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POTLATCHDELTIC CORP - Quarter Report: 2022 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, 2022

or

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

For the transition period from to

Commission File Number 1-32729

PotlatchDeltic Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

82-0156045

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

601 West First Avenue, Suite 1600

 

Spokane, Washington

99201

(Address of principal executive offices)

(Zip Code)

 

(509) 835-1500

(Registrant’s telephone number, including area code)

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 ($1 par value)

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

 

 

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 25, 2022, was 80,776,600.

 

 


 

POTLATCHDELTIC CORPORATION AND CONSOLIDATED SUBSIDIARIES

Table of Contents

 

 

 

 

 

 

Page
Number

PART I. - FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements (unaudited)

 

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Statements of Comprehensive Income

4

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Condensed Consolidated Statements of Stockholders’ Equity

8

 

Index for the Notes to Condensed Consolidated Financial Statements

9

 

Notes to Condensed Consolidated Financial Statements

10

ITEM 2.

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

23

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

39

ITEM 4.

Controls and Procedures

39

 

 

 

PART II. - OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

40

ITEM 1A.

Risk Factors

40

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

ITEM 6.

Exhibits

41

 

 

 

SIGNATURE

42

 

 

 

 

 

 


Table of Contents

 

Part I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

(in thousands, except per share amounts)

2022

 

 

2021

 

 

 

2022

 

 

2021

 

Revenues

$

306,693

 

 

$

287,330

 

 

 

$

1,077,640

 

 

$

1,089,029

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

220,876

 

 

 

190,602

 

 

 

 

592,057

 

 

 

537,683

 

Selling, general and administrative expenses

 

18,878

 

 

 

18,512

 

 

 

 

55,584

 

 

 

54,782

 

CatchMark merger-related expenses

 

26,007

 

 

 

 

 

 

 

26,007

 

 

 

 

Gain on fire damage

 

(24,913

)

 

 

(4,394

)

 

 

 

(34,505

)

 

 

(4,394

)

 

 

240,848

 

 

 

204,720

 

 

 

 

639,143

 

 

 

588,071

 

Operating income

 

65,845

 

 

 

82,610

 

 

 

 

438,497

 

 

 

500,958

 

Interest expense, net

 

(8,280

)

 

 

(8,641

)

 

 

 

(18,593

)

 

 

(20,414

)

Pension settlement charge

 

 

 

 

 

 

 

 

(14,165

)

 

 

 

Non-operating pension and other postretirement employee benefit costs

 

(1,808

)

 

 

(3,271

)

 

 

 

(5,546

)

 

 

(9,956

)

Other

 

(1

)

 

 

 

 

 

 

(1

)

 

 

 

Income before income taxes

 

55,756

 

 

 

70,698

 

 

 

 

400,192

 

 

 

470,588

 

Income taxes

 

(9,801

)

 

 

(5,031

)

 

 

 

(70,135

)

 

 

(85,910

)

Net income

$

45,955

 

 

$

65,667

 

 

 

$

330,057

 

 

$

384,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.64

 

 

$

0.98

 

 

 

$

4.70

 

 

$

5.72

 

Diluted

$

0.64

 

 

$

0.97

 

 

 

$

4.69

 

 

$

5.69

 

Dividends per share

$

0.44

 

 

$

0.41

 

 

 

$

1.32

 

 

$

1.23

 

Weighted-average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

71,486

 

 

 

67,315

 

 

 

 

70,171

 

 

 

67,275

 

Diluted

 

71,632

 

 

 

67,648

 

 

 

 

70,308

 

 

 

67,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

3


Table of Contents

 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income

 

$

45,955

 

 

$

65,667

 

 

$

330,057

 

 

$

384,678

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other postretirement employee benefits:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss arising during the period, net of tax benefit of $0, $0, $1,570 and $0

 

 

 

 

 

 

 

 

(4,587

)

 

 

 

Effect of pension settlement, net of tax expense of $0, $0, $3,612 and $0

 

 

 

 

 

 

 

 

10,553

 

 

 

 

Amortization of actuarial loss included in net income, net of tax expense of $270, $1,073, $1,012 and $3,254

 

 

784

 

 

 

3,050

 

 

 

2,954

 

 

 

9,258

 

Amortization of prior service cost (credit) included in net income, net of tax expense (benefit) of $44, $(73), $133 and $(217)

 

 

130

 

 

 

(204

)

 

 

389

 

 

 

(614

)

Cash flow hedges, net of tax (benefit) expense of $(4,093), $397, $973 and $2,249

 

 

32,725

 

 

 

6,636

 

 

 

118,530

 

 

 

39,580

 

Other comprehensive income, net of tax

 

 

33,639

 

 

 

9,482

 

 

 

127,839

 

 

 

48,224

 

Comprehensive income

 

$

79,594

 

 

$

75,149

 

 

$

457,896

 

 

$

432,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

4


Table of Contents

 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

(in thousands, except per share amounts)

 

September 30, 2022

 

 

December 31, 2021

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

484,018

 

 

$

296,151

 

Customer receivables, net

 

 

37,224

 

 

 

31,028

 

Inventories, net

 

 

62,584

 

 

 

72,369

 

Other current assets

 

 

41,551

 

 

 

21,630

 

Total current assets

 

 

625,377

 

 

 

421,178

 

Property, plant and equipment, net

 

 

319,232

 

 

 

292,320

 

Investment in real estate held for development and sale

 

 

57,458

 

 

 

65,604

 

Timber and timberlands, net

 

 

2,520,505

 

 

 

1,682,671

 

Intangible assets, net

 

 

17,906

 

 

 

15,491

 

Other long-term assets

 

 

184,310

 

 

 

57,951

 

Total assets

 

$

3,724,788

 

 

$

2,535,215

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

111,607

 

 

$

78,209

 

Current portion of long-term debt

 

 

39,996

 

 

 

42,977

 

Current portion of pension and other postretirement employee benefits

 

 

4,993

 

 

 

4,993

 

Total current liabilities

 

 

156,596

 

 

 

126,179

 

Long-term debt

 

 

992,507

 

 

 

715,279

 

Pension and other postretirement employee benefits

 

 

92,990

 

 

 

83,674

 

Deferred tax liabilities, net

 

 

38,469

 

 

 

34,874

 

Other long-term obligations

 

 

38,807

 

 

 

49,076

 

Total liabilities

 

 

1,319,369

 

 

 

1,009,082

 

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 80,777 and 69,064 shares

 

 

80,777

 

 

 

69,064

 

Additional paid-in capital

 

 

2,292,130

 

 

 

1,781,217

 

Accumulated deficit

 

 

(52,089

)

 

 

(280,910

)

Accumulated other comprehensive income (loss)

 

 

84,601

 

 

 

(43,238

)

Total stockholders’ equity

 

 

2,405,419

 

 

 

1,526,133

 

Total liabilities and stockholders' equity

 

$

3,724,788

 

 

$

2,535,215

 

 

 

 

 

 

 

 

 

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

 

5


Table of Contents

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

330,057

 

 

$

384,678

 

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

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

67,960

 

 

 

57,365

 

Basis of real estate sold

 

 

25,024

 

 

 

22,733

 

Change in deferred taxes

 

 

(1,359

)

 

 

3,221

 

Pension and other postretirement employee benefits

 

 

10,936

 

 

 

16,595

 

Pension settlement charge

 

 

14,165

 

 

 

Equity-based compensation expense

 

 

16,141

 

 

 

6,345

 

Gain on fire damage

 

 

(34,505

)

 

 

(4,394

)

Other, net

 

 

(455

)

 

 

633

 

Change in working capital and operating-related activities, net

 

 

14,071

 

 

 

(20,082

)

Real estate development expenditures

 

 

(6,986

)

 

 

(6,434

)

Funding of pension and other postretirement employee benefits

 

 

(3,290

)

 

 

(7,418

)

Proceeds from insurance recoveries

 

 

26,678

 

 

 

 

Net cash from operating activities

 

 

458,437

 

 

 

453,242

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Property, plant and equipment additions

 

 

(44,000

)

 

 

(26,291

)

Timberlands reforestation and roads

 

 

(12,220

)

 

 

(12,236

)

Acquisition of timber and timberlands

 

 

(96,081

)

 

 

(2,450

)

Proceeds from property insurance

 

 

 

 

13,250

 

Cash acquired in CatchMark merger

 

 

23,571

 

 

 

 

Other, net

 

 

935

 

 

 

993

 

Net cash from investing activities

 

 

(127,795

)

 

 

(26,734

)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Distributions to common stockholders

 

 

(96,578

)

 

 

(82,462

)

Repurchase of common stock

 

 

(4,527

)

 

 

Proceeds from issuance of long-term debt

 

 

277,500

 

 

 

 

Repayment of long-term debt

 

 

(303,000

)

 

 

Other, net

 

 

(6,120

)

 

 

(3,619

)

Net cash from financing activities

 

 

(132,725

)

 

 

(86,081

)

Change in cash, cash equivalents and restricted cash

 

 

197,917

 

 

 

340,427

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

296,772

 

 

 

252,340

 

Cash, cash equivalents and restricted cash at end of period

 

$

494,689

 

 

$

592,767

 

 

 

 

 

 

 

 

NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

Accrued property, plant and equipment additions

 

$

4,429

 

 

$

2,695

 

Accrued timberlands reforestation and roads

 

$

2,749

 

 

$

1,590

 

Equity issued as consideration in the CatchMark merger

 

$

508,314

 

 

$

 

Long-term debt and other liabilities assumed in our merger with CatchMark

 

$

323,102

 

 

$

 

 

6


Table of Contents

 

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 amounts shown in the Condensed Consolidated Statements of Cash Flows.

 

(in thousands)

 

September 30, 2022

 

 

September 30, 2021

 

Cash and cash equivalents

 

$

484,018

 

 

$

592,767

 

Restricted cash included in other long-term assets1

 

 

10,671

 

 

 

 

Total cash, cash equivalents, and restricted cash

 

$

494,689

 

 

$

592,767

 

 

1

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

 

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

7


Table of Contents

 

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

 

 

Income (Loss)

 

 

Equity

 

Balance, December 31, 2021

 

 

69,064

 

 

$

69,064

 

 

$

1,781,217

 

 

$

(280,910

)

 

$

(43,238

)

 

$

1,526,133

 

Net income

 

 

 

 

 

 

 

 

 

 

 

163,880

 

 

 

 

 

 

163,880

 

Shares issued for stock compensation

 

 

308

 

 

 

308

 

 

 

(308

)

 

 

 

 

 

 

 

 

 

Equity-based compensation expense

 

 

 

 

 

 

 

 

2,056

 

 

 

 

 

 

 

 

 

2,056

 

Pension plans and OPEB obligations, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,480

 

 

 

7,480

 

Cash flow hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43,276

 

 

 

43,276

 

Dividends on common stock, $0.44 per share

 

 

 

 

 

 

 

 

 

 

 

(30,524

)

 

 

 

 

 

(30,524

)

Other transactions, net

 

 

 

 

 

 

 

 

(25

)

 

 

(78

)

 

 

 

 

 

(103

)

Balance, March 31, 2022

 

 

69,372

 

 

 

69,372

 

 

 

1,782,940

 

 

 

(147,632

)

 

 

7,518

 

 

 

1,712,198

 

Net income

 

 

 

 

 

 

 

 

 

 

 

120,222

 

 

 

 

 

 

120,222

 

Shares issued for stock compensation

 

 

3

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

Equity-based compensation expense

 

 

 

 

 

 

 

 

2,368

 

 

 

 

 

 

 

 

 

2,368

 

Repurchase of common stock

 

 

(95

)

 

 

(95

)

 

 

 

 

 

(4,061

)

 

 

 

 

 

(4,156

)

Pension plans and OPEB obligations, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

915

 

 

 

915

 

Cash flow hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42,529

 

 

 

42,529

 

Dividends on common stock, $0.44 per share

 

 

 

 

 

 

 

 

 

 

 

(30,524

)

 

 

 

 

 

(30,524

)

Other transactions, net

 

 

 

 

 

 

 

 

78

 

 

 

(79

)

 

 

 

 

 

(1

)

Balance, June 30, 2022

 

 

69,280

 

 

 

69,280

 

 

 

1,785,383

 

 

 

(62,074

)

 

 

50,962

 

 

 

1,843,551

 

Net income

 

 

 

 

 

 

 

 

 

 

 

45,955

 

 

 

 

 

 

45,955

 

Shares issued for stock compensation

 

 

31

 

 

 

31

 

 

 

(31

)

 

 

 

 

 

 

 

 

 

Equity-based compensation expense

 

 

 

 

 

 

 

 

2,409

 

 

 

 

 

 

 

 

 

2,409

 

Repurchase of common stock

 

 

(8

)

 

 

(8

)

 

 

 

 

 

(363

)

 

 

 

 

 

(371

)

Pension plans and OPEB obligations, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

914

 

 

 

914

 

Cash flow hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,725

 

 

 

32,725

 

Dividends on common stock, $0.44 per share

 

 

 

 

 

 

 

 

 

 

 

(35,530

)

 

 

 

 

 

(35,530

)

Common stock issued for CatchMark merger

 

 

11,474

 

 

 

11,474

 

 

 

504,292

 

 

 

 

 

 

 

 

 

515,766

 

Other transactions, net

 

 

 

 

 

 

 

 

77

 

 

 

(77

)

 

 

 

 

 

 

Balance, September 30, 2022

 

 

80,777

 

 

$

80,777

 

 

$

2,292,130

 

 

$

(52,089

)

 

$

84,601

 

 

$

2,405,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2020

 

 

66,876

 

 

$

66,876

 

 

$

1,674,576

 

 

$

(315,510

)

 

$

(120,989

)

 

$

1,304,953

 

Net income

 

 

 

 

 

 

 

 

 

 

 

131,106

 

 

 

 

 

 

131,106

 

Shares issued for stock compensation

 

 

166

 

 

 

166

 

 

 

(166

)

 

 

 

 

 

 

 

 

 

Equity-based compensation expense

 

 

 

 

 

 

 

 

1,930

 

 

 

 

 

 

 

 

 

1,930

 

Pension plans and OPEB obligations, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,953

 

 

 

2,953

 

Cash flow hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64,107

 

 

 

64,107

 

Dividends on common stock, $0.41 per share

 

 

 

 

 

 

 

 

 

 

 

(27,484

)

 

 

 

 

 

(27,484

)

Other transactions, net

 

 

 

 

 

 

 

 

81

 

 

 

(97

)

 

 

 

 

 

(16

)

Balance, March 31, 2021

 

 

67,042

 

 

 

67,042

 

 

 

1,676,421

 

 

 

(211,985

)

 

 

(53,929

)

 

 

1,477,549

 

Net income

 

 

 

 

 

 

 

 

 

 

 

187,905

 

 

 

 

 

 

187,905

 

Shares issued for stock compensation

 

 

3

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

Equity-based compensation expense

 

 

 

 

 

 

 

 

2,140

 

 

 

 

 

 

 

 

 

2,140

 

Pension plans and OPEB obligations, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,845

 

 

 

2,845

 

Cash flow hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,163

)

 

 

(31,163

)

Dividends on common stock, $0.41 per share

 

 

 

 

 

 

 

 

 

 

 

(27,489

)

 

 

 

 

 

(27,489

)

Other transactions, net

 

 

 

 

 

 

 

 

103

 

 

 

(101

)

 

 

 

 

 

2

 

Balance, June 30, 2021

 

 

67,045

 

 

 

67,045

 

 

 

1,678,661

 

 

 

(51,670

)

 

 

(82,247

)

 

 

1,611,789

 

Net income

 

 

 

 

 

 

 

 

 

 

 

65,667

 

 

 

 

 

 

65,667

 

Shares issued for stock compensation

 

 

55

 

 

 

55

 

 

 

(55

)

 

 

 

 

 

 

 

 

 

Equity-based compensation expense

 

 

 

 

 

 

 

 

2,275

 

 

 

 

 

 

 

 

 

2,275

 

Pension plans and OPEB obligations, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,846

 

 

 

2,846

 

Cash flow hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,636

 

 

 

6,636

 

Dividends on common stock, $0.41 per share

 

 

 

 

 

 

 

 

 

 

 

(27,489

)

 

 

 

 

 

(27,489

)

Other transactions, net

 

 

 

 

 

 

 

 

(1,549

)

 

 

(69

)

 

 

 

 

 

(1,618

)

Balance, September 30, 2021

 

 

67,100

 

 

$

67,100

 

 

$

1,679,332

 

 

$

(13,561

)

 

$

(72,765

)

 

$

1,660,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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Table of Contents

 

INDEX FOR THE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 1: Basis of Presentation

10

Note 2: Segment Information

12

Note 3: Earnings Per Share

14

Note 4: Certain Balance Sheet Components

14

Note 5: Debt

16

Note 6: Derivative Instruments

16

Note 7: Fair Value Measurements

17

Note 8: Equity-Based Compensation

18

Note 9: Income Taxes

19

Note 10: Leases

19

Note 11: Pension and Other Postretirement Employee Benefits

20

Note 12: Components of Accumulated Other Comprehensive Income (Loss)

21

Note 13: CatchMark Merger

21

 

9


Table of Contents

 

Notes to Condensed Consolidated Financial Statements

NOTE 1. BASIS OF PRESENTATION

General

PotlatchDeltic Corporation and its subsidiaries (collectively referred to in this report as the company, us, we or our) is a leading timberland Real Estate Investment Trust (REIT) with operations in nine states. We are engaged in activities associated with timberland management, including the sale of timber, the management of approximately 2.2 million acres of timberlands and the purchase and sale of timberlands. We are also engaged in the manufacturing and sale of wood products and the development of real estate. Our timberlands, real estate development projects and all of our wood products facilities are located within the continental United States. The primary market for our products is the United States. We converted to a REIT effective January 1, 2006.

Condensed Consolidated Financial Statements

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. Except as otherwise disclosed in these Notes to Condensed Consolidated Financial Statements, such adjustments are of a normal, recurring nature. Intercompany transactions and accounts have been eliminated in consolidation. 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, 2021, as filed with the Securities and Exchange Commission on February 17, 2022. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year.

Use of Estimates

The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and requires judgments affecting the amounts reported in the financial statements and the accompanying notes. Actual results may differ materially from our estimates.

Business Combinations and Acquisitions

We apply the principles provided in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations, to determine whether an acquisition involves an asset or a business. In determining whether an acquisition should be accounted for as a business combination or asset acquisition, we first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the single identifiable asset or the group of similar assets is accounted for as an asset acquisition. If this is not the case, we then further evaluate whether the single identifiable asset or group of similar identifiable assets and activities includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the transaction is accounted for as a business combination.

We account for business combinations using the acquisition method of accounting which requires that (i) identifiable assets acquired (including identifiable intangible assets) and liabilities assumed generally be measured and recognized at fair value as of the acquisition date and (ii) the excess of the purchase price over the net fair value of identifiable assets acquired and liabilities assumed be recognized as goodwill, which is not amortized for accounting purposes but is subject to testing for impairment at least annually. We measure and recognize asset acquisitions that are not deemed to be business combinations based on the cost to acquire the assets. Goodwill is not recognized in an asset acquisition with any consideration in excess of net assets acquired allocated to acquired assets on a relative estimated fair value basis. Transaction costs are expensed in a business combination and transaction costs directly attributable to the acquisition are considered a component of the cost of the acquisition in an asset acquisition. See Note 13: CatchMark Merger for additional information.

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Table of Contents

 

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 material adverse effect on our consolidated financial position, operating results or net cash flow.

New Accounting Standards

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 contains practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by this guidance apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued as a result of reference rate reform. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rate Committee, a steering committee comprised of large U.S. financial institutions, has recommended replacing LIBOR with the Secured Overnight Financing Rate (SOFR). The guidance in ASU 2020-04, which can be applied immediately, is optional and may be elected over time as reference rate reform activities occur. This guidance is not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity was expected to be completed. Our credit agreement, variable rate term loans with $403.5 million in principal and the associated interest rate swaps, and $290.0 million of forward starting interest rate swaps have an interest rate tied to LIBOR. We are working with our lenders and counterparties to modify the benchmark rate from LIBOR to SOFR in our variable rate term loans and interest rate derivative agreements. We expect to complete this conversion by the end of 2022. We do not expect our adoption of ASU 2020-04 will have a material impact on our consolidated financial statements.

 

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NOTE 2. SEGMENT INFORMATION

Our operations are organized into three reportable 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 and carbon sequestration. The Wood Products segment manufactures and markets lumber and plywood. Activities in the Real Estate segment include our rural timberland-holdings sales program, master planned community development and a country club.

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 sizeable portion of the Timberlands segment’s total revenues. Our other segments generally do not generate intersegment revenues. These intercompany transactions are eliminated in consolidation.

The reportable segments follow the same accounting policies used for our Condensed Consolidated Financial Statements, with the exception of the valuation of inventories, which are reported using the average cost method for purposes of reporting segment results.

The following table presents our revenues by major product:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

2022

 

 

2021

 

 

2022

 

 

2021

 

Timberlands

 

 

 

 

 

 

 

 

 

 

 

Northern region

 

 

 

 

 

 

 

 

 

 

 

Sawlogs

$

78,668

 

 

$

88,244

 

 

$

223,102

 

 

$

251,198

 

Pulpwood

 

582

 

 

 

119

 

 

 

1,561

 

 

 

815

 

Other

 

281

 

 

 

205

 

 

 

797

 

 

 

740

 

Total Northern revenues

 

79,531

 

 

 

88,568

 

 

 

225,460

 

 

 

252,753

 

 

 

 

 

 

 

 

 

 

 

 

 

Southern region

 

 

 

 

 

 

 

 

 

 

 

Sawlogs

 

29,618

 

 

 

22,191

 

 

 

77,364

 

 

 

65,620

 

Pulpwood

 

17,694

 

 

 

13,843

 

 

 

41,542

 

 

 

33,167

 

Stumpage

 

4,028

 

 

 

2,275

 

 

 

9,494

 

 

 

3,310

 

Other

 

3,705

 

 

 

2,666

 

 

 

9,859

 

 

 

7,825

 

Total Southern revenues

 

55,045

 

 

 

40,975

 

 

 

138,259

 

 

 

109,922

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Timberlands revenues

 

134,576

 

 

 

129,543

 

 

 

363,719

 

 

 

362,675

 

 

 

 

 

 

 

 

 

 

 

 

 

Wood Products

 

 

 

 

 

 

 

 

 

 

 

Lumber

 

151,540

 

 

 

141,255

 

 

 

622,228

 

 

 

679,417

 

Residuals and Panels

 

41,891

 

 

 

46,505

 

 

 

133,578

 

 

 

135,312

 

Total Wood Products revenues

 

193,431

 

 

 

187,760

 

 

 

755,806

 

 

 

814,729

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

Rural real estate

 

6,182

 

 

 

6,939

 

 

 

44,268

 

 

 

28,469

 

Development real estate

 

10,205

 

 

 

4,260

 

 

 

28,429

 

 

 

14,087

 

Other

 

2,621

 

 

 

2,298

 

 

 

7,112

 

 

 

7,252

 

Total Real Estate revenues

 

19,008

 

 

 

13,497

 

 

 

79,809

 

 

 

49,808

 

 

 

 

 

 

 

 

 

 

 

 

 

Total segment revenues

 

347,015

 

 

 

330,800

 

 

 

1,199,334

 

 

 

1,227,212

 

Intersegment Timberlands revenues1

 

(40,322

)

 

 

(43,470

)

 

 

(121,694

)

 

 

(138,183

)

Total consolidated revenues

$

306,693

 

 

$

287,330

 

 

$

1,077,640

 

 

$

1,089,029

 

 

1

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

 

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Table of Contents

 

Management uses Adjusted EBITDDA to evaluate the operating performance and effectiveness of operating strategies of our segments and allocation of resources to them. EBITDDA is calculated as net income 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 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)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Adjusted EBITDDA:

 

 

 

 

 

 

 

 

 

 

 

 

Timberlands

 

$

64,482

 

 

$

76,023

 

 

$

198,806

 

 

$

221,140

 

Wood Products

 

 

31,258

 

 

 

26,566

 

 

 

288,465

 

 

 

356,654

 

Real Estate

 

 

14,140

 

 

 

9,069

 

 

 

66,080

 

 

 

37,450

 

Corporate

 

 

(12,629

)

 

 

(11,496

)

 

 

(36,125

)

 

 

(35,028

)

Eliminations and adjustments

 

 

3,839

 

 

 

7,021

 

 

 

4,596

 

 

 

(3,063

)

Total Adjusted EBITDDA

 

 

101,090

 

 

 

107,183

 

 

 

521,822

 

 

 

577,153

 

Interest expense, net1

 

 

(8,280

)

 

 

(8,641

)

 

 

(18,593

)

 

 

(20,414

)

Depreciation, depletion and amortization

 

 

(27,329

)

 

 

(21,131

)

 

 

(66,838

)

 

 

(56,156

)

Basis of real estate sold

 

 

(6,845

)

 

 

(6,697

)

 

 

(25,024

)

 

 

(22,733

)

CatchMark merger-related expenses

 

 

(26,007

)

 

 

 

 

 

(26,007

)

 

 

 

Gain on fire damage

 

 

24,913

 

 

 

4,394

 

 

 

34,505

 

 

 

4,394

 

Pension settlement charge

 

 

 

 

 

 

 

 

(14,165

)

 

 

 

Non-operating pension and other postretirement employee benefits

 

 

(1,808

)

 

 

(3,271

)

 

 

(5,546

)

 

 

(9,956

)

Gain (loss) on disposal of fixed assets

 

 

23

 

 

 

(1,139

)

 

 

39

 

 

 

(1,700

)

Other

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

Income before income taxes

 

$

55,756

 

 

$

70,698

 

 

$

400,192

 

 

$

470,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Timberlands

 

$

16,963

 

 

$

11,893

 

 

$

40,687

 

 

$

33,792

 

Wood Products

 

 

10,069

 

 

 

8,879

 

 

 

25,226

 

 

 

21,261

 

Real Estate

 

 

175

 

 

 

162

 

 

 

518

 

 

 

477

 

Corporate

 

 

122

 

 

 

197

 

 

 

407

 

 

 

626

 

 

 

 

27,329

 

 

 

21,131

 

 

 

66,838

 

 

 

56,156

 

Bond discounts and deferred loan fees1

 

 

378

 

 

 

403

 

 

 

1,122

 

 

 

1,209

 

Total depreciation, depletion and amortization

 

$

27,707

 

 

$

21,534

 

 

$

67,960

 

 

$

57,365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of real estate sold:

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

$

6,845

 

 

$

6,703

 

 

$

25,033

 

 

$

22,751

 

Eliminations and adjustments

 

 

 

 

 

(6

)

 

 

(9

)

 

 

(18

)

Total basis of real estate sold

 

$

6,845

 

 

$

6,697

 

 

$

25,024

 

 

$

22,733

 

 

1

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

 

13


Table of Contents

 

NOTE 3. 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)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Basic weighted-average shares outstanding

 

 

71,486

 

 

 

67,315

 

 

 

70,171

 

 

 

67,275

 

Incremental shares due to:

 

 

 

 

 

 

 

 

 

 

 

 

Performance shares

 

 

111

 

 

 

272

 

 

 

104

 

 

 

257

 

Restricted stock units

 

 

35

 

 

 

61

 

 

 

33

 

 

 

56

 

Diluted weighted-average shares outstanding

 

 

71,632

 

 

 

67,648

 

 

 

70,308

 

 

 

67,588

 

 

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, 2022, there were approximately 117,000 and 136,000 stock-based awards, respectively, that were excluded from the calculation of diluted earnings per share as they were anti-dilutive. For the three and nine months ended September 30, 2021, there were approximately 101,000 and 88,000 stock-based awards, respectively, that were excluded from the calculation of diluted earnings per share as they were anti-dilutive. Anti-dilutive stock-based awards could be dilutive in future periods.

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). During the three and nine months ended September 30, 2022, we repurchased 8,444 and 103,010 shares of our common stock (at a total consideration of $0.4 million and $4.5 million), respectively, under the 2018 Repurchase Program. All common stock purchases were made in open-market transactions. We did not repurchase any shares during the nine months ended September 31, 2021.

On August 31, 2022, our board of directors authorized management to repurchase up to $200.0 million of our common stock with no set time limit for the repurchase (the 2022 Repurchase Program). Concurrently, the board of directors terminated the remaining repurchase authorization under the 2018 Repurchase Program.

Shares under the 2022 Repurchase Program may be repurchased in open market transactions, including pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934 (the Trading Plan). The timing, manner, price and amount of repurchases will be determined according to, and subject to, the terms of the Trading Plan, and, subject to the terms of the Trading Plan, the 2022 Repurchase Program may be suspended, terminated or modified at any time for any reason. No shares were repurchased under the 2022 Repurchase Program during the nine months ended September 30, 2022. At September 30, 2022, we had remaining authorization of $200.0 million for future stock repurchases under the 2022 Repurchase Program. Transaction costs are not counted against authorized funds.

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. We retire shares upon repurchase. Any excess repurchase price over par is recorded in accumulated deficit.

NOTE 4. CERTAIN BALANCE SHEET COMPONENTS

Inventories

 

(in thousands)

 

September 30, 2022

 

 

December 31, 2021

 

Logs

 

$

25,179

 

 

$

41,199

 

Lumber, panels and veneer

 

 

37,893

 

 

 

34,528

 

Materials and supplies

 

 

20,650

 

 

 

17,780

 

Total inventories

 

 

83,722

 

 

 

93,507

 

Less: LIFO reserve

 

 

(21,138

)

 

 

(21,138

)

Total inventories, net

 

$

62,584

 

 

$

72,369

 

 

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Table of Contents

 

Property, plant and equipment

 

(in thousands)

 

September 30, 2022

 

 

December 31, 2021

 

Property, plant and equipment

 

$

583,747

 

 

$

532,324

 

Less: accumulated depreciation

 

 

(264,515

)

 

 

(240,004

)

Total property, plant and equipment, net

 

$

319,232

 

 

$

292,320

 

Ola, Arkansas sawmill fire

On June 13, 2021, a fire occurred at our Ola, Arkansas sawmill. There were no injuries or environmental issues from the fire. The damage was principally limited to the large log primary breakdown area of the mill. The planer mill, kiln, and shipping department were not affected. We have adequate property damage and business interruption insurance and expect to be reimbursed for both property damage and business interruption losses by our insurance carriers, subject to an applicable deductible, under which we filed a claim with the insurance carriers. Insurance recoveries are recorded when deemed probable and reasonably estimable. The new equipment has been installed and the start-up phase and log processing began in late September 2022, with expected completion by the end of 2022. We also expect to finalize our insurance claim and receive the remaining insurance proceeds in 2023.

Damaged and obsolete fixed asset write-offs, disposal costs and insurance recoveries for the Ola, Arkansas sawmill fire and gain on fire damage consists of the following:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Fixed asset write-offs

 

$

 

 

$

7,436

 

 

$

 

 

$

9,544

 

Disposal costs

 

 

87

 

 

 

1,062

 

 

 

924

 

 

 

1,062

 

Total fixed asset loss on disposal

 

 

87

 

 

 

8,498

 

 

 

924

 

 

 

10,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance recoveries

 

 

(25,000

)

 

 

(12,892

)

 

 

(35,000

)

 

 

(15,000

)

Gain on fire damage at Ola

 

 

(24,913

)

 

 

(4,394

)

 

 

(34,076

)

 

 

(4,394

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance recoveries on timberlands fire damage

 

 

 

 

 

 

 

 

(429

)

 

 

 

Gain on fire damage

 

$

(24,913

)

 

$

(4,394

)

 

$

(34,505

)

 

$

(4,394

)

Timber and timberlands

 

(in thousands)

 

September 30, 2022

 

 

December 31, 2021

 

Timber and timberlands

 

$

2,428,840

 

 

$

1,597,011

 

Logging roads

 

 

91,665

 

 

 

85,660

 

Total timber and timberlands, net

 

$

2,520,505

 

 

$

1,682,671

 

During the nine months ended September 30, 2022, we were the successful bidder for three bolt-on timberland transactions, aggregating approximately $101 million, consisting of approximately 46,000 acres in Mississippi and Arkansas. Additionally, on September 14, 2022, we completed our merger with CatchMark Timber Trust, Inc. (CatchMark) which consists of approximately 348,000 acres in Alabama, Georgia and South Carolina. See Note 13: CatchMark Merger for additional information.

Accounts payable and accrued liabilities

 

(in thousands)

 

September 30, 2022

 

 

December 31, 2021

 

Income taxes payable

 

$

9,457

 

 

$

1,134

 

Accrued payroll and benefits

 

 

30,812

 

 

 

28,944

 

Accounts payable

 

 

15,898

 

 

 

12,749

 

Deferred revenue1

 

 

13,201

 

 

 

8,392

 

Other accrued taxes

 

 

9,793

 

 

 

5,714

 

Accrued interest

 

 

5,274

 

 

 

6,046

 

Other current liabilities

 

 

27,172

 

 

 

15,230

 

Total accounts payable and accrued liabilities

 

$

111,607

 

 

$

78,209

 

 

1

Deferred revenue predominately relates to hunting and other access rights on our timberlands, payments received for lumber shipments where control of goods has not transferred, member-related activities at an owned country club and certain post-close obligations for real estate sales. These contract liabilities are recognized over the term of the contracts, which is typically twelve months or less, except for country club initiation fees which are recognized over the average life of club membership.

 

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NOTE 5. DEBT

TERM LOANS

On September 14, 2022, through a seventh amendment to the Second Amended and Restated Term Loan Agreement (Amended Term Loan Agreement) with our primary lender, we refinanced $277.5 million of long-term debt assumed in the CatchMark merger. See Note 13: CatchMark Merger for additional information.

The amendment to the Amended Term Loan Agreement provided for a new 5-year term loan in the principal amount of $138.75 million maturing on September 1, 2027, and a new 8-year term loan in the principal amount of $138.75 million maturing on September 1, 2030 (collectively the New Term Loans). The New Term Loans bear interest at a rate equal to one-month SOFR plus 2.0% per annum. In addition, the 8-year term loan provides for a cost-of-capital reset at year five. In connection with the refinance, we entered into two one-month SOFR based interest rate swaps to fix the interest rates on the New Term Loans at 2.50% and 2.66% respectively, before patronage credits from lenders.

At September 30, 2022, our total outstanding principal on our long-term debt of $1.04 billion included $971.0 million of term loans under the Amended Term Loan Agreement, including the New Term Loans and a $40.0 million term loan that we expect to refinance upon its maturity in December 2022. In addition to the New Term Loans, certain borrowings under the Amended Term Loan Agreement are at variable rates of one or three-month LIBOR plus a spread between 1.68% and 2.10%. We have entered into LIBOR based interest rate swaps to fix the interest rate on these LIBOR base rate term loans.

See Note: 6 Derivative Instruments for additional information.

CREDIT AGREEMENT

At September 30, 2022, there were no borrowings under our $300.0 million revolving line of credit and approximately $11.0 million of our revolving line of credit was utilized for outstanding letters of credit. As provided in the revolving line of credit agreement, borrowings may be increased by up to an additional $500.0 million. The revolving line of credit agreement also includes a sublimit of $75.0 million for the issuance of standby letters of credit and a sublimit of $25.0 million for swing line loans. Usage under either or both sub facilities reduce availability under the revolving line of credit. We may utilize borrowings under the credit facility to, among other things, refinance existing indebtedness and provide funding for working capital requirements, capital projects, acquisitions and other general corporate expenditures.

We were in compliance with all debt and credit agreement covenants at September 30, 2022.

NOTE 6. 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 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. All 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 hedges.

As of September 30, 2022, we have interest rate swaps associated with $403.5 million of LIBOR based term loans. These swaps are cash flow hedges that convert variable rates ranging from one-month and three-month LIBOR plus 1.68% to 2.10%, to fixed rates ranging from 3.04% to 4.75% before patronage credits from lenders.

We held $567.5 million of one-month LIBOR based forward starting interest rate swaps designated as cash flow hedges prior to the termination of certain forward starting swaps noted below. These forward starting interest rate swaps were entered into in March 2020, to effectively hedge the variability in future benchmark interest payments attributable to changes in interest rates on $567.5 million of expected future debt refinances through January 2029, with expected interest payments through January 2039, by converting the benchmark interest rate. On September 15, 2022, we terminated $277.5 million of these forward starting interest rate swaps and transferred the value realized from their termination into two new swaps to hedge the variability in future cash flows on the SOFR based New Term Loans of $277.5 million. These two new one-month SOFR based interest rate swaps with a notional amount of $138.75 million each effectively fix the interest rates at 2.50% and 2.66% on the New Term Loans before patronage credits from lenders. See Note 5: Debt for additional information. As of September 30, 2022, we have $290.0 million of remaining forward starting interest rate swaps. These cash flow hedges for expected future debt refinances require settlement on the stated maturity date.

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Additionally, in connection with the CatchMark merger, we acquired two LIBOR based interest rate swaps with a combined notional amount of $275.0 million which were used to fix the interest rates on CatchMark’s long-term debt. These interest rate swaps had a fair value of $19.2 million at the date of the CatchMark merger. We terminated these interest rate swaps and transferred the value realized from their termination into an existing $150.0 million LIBOR based interest rate swap associated with a $150.0 million term loan maturing January 1, 2029, resulting in the reduction of the LIBOR based swap rate from 2.71% to 0.49%.

At September 30, 2022, the amount of net gains expected to be reclassified into earnings in the next 12 months is approximately $11.5 million. However, this expected amount to be reclassified into earnings is subject to volatility as the ultimate amount recognized in earnings is based on the LIBOR and SOFR rates, as applicable, at the time of net swap cash payments.

The gross fair values of derivative instruments on our Condensed Consolidated Balance Sheets are as follows:

 

 

 

 

 

Asset Derivatives

 

 

 

 

Liability Derivatives

 

(in thousands)

 

Location

 

September 30, 2022

 

 

December 31, 2021

 

 

Location

 

September 30, 2022

 

 

December 31, 2021

 

Derivatives designated in cash flow hedging relationships:

 

 

 

 

 

 

 

 

 

   Interest rate contracts

 

Other assets, current1

 

$

8,889

 

 

$

2,191

 

 

Accounts payable and accrued liabilities1

 

$

 

 

$

 

Interest rate contracts

 

Other assets, non-current

 

 

138,795

 

 

 

31,306

 

 

Other long-term obligations

 

 

 

 

 

24,060

 

 

 

 

 

$

147,684

 

 

$

33,497

 

 

 

 

$

 

 

$

24,060

 

 

1

Derivative instruments that mature within one year, as a whole, are classified as current.

 

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

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

Location

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Derivatives designated in cash flow hedging relationships:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income recognized in other comprehensive income, net of tax

 

 

 

$

32,895

 

 

$

4,310

 

 

$

115,256

 

 

$

32,741

 

Amounts reclassified from accumulated other comprehensive income (loss), net of tax1

 

Interest expense

 

$

170

 

 

$

(2,326

)

 

$

(3,274

)

 

$

(6,839

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

$

8,280

 

 

$

8,641

 

 

$

18,593

 

 

$

20,414

 

 

1

Realized gains and losses on interest rate contracts consist of realized net cash received or paid and interest accruals on the interest rate swaps during the periods in addition to amortization of amounts out of other comprehensive income related to certain terminated hedges and adjustments to interest expense resulting from amortization of inception value of certain off-market designated hedges. Net cash received or paid is included in the supplemental cash flow information within interest, net of amounts capitalized in the Condensed Consolidated Statements of Cash Flows.

 

NOTE 7. FAIR VALUE MEASUREMENTS

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

(in thousands)

 

Carrying
Amount

 

 

Fair
Value

 

 

Carrying
Amount

 

 

Fair
Value

 

Derivative assets related to interest rate swaps (Level 2)

 

$

147,684

 

 

$

147,684

 

 

$

33,497

 

 

$

33,497

 

Derivative liabilities related to interest rate swaps (Level 2)

 

$

 

 

$

 

 

$

(24,060

)

 

$

(24,060

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including current portion (Level 2):

 

 

 

 

 

 

 

 

 

 

 

 

Term loans

 

$

(969,107

)

 

$

(961,581

)

 

$

(691,119

)

 

$

(705,135

)

Revenue bonds

 

 

(65,735

)

 

 

(64,349

)

 

 

(65,735

)

 

 

(69,278

)

Medium-term notes

 

 

 

 

 

 

 

 

(3,000

)

 

 

(3,007

)

Total long-term debt1

 

$

(1,034,842

)

 

$

(1,025,930

)

 

$

(759,854

)

 

$

(777,420

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Company owned life insurance asset (COLI) (Level 3)

 

$

4,305

 

 

$

4,305

 

 

$

3,923

 

 

$

3,923

 

 

1

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

The fair value of interest rate swaps is determined using a discounted cash flow analysis, based on third party sources, 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.

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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, restricted cash, 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.

NOTE 8. EQUITY-BASED COMPENSATION

On May 2, 2022, our stockholders approved the PotlatchDeltic Corporation Amended and Restated 2019 Long-Term Incentive Plan to increase the number of shares available for issuance by 1.4 million shares. At September 30, 2022, approximately 2.1 million shares are available for future use under our long-term incentive plans.

Share-based compensation activity during the nine months ended September 30, 2022, included the following:

 

(Shares in thousands)

 

Granted

 

 

Vested

 

 

Forfeited

 

Performance Share Awards (PSAs)

 

 

92,490

 

 

 

 

 

 

971

 

Restricted Stock Units (RSUs)

 

 

58,549

 

 

 

39,594

 

 

 

1,323

 

Approximately 0.3 million shares of common stock were issued to employees during the nine months ended September 30, 2022, as a result of PSA and RSU vesting during 2021 and 2022.

The following details compensation expense and the related income tax benefit for company specific equity-based awards:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Equity-based compensation expense:

 

 

 

 

 

 

 

 

 

 

 

 

Performance share awards

 

$

1,535

 

 

$

1,416

 

 

$

4,351

 

 

$

4,012

 

Restricted stock units

 

 

825

 

 

 

805

 

 

 

2,335

 

 

 

2,197

 

Deferred compensation stock equivalent units expense

 

 

49

 

 

 

54

 

 

 

147

 

 

 

136

 

Total equity-based compensation expense

 

$

2,409

 

 

$

2,275

 

 

$

6,833

 

 

$

6,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total tax benefit recognized for equity-based expense

 

$

119

 

 

$

125

 

 

$

338

 

 

$

321

 

Additionally, during the three months ended September 30, 2022, we recognized a $9.3 million expense for the accelerated vesting of CatchMark equity awards related to the CatchMark merger which is included in CatchMark merger-related expenses on the Condensed Consolidated Statements of Operations. See Note 13: CatchMark Merger for additional information.

Performance Share Awards

The weighted average grant date fair value of PSAs granted in 2022 was $76.18 per share. 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 number of shares actually issued, as a percentage of the amount subject to the PSA, could range from 0% to 200%. PSAs granted under the 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 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 following table presents the key inputs used in the Monte Carlo simulation to calculate the fair value of the performance share awards granted in 2022:

 

Stock price as of valuation date

 

$

55.02

 

Risk-free rate

 

 

1.79

%

Expected volatility

 

 

45.69

%

Expected dividend yield1

 

 

 

Expected term (years)

 

 

3.00

 

 

1

Full dividend reinvestment assumed.

 

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Restricted Stock Units

The weighted average fair value of all RSUs granted during the nine months ended September 30, 2022, was $53.73 per share. 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 RSU awards granted accrue dividend equivalents based on dividends paid during the RSU vesting period. Recipients will receive dividend equivalents in the form of additional shares of common stock at the date the vested RSUs are settled. Any forfeited RSUs will not receive dividends. Therefore, the shares are not considered participating securities.

NOTE 9. INCOME TAXES

As a REIT, we generally are not subject to federal and state corporate income taxes on income from investments in real estate, including our timberlands, that we distribute to our shareholders. We conduct certain activities through our PotlatchDeltic taxable REIT subsidiaries (TRS) which are subject to corporate level federal and state income taxes. These activities are principally comprised of our wood products manufacturing operations and certain real estate investments. Therefore, income tax expense or benefit is primarily due to pre-tax book income or loss of the TRS, as well as permanent book versus tax differences. In conjunction with the CatchMark merger (see Note 13: CatchMark Merger), we recorded uncertain tax position liabilities totaling $9.4 million, including $0.5 million for accrued interest, related to the treatment of certain intercompany transactions between CatchMark's REIT and its taxable REIT subsidiary. These liabilities are included in Other long-term obligations in our Condensed Consolidated Balance Sheets.

NOTE 10. LEASES

We lease certain equipment, office space and land. Lease 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.

The following table presents supplemental balance sheet information related to lease assets and liabilities:

 

(in thousands)

Classification

 

September 30, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

 

Operating lease assets

Other long-term assets

 

$

10,071

 

 

$

8,514

 

Finance lease assets1

Property, plant and equipment, net

 

 

13,365

 

 

 

10,663

 

Total lease assets

 

 

$

23,436

 

 

$

19,177

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

Operating lease liabilities

Accounts payable and accrued liabilities

 

$

2,819

 

 

$

3,021

 

Finance lease liabilities

Accounts payable and accrued liabilities

 

 

4,883

 

 

 

3,577

 

Noncurrent:

 

 

 

 

 

 

 

Operating lease liabilities

Other long-term obligations

 

 

7,219

 

 

 

5,598

 

Finance lease liabilities

Other long-term obligations

 

 

8,318

 

 

 

6,972

 

Total lease liabilities

 

 

$

23,239

 

 

$

19,168

 

 

1

Finance lease assets are presented net of accumulated amortization of $7.6 million and $4.5 million as of September 30, 2022 and December 31, 2021, respectively.

The following table presents the components of lease expense:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Operating lease costs1

 

$

805

 

 

$

1,156

 

 

$

2,633

 

 

$

3,769

 

Finance lease costs:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of leased assets

 

 

1,137

 

 

 

741

 

 

 

3,061

 

 

 

1,963

 

Interest on lease liabilities

 

 

90

 

 

 

60

 

 

 

226

 

 

 

162

 

Net lease costs

 

$

2,032

 

 

$

1,957

 

 

$

5,920

 

 

$

5,894

 

 

1

Excludes short-term leases and variable lease costs, which are immaterial.

 

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The following table presents supplemental cash flow information related to leases:

 

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

 

2022

 

 

2021

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows for operating leases

 

$

2,733

 

 

$

3,723

 

Operating cash flows for finance leases

 

$

226

 

 

$

162

 

Financing cash flows for finance leases

 

$

3,110

 

 

$

1,963

 

Leased assets exchanged for new lease liabilities:

 

 

 

 

 

 

Operating leases1

 

$

3,931

 

 

$

213

 

Finance leases

 

$

5,761

 

 

$

3,916

 

 

 

1

Includes $2.4 million for an office lease assumed in the CatchMark merger. See Note 13: CatchMark Merger.

 

NOTE 11. PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS

In March 2022, we transferred $75.6 million of our qualified pension plan (the Plan) assets to an insurance company for the purchase of a group annuity contract. As a result of the transaction, the insurance company assumed responsibility for annuity administration and benefit payments to select retirees and terminated vested participants, with no change to participants' pension benefits. We recorded a non-cash pretax settlement charge of $14.2 million as a result of accelerating the recognition of actuarial losses included in Accumulated Other Comprehensive Income (Loss) that would have been recognized in future periods.

The settlement triggered a remeasurement of the Plan's assets and liabilities. We updated the discount rate used to measure our projected benefit obligation for the Plan as of March 31, 2022, and to calculate the related net periodic benefit cost for the remainder of 2022 to 3.95% from 3.00%. All other pension assumptions remain unchanged. The net effect of the remeasurement was a $6.2 million reduction in the funded status of the Plan, primarily driven by lower returns on Plan assets.

The following table details 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)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service cost

 

$

1,652

 

 

$

2,045

 

 

$

79

 

 

$

168

 

Interest cost

 

 

2,611

 

 

 

2,633

 

 

 

228

 

 

 

317

 

Expected return on plan assets

 

 

(2,259

)

 

 

(3,525

)

 

 

 

 

 

 

Amortization of prior service cost (credit)

 

 

19

 

 

 

21

 

 

 

155

 

 

 

(298

)

Amortization of actuarial loss (gain)

 

 

1,150

 

 

 

3,578

 

 

 

(96

)

 

 

545

 

Total net periodic cost

 

$

3,173

 

 

$

4,752

 

 

$

366

 

 

$

732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

Pension

 

 

OPEB

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service cost

 

$

5,153

 

 

$

6,135

 

 

$

237

 

 

$

504

 

Interest cost

 

 

8,034

 

 

 

7,899

 

 

 

686

 

 

 

951

 

Expected return on plan assets

 

 

(7,662

)

 

 

(10,575

)

 

 

 

 

 

 

Amortization of prior service cost (credit)

 

 

55

 

 

 

63

 

 

 

467

 

 

 

(894

)

Amortization of actuarial loss (gain)

 

 

4,252

 

 

 

10,877

 

 

 

(286

)

 

 

1,635

 

Net periodic cost before pension settlement charge

 

 

9,832

 

 

 

14,399

 

 

 

1,104

 

 

 

2,196

 

Pension settlement charge

 

 

14,165

 

 

 

 

 

 

 

 

 

 

Net periodic cost

 

$

23,997

 

 

$

14,399

 

 

$

1,104

 

 

$

2,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the nine months ended September 30, 2022 and 2021, funding of pension and other postretirement employee benefit plans was $3.3 million and $7.4 million, respectively.

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NOTE 12. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table details changes in amounts included in our Accumulated Other Comprehensive Income (Loss) (AOCI) by component on our Condensed Consolidated Balance Sheets, net of tax:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Pension Plans

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

41,274

 

 

$

73,592

 

 

$

49,579

 

 

$

79,025

 

Net loss arising during the period

 

 

 

 

 

 

 

 

4,587

 

 

 

 

Effect of pension settlement

 

 

 

 

 

 

 

 

(10,553

)

 

 

 

Amounts reclassified from AOCI to earnings

 

 

(869

)

 

 

(2,664

)

 

 

(3,208

)

 

 

(8,097

)

Balance at end of period

 

 

40,405

 

 

 

70,928

 

 

 

40,405

 

 

 

70,928

 

Other Postretirement Benefit Plans

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

1,700

 

 

 

14,418

 

 

 

1,790

 

 

 

14,783

 

Amounts reclassified from AOCI to earnings

 

 

(45

)

 

 

(182

)

 

 

(135

)

 

 

(547

)

Balance at end of period

 

 

1,655

 

 

 

14,236

 

 

 

1,655

 

 

 

14,236

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

(93,936

)

 

 

(5,763

)

 

 

(8,131

)

 

 

27,181

 

Amounts arising during the period

 

 

(32,895

)

 

 

(4,310

)

 

 

(115,256

)

 

 

(32,741

)

Amounts reclassified from AOCI to earnings

 

 

170

 

 

 

(2,326

)

 

 

(3,274

)

 

 

(6,839

)

Balance at end of period

 

 

(126,661

)

 

 

(12,399

)

 

 

(126,661

)

 

 

(12,399

)

Accumulated other comprehensive (income) loss, end of period

 

$

(84,601

)

 

$

72,765

 

 

$

(84,601

)

 

$

72,765

 

 

See Note 11: Pension and Other Postretirement Employee Benefits and Note 6: Derivative Instruments for additional information.

NOTE 13. CATCHMARK MERGER

On September 14, 2022, CatchMark and CatchMark Timber Operating Partnership, L.P. (the Partnership) merged into a wholly owned subsidiary (Merger Sub) of PotlatchDeltic, pursuant to the terms of a merger agreement dated May 29, 2022, with the Merger Sub surviving the mergers. CatchMark owned approximately 348,000 acres of superior site index timberlands located in Alabama, Georgia and South Carolina.

Under the terms of the merger agreement, immediately prior to the mergers all outstanding unvested CatchMark equity awards and Partnership Long-term Incentive Plan (LTIP) Units were deemed fully vested, at maximum performance to the extent applicable, and converted to shares of CatchMark common stock and common partnership units of the Partnership (Partnership OP Units), respectively. CatchMark stockholders and the holders of the Partnership OP Units received 0.230 shares of PotlatchDeltic common stock for each share of CatchMark common stock and for each Partnership OP Unit and cash in lieu of fractional shares at the effective time of the merger.

As a result of the merger, we issued approximately 11.5 million shares of PotlatchDeltic common stock, including (i) 11.3 million shares in exchange for the outstanding shares of CatchMark common stock, which included unvested CatchMark share-based awards that fully vested upon closing of the merger; and (ii) 0.2 million shares in exchange for the Partnership OP Units.

Immediately following the merger, we refinanced $277.5 million of CatchMark's $300.0 million outstanding long-term debt and repaid the remaining $22.5 million with cash on hand. We also entered into $277.5 million of interest rate swaps to fix the interest rates on the refinanced long-term debt. Refer to Note 5: Debt and Note 6: Derivative Instruments for further information.

Based on guidance of ASC Topic 805, Business Combinations, we accounted for the transaction as an asset acquisition due to the determination that substantially all of the fair value of the assets acquired was concentrated in the acquired timber and timberlands asset group. See Note 1: Basis of Presentation for information on accounting and significant estimates associated with business combinations and asset acquisitions. The CatchMark timber and timberlands assets and operations are included in our Timberlands segment within the Southern region.

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The following table summarizes the cost of the acquisition for accounting purposes:

 

(in thousands, except shares and per share amounts)

 

 

Total CatchMark shares and Partnership OP units outstanding to be converted1

 

48,688,754

 

Exchange ratio2

 

0.23

 

PotlatchDeltic shares issued as merger consideration

 

11,198,413

 

Price per PotlatchDeltic common share3

$

44.95

 

Value of PotlatchDeltic common shares issued as merger consideration

$

503,369

 

Attribution to consideration transferred for pre-merger services4

 

4,945

 

Total value of equity consideration

 

508,314

 

Cash paid in lieu of fractional shares

 

101

 

Transaction costs capitalized5

 

9,341

 

Purchase consideration

$

517,756

 

 

1.
Number of shares of CatchMark common stock and Partnership OP units issued and outstanding as of September 14, 2022, immediately prior to the merger, net of fractional shares. These shares exclude 1.5 million unvested CatchMark share-based awards that fully vested, were exchanged for PotlatchDeltic shares upon closing of the merger and were allocated between the pre-merger and post-merger periods.
2.
Exchange ratio per the merger agreement.
3.
Closing price of PotlatchDeltic common stock on September 14, 2022.
4.
Represents the fair value of CatchMark unvested share-based awards that fully vested upon closing of the merger allocated to the pre-merger period, net of impact from shares withheld to cover employee taxes.
5.
Transaction costs include items such as investment banking fees, legal services, and other professional fees directly attributable to the merger. These costs are capitalized in an asset acquisition.

The following table reflects the fair value of assets acquired and liabilities assumed:

 

(in thousands)

 

 

ASSETS

 

 

Cash and cash equivalents

$

23,571

 

Other current assets

 

2,764

 

Intangible assets

 

3,000

 

Timber and timberlands

 

782,258

 

Other long-term assets1

 

29,265

 

Total assets acquired

 

840,858

 

LIABILITIES

 

 

Accounts payable and accrued liabilities

 

10,781

 

Long-term debt

 

300,000

 

Deferred tax liabilities, net

 

795

 

Other long-term liabilities2

 

11,526

 

Total liabilities assumed

 

323,102

 

Net assets acquired

$

517,756

 

 

1.
Includes $19.2 million for interest rate swap contracts. See Note 6: Derivative Instruments for additional information.
2.
Includes $9.4 million in uncertain tax position liabilities. See Note 9: Income Taxes for additional information.

During the three months ended September 30, 2022, we incurred non-capitalizable merger costs in connection with the CatchMark merger as follows:

 

(in thousands)

 

 

Severance benefits1

$

7,513

 

Partnership OP Units' tax gross-up2

 

8,124

 

Share-based compensation3

 

9,307

 

Other

 

1,063

 

Total merger expenses

$

26,007

 

 

1.
Qualifying change-in-control and termination benefits for CatchMark executive officers and employees.
2.
Tax gross-up payments to holders of Partnership OP Units, as defined in the merger agreement.
3.
Share-based compensation for the acceleration of CatchMark equity awards that fully vested upon closing of the merger and were allocated to the post-merger period.

These costs are included in CatchMark merger related expenses in our Condensed Consolidated Statements of Operations.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, expectations regarding economic conditions, including interest rates and our ability to offset the impact of inflation; expected seasonal fluctuations in our business segments; expected effectiveness of our hedging instruments and swaps; expected return on pension assets; anticipated share repurchases and regular and special dividend payments; anticipated cash balances, cash flows from operations and expected liquidity; potential uses of our credit facility; the expected impact from the Ola, Arkansas sawmill fire, anticipated insurance coverage and expected timing to finalize the insurance claim and receive the remaining insurance proceeds, and expected timing to return to full operation; expectations regarding debt obligations, interest payments and debt refinancing; expectations regarding the market transition away from LIBOR and our ability and expected timing to replace LIBOR with SOFR under our variable rate term loans and interest rate derivative agreements; maintenance of our investment grade credit rating; expectations regarding the U.S. housing market and home repair and remodeling activity; the lumber and log markets and pricing; lumber shipment volumes; timber harvest volumes; rural real estate and residential and commercial real estate development sales; sufficiency of cash and any necessary borrowings to meet operating requirements; expected 2022 and future capital expenditures; costs associated with the expansion and modernization of our Waldo, Arkansas sawmill, the expected timing of completion of the project, and expected increases in productivity resulting from the project; expectations regarding the development of the forest carbon sequestration market; and similar matters. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often involve use of words such as expects, may, could, should, will, believes, anticipates, estimates, projects, intends, plans, targets or approximately, or similar words or terminology. 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. The realization of our expectations and the accuracy of our assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to:

the effect of general economic conditions, including employment rates, interest rate levels, discount rates, housing starts and the general availability of financing for home mortgages;
availability of labor and developable land;
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 timber prices and timberland values;
changes in silviculture, production and production capacity in the forest products industry;
competitive pricing pressures for our products;
disruptions or inefficiencies in our supply chain and/or operations and unanticipated manufacturing disruptions;
the effect of weather on our harvesting and manufacturing activities;
the risk of loss from fire (such as the Ola, Arkansas sawmill fire and fires on our timberland), floods, windstorms, hurricanes, pest infestation or other natural disasters;
changes in the cost or availability of shipping and transportation;
changes in principal expenses;
recent increases in inflation and the extent to which such increases will continue;
unforeseen environmental liabilities or expenditures;
changes in general and industry-specific environmental laws and regulations, and interpretations thereof by regulatory agencies;
impact of the coronavirus (COVID-19 and its variants) outbreaks, governmental responses to such outbreaks, and anticipated recovery from the pandemic on our business, suppliers, consumers, customers and employees;
our ability to successfully realize the expected benefits from our merger with CatchMark; and
our ability and our contractors' ability to implement the modernization plan for the Waldo, Arkansas sawmill.

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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, Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. Investors should not interpret the disclosure of a risk to imply that the risk has not already materialized.

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 REIT with ownership of approximately 2.2 million acres of timberland. We also own six sawmills and an industrial grade plywood mill, a residential and commercial real estate development business and a rural timberland sales program.

Our operations are 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 sizeable 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 Results discussion below, 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 affected by the cyclical nature of the forest products industry. Log and pulpwood sales volumes in our Timberlands segment are typically lower in the first half of each year as winter rains in the Southern region and spring thaw in the Northern region limit timber harvesting operations due to softened roadbeds and wet logging conditions that restrict access to logging sites. The third quarter is typically our Timberlands segment's strongest production quarter. Demand for our manufactured wood products typically decreases in the winter months when construction activity is slower, while demand typically increases during the spring, summer and fall when construction activity is generally higher. Rural real estate dispositions and acquisitions can be adversely affected when access to any properties to be sold or considered for acquisition are limited due to adverse weather conditions. Development real estate sales at Chenal Valley occur throughout the year, though historically most sales take place in the second half of the year as builders prepare for the following year's spring and summer traditional home building and buying season. The timing of development real estate sales can also be impacted by contractor availability needed to complete infrastructure and other improvements prior to bringing developed real estate to market.

Our business segments have been and will continue to be influenced by a variety of other factors, including 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, disruptions or inefficiencies in our supply chain including 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, inflation, asset dispositions or acquisitions, impact of pandemics (such as COVID-19 and its variants), fires (such as the Ola, Arkansas sawmill fire and fires on our timberlands), other natural disasters and other factors.

Additionally, governments and businesses across the globe are taking action on climate change and are making significant commitments towards reducing greenhouse gas emissions to net zero. Achieving these commitments will require governments and companies to take major steps to modify operations, invest in low-carbon activities and purchase offsets to reduce environmental impacts. We believe we are well positioned to help entities achieve these commitments through natural climate solutions, including forest carbon sequestration and carbon capture and storage activities.

Non-GAAP Measures

To supplement our financial statements presented in accordance with generally accepted accounting principles in the United States (GAAP), we present 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.

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Adjusted EBITDDA is a non-GAAP measure that management uses in evaluating performance and allocating 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 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 2: 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 Affecting Our Operations

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, both of which were very strong until recently. Higher interest rates and inflation have caused consumer confidence and the pace of housing starts to decline in recent months. In October 2022, the National Association of Home Builders (NAHB) reported the NAHB/Wells Fargo Housing Market Index (HMI) was at 38, the tenth straight month of decline and half the level it was in April 2022. The repair and remodel sector, which has experienced growth during the pandemic-driven home improvement movement that began in early 2020, is expected to continue to grow, but at a slower rate. Rising construction costs, a persistently tight labor pool, supply chain challenges and rising mortgage rates could negatively impact the pace of housing starts and repair and remodel projects.

While housing starts have tempered in recent months, we believe long-term housing fundamentals remain favorable, due to a shortage of homes, lower than historical average existing inventory for sale, a large millennial demographic in their prime home-buying years, the continued remote work evolution, and an aging existing housing stock supporting repair and remodel demand. These fundamentals are key drivers for our business, and we continue to expect that lumber prices will remain structurally higher than long-term historical averages.

Inflation has impacted our business, especially for fuel, energy and repair and maintenance costs, although we believe there are offsetting impacts including wood product prices. Over the last twelve months, the Consumer Price Index (all items) increased by 8.2 percent before seasonal adjustments, while the Producer Price Index (final demand) increased by 8.5 percent on an unadjusted basis.

In our Timberlands segment, sawlogs pricing benefitted from strong demand for Southern pine sawlogs. Idaho sawlog prices continue to benefit from being indexed on a four-week lag to lumber prices. Our Southern harvest volume of 1.4 million tons in the third quarter of 2022 was higher than the third quarter of 2021, primarily due to favorable harvest conditions and strong log demand. We expect to harvest between 1.8 and 1.9 million tons during the fourth quarter of 2022, with approximately 75% of the volume in the Southern region. For 2022, we expect to harvest approximately 6.5 million tons, with approximately 75% of the volume in the Southern region.

During the second quarter of 2021 we experienced a fire at our Ola, Arkansas sawmill. The damage was principally limited to the large log primary breakdown machine center. The planer mill, kiln, and shipping department were not affected. We have adequate property damage and business interruption insurance, subject to an applicable deductible. The new equipment has been installed and the start-up phase and log processing began in late September 2022. We expect the start-up phase to be completed by the end of 2022.

In our Wood Products segment, we shipped 265 million board feet of lumber during the third quarter of 2022 and expect to ship between 265 and 275 million board feet of lumber during the fourth quarter of 2022. For 2022, we expect to ship approximately 1.0 billion board feet of lumber. This estimate assumes that the Ola, Arkansas sawmill start-up remains on track.

Our Real Estate segment benefitted from strong Chenal Valley residential lot and commercial land sales in the third quarter of 2022. We expect to sell approximately 1,475 acres of rural land and 23 residential lots during the fourth quarter of 2022. For 2022, we expect to sell approximately 20,600 acres of rural land and 180 residential lots.

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CatchMark Merger

On September 14, 2022, CatchMark Timber Trust, Inc. (CatchMark) and CatchMark Timber Operating Partnership, L.P. (the Partnership) merged into a wholly owned subsidiary (Merger Sub) of PotlatchDeltic, pursuant to the terms of a merger agreement dated May 29, 2022, with the Merger Sub surviving the mergers. The mergers result in PotlatchDeltic owning approximately 2.2 million acres of diversified timberlands, including over 1.5 million acres in strengthening markets in the U.S. South. See Note 13: CatchMark Merger in the Notes to the Condensed Consolidated Financial Statements for additional details surrounding the merger.

Consolidated Results

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

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

2022

 

 

2021

 

 

Change

 

 

2022

 

 

2021

 

 

Change

 

Revenues

$

306,693

 

 

$

287,330

 

 

$

19,363

 

 

$

1,077,640

 

 

$

1,089,029

 

 

$

(11,389

)

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

220,876

 

 

 

190,602

 

 

 

30,274

 

 

 

592,057

 

 

 

537,683

 

 

 

54,374

 

Selling, general and administrative expenses

 

18,878

 

 

 

18,512

 

 

 

366

 

 

 

55,584

 

 

 

54,782

 

 

 

802

 

CatchMark merger-related expenses

 

26,007

 

 

 

 

 

 

26,007

 

 

 

26,007

 

 

 

 

 

 

26,007

 

Gain on fire damage

 

(24,913

)

 

 

(4,394

)

 

 

(20,519

)

 

 

(34,505

)

 

 

(4,394

)

 

 

(30,111

)

 

 

240,848

 

 

 

204,720

 

 

 

36,128

 

 

 

639,143

 

 

 

588,071

 

 

 

51,072

 

Operating income

 

65,845

 

 

 

82,610

 

 

 

(16,765

)

 

 

438,497

 

 

 

500,958

 

 

 

(62,461

)

Interest expense, net

 

(8,280

)

 

 

(8,641

)

 

 

361

 

 

 

(18,593

)

 

 

(20,414

)

 

 

1,821

 

Pension settlement charge

 

 

 

 

 

 

 

 

 

 

(14,165

)

 

 

 

 

 

(14,165

)

Non-operating pension and other postretirement benefit costs

 

(1,808

)

 

 

(3,271

)

 

 

1,463

 

 

 

(5,546

)

 

 

(9,956

)

 

 

4,410

 

Other

 

(1

)

 

 

 

 

 

(1

)

 

 

(1

)

 

 

 

 

 

(1

)

Income before income taxes

 

55,756

 

 

 

70,698

 

 

 

(14,942

)

 

 

400,192

 

 

 

470,588

 

 

 

(70,396

)

Income taxes

 

(9,801

)

 

 

(5,031

)

 

 

(4,770

)

 

 

(70,135

)

 

 

(85,910

)

 

 

15,775

 

Net income

$

45,955

 

 

$

65,667

 

 

$

(19,712

)

 

$

330,057

 

 

$

384,678

 

 

$

(54,621

)

Total Adjusted EBITDDA1

$

101,090

 

 

$

107,183

 

 

$

(6,093

)

 

$

521,822

 

 

$

577,153

 

 

$

(55,331

)

 

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 2022 Compared with Third Quarter 2021

Revenues

Revenues were $306.7 million, an increase of $19.4 million compared with the third quarter of 2021 primarily due to higher lumber prices, increased harvest volumes in our Southern region and increased commercial acres sold in our Chenal Valley master planned community. These increases were partially offset by lower Northern sawlog prices.

Cost of goods sold

Cost of goods sold increased $30.3 million compared with the third quarter of 2021 mainly due to higher manufacturing and log and haul costs primarily from inflationary price increases in areas such as diesel fuel, energy, and repair and maintenance, and increased harvest volumes in the Southern region.

CatchMark merger-related expenses

Merger-related expenses for the three months ended September 30, 2022, were $26.0 million. This included $7.5 million for severance benefits, $9.3 million for accelerated vesting of CatchMark equity awards that fully vested upon closing of the merger and were allocated to the post-merger period, and $8.1 million for tax gross-up payments to holders of CatchMark Partnership OP Units.

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Gain on fire damage

In June 2021, a fire occurred at our Ola, Arkansas sawmill. During the third quarter of 2022, we recognized insurance recoveries of $25.0 million and $0.1 million in disposal costs compared with insurance recoveries of $12.9 million and an $8.5 million charge for the write-off of damaged and obsolete equipment and disposal costs during the third quarter of 2021.

Income taxes

Income taxes are primarily due to income from our PotlatchDeltic taxable REIT subsidiaries (TRS). For the three months ended September 30, 2022, we recorded income tax expense of $9.8 million on TRS income before tax of $40.9 million which included the $24.9 million gain on fire damage. For the three months ended September 30, 2021, we recorded income tax expense of $5.0 million on TRS income before tax of $18.2 million, which included the 2021 gain on fire damage of $4.4 million.

Total Adjusted EBITDDA

Total Adjusted EBITDDA for the third quarter of 2022 decreased $6.1 million compared to the third quarter of 2021 primarily due to higher manufacturing and log and haul costs. These higher costs were partially offset by increased lumber price realization, increased Southern harvest volumes, and increased commercial acres sold in Chenal Valley. Refer to the Business Segment 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 2022 Compared with Year to Date 2021

Revenues

Revenues of $1.1 billion were $11.4 million lower compared with the first nine months of 2021 primarily due to lower lumber prices and shipments and decreased Northern harvest volumes. Lumber shipments in the first nine months of 2022 were more impacted compared to the first nine months of 2021 by the loss of production at our Ola, Arkansas sawmill following a fire in June 2021. These decreases were partially offset by increased Southern harvest volumes and sawlog prices and increases in development real estate sales.

Cost of goods sold

Cost of goods sold increased $54.4 million compared with the first nine months of 2021 mainly due to higher manufacturing and log and haul costs primarily from inflationary price increases in areas such as diesel fuel, energy, and repair and maintenance along with increased Southern harvest volumes.

CatchMark merger-related expenses

Merger-related expenses for the nine months ended September 30, 2022, were $26.0 million. This included $7.5 million for severance benefits, $9.3 million for accelerated vesting of CatchMark equity awards that fully vested upon closing of the merger and were allocated to the post-merger period, and $8.1 million for tax gross-up payments to holders of CatchMark Partnership OP Units.

Gain on fire damage

During the first nine months of 2022, we recognized insurance recoveries of $35.4 million for fire damage and incurred $0.9 million of disposal costs at our Ola, Arkansas sawmill. For the first nine months of 2021, we recognized insurance recoveries of $15.0 million for fire damage and recorded a $10.6 million charge for the write-off of damaged and obsolete equipment and disposal costs at the Ola sawmill.

Pension settlement charge

In March 2022 we transferred $75.6 million of our qualified pension plan (the Plan) assets to an insurance company for the purchase of a group annuity contract. In connection with this transaction, we recorded a non-cash pretax settlement charge of $14.2 million.

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Non-operating pension and other postretirement benefit costs

Non-operating pension and other postretirement benefit costs decreased $4.4 million compared to the first nine months of 2021. This decrease is primarily a result of an increase in the discount rate used to determine the benefit obligation partially offset by a decrease in expected return on plan assets.

Income taxes

Income taxes are primarily due to income from our TRS. For the nine months ended September 30, 2022, we recorded income tax expense of $70.1 million on TRS income before tax of $279.1 million, which included the $14.2 million pension settlement charge and the $34.5 million gain on fire damage. For the nine months ended September 30, 2021, we recorded income tax expense of $85.9 million on TRS income before tax of $329.4 million, which included the $4.4 million gain on fire damage in 2021.

Total Adjusted EBITDDA

Total Adjusted EBITDDA for the first nine months of 2022 decreased $55.3 million compared to the first nine months of 2021 primarily due to lower lumber prices and shipments and higher manufacturing and log and haul costs. These decreases were partially offset by higher harvest activity and sawlog prices in the Southern region and increases in development real estate sales. Refer to the Business Segment 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)

 

2022

 

 

2021

 

 

Change

 

 

2022

 

 

2021

 

 

Change

 

Revenues1

 

$

134,576

 

 

$

129,543

 

 

$

5,033

 

 

$

363,719

 

 

$

362,675

 

 

$

1,044

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Logging and hauling

 

 

57,221

 

 

 

42,397

 

 

 

14,824

 

 

 

134,426

 

 

 

112,168

 

 

 

22,258

 

Other

 

 

11,249

 

 

 

9,108

 

 

 

2,141

 

 

 

25,310

 

 

 

23,792

 

 

 

1,518

 

Selling, general and administrative expenses

 

 

1,624

 

 

 

2,015

 

 

 

(391

)

 

 

5,177

 

 

 

5,575

 

 

 

(398

)

 Timberlands Adjusted EBITDDA2

 

$

64,482

 

 

$

76,023

 

 

$

(11,541

)

 

$

198,806

 

 

$

221,140

 

 

$

(22,334

)

 

1

Prior to elimination of intersegment fiber revenues of $40.3 million and $43.5 million for the three months ended September 30, 2022 and 2021, and $121.7 million and $138.2 million for the nine months ended September 30, 2022 and 2021, respectively.

2

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

 

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Timberlands Segment Statistics

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Harvest Volumes (in tons)

 

2022

 

 

2021

 

 

Change

 

 

2022

 

 

2021

 

 

Change

 

Northern region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sawlog

 

 

459,128

 

 

 

462,492

 

 

 

(3,364

)

 

 

1,120,765

 

 

 

1,243,539

 

 

 

(122,774

)

Pulpwood

 

 

11,197

 

 

 

4,039

 

 

 

7,158

 

 

 

30,839

 

 

 

24,736

 

 

 

6,103

 

Total

 

 

470,325

 

 

 

466,531

 

 

 

3,794

 

 

 

1,151,604

 

 

 

1,268,275

 

 

 

(116,671

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southern region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sawlog

 

 

613,303

 

 

 

460,840

 

 

 

152,463

 

 

 

1,611,075

 

 

 

1,449,106

 

 

 

161,969

 

Pulpwood

 

 

539,856

 

 

 

467,138

 

 

 

72,718

 

 

 

1,296,350

 

 

 

1,145,572

 

 

 

150,778

 

Stumpage

 

 

287,929

 

 

 

109,469

 

 

 

178,460

 

 

 

602,060

 

 

 

211,234

 

 

 

390,826

 

Total

 

 

1,441,088

 

 

 

1,037,447

 

 

 

403,641

 

 

 

3,509,485

 

 

 

2,805,912

 

 

 

703,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total harvest volume

 

 

1,911,413

 

 

 

1,503,978

 

 

 

407,435

 

 

 

4,661,089

 

 

 

4,074,187

 

 

 

586,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales Price/Unit ($ per ton)1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sawlog

 

$

171

 

 

$

191

 

 

$

(20

)

 

$

199

 

 

$

202

 

 

$

(3

)

Pulpwood

 

$

52

 

 

$

30

 

 

$

22

 

 

$

51

 

 

$

33

 

 

$

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southern region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sawlog

 

$

48

 

 

$

48

 

 

$

 

 

$

48

 

 

$

45

 

 

$

3

 

Pulpwood

 

$

33

 

 

$

30

 

 

$

3

 

 

$

32

 

 

$

29

 

 

$

3

 

Stumpage

 

$

14

 

 

$

21

 

 

$

(7

)

 

$

16

 

 

$

16

 

 

$

 

 

1

Sawlog and pulpwood sales prices are on a delivered basis, which includes logging and hauling costs. 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, 2022, compared with the three and nine months ended September 30, 2021:

 

(in thousands)

 

Three Months

 

 

Nine Months

 

Timberlands Adjusted EBITDDA - prior year

 

$

76,023

 

 

$

221,140

 

Sales price and mix

 

 

(8,568

)

 

 

3,057

 

Harvest volume

 

 

6,957

 

 

 

(6,092

)

Logging and hauling costs per unit

 

 

(9,348

)

 

 

(20,323

)

Forest management, indirect and other

 

 

(582

)

 

 

1,024

 

Timberlands Adjusted EBITDDA - current year

 

$

64,482

 

 

$

198,806

 

 

 

 

 

 

 

 

Third Quarter 2022 Compared with Third Quarter 2021

Timberlands Adjusted EBITDDA for the third quarter of 2022 decreased $11.5 million compared with the third quarter of 2021, primarily as a result of the following:

Sales Price and Mix: Sawlog prices in the Northern region decreased 10.5%, to $171 per ton, primarily due to the effect of lower indexed sawlog prices in Idaho. Southern sawlog prices of $48 per ton remained consistent with the third quarter of 2021.
Harvest Volume: We harvested 1.4 million tons in the Southern region during the third quarter of 2022, which was 38.9% higher than the third quarter of 2021, primarily due to more favorable harvest conditions, increased stumpage sales and harvest activity on recently acquired timberlands. Harvest volumes in the Northern region were consistent with the third quarter of 2021.
Logging and Hauling Cost per Unit: Log and hauling costs per unit were higher primarily due to increased diesel costs and log and haul capacity constraints.

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Year to Date 2022 Compared with Year to Date 2021

Timberlands Adjusted EBITDDA for the first nine months of 2022 decreased $22.3 million compared to the first nine months of 2021, primarily as a result of the following:

Sales Price and Mix: Southern sawlog prices increased 6.7%, to $48 per ton, compared to the first nine months of 2021, primarily as a result of stronger demand. Sawlog prices in the Northern region were consistent with the first nine months of 2021.
Harvest Volume: We harvested 3.5 million tons in the Southern region during the first nine months of 2022, which was 25.1% higher than the first nine months of 2021, primarily due to more favorable harvest conditions, increased stumpage sales and harvest activity on recently acquired timberlands. In the Northern region hauling conditions were more favorable in the first nine months of 2021 as compared to the first nine months of 2022 resulting in a 9.2% decrease in harvest volume.
Logging and Hauling Cost per Unit: Log and hauling costs per unit were higher primarily due to increased diesel costs and log and haul capacity constraints.

Wood Products Segment

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2022

 

 

2021

 

 

Change

 

 

2022

 

 

2021

 

 

Change

 

Revenues

 

$

193,431

 

 

$

187,760

 

 

$

5,671

 

 

$

755,806

 

 

$

814,729

 

 

$

(58,923

)

Costs and expenses1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiber costs

 

 

82,638

 

 

 

75,629

 

 

 

7,009

 

 

 

249,226

 

 

 

242,719

 

 

 

6,507

 

Freight, logging and hauling

 

 

18,766

 

 

 

17,760

 

 

 

1,006

 

 

 

56,739

 

 

 

56,223

 

 

 

516

 

Manufacturing costs

 

 

52,952

 

 

 

52,976

 

 

 

(24

)

 

 

159,318

 

 

 

152,195

 

 

 

7,123

 

Finished goods inventory change

 

 

4,717

 

 

 

12,681

 

 

 

(7,964

)

 

 

(7,814

)

 

 

90

 

 

 

(7,904

)

Selling, general and administrative expenses

 

 

2,964

 

 

 

3,288

 

 

 

(324

)

 

 

9,482

 

 

 

8,758

 

 

 

724

 

Other

 

 

136

 

 

 

(1,140

)

 

 

1,276

 

 

 

390

 

 

 

(1,910

)

 

 

2,300

 

Wood Products Adjusted EBITDDA2

 

$

31,258

 

 

$

26,566

 

 

$

4,692

 

 

$

288,465

 

 

$

356,654

 

 

$

(68,189

)

 

1

Prior to elimination of intersegment fiber costs of $40.3 million and $43.5 million for the three months ended September 30, 2022 and 2021, and $121.7 million and $138.2 million for the nine months ended September 30, 2022 and 2021, respectively.

2

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

Wood Products Segment Statistics

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

Change

 

 

2022

 

 

2021

 

 

Change

 

Lumber shipments (MBF)1

 

 

264,748

 

 

 

264,855

 

 

 

(107

)

 

 

752,161

 

 

 

783,235

 

 

 

(31,074

)

Lumber sales prices ($ per MBF)

 

$

572

 

 

$

533

 

 

$

39

 

 

$

827

 

 

$

867

 

 

$

(40

)

 

1

MBF stands for thousand board feet.

 

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Wood Products Adjusted EBITDDA

The following table summarizes Wood Products Adjusted EBITDDA variances for the three and nine months ended September 30, 2022, compared with the three and nine months ended September 30, 2021:

 

(in thousands)

 

Three Months

 

 

Nine Months

 

Wood Products Adjusted EBITDDA - prior year

 

$

26,566

 

 

$

356,654

 

Lumber:

 

 

 

 

 

 

Price

 

 

10,345

 

 

 

(33,869

)

Volume

 

 

(6

)

 

 

(12,030

)

Manufacturing costs per unit

 

 

(2,603

)

 

 

(13,069

)

Log costs per unit

 

 

981

 

 

 

(6,458

)

Inventory charge

 

 

4,214

 

 

 

4,214

 

Residuals, panels and other

 

 

(8,239

)

 

 

(6,977

)

Wood Products Adjusted EBITDDA - current year

 

$

31,258

 

 

$

288,465

 

Third Quarter 2022 Compared with Third Quarter 2021

Wood Products Adjusted EBITDDA for the third quarter of 2022 increased $4.7 million compared with the third quarter of 2021, primarily as a result of the following:

Lumber Price: Average lumber sales prices increased to $572 per MBF during the third quarter of 2022 compared to $533 per MBF during the third quarter of 2021.
Manufacturing Cost Per Unit: Higher manufacturing costs per unit quarter over quarter was primarily a result of inflationary price increases in areas such as energy and repair and maintenance.
Inventory Charge: Inventory at the end of the third quarter of 2022 was written down $2.2 million compared to $6.4 million at the end of the third quarter of 2021, primarily due to high indexed Idaho log costs in both periods.
Residual Sales, Panels and Other: Lower plywood price realization and increased manufacturing costs as a result of inflationary price increases more than offset increased residual sales.

Year to Date 2022 Compared with Year to Date 2021

Wood Products Adjusted EBITDDA for the first nine months of 2022 decreased $68.2 million compared with the first nine months of 2021, primarily as a result of the following:

Lumber Price: Average lumber sales prices decreased to $827 per MBF during the first nine months of 2022 compared to $867 per MBF during the first nine months of 2021.
Lumber Volume: Lumber shipments decreased 31.1 million board feet during the first nine months of 2022 compared to the first nine months of 2021, primarily as a result of decreased shipments from our Ola, Arkansas sawmill following the fire in June 2021.
Manufacturing Cost Per Unit: Higher manufacturing costs per unit was primarily a result of lost production at our Ola, Arkansas sawmill and inflationary price increases in areas such as energy and repair and maintenance.
Log Costs Per Unit: Log costs per unit were higher primarily as a result of increased log costs at each of our sawmills.
Inventory Charge: Inventory at the end of the third quarter of 2022 was written down $2.2 million compared to $6.4 million at the end of the third quarter of 2021, primarily due to high indexed Idaho log costs in both periods.
Residual Sales, Panels and Other: Lower plywood price realization and increased manufacturing costs as a result of inflationary price increases during 2022 compared to 2021.

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Real Estate Segment

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2022

 

 

2021

 

 

Change

 

 

2022

 

 

2021

 

 

Change

 

Revenues

 

$

19,008

 

 

$

13,497

 

 

$

5,511

 

 

$

79,809

 

 

$

49,808

 

 

$

30,001

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

 

3,685

 

 

 

3,263

 

 

 

422

 

 

 

10,395

 

 

 

8,612

 

 

 

1,783

 

Selling, general and administrative expenses

 

 

1,183

 

 

 

1,165

 

 

 

18

 

 

 

3,334

 

 

 

3,746

 

 

 

(412

)

Real Estate Adjusted EBITDDA1

 

$

14,140

 

 

$

9,069

 

 

$

5,071

 

 

$

66,080

 

 

$

37,450

 

 

$

28,630

 

 

1

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

Real Estate Segment Statistics

 

Rural Real Estate

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Acres sold

 

 

1,622

 

 

 

2,303

 

 

 

19,122

 

 

 

11,991

 

Average price per acre

 

$

3,811

 

 

$

3,013

 

 

$

2,315

 

 

$

2,374

 

 

Development Real Estate

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Residential lots

 

 

48

 

 

 

52

 

 

 

157

 

 

 

122

 

Average price per lot

 

$

78,344

 

 

$

81,923

 

 

$

108,418

 

 

$

90,301

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial acres

 

 

35

 

 

 

 

 

 

41

 

 

 

11

 

Average price per acre

 

$

182,520

 

 

$

 

 

$

273,568

 

 

$

277,425

 

Real Estate Adjusted EBITDDA

The following table summarizes Real Estate Adjusted EBITDDA variances for the three and nine months ended September 30, 2022, compared with the three and nine months ended September 30, 2021:

 

(in thousands)

 

Three Months

 

 

Nine Months

 

Real Estate Adjusted EBITDDA - prior year

 

$

9,069

 

 

$

37,450

 

Rural real estate sales

 

 

(757

)

 

 

15,788

 

Real estate development sales

 

 

6,268

 

 

 

14,213

 

Selling, general and administrative expenses

 

 

(19

)

 

 

412

 

Other costs, net

 

 

(421

)

 

 

(1,783

)

Real Estate Adjusted EBITDDA - current year

 

$

14,140

 

 

$

66,080

 

Third Quarter 2022 Compared with Third Quarter 2021

Real Estate Adjusted EBITDDA for the third quarter of 2022 was $14.1 million, an increase of $5.1 million compared with the third quarter of 2021, primarily as a result of the following:

Rural Sales: The decrease in rural real estate sales is primarily a result of fewer acres sold compared to the third quarter of 2021. 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.
Development Sales: During the third quarter of 2022, we sold 48 residential lots at an average lot price of $78,344 compared to 52 lots at an average lot price of $81,923 during the third quarter of 2021. In addition, we sold 35 acres of commercial land in Chenal Valley for $182,520 per acre during the third quarter of 2022. The average price per lot or acre fluctuates based on a variety of factors including size and location within the development.

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Year to Date 2022 Compared with Year to Date 2021

Real Estate Adjusted EBITDDA for the first nine months of 2022 was $66.1 million, an increase of $28.6 million compared with the first nine months of 2021, primarily as a result of the following:

Rural Sales: The increase in rural real estate sales is primarily a result of a 1,760 acre sale in the South for $7,500 per acre in the first quarter of 2022 to an energy provider for a planned commercial solar farm and a 10,700 acre timberland sale in Minnesota in the second quarter of 2022, which were not matched by similarly sized land sales during the first nine months of 2021.
Development Sales: During the first nine months of 2022, we sold 157 residential lots at an average lot price of $108,418 compared to 122 lots at an average lot price of $90,301 during the first nine months of 2021. In addition, we sold 41 acres of commercial land in Chenal Valley for $273,568 per acre compared to 11 acres for $277,425 per acre in the first nine months of 2021.

 

Liquidity and Capital Resources

Cash generated by our operations is highly dependent on selling prices of our products and can vary from period to period. Changes in significant sources and uses of cash for the nine months ended September 30, 2022 and 2021 are presented by category as follows:

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2022

 

 

2021

 

 

Change

 

Net cash from operating activities

 

$

458,437

 

 

$

453,242

 

 

$

5,195

 

Net cash from investing activities

 

$

(127,795

)

 

$

(26,734

)

 

$

(101,061

)

Net cash from financing activities

 

$

(132,725

)

 

$

(86,081

)

 

$

(46,644

)

 

 

 

 

 

 

 

 

 

 

Net Cash Flows from Operating Activities

Net cash from operating activities increased $5.2 million in the first nine months of 2022, compared to the first nine months of 2021 primarily as a result of the following:

Cash received from customers decreased $16.4 million primarily due to lower average lumber prices and reduced lumber shipments at our Ola, Arkansas sawmill following the fire in June 2021. These decreases were partially offset by increased harvest volume and sawlog prices in the Southern region and increased real estate rural land and development sales.
Cash payments increased $38.1 million due to merger-related costs incurred for our merger with CatchMark, inflationary cost increases in areas such as diesel fuel, energy and repair and maintenance in our manufacturing and harvest operations and increased Southern harvest activities. These increases were partially offset by reduced vendor payments as a result of lower production at our Ola, Arkansas sawmill following the fire in June 2021 and lower Northern harvest activities.
During the first nine months of 2022, we received $26.7 million in insurance proceeds primarily as a result of the fire at our Ola, Arkansas sawmill.
Cash contributions to our pension and other postretirement employee benefit plans decreased $4.1 million.
Net tax payments decreased $27.6 million as a result of lower taxable income generated from our TRS operations.

Net Cash Flows from Investing Activities

Changes in cash flows from investing activities were primarily a result of the following:

We spent $56.2 million on capital expenditures for property, plant and equipment, timberlands reforestation and road construction projects during the first nine months of 2022 compared to $38.5 million during the first nine months of 2021. Capital expenditures in 2022 include $12.2 million for the Waldo, Arkansas sawmill expansion and modernization project.
During the third quarter of 2021, we received initial insurance proceeds of $13.3 million for property losses as a result of the fire at our Ola, Arkansas sawmill.

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Table of Contents

 

Cash expenditures for timberland acquisitions during the first nine months of 2022 was $96.1 million compared to $2.5 million during the first nine months of 2021.
We acquired $23.6 million of cash from our merger with CatchMark in September 2022.

Net Cash Flows from Financing Activities

Changes in cash flows from financing activities were primarily a result of the following:

We paid dividends of $96.6 million during the first nine months of 2022 compared to $82.5 million during the first nine months of 2021. In addition to increasing our quarterly dividend from $0.41 per share to $0.44 per share in the fourth quarter of 2021, our quarterly dividend also increased due to the issuance of 13.4 million shares to complete the CatchMark and Loutre mergers in September 2022 and December 2021, respectively.
We repaid $25.5 million in long-term debt during the first nine months of 2022, including $22.5 million assumed in the CatchMark merger. Additionally, we paid $1.0 million in loan fees, primarily associated with the refinancing of $277.5 million of long-term debt acquired in the CatchMark merger. We had no similar payment in the first nine months of 2021.
During the first nine months of 2022 we repurchased 103,010 shares of our common stock totaling $4.5 million compared to no shares repurchased during the first nine months of 2021.

Future Sources and Uses of Cash

At September 30, 2022, we had cash and cash equivalents of $484.0 million. We expect cash and cash equivalents on hand, generated from our operating activities, and supplemented by borrowings under our credit agreement, if needed, to be adequate to meet our future cash requirements.

At September 30, 2022, there were no significant changes in our cash commitments arising in the normal course of business under our known contractual and other obligations as described in our Annual Report on Form 10-K for the year ended December 31, 2021.

Returning cash to shareholders through a secure regular dividend and opportunistic share repurchases is an important and durable part of our disciplined capital allocation strategy. Our board of directors, in its sole discretion, determines the actual amount of dividends to be made to stockholders based on consideration of a number of factors, including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions in our industry and in the markets for our products, borrowing capacity, debt covenant restrictions, future acquisitions and dispositions, and REIT requirements. Generally, a REIT must distribute its taxable income each year and there is a 20% limit on the value of our TRS, including cash, that can be retained. Based on our strong performance during the first nine months of 2022, we generated large cash balances in both our REIT and TRS and expect to pay a special dividend to stockholders in December 2022.

Capital Expenditures

We invest cash in maintenance and discretionary capital expenditures at our Wood Products facilities. 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. We evaluate discretionary capital improvements based on an expected level of return on investment. We expect to spend a total of approximately $85 to $90 million for capital expenditures during 2022.

In June 2022, we announced a project to expand and modernize our Waldo, Arkansas sawmill. The project is expected to increase the mill’s annual capacity from 190 million board feet of dimensional lumber to approximately 275 million board feet. The investment is also expected to reduce the mill’s operating costs significantly. The Waldo investment includes upgrades to the log yard and planer, a new saw line, and a new continuous dry kiln. The existing mill will continue to operate during the project and completion is expected by the end of 2024. We expect to spend approximately $131.0 million on the project, including a $12 million deposit paid in 2022.

Our 2022 planned capital spend also includes approximately $18.0 million of capital expenditures for the reconstruction of our fire-damaged Ola sawmill, which is largely covered by insurance. The new equipment has been installed and the initial start-up phase and log processing began in late September 2022. We expect the start-up phase to be completed by the end of the year.

Bolt-On Timberland Acquisitions

During the nine months ended September 30, 2022, we were the successful bidder on three bolt-on timberland transactions, aggregating approximately $101 million, covering approximately 46,000 acres in Mississippi and Arkansas. We used cash to pay for the acquisitions, including approximately $15.0 million for the third transaction that closed in October 2022.

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Table of Contents

 

Share Repurchase Program

On August 31, 2022, our board of directors authorized management to repurchase up to $200.0 million of our common stock with no set time limit for the repurchase (the 2022 Repurchase Program). Concurrently, the board of directors terminated the remaining repurchase authorization under a repurchase program approved in August 2018. At September 30, 2022, we had remaining authorization of $200.0 million for future stock repurchases under the 2022 Repurchase Program. The timing, manner, price and amount of repurchases will be determined according to the trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934 (the Trading Plan), and, subject to the terms of the Trading Plan, the Repurchase Program may be suspended, terminated or modified at any time for any reason.

Term Loans and Credit Agreement

On September 14, 2022, through a seventh amendment to the Second Amended and Restated Term Loan Agreement (Amended Term Loan Agreement) with our primary lender, we refinanced $277.5 million of long-term debt acquired in the CatchMark merger. The amendment to the Amended Term Loan Agreement provided for a new 5-year term loan in the principal amount of $138.75 million maturing on September 1, 2027, and a new 8-year term loan in the principal amount of $138.75 million maturing on September 1, 2030 (collectively the New Term Loans). The New Term Loans bear interest at a rate equal to one-month SOFR plus 2.0% per annum. In addition, the 8-year term loan provides for a cost-of-capital reset at year five. In connection with the refinance, we entered into two one-month SOFR based interest rate swaps to fix the interest rates on the New Term Loans at 2.50% and 2.66% respectively, before patronage credits from lenders.

At September 30, 2022, our total outstanding net long-term debt was $1.0 billion. We expect to refinance a $40.0 million term loan expiring in December 2022 at maturity, which is covered by forward starting interest rate swaps that hedges the variability in future benchmark interest payments attributable to changes in interest rates. All interest rates on our outstanding long-term debt are fixed rates under fixed rate loans or variable rate loans with an associated interest rate swap that fixes the variable benchmark interest rate component.

We have a $300.0 million revolving line of credit with a syndicate of lenders that matures February 14, 2027. Under the terms of the Amended Credit Agreement, the amount of available principal may be increased up to an additional $500.0 million. We may also utilize borrowings under the Amended Credit Agreement to, among other things, refinance existing indebtedness and provide funding for working capital requirements, capital projects, acquisitions, and other general corporate expenditures. At September 30, 2022, there were no borrowings under the revolving line of credit and approximately $11.0 million of the credit facility was utilized by outstanding letters of credit.

On March 5, 2021, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that the US Dollar LIBOR will no longer be published after June 30, 2023. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rate Committee, a steering committee comprised of large U.S. financial institutions, has recommended replacing LIBOR with the Secured Overnight Financing Rate (SOFR). Our credit agreement, variable rate term loans with $403.5 million in principal and the associated interest rate swaps, and $290.0 million of forward starting interest rate swaps designated as cash flow hedges have an interest rate tied to LIBOR. We are working with our lenders and counterparties to modify the benchmark rate from LIBOR to SOFR in our variable rate term loans and interest rate derivative agreements. We expect to complete this conversion by the end of 2022. We do not expect the transition from LIBOR to SOFR to have a material impact on our consolidated financial statements.

Financial Covenants

The Amended Term Loan Agreement and Amended Credit Agreement (collectively referred to as the Agreements) contain certain covenants that limit our ability and that of our subsidiaries to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates or change the nature of our business. The Agreements also contain financial maintenance covenants including the maintenance of a minimum interest coverage ratio and a maximum leverage ratio. We are permitted to pay dividends to our stockholders under the terms of the Agreements so long as we expect to remain in compliance with the financial maintenance covenants.

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The following table presents the components and applicable limits of Total Asset Value (TAV), a component of the Leverage Ratio, at September 30, 2022:

 

(in thousands)

 

 

 

Estimated timberland fair value

 

$

4,836,528

 

Wood Products manufacturing facilities book basis (limited to 10% of TAV)

 

 

290,166

 

Cash and cash equivalents

 

 

484,018

 

Other1

 

 

22,587

 

Total Asset Value

 

$

5,633,299

 

 

1

Includes, as applicable, Company Owned Life Insurance (limited to 5% of TAV), Construction in Progress (limited to 10% of TAV) and Investments in Affiliates (limited to 15% TAV) as defined in the Agreements.

At September 30, 2022, we were in compliance with all covenants under the Agreements. The following table sets forth the financial covenants for the Agreements and our status with respect to these covenants at September 30, 2022:

 

 

 

Covenant Requirement

 

Actual at
September 30, 2022

Interest coverage ratio

 

 

3.00 to 1.00

 

22.39

Leverage ratio

 

 

40%

 

19%

 

 

 

 

 

 

 

 

See Note 5: Debt in the Notes to the Condensed Consolidated Financial Statements for additional information on our debt and credit agreements.

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. Both Moody’s and S&P rate our debt as investment grade.

Capital Structure

 

(in thousands)

 

September 30, 2022

 

 

December 31, 2021

 

Long-term debt (including current portion)

 

$

1,032,503

 

 

$

758,256

 

Cash and cash equivalents

 

 

(484,018

)

 

 

(296,151

)

Net debt

 

 

548,485

 

 

 

462,105

 

Market capitalization1

 

 

3,315,072

 

 

 

4,159,034

 

Enterprise value

 

$

3,863,557

 

 

$

4,621,139

 

 

 

 

 

 

 

 

Net debt to enterprise value

 

 

14.2

%

 

 

10.0

%

Dividend yield2

 

 

4.3

%

 

 

2.9

%

Weighted-average cost of debt, after tax3

 

 

2.4

%

 

 

3.1

%

 

 

1

Market capitalization is based on outstanding shares of 80.8 million and 69.1 million times closing share prices of $41.04 and $60.22 as of September 30, 2022, and December 31, 2021, respectively.

2

Dividend yield is based on annualized dividends per share of $1.76 and share prices of $41.04 and $60.22 as of September 30, 2022, and December 31, 2021, 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.

 

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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 and 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 the 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 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)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income

 

$

45,955

 

 

$

65,667

 

 

$

330,057

 

 

$

384,678

 

Interest expense, net

 

 

8,280

 

 

 

8,641

 

 

 

18,593

 

 

 

20,414

 

Income taxes

 

 

9,801

 

 

 

5,031

 

 

 

70,135

 

 

 

85,910

 

Depreciation, depletion and amortization

 

 

27,329

 

 

 

21,131

 

 

 

66,838

 

 

 

56,156

 

Basis of real estate sold

 

 

6,845

 

 

 

6,697

 

 

 

25,024

 

 

 

22,733

 

CatchMark merger-related expenses

 

 

26,007

 

 

 

 

 

 

26,007

 

 

 

 

Gain on fire damage

 

 

(24,913

)

 

 

(4,394

)

 

 

(34,505

)

 

 

(4,394

)

Pension settlement charge

 

 

 

 

 

 

 

 

14,165

 

 

 

 

Non-operating pension and other postretirement benefit costs

 

 

1,808

 

 

 

3,271

 

 

 

5,546

 

 

 

9,956

 

(Gain) loss on disposal of fixed assets

 

 

(23

)

 

 

1,139

 

 

 

(39

)

 

 

1,700

 

Other

 

 

1

 

 

 

 

 

 

1

 

 

 

 

Total Adjusted EBITDDA

 

$

101,090

 

 

$

107,183

 

 

$

521,822

 

 

$

577,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We define CAD as cash from operating activities adjusted for capital spending for purchases of property, plant and equipment, timberlands reforestation and roads and timberland acquisitions not classified as strategic. 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.

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

 

 

 

Nine Months Ended September 30,

 

 

Twelve Months Ended September 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net cash from operating activities1

 

$

458,437

 

 

$

453,242

 

 

$

510,081

 

 

$

597,660

 

Capital expenditures2

 

 

(152,301

)

 

 

(40,977

)

 

 

(186,738

)

 

 

(55,013

)

CAD

 

$

306,136

 

 

$

412,265

 

 

$

323,343

 

 

$

542,647

 

Net cash from investing activities3

 

$

(127,795

)

 

$

(26,734

)

 

$

(160,206

)

 

$

(40,662

)

Net cash from financing activities

 

$

(132,725

)

 

$

(86,081

)

 

$

(447,953

)

 

$

(114,235

)

 

1

Net cash from operating activities for the nine months and twelve months ended September 30, 2022, includes cash paid for CatchMark merger-related expenses of $12.1 million and cash paid for real estate development expenditures of $7.0 million and $9.8 million, respectively. Net cash from operating activities for the nine and twelve months ended September 30, 2021, includes cash paid for real estate development expenditures of $6.4 million and $8.9 million, respectively.

2

The nine and twelve months ended September 30, 2022, includes fire related capital expenditures for the Ola, Arkansas sawmill of $12.4 million and $14.3 million, respectively, and excludes $0 and $1.8 million, respectively, of insurance proceeds for property losses at the sawmill. The nine and twelve months ended September 30, 2021, includes fire related capital expenditures for the Ola, Arkansas sawmill of $4.8 million and excludes $13.3 million of insurance proceeds for property losses at the sawmill.

3

Net cash from investing activities includes payment for capital expenditures and acquisition of non-strategic timber and timberlands, which is also included in our reconciliation of CAD.

 

Critical Accounting Policies and Estimates

Pension Annuitization. In March 2022, we transferred $75.6 million of our qualified pension plan (the Plan) assets to an insurance company for the purchase of a group annuity contract. This transaction triggered a remeasurement of the Plan's assets and liabilities. We updated the discount rate used to measure our projected benefit obligation for the Plan as of March 31, 2022. All other pension assumptions remain unchanged. See Note 11: Pension and Other Postretirement Employee Benefits for further information on the pension settlement and change to the projected benefit obligation.

Business Combinations and Asset Acquisitions. We apply the principles provided in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations, to determine whether an acquisition involves an asset or a business. In determining whether an acquisition should be accounted for as a business combination or asset acquisition, we first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the single identifiable asset or the group of similar assets is accounted for as an asset acquisition. If this is not the case, we then further evaluate whether the single identifiable asset or group of similar identifiable assets and activities includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the transaction is accounted for as a business combination.

We account for business combinations using the acquisition method of accounting which requires that (i) identifiable assets acquired (including identifiable intangible assets) and liabilities assumed generally be measured and recognized at fair value as of the acquisition date and (ii) the excess of the purchase price over the net fair value of identifiable assets acquired and liabilities assumed be recognized as goodwill, which is not amortized for accounting purposes but is subject to testing for impairment at least annually. We measure and recognize asset acquisitions that are not deemed to be business combinations based on the cost to acquire the assets. Goodwill is not recognized in an asset acquisition with any consideration in excess of net assets acquired allocated to acquired assets on a relative estimated fair value basis. Transaction costs are expensed in a business combination and transaction costs directly attributable to the acquisition are considered a component of the cost of the acquisition in an asset acquisition. See Note 13: CatchMark Merger in the Notes to Condensed Consolidated Financial Statements for additional information.

There have been no other significant changes during 2022 to our critical accounting policies or estimates as presented in our 2021 Annual Report on Form 10-K.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk exposure on financial instruments includes interest rate risk on our bank credit facility, term loans and interest rate swap agreements and forward starting interest rate swap agreements. We are exposed to interest rate volatility on existing variable rate debt instruments and future incurrences of fixed or variable rate debt, which exposure primarily relates to movements in various interest rates. We use interest rate swaps and forward starting swaps to hedge our exposure to the impact of interest rate changes on existing debt and future debt issuances, respectively. All market risk sensitive instruments were entered into for purposes other than trading purposes.

For quantitative and qualitative disclosures about market risk, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our annual report on Form 10-K for the year ended December 31, 2021. Our exposures to market risk have not changed materially since December 31, 2021.

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, 2022. 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, 2022.

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, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II – OTHER INFORMATION

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, 2021

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). During the third quarter of 2022 we repurchased 8,444 common shares for approximately $0.4 million (including transaction fees) under the 2018 Repurchase Program in open-market transactions.

On August 31, 2022, our board of directors authorized management to repurchase up to $200.0 million of our common stock with no set time limit for the repurchase (the 2022 Repurchase Program). Concurrently, the board of directors terminated the remaining repurchase authorization under the 2018 Repurchase Program. No shares were repurchased under the 2022 Repurchase Program during the three months ended September 30, 2022. At September 30, 2022, we had remaining authorization of $200.0 million for future stock repurchases under the 2022 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. We retire shares upon repurchase. Any excess repurchase price over par is recorded in accumulated deficit.

The following table provides information with respect to purchases of common stock made by the company during the third quarter of 2022:

 

Common Share Purchases

 

Total Number of Shares Purchased

 

 

Average Price Paid Per Share

 

 

Total Number of Shares Purchased as Part of a Publicly Announced Plan

 

 

Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan

 

July 1 - July 31

 

 

8,444

 

 

$

43.93

 

 

 

8,444

 

 

$

54,972,337

 

August 1 - August 31

 

 

 

 

$

 

 

 

 

 

$

54,972,337

 

September 1 - September 30

 

 

 

 

$

 

 

 

 

 

$

200,000,000

 

Total

 

 

8,444

 

 

 

 

 

 

8,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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ITEM 6. EXHIBITS

 

EXHIBIT

NUMBER

DESCRIPTION

2.1*

Agreement and Plan of Merger, dated as of May 29, 2022, by and among PotlatchDeltic Corporation, Horizon Merger Sub 2022, LLC, CatchMark Timber Trust, Inc. and CatchMark Timber Operating Partnership, L.P., filed as Exhibit 2.1 to the Current Report on Form 8-K filed by the Registrant on May 31, 2022.

3.1*

 

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.

3.2*

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.

10.1

Summary of PotlatchDeltic Corporation Non-Employee Director Compensation, effective December 1, 2022.

10.2*

Seventh Amendment to Second Amended and Restated Term Loan Agreement dated as of September 14, 2022 among PotlatchDeltic Corporation and its wholly owned subsidiaries, PotlatchDeltic Forest Holdings, Inc. and PotlatchDeltic Land & Lumber, LLC, as borrowers, the guarantors party thereto, the lenders party thereto, the voting participants party thereto and Northwest Farm Credit Services, PCA, as administrative agent, filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on September 14, 2022.

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, 2022, filed on October 28, 2022 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021, (iii) the Condensed Consolidated Balance Sheets at September 30, 2022 and December 31, 2021, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021, (v) the Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 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.

 

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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 28, 2022

 

 

 

42