistent with the first nine months of 2018. The first nine months of 2019 benefitted from a second quarter sale of 1,787 acres outside of Little Rock, Arkansas for $11,000 per acre.

•

Development Real Estate Sales: Real estate development sales favorably impacted Real Estate Adjusted EBITDDA during the first nine months of 2019 due to increased residential and commercial sales at Chenal Valley. In addition to the 6 acres of commercial land sold in the third quarter of 2019 discussed above, we sold 93 lots at an average lot price of approximately $97,500 during the first nine months of 2019 compared to 34 lots at an average lot price of $101,100 during the first nine months of 2018.

Liquidity and Capital Resources

As of September 30, 2019, our cash and cash equivalents were $94.7 million, an increase of $18.1 million from December 31, 2018. Changes in significant sources of cash for the nine months ended September 30, 2019 and 2018 are presented by categories as follows:

	Nine Months Ended September 30,
(in thousands)	2019			2018
Net cash provided by operating activities	$	105,427		$	148,368
Net cash provided by (used in) investing activities	$	22,187		$	(27,052	)
Net cash used in financing activities	$	(111,265	)	$	(100,530	)

Net Cash from Operations

Net cash provided by operating activities was $105.4 million for the first nine months of 2019, a $43.0 million decrease compared to the first nine months of 2018.

Changes in cash provided by operating activities was negatively impacted by:

•

Decreased cash receipts from customers of $104.8 million due lower lumber and log prices and lower log sales volume year over year combined with the sale of the Deltic MDF facility in February 2019.

•

Increased cash payments to vendors of $15.4 million due to the addition of the Deltic operations for the first nine months of 2019 compared to only 7.5 months during the first nine months of 2018. Also, operations in 2019 only included 1.5 months of operations at the Deltic MDF facility compared to 7.5 months in 2018.

•

Net cash paid for interest of $24.7 million compared to $23.2 million during the first nine months of 2018.

Changes in cash provided by operating activities was positively impacted by:

•

Cash payments of $20.8 million associated with the $21.2 million of merger expense during the first nine months of 2018 that did not reoccur during 2019.

•

Cash contributions of $4.6 million to our pension and other postretirement employee benefit plans compared to $56.0 million during the first nine months of 2018.

•

Net tax payments of $3.8 million during the first nine months of 2019 compared to $10.3 million net tax payments during the first nine months of 2018.

Net Cash Flows from Investing Activities

Net cash provided by investing activities was $22.2 million for the nine months ended September 30, 2019, compared with $27.1 million used in 2018.

•

We spent $38.9 million on capital expenditures for property, plant and equipment and timberlands reforestation and roads during the first nine months of 2019 compared to $31.0 million during the first nine months of 2018.

•

We received $58.8 million of net cash proceeds from the Deltic MDF facility sale in February 2019. See Note 4: Sale of Deltic MDF Facility in the Notes to Condensed Consolidated Financial Statements.

•

We acquired $3.4 million of cash from the merger with Deltic during the first quarter of 2018.

Net Cash Flows from Financing Activities

Net cash used in financing activities was $111.3 million and $100.5 million for the nine months ended September 30, 2019 and 2018, respectively.

•

Cash distributions to stockholders were $80.8 million in the first nine months of 2019, compared with $75.3 million during the first nine months of 2018. Our quarterly dividend increased approximately $1.6 million due to the issuance of approximately 4.8 million additional shares in November of 2018 related to the special distribution of Deltic’s accumulated earnings and profits as of the merger date net of the 0.7 million shares repurchased under the 2018 Repurchase Program. See Note 6: Earnings Per Share in the Notes to Condensed Consolidated Financial Statements.

•

In January 2019, we refinanced $150.0 million of Senior Notes due in 2019 with a $150.0 million variable rate term loan that will mature in 2029. Concurrent with the borrowing, we entered into an interest rate swap associated with the new term loan to fix the rate at 4.56%. Upon the refinancing, we redeemed and paid all outstanding Senior Notes, including a redemption premium of $4.9 million.

•

During the first nine months of 2018, we repaid $20.3 million of net debt and paid $2.4 million in loan fees.

•

During the first nine months of 2019 we repurchased 686,240 shares of our common stock totaling $25.2 million.

Future Cash Requirements

We invest cash in maintenance and discretionary capital expenditures for our facilities in our Wood Product operations. We evaluate discretionary capital improvements based on an expected level of return on investment. We also invest cash in the reforestation of timberlands and construction of roads in our Timberlands operations and to develop land in our Real Estate development operations. In total, we expect we will spend approximately $65 to $70 million in Woods Products, Timberlands and Real Estate segments in 2019.

On August 30, 2018, the board of directors authorized the repurchase up to $100.0 million of common stock with no time limit set for the repurchase. At September 30, 2019, we had remaining authorization of $74.8 million for future stock repurchase under the 2018 repurchase program. Stock repurchases in the future will depend on a variety of factors including our cash position, our desired level of liquidity, debt covenant restrictions and our stock price.

Capital Structure

	September 30,			December 31,
(in thousands)	2019			2018
Long-term debt	$	756,345		$	755,364
Cash and cash equivalents		(94,747	)		(76,639	)
Net debt		661,598			678,725
Market capitalization¹		2,762,111			2,137,915
Enterprise value	$	3,423,709		$	2,816,640

Net debt to enterprise value		19.3	%		24.1	%
Dividend yield²		3.9	%		5.1	%
Weighted-average cost of debt, after tax³		3.3	%		3.5	%

¹	Market capitalization is based on outstanding shares of 67.2 million and 67.6 million times closing share prices of $41.09 and $31.64 as of September 30, 2019, and December 31, 2018, respectively.

²	Dividend yield is based on annualized dividends per share of $1.60 and share prices of $41.09 and $31.64 as of September 30, 2019, and December 31, 2018, respectively.

³	Weighted-average cost of debt excludes deferred debt costs and credit facility fees and includes estimated annual patronage credit on term loan debt.

Liquidity and Performance Measures

The discussion below is presented to enhance the reader’s understanding of our operating performance, ability to generate cash and satisfy rating agency and creditor requirements. This information includes two measures: Adjusted EBITDDA and Cash Available for Distribution (CAD). These measures are not defined by GAAP and the discussion of Adjusted EBITDDA and CAD is not intended to conflict with or change any of the GAAP disclosures described herein.

Adjusted EBITDDA is a non-GAAP measure that management uses in evaluating performance, to allocate resources between segments, and that investors can use to evaluate the operational performance of the assets under management. It removes the impact of specific items that management believes do not directly reflect the core business operations on an ongoing basis. This measure should not be considered in isolation from and is not intended to represent an alternative to, our results reported in accordance with GAAP. Management believes that this non-GAAP measure, when read in conjunction with our GAAP financial statements, provides useful information to investors by facilitating the comparability of our ongoing operating results over the periods presented, the ability to identify trends in our underlying business and the comparison of our operating results against analyst financial models and operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.

Our definition of EBITDDA may be different from similarly titled measures reported by other companies. We define EBITDDA as net income (loss) before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses.

We reconcile Total Adjusted EBITDDA to net income for the consolidated company as it is the most comparable GAAP measure.

The following table provides a reconciliation of net income to Total Adjusted EBITDDA for the respective periods:

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2019			2018		2019			2018
Net income	$	20,565		$	60,336	$	44,262		$	121,081
Interest expense, net		8,475			10,109		21,821			25,125
Income tax		1,221			5,355		1,860			23,077
Depreciation, depletion and amortization		18,786			18,836		51,310			51,982
Basis of real estate sold		5,228			4,248		14,211			10,673
Loss on extinguishment of debt		—			—		5,512			—
Non-operating pension and other postretirement benefit costs		935			1,942		2,804			5,707
Deltic merger related costs		—			972		—			21,245
Gain on sale of facility		—			—		(9,176	)		—
Inventory purchase price adjustment in cost of goods sold		—			—		—			1,849
(Gain) loss on fixed assets		(198	)		12		(260	)		11
Total Adjusted EBITDDA	$	55,012		$	101,810	$	132,344		$	260,750

We define CAD as cash provided by operating activities adjusted for capital spending for purchases of property, plant and equipment, timberlands reforestation and roads and acquisition of timber and timberlands. Management believes CAD is a useful indicator of the company’s overall liquidity, as it provides a measure of cash generated that is available for dividends to common stockholders (an important factor in maintaining our REIT status), repurchase of the company’s common shares, debt repayment, acquisitions and other discretionary and nondiscretionary activities. Our definition of CAD is limited in that it does not solely represent residual cash flows available for discretionary expenditures since the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view CAD as a measure that provides supplemental information to our Condensed Consolidated Statements of Cash Flows. Our definition of CAD may be different from similarly titled measures reported by other companies, including those in our industry. CAD is not necessarily indicative of the CAD that may be generated in future periods.

The following table provides a reconciliation of cash provided by operating activities to CAD:

	Nine Months Ended September 30,
(in thousands)	2019			2018
Cash provided by operating activities¹	$	105,427		$	148,368
Capital expenditures		(39,143	)		(31,126	)
CAD	$	66,284		$	117,242
Net cash provided by (used in) investing activites²	$	22,187		$	(27,052	)
Net cash used in financing activities	$	(111,265	)	$	(100,530	)

¹	Cash from operating activities for the nine months ended September 30, 2019 and 2018 includes cash paid for Deltic merger-related costs of $0.0 million and $20.8 million, respectively, and cash paid for real estate development expenditures of $5.7 million and $3.mi, respectively.

²	Net cash from investing activities includes payments for capital expenditures, which is also included in our reconciliation of CAD.

Sources of Financing

Credit and Term Loan Agreements

In January 2019, we refinanced $150.0 million of 7.50% Senior Notes due in 2019 with a $150.0 million term loan that will mature in 2029. The new term loan carries a variable interest rate of one-month LIBOR plus 1.85%. Concurrent with the new term loan, we entered into an interest rate swap to fix the rate at 4.56%. Upon the refinancing, we redeemed and paid all outstanding Senior Notes, including a redemption premium of $4.9 million, and paid $0.5 million of lender fees on the new term loan. Subsequent to the refinancing, $693.5 million was outstanding under the Amended Term Loan Agreement.

We have a $40.0 million term loan that matures in December 2019. We expect to refinance this term loan at maturity. In September 2019, we entered into a $40.0 million interest rate swap, the objective of which is to lock in the index component rate on an expected new term loan in December 2019. This cash flow hedge requires settlement in December 2019.

A number of our debt instruments and associated interest rate derivative agreements have an interest rate tied to LIBOR. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. We are monitoring the developments with respect to the potential phasing out of LIBOR after 2021 and will work with our lenders and counter parties to identify a suitable replacement rate and amend our agreements to reflect this new reference rate accordingly. We do not believe that the discontinuation of LIBOR as a reference rate in our debt and interest rate derivative agreements will have a material adverse effect on our financial position or materially affect our interest expense.

As of September 30, 2019, we were in compliance with all debt and credit agreement covenants, there were no borrowings under the revolving line of credit and approximately $1.0 million of the $380.0 million credit facility was utilized by outstanding letters of credit.

The following table sets forth the financial covenants in the credit and term loan agreements and our status with respect to these covenants as of September 30, 2019:

	Covenant Requirement		Actual at September 30, 2019
Interest coverage ratio	≥	3.00 to 1.00	5.61
Leverage ratio	≤	40%	20%

Contractual Obligations

Other than the $150.0 million refinance of the 7.50% Senior Notes described in Note 9: Debt in the Notes to Condensed Consolidated Financial Statements, which are incorporated herein by reference, there have been no material changes to our contractual obligations during the nine months ended September 30, 2019 outside the ordinary course of business.

Credit Ratings

Two major debt rating agencies routinely evaluate our debt and our cost of borrowing can increase or decrease depending on our credit rating. During 2018, both Moody’s and S&P Global upgraded our debt rating to investment grade. There have been no changes in our credit rating during the nine months ended September 30, 2019. In August 2019 S&P Global revised their outlook on the company to negative from stable.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

There have been no significant changes during 2019 to our critical accounting policies presented in our 2018 Annual Report on Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Other than the $150.0 million refinance of the Senior Notes described in Note 9: Debt in the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference, our exposures to market risk have not changed materially since December 31, 2018. For quantitative and qualitative disclosures about market risk, see Item 7A – Quantitative and Qualitative Disclosure about Market Risk in our 2018 Annual Report on Form 10-K.

Quantitative Information about Market Risks

The table below provides information about our outstanding long-term debt, weighted-average interest rates and interest rate swaps as of September 30, 2019. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted-average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted-average variable rates are based on implied forward rates in the yield curve.

	EXPECTED MATURITY DATE
(in thousands)	2019			2020			2021			2022			2023			THEREAFTER			TOTAL			FAIR VALUE
Variable rate debt:
Principal due	$	40,000		$	40,000		$	40,000		$	—		$	—		$	277,500		$	397,500		$	397,500
Average interest rate		3.61	%		3.44	%		3.28	%		—			—			3.21	%		3.28	%
Fixed rate debt:
Principal due	$	—		$	6,000		$	—		$	43,000		$	40,000		$	275,735		$	364,735		$	378,866
Average interest rate		—			3.70	%		—			4.60	%		4.49	%		3.98	%		4.10	%
Interest rate swaps:
Variable to fixed	$	40,000		$	40,000		$	40,000		$	—		$	—		$	277,500		$	397,500		$	(28,586	)
Average pay rate		1.23	%		2.84	%		2.92	%		—			—			2.66	%		2.56	%
Average receive rate		1.87	%		1.54	%		1.38	%		—			—			1.29	%		1.38	%

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 (the Exchange Act)), under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2019. 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 CEO and CFO have concluded that these disclosure controls and procedures were effective as of September 30, 2019.

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

No changes occurred in our internal control over financial reporting during the nine months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We believe there is no 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, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

On August 30, 2018, our board of directors authorized management to repurchase up to $100.0 million of common stock with no time limit set for the repurchase (the 2018 Repurchase Program). No repurchases were made by the Company during the third quarter of 2019. During the nine months ended September 30, 2019, we repurchased 686,240 shares of common stock for $25.2 million (including transaction costs) under the 2018 Repurchase Program. Transaction costs are not counted against authorized funds. All common stock purchases were made in open-market transactions. At September 30, 2019, we had remaining authorization of $74.8 million for future stock repurchases under the 2018 Repurchase Program.

ITEM 6. EXHIBITS

EXHIBIT NUMBER	DESCRIPTION
(3)(a)*	Third Restated Certificate of Incorporation of the Registrant, effective February 20, 2018, filed as Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on February 21, 2018.
(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)	See Exhibits (3)(a) and (3)(b). The 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 PotlatchDeltic Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019, filed on October 30, 2019 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months September 30, 2019 and 2018, (iii) the Condensed Consolidated Balance Sheets at September 30, 2019 and December 31, 2018, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018, (v) the Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 and (vi) the Notes to Condensed Consolidated Financial Statements.
(104)	Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101).

* Incorporated by reference

SIGNATURE

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.

		PotlatchDeltic Corporation
		(Registrant)

		By	/s/ WAYNE WASECHEK
			Wayne Wasechek
			Corporate Controller (Duly Authorized; Principal Accounting Officer)


Date:	October 30, 2019