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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, 2020 

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

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 28, 2020 was 66,873,051.

 

 

 

POTLATCHDELTIC CORPORATION AND CONSOLIDATED SUBSIDIARIES

Table of Contents

 

 

 

 

 

 

 

 

Page
Number

PART I. - FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements (unaudited)

 

 

Condensed Consolidated Statements of Operations

2

 

Condensed Consolidated Statements of Comprehensive Income

3

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Condensed Consolidated Statements of Stockholders’ Equity

7

 

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

37

ITEM 4.

Controls and Procedures

37

 

 

 

PART II. - OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

38

ITEM 1A.

Risk Factors

38

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

ITEM 6.

Exhibits

39

 

 

 

SIGNATURE

40

 

 

 

 

 

 

 

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)

 

2020

 

 

 

 

2019

 

 

 

 

2020

 

 

2019

 

Revenues

 

$

313,046

 

 

 

 

$

226,302

 

 

 

 

$

703,481

 

 

$

623,599

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

182,039

 

 

 

 

 

182,634

 

 

 

 

 

503,921

 

 

 

512,522

 

Selling, general and administrative expenses

 

 

21,046

 

 

 

 

 

12,472

 

 

 

 

 

52,064

 

 

 

43,994

 

Gain on sale of facility

 

 

—

 

 

 

 

 

—

 

 

 

 

 

—

 

 

 

(9,176

)

 

 

 

203,085

 

 

 

 

 

195,106

 

 

 

 

 

555,985

 

 

 

547,340

 

Operating income

 

 

109,961

 

 

 

 

 

31,196

 

 

 

 

 

147,496

 

 

 

76,259

 

Interest expense, net

 

 

(8,557

)

 

 

 

 

(8,475

)

 

 

 

 

(20,594

)

 

 

(21,821

)

Loss on extinguishment of debt

 

 

—

 

 

 

 

 

—

 

 

 

 

 

—

 

 

 

(5,512

)

Pension settlement charge

 

 

—

 

 

 

 

 

—

 

 

 

 

 

(42,988

)

 

 

—

 

Non-operating pension and other postretirement employee benefit costs

 

 

(3,557

)

 

 

 

 

(935

)

 

 

 

 

(10,670

)

 

 

(2,804

)

Income before income taxes

 

 

97,847

 

 

 

 

 

21,786

 

 

 

 

 

73,244

 

 

 

46,122

 

Income taxes

 

 

(16,840

)

 

 

 

 

(1,221

)

 

 

 

 

(6,431

)

 

 

(1,860

)

Net income

 

$

81,007

 

 

 

 

$

20,565

 

 

 

 

$

66,813

 

 

$

44,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.21

 

 

 

 

$

0.30

 

 

 

 

$

0.99

 

 

$

0.65

 

Diluted

 

$

1.20

 

 

 

 

$

0.30

 

 

 

 

$

0.99

 

 

$

0.65

 

Dividends per share

 

$

0.40

 

 

 

 

$

0.40

 

 

 

 

$

1.20

 

 

$

1.20

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

67,149

 

 

 

 

 

67,446

 

 

 

 

 

67,263

 

 

 

67,781

 

Diluted

 

 

67,528

 

 

 

 

 

67,545

 

 

 

 

 

67,535

 

 

 

67,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

2

 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income

 

$

81,007

 

 

$

20,565

 

 

$

66,813

 

 

$

44,262

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other postretirement employee benefits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss arising during the period, net of tax benefit of $0, $0, $6,817 and $0

 

 

—

 

 

 

—

 

 

 

(19,402

)

 

 

—

 

Effect of pension settlement, net of tax benefit of $0, $0, $11,177 and $0

 

 

—

 

 

 

—

 

 

 

31,811

 

 

 

—

 

Amortization of prior service credit included in net income, net of tax benefit of $75, $562, $227 and $1,684

 

 

(215

)

 

 

(1,598

)

 

 

(645

)

 

 

(4,792

)

Amortization of actuarial loss included in net income, net of tax expense of $1,111, $943, $3,334 and $2,829

 

 

3,163

 

 

 

2,685

 

 

 

9,489

 

 

 

8,053

 

Cash flow hedges, net of tax expense (benefit) of $763, $(387), $(1,043) and $(1,300)

 

 

11,332

 

 

 

(6,978

)

 

 

(29,040

)

 

 

(25,908

)

Other comprehensive income (loss), net of tax

 

 

14,280

 

 

 

(5,891

)

 

 

(7,787

)

 

 

(22,647

)

Comprehensive income

 

$

95,287

 

 

$

14,674

 

 

$

59,026

 

 

$

21,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

3

 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

(in thousands, except per share amounts)

 

September 30, 2020

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

148,919

 

 

$

83,310

 

Customer receivables, net

 

 

50,084

 

 

 

14,167

 

Inventories, net

 

 

58,572

 

 

 

65,781

 

Other current assets

 

 

21,090

 

 

 

20,183

 

Total current assets

 

 

278,665

 

 

 

183,441

 

Property, plant and equipment, net

 

 

289,305

 

 

 

286,383

 

Investment in real estate held for development and sale

 

 

74,216

 

 

 

74,233

 

Timber and timberlands, net

 

 

1,608,026

 

 

 

1,638,663

 

Intangible assets, net

 

 

16,465

 

 

 

17,049

 

Other long-term assets

 

 

31,236

 

 

 

35,290

 

Total assets

 

$

2,297,913

 

 

$

2,235,059

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

108,425

 

 

$

60,577

 

Current portion of long-term debt

 

 

45,995

 

 

 

45,974

 

Current portion of pension and other postretirement employee benefits

 

 

6,701

 

 

 

6,701

 

Total current liabilities

 

 

161,121

 

 

 

113,252

 

Long-term debt

 

 

711,254

 

 

 

710,495

 

Pension and other postretirement employee benefits

 

 

139,022

 

 

 

115,463

 

Deferred tax liabilities, net

 

 

12,202

 

 

 

20,165

 

Other long-term obligations

 

 

78,237

 

 

 

48,853

 

Total liabilities

 

 

1,101,836

 

 

 

1,008,228

 

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 66,872 and 67,221 shares

 

 

66,872

 

 

 

67,221

 

Additional paid-in capital

 

 

1,672,351

 

 

 

1,666,299

 

Accumulated deficit

 

 

(388,000

)

 

 

(359,330

)

Accumulated other comprehensive loss

 

 

(155,146

)

 

 

(147,359

)

Total stockholders’ equity

 

 

1,196,077

 

 

 

1,226,831

 

Total liabilities and stockholders' equity

 

$

2,297,913

 

 

$

2,235,059

 

 

 

 

 

 

 

 

 

 

 

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

 

4

 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

66,813

 

 

$

44,262

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

57,809

 

 

 

52,589

 

Basis of real estate sold

 

 

14,440

 

 

 

14,211

 

Gain on sale of facility

 

 

—

 

 

 

(9,176

)

Loss on extinguishment of debt

 

 

—

 

 

 

5,512

 

Change in deferred taxes

 

 

(14,387

)

 

 

(16,943

)

Pension and other postretirement employee benefits

 

 

17,750

 

 

 

8,907

 

Pension settlement charge

 

 

42,988

 

 

 

—

 

Equity-based compensation expense

 

 

5,928

 

 

 

5,362

 

Other, net

 

 

(544

)

 

 

(2,692

)

Change in working capital and operating-related activities, net

 

 

12,706

 

 

 

13,745

 

Real estate development expenditures

 

 

(4,200

)

 

 

(5,738

)

Funding of pension and other postretirement employee benefits

 

 

(8,458

)

 

 

(4,612

)

Net cash provided by operating activities

 

 

190,845

 

 

 

105,427

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Property, plant and equipment additions

 

 

(14,666

)

 

 

(25,596

)

Timberlands reforestation and roads

 

 

(12,345

)

 

 

(13,269

)

Acquisition of timber and timberlands

 

 

(4,738

)

 

 

(278

)

Proceeds on sale of facility

 

 

1,000

 

 

 

58,793

 

Proceeds on disposition of property, plant and equipment

 

 

335

 

 

 

2,017

 

Other, net

 

 

2,149

 

 

 

520

 

Net cash (used in) provided by investing activities

 

 

(28,265

)

 

 

22,187

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Distributions to common stockholders

 

 

(80,434

)

 

 

(80,834

)

Repurchase of common stock

 

 

(15,364

)

 

 

(25,173

)

Proceeds from issuance of long-term debt

 

 

—

 

 

 

150,000

 

Repayment of long-term debt

 

 

—

 

 

 

(150,000

)

Premiums and fees on debt retirement

 

 

—

 

 

 

(4,865

)

Other, net

 

 

(1,032

)

 

 

(393

)

Net cash used in financing activities

 

 

(96,830

)

 

 

(111,265

)

Change in cash, cash equivalents and restricted cash

 

 

65,750

 

 

 

16,349

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

84,254

 

 

 

79,441

 

Cash, cash equivalents and restricted cash at end of period

 

$

150,004

 

 

$

95,790

 

 

 

 

 

 

 

 

 

 

NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Long-term debt assumed by buyer in sale of facility

 

$

—

 

 

$

29,000

 

Accrued property, plant and equipment additions

 

$

3,785

 

 

$

453

 

Accrued timberlands reforestation and roads

 

$

1,536

 

 

$

1,406

 

 

 

5

 

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, 2020

 

 

September 30, 2019

 

Cash and cash equivalents

 

$

148,919

 

 

$

94,747

 

Restricted cash included in other long-term assets1

 

 

1,085

 

 

 

1,043

 

Total cash, cash equivalents, and restricted cash

 

$

150,004

 

 

$

95,790

 

 

 

 

 

 

 

 

 

 

 

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.

 

 

6

 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

 

 

 

Common Stock

 

 

Additional Paid-

 

 

Accumulated

 

 

Accumulated Other

Comprehensive

 

 

Total Stockholders'

 

(in thousands, except per share amounts)

 

Shares

 

 

Amount

 

 

in Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance, December 31, 2019

 

 

67,221

 

 

$

67,221

 

 

$

1,666,299

 

 

$

(359,330

)

 

$

(147,359

)

 

$

1,226,831

 

Net loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(16,832

)

 

 

—

 

 

 

(16,832

)

Shares issued for stock compensation

 

 

131

 

 

 

131

 

 

 

(131

)

 

 

—

 

 

 

—

 

 

 

—

 

Equity-based compensation expense

 

 

—

 

 

 

—

 

 

 

1,885

 

 

 

—

 

 

 

—

 

 

 

1,885

 

Pension plans and OPEB obligations

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

15,578

 

 

 

15,578

 

Cash flow hedges

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(38,525

)

 

 

(38,525

)

Common dividends, $0.40 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(26,941

)

 

 

—

 

 

 

(26,941

)

Repurchase of common stock

 

 

(401

)

 

 

(401

)

 

 

—

 

 

 

(11,954

)

 

 

—

 

 

 

(12,355

)

Other transactions, net

 

 

—

 

 

 

—

 

 

 

69

 

 

 

(96

)

 

 

—

 

 

 

(27

)

Balance, March 31, 2020

 

 

66,951

 

 

$

66,951

 

 

$

1,668,122

 

 

$

(415,153

)

 

$

(170,306

)

 

$

1,149,614

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,638

 

 

 

—

 

 

 

2,638

 

Shares issued for stock compensation

 

 

9

 

 

 

9

 

 

 

(9

)

 

 

—

 

 

 

—

 

 

 

—

 

Equity-based compensation expense

 

 

—

 

 

 

—

 

 

 

1,980

 

 

 

—

 

 

 

—

 

 

 

1,980

 

Pension plans and OPEB obligations

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,727

 

 

 

2,727

 

Cash flow hedges

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,847

)

 

 

(1,847

)

Common dividends, $0.40 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(26,744

)

 

 

—

 

 

 

(26,744

)

Repurchase of common stock

 

 

(89

)

 

 

(89

)

 

 

—

 

 

 

(2,920

)

 

 

—

 

 

 

(3,009

)

Other transactions, net

 

 

—

 

 

 

—

 

 

 

91

 

 

 

26

 

 

 

—

 

 

 

117

 

Balance, June 30, 2020

 

 

66,871

 

 

$

66,871

 

 

$

1,670,184

 

 

$

(442,153

)

 

$

(169,426

)

 

$

1,125,476

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

81,007

 

 

 

—

 

 

 

81,007

 

Shares issued for stock compensation

 

 

1

 

 

 

1

 

 

 

(1

)

 

 

—

 

 

 

—

 

 

 

—

 

Equity-based compensation expense

 

 

—

 

 

 

—

 

 

 

2,063

 

 

 

—

 

 

 

—

 

 

 

2,063

 

Pension plans and OPEB obligations

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,948

 

 

 

2,948

 

Cash flow hedges

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

11,332

 

 

 

11,332

 

Common dividends, $0.40 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(26,749

)

 

 

—

 

 

 

(26,749

)

Other transactions, net

 

 

—

 

 

 

—

 

 

 

105

 

 

 

(105

)

 

 

—

 

 

 

—

 

Balance, September 30, 2020

 

 

66,872

 

 

$

66,872

 

 

$

1,672,351

 

 

$

(388,000

)

 

$

(155,146

)

 

$

1,196,077

 

 

 

7

 

 

 

Common Stock

 

 

Additional Paid-

 

 

Accumulated

 

 

Accumulated Other

Comprehensive

 

 

Total Stockholders'

 

(in thousands, except per share amounts)

 

Shares

 

 

Amount

 

 

in Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance, December 31, 2018

 

 

67,570

 

 

$

67,570

 

 

$

1,659,031

 

 

$

(282,391

)

 

$

(129,431

)

 

$

1,314,779

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

6,560

 

 

 

—

 

 

 

6,560

 

Shares issued for stock compensation

 

 

297

 

 

 

297

 

 

 

(297

)

 

 

—

 

 

 

—

 

 

 

—

 

Equity-based compensation expense

 

 

—

 

 

 

—

 

 

 

1,617

 

 

 

—

 

 

 

—

 

 

 

1,617

 

Pension plans and OPEB obligations

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,166

 

 

 

1,166

 

Cash flow hedges

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(8,513

)

 

 

(8,513

)

Common dividends, $0.40 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(27,065

)

 

 

—

 

 

 

(27,065

)

Repurchase of common stock

 

 

(279

)

 

 

(279

)

 

 

—

 

 

 

(9,879

)

 

 

—

 

 

 

(10,158

)

Other transactions, net

 

 

—

 

 

 

—

 

 

 

99

 

 

 

(99

)

 

 

—

 

 

 

—

 

Balance, March 31, 2019

 

 

67,588

 

 

$

67,588

 

 

$

1,660,450

 

 

$

(312,874

)

 

$

(136,778

)

 

$

1,278,386

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

17,137

 

 

 

—

 

 

 

17,137

 

Shares issued for stock compensation

 

 

5

 

 

 

5

 

 

 

(5

)

 

 

—

 

 

 

—

 

 

 

—

 

Equity-based compensation expense

 

 

—

 

 

 

—

 

 

 

1,832

 

 

 

—

 

 

 

—

 

 

 

1,832

 

Pension plans and OPEB obligations

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,008

 

 

 

1,008

 

Cash flow hedges

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(10,417

)

 

 

(10,417

)

Common dividends, $0.40 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(26,881

)

 

 

—

 

 

 

(26,881

)

Repurchase of common stock

 

 

(407

)

 

 

(407

)

 

 

—

 

 

 

(14,608

)

 

 

—

 

 

 

(15,015

)

Other transactions, net

 

 

—

 

 

 

—

 

 

 

104

 

 

 

(104

)

 

 

—

 

 

 

—

 

Balance, June 30, 2019

 

 

67,186

 

 

$

67,186

 

 

$

1,662,381

 

 

$

(337,330

)

 

$

(146,187

)

 

$

1,246,050

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

20,565

 

 

 

—

 

 

 

20,565

 

Shares issued for stock compensation

 

 

35

 

 

 

35

 

 

 

(35

)

 

 

—

 

 

 

—

 

 

 

—

 

Equity-based compensation expense

 

 

—

 

 

 

—

 

 

 

1,913

 

 

 

—

 

 

 

—

 

 

 

1,913

 

Pension plans and OPEB obligations

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,087

 

 

 

1,087

 

Cash flow hedges

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(6,978

)

 

 

(6,978

)

Common dividends, $0.40 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(26,888

)

 

 

—

 

 

 

(26,888

)

Other transactions, net

 

 

—

 

 

 

—

 

 

 

74

 

 

 

(94

)

 

 

—

 

 

 

(20

)

Balance, September 30, 2019

 

 

67,221

 

 

$

67,221

 

 

$

1,664,333

 

 

$

(343,747

)

 

$

(152,078

)

 

$

1,235,729

 

 

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

8

 

INDEX FOR NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

Note 1: Basis of Presentation

10

Note 2: Recent Accounting Pronouncements

11

Note 3: Sale of Deltic MDF Facility

11

Note 4: Revenue Recognition

12

Note 5: Segment Information

13

Note 6: Earnings Per Share

15

Note 7: Certain Balance Sheet Components

16

Note 8: Debt

16

Note 9: Derivative Instruments

17

Note10: Fair Value Measurements

18

Note 11: Equity-Based Compensation

18

Note 12: Income Taxes

19

Note 13: Leases

20

Note 14: Pension and Other Postretirement Benefits

21

Note 15: Components of Accumulated Other Comprehensive Loss

22

 

9

 

Notes to Condensed Consolidated Financial Statements

NOTE 1. BASIS OF PRESENTATION

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

We are primarily engaged in activities associated with timberland management, including the sale of timber, the management of approximately 1.8 million acres of timberlands and the purchase and sale of timberlands. We are also engaged in the manufacture and sale of wood products and the development of real estate.

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, 2019, as filed with the Securities and Exchange Commission on February 19, 2020. 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

In March 2020 the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. Shortly thereafter the United States declared a national emergency concerning the outbreak, and all states and several municipalities subsequently declared public health emergencies. These declarations resulted in a wide-range of government directives impacting individuals and businesses beginning in late March 2020 to contain and combat the outbreak and spread of COVID-19.

The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses. The full extent to which COVID-19 will directly or indirectly impact our business, results of operations and financial condition, will depend on future developments that are highly uncertain, including new information that may emerge concerning COVID-19, the additional actions taken to contain it or treat it, as well as the severity and duration of the economic impact on local, regional, and national customers, suppliers and markets.

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 have to pay in connection with any legal proceeding would have a materially adverse effect on our consolidated financial position or net cash flow.

On June 21, 2020, we announced an agreement to sell approximately 72,000 acres of rural timberland in Minnesota to The Conservation Fund for approximately $48.0 million in cash, subject to certain closing adjustments as defined in the agreement. The transaction is subject to customary closing conditions and is expected to close in the fourth quarter of 2020.

10

 

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

New Accounting Standards Recently Adopted

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies that implementation costs incurred by customers in cloud computing arrangements are deferred if they would be capitalized by customers in software licensing arrangements under the internal-use software guidance. Additionally, ASU 2018-15 clarifies that all capitalized costs must be presented in the same financial statement line item as the cloud computing arrangement. The standard was effective, on either a prospective or retrospective basis, for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The prospective adoption of this standard on January 1, 2020 did not have a material impact our Condensed Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 was effective for fiscal years ending after December 15, 2020, including interim periods within those years and requires retrospective adoption; early adoption is permitted. The adoption of this standard on January 1, 2020 did not have a material impact on our defined benefit pension plan and other postretirement plan disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies certain disclosure requirements related to fair value measurements including (i) requiring disclosures on changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements; and (ii) a requirement to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 was effective for fiscal years beginning after December 15, 2019, including interim periods within those years. The adoption of this standard on January 1, 2020 did not have a material impact on our fair value measurement disclosures.

New Accounting Standards Being Evaluated

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 to US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting impacts related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. Companies can apply the ASU immediately. Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed. We are currently evaluating the impact this guidance may have on our Condensed Consolidated Financial Statements and related disclosures.

NOTE 3. SALE OF DELTIC MDF FACILITY

On December 20, 2018, we entered into an Asset Purchase and Sale Agreement (the Agreement) with Roseburg Forest Products Co. to sell the Deltic MDF facility for $92.0 million, consisting of $63.0 million in cash and assumption of $29.0 million of revenue bonds. The purchase price was subject to post-closing adjustments for certain changes in working capital as defined in the Agreement. The transaction closed on February 12, 2019 resulting in a $9.2 million pre-tax gain on sale. Net proceeds received in February 2019 after closing costs and other expenses were $60.0 million. The net proceeds were reduced by $1.2 million during the second quarter of 2019 following the finalization of the post-closing working capital adjustments. A portion of the purchase price was escrowed pending satisfaction of certain covenants as outlined in the Agreement. These funds were fully released to us during the three months ended March 31, 2020. In addition, we had a carryover tax basis in the facility from the Deltic merger, and as a result, we recorded a reduction to deferred tax liabilities and increase to income taxes payable of $15.8 million at the date of sale. The sale of the MDF facility was not considered a strategic shift that has or will have a major effect on our operations or financial results and therefore did not meet the requirements for presentation as discontinued operations.

11

 

NOTE 4. REVENUE RECOGNITION

The following table represents our revenues by major product. For additional information regarding our segments, see Note 5: Segment Information.

 

 

Three Months Ended September 30,

 

 

 

 

Nine Months Ended September 30,

 

(in thousands)

2020

 

 

 

 

2019

 

 

 

 

2020

 

 

 

 

2019

 

Timberlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sawlogs

$

72,815

 

 

 

 

$

53,152

 

 

 

 

$

144,860

 

 

 

 

$

116,118

 

Pulpwood

 

1,243

 

 

 

 

 

1,489

 

 

 

 

 

3,914

 

 

 

 

 

4,698

 

Stumpage

 

—

 

 

 

 

 

3

 

 

 

 

 

316

 

 

 

 

 

109

 

Other

 

855

 

 

 

 

 

1,085

 

 

 

 

 

1,450

 

 

 

 

 

1,649

 

Total Northern revenues

 

74,913

 

 

 

 

 

55,729

 

 

 

 

 

150,540

 

 

 

 

 

122,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southern region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sawlogs

 

25,462

 

 

 

 

 

24,053

 

 

 

 

 

70,606

 

 

 

 

 

63,469

 

Pulpwood

 

13,413

 

 

 

 

 

15,754

 

 

 

 

 

35,486

 

 

 

 

 

38,847

 

Stumpage

 

770

 

 

 

 

 

767

 

 

 

 

 

2,416

 

 

 

 

 

1,233

 

Other

 

2,427

 

 

 

 

 

2,506

 

 

 

 

 

7,707

 

 

 

 

 

7,725

 

Total Southern revenues

 

42,072

 

 

 

 

 

43,080

 

 

 

 

 

116,215

 

 

 

 

 

111,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Timberlands revenues

 

116,985

 

 

 

 

 

98,809

 

 

 

 

 

266,755

 

 

 

 

 

233,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wood Products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lumber

 

185,558

 

 

 

 

 

108,364

 

 

 

 

 

400,290

 

 

 

 

 

301,923

 

Residuals and Panels

 

32,733

 

 

 

 

 

35,279

 

 

 

 

 

89,217

 

 

 

 

 

112,056

 

Total Wood Products revenues

 

218,291

 

 

 

 

 

143,643

 

 

 

 

 

489,507

 

 

 

 

 

413,979

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rural real estate

 

13,284

 

 

 

 

 

9,689

 

 

 

 

 

30,455

 

 

 

 

 

44,223

 

Development real estate

 

2,157

 

 

 

 

 

7,674

 

 

 

 

 

6,121

 

 

 

 

 

12,102

 

Other

 

2,710

 

 

 

 

 

1,500

 

 

 

 

 

5,649

 

 

 

 

 

5,134

 

Total Real Estate revenues

 

18,151

 

 

 

 

 

18,863

 

 

 

 

 

42,225

 

 

 

 

 

61,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total segment revenues

 

353,427

 

 

 

 

 

261,315

 

 

 

 

 

798,487

 

 

 

 

 

709,286

 

Intersegment Timberlands revenues1

 

(40,381

)

 

 

 

 

(35,013

)

 

 

 

 

(95,006

)

 

 

 

 

(85,687

)

Total consolidated revenues

$

313,046

 

 

 

 

$

226,302

 

 

 

 

$

703,481

 

 

 

 

$

623,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

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

Contract Balances

In general, a customer receivable is recorded as we deliver wood products, logs and residuals. We generally receive payment shortly after products have been received by our customers. At September 30, 2020 and December 31, 2019, we recorded deferred revenue of $10.5 million and $5.5 million, respectively, for contract liabilities. These contract liabilities predominately relate to hunting and other access rights on our timberlands and member related activities at a country club. These contract liabilities are recognized over the term of the contracts, which is typically twelve months or less, except membership initiation fees at the country club which typically are recognized up to 10 years. Other contract asset and liability balances, such as prepayments, are immaterial. For real estate sales, we typically receive the entire consideration in cash at closing.

12

 

NOTE 5. SEGMENT INFORMATION

Our businesses are organized into three reportable operating segments: Timberlands, Wood Products and Real Estate.  The Timberlands segment includes 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. The Real Estate segment includes the sale of land holdings deemed non-strategic or identified as having higher and better use alternatives, 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.

Management primarily evaluates the performance of its segments and allocates resources to them based upon Adjusted EBITDDA. 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. Management uses Adjusted EBITDDA to compare the operating performance of our segments on a consistent basis and to evaluate the performance and effectiveness of each segment’s operational strategies. Our calculation of Adjusted EBITDDA may not be comparable to that reported by other companies.

13

 

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)

 

2020

 

 

2019

 

 

 

 

2020

 

 

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timberlands

 

$

116,985

 

 

$

98,809

 

 

 

 

$

266,755

 

 

 

 

$

233,848

 

Wood Products

 

 

218,291

 

 

 

143,643

 

 

 

 

 

489,507

 

 

 

 

 

413,979

 

Real Estate

 

 

18,151

 

 

 

18,863

 

 

 

 

 

42,225

 

 

 

 

 

61,459

 

 

 

 

353,427

 

 

 

261,315

 

 

 

 

 

798,487

 

 

 

 

 

709,286

 

Intersegment Timberlands revenues1

 

 

(40,381

)

 

 

(35,013

)

 

 

 

 

(95,006

)

 

 

 

 

(85,687

)

Consolidated revenues

 

$

313,046

 

 

$

226,302

 

 

 

 

$

703,481

 

 

 

 

$

623,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timberlands

 

$

59,649

 

 

$

42,996

 

 

 

 

$

120,290

 

 

 

 

$

95,977

 

Wood Products

 

 

81,644

 

 

 

5,903

 

 

 

 

 

105,780

 

 

 

 

 

11,058

 

Real Estate

 

 

13,466

 

 

 

14,678

 

 

 

 

 

30,062

 

 

 

 

 

48,697

 

Corporate

 

 

(15,361

)

 

 

(6,930

)

 

 

 

 

(34,567

)

 

 

 

 

(26,930

)

Eliminations and adjustments

 

 

(4,012

)

 

 

(1,635

)

 

 

 

 

(3,235

)

 

 

 

 

3,542

 

Total Adjusted EBITDDA

 

 

135,386

 

 

 

55,012

 

 

 

 

 

218,330

 

 

 

 

 

132,344

 

Interest expense, net2

 

 

(8,557

)

 

 

(8,475

)

 

 

 

 

(20,594

)

 

 

 

 

(21,821

)

Depreciation, depletion and amortization

 

 

(20,187

)

 

 

(18,786

)

 

 

 

 

(56,590

)

 

 

 

 

(51,310

)

Basis of real estate sold

 

 

(5,249

)

 

 

(5,228

)

 

 

 

 

(14,440

)

 

 

 

 

(14,211

)

Loss on extinguishment of debt

 

 

—

 

 

 

—

 

 

 

 

 

—

 

 

 

 

 

(5,512

)

Pension settlement charge

 

 

—

 

 

 

—

 

 

 

 

 

(42,988

)

 

 

 

 

—

 

Non-operating pension and other postretirement employee benefits

 

 

(3,557

)

 

 

(935

)

 

 

 

 

(10,670

)

 

 

 

 

(2,804

)

Gain on sale of facility

 

 

—

 

 

 

—

 

 

 

 

 

—

 

 

 

 

 

9,176

 

Gain on disposal of fixed assets

 

 

11

 

 

 

198

 

 

 

 

 

196

 

 

 

 

 

260

 

Income before income taxes

 

$

97,847

 

 

$

21,786

 

 

 

 

$

73,244

 

 

 

 

$

46,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timberlands

 

$

13,821

 

 

$

12,627

 

 

 

 

$

37,978

 

 

 

 

$

33,361

 

Wood Products

 

 

5,983

 

 

 

5,763

 

 

 

 

 

17,411

 

 

 

 

 

16,666

 

Real Estate

 

 

149

 

 

 

152

 

 

 

 

 

465

 

 

 

 

 

508

 

Corporate

 

 

234

 

 

 

244

 

 

 

 

 

736

 

 

 

 

 

775

 

 

 

 

20,187

 

 

 

18,786

 

 

 

 

 

56,590

 

 

 

 

 

51,310

 

Bond discounts and deferred loan fees2

 

 

407

 

 

 

392

 

 

 

 

 

1,219

 

 

 

 

 

1,279

 

Total depreciation, depletion and amortization

 

$

20,594

 

 

$

19,178

 

 

 

 

$

57,809

 

 

 

 

$

52,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of real estate sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

$

5,257

 

 

$

5,283

 

 

 

 

$

14,973

 

 

 

 

$

14,326

 

Eliminations and adjustments

 

 

(8

)

 

 

(55

)

 

 

 

 

(533

)

 

 

 

 

(115

)

Total basis of real estate sold

 

$

5,249

 

 

$

5,228

 

 

 

 

$

14,440

 

 

 

 

$

14,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

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

2

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

14

 

NOTE 6. EARNINGS PER SHARE

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands, except per share amounts)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income

 

$

81,007

 

 

$

20,565

 

 

$

66,813

 

 

$

44,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

 

67,149

 

 

 

67,446

 

 

 

67,263

 

 

 

67,781

 

Incremental shares due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance shares

 

 

320

 

 

 

65

 

 

 

238

 

 

 

50

 

Restricted stock units

 

 

59

 

 

 

34

 

 

 

34

 

 

 

17

 

Diluted weighted-average shares outstanding

 

 

67,528

 

 

 

67,545

 

 

 

67,535

 

 

 

67,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

1.21

 

 

$

0.30

 

 

$

0.99

 

 

$

0.65

 

Diluted net income per share

 

$

1.20

 

 

$

0.30

 

 

$

0.99

 

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2020, there were 0 and approximately 47,000 stock-based awards, respectively, that were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the three and nine months ended September 30, 2019, there were approximately 25,000 and 134,000 stock-based awards, respectively, that were excluded from the calculation of diluted earnings per share because they were anti-dilutive. Anti-dilutive stock-based awards could be dilutive in future periods.

Share 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). In September 2020 we entered into a trading plan in accordance with the guidelines in Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, with an independent broker for the purpose of repurchasing a limited number of the Company’s common shares under the 2018 Repurchase Program. This trading plan became effective on October 29, 2020 and expires upon expenditure of the principal specified in the plan, an early termination event (as specified in the plan), or the close of business on October 26, 2022, whichever occurs first.

During the nine months ended September 30, 2020 we repurchased 489,850 shares of common stock (at a total consideration of $15.4 million), and we repurchased no shares during the three months ended September 30, 2020, under the 2018 Repurchase Program. During the nine months ended September 30, 2019 we repurchased 686,240 shares of common stock (at a total consideration of $25.2 million), and we repurchased no shares during the three months ended September 30, 2019 under the 2018 Repurchase Program. All common stock purchases under the 2018 Repurchase Program were made in open-market transactions. At September 30, 2020, we had remaining authorization of $59.5 million for future stock repurchases under the 2018 Repurchase Program.

We record share repurchases upon trade date as opposed to the settlement date when cash is disbursed. We record a liability to account for repurchases that have not been cash settled. There were no unsettled repurchases as of September 30, 2020. We retire shares upon repurchase. Any excess repurchase price over par is recorded in accumulated deficit.

15

 

NOTE 7. CERTAIN BALANCE SHEET COMPONENTS

Inventories

 

(in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

Logs

 

$

24,592

 

 

$

33,313

 

Lumber, panels and veneer

 

 

31,730

 

 

 

31,639

 

Materials and supplies

 

 

14,252

 

 

 

12,831

 

Total inventories

 

 

70,574

 

 

 

77,783

 

Less: LIFO reserve

 

 

(12,002

)

 

 

(12,002

)

Total inventories, net

 

$

58,572

 

 

$

65,781

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

(in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

Property, plant and equipment

 

$

517,702

 

 

$

498,113

 

Less: accumulated depreciation

 

 

(228,397

)

 

 

(211,730

)

Total property, plant and equipment, net

 

$

289,305

 

 

$

286,383

 

 

 

 

 

 

 

 

 

 

 

Timber and timberlands

 

(in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

Timber and timberlands

 

$

1,524,562

 

 

$

1,554,882

 

Logging roads

 

 

83,464

 

 

 

83,781

 

Total timber and timberlands, net

 

$

1,608,026

 

 

$

1,638,663

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

(in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

Accrued payroll and benefits

 

$

28,055

 

 

$

12,920

 

Accounts payable

 

 

24,614

 

 

 

12,734

 

Deferred revenue

 

 

10,517

 

 

 

5,514

 

Accrued taxes

 

 

23,697

 

 

 

6,638

 

Accrued interest

 

 

5,470

 

 

 

6,946

 

Operating lease liabilities

 

 

4,538

 

 

 

4,998

 

Other current liabilities

 

 

11,534

 

 

 

10,827

 

Total accounts payable and accrued liabilities

 

$

108,425

 

 

$

60,577

 

 

 

 

 

 

 

 

 

 

 

NOTE 8. DEBT 

At September 30, 2020, our total outstanding long-term debt included $693.5 million of term loans under our Second Amended and Restated Term Loan Agreement (Amended Term Loan Agreement) with our primary lender, of which $46.0 million matures in December 2020. Certain borrowings under the Amended Term Loan Agreement are at variable rates of one or three-month LIBOR plus a spread between 1.85% and 2.15%. We have entered into interest rate swaps for these variable rate term loans to fix the interest rate. See Note: 9 Derivative Instruments for additional information.

At September 30, 2020, there were no borrowings under our $380.0 million revolving line of credit and approximately $1.0 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 $420.0 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 subfacilities reduces 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, 2020.

16

 

NOTE 9. DERIVATIVE INSTRUMENTS

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

At September 30, 2020, we have six interest rate swaps associated with $397.5 million of term loan debt. These swaps are cash flow hedges that convert variable rates ranging from three-month and one-month LIBOR plus 1.85% to 2.15%, to fixed rates ranging from 3.17% to 4.82%. Our cash flow hedges are expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the hedges.

In March 2020, we entered into $653.5 million of forward starting interest rate swaps. These forward starting interest rate swaps effectively hedge the variability in future benchmark interest payments attributable to changes in interest rates on future debt refinancing by converting the benchmark interest rates to fixed rates on our anticipated future refinancing of $653.5 million of term loan debt maturing December 2020 through January 2029. The fixed interest rate components for these forward swaps range from 0.85% to 1.17%. The variable rate component on these forward interest rate swaps is one-month LIBOR. Accordingly, the forward rate swaps were designated as cash flow hedges. In addition, these cash flow hedges require settlement on the stated maturity date for each respective term loan currently outstanding.  

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

 

 

 

 

 

Asset Derivatives

 

 

 

 

Liability Derivatives

 

(in thousands)

 

Location

 

September 30, 2020

 

 

December 31, 2019

 

 

Location

 

September 30, 2020

 

 

December 31, 2019

 

Derivatives designated in cash flow hedging relationships:

 

 

 

 

 

 

 

 

 

 

 

   Interest rate contracts

 

Other assets, current1

 

$

—

 

 

$

—

 

 

Accounts payable and accrued liabilities1

 

$

1,356

 

 

$

—

 

Interest rate contracts

 

Other assets, non-current

 

 

3,282

 

 

 

1,601

 

 

Other long-term obligations

 

 

52,805

 

 

 

22,398

 

 

 

 

 

$

3,282

 

 

$

1,601

 

 

 

 

$

54,161

 

 

$

22,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Derivatives designated in cash flow hedging relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) recognized in other comprehensive income (loss), net of tax

 

 

 

$

8,920

 

 

$

(7,384

)

 

$

(34,112

)

 

$

(26,576

)

Reclassifications from AOCL to earnings1

 

Interest expense

 

$

2,412

 

 

$

406

 

 

$

5,072

 

 

$

668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

$

8,557

 

 

$

8,475

 

 

$

20,594

 

 

$

21,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1Realized loss on hedging instruments consist of net swap cash payments and interest accruals on interest rate swaps during the periods.

At September 30, 2020, approximately $8.9 million of net losses are expected to be reclassified into earnings over the next 12 months. However, this expected amount to be reclassified into earnings is subject to volatility as the ultimate amount recognized in earnings is based on the market LIBOR rate at the time of net swap cash payments.

17

 

NOTE 10. FAIR VALUE MEASUREMENTS

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

 

 

 

September 30, 2020

 

 

December 31, 2019

 

(in thousands)

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Derivative assets related to interest rate swaps (Level 2)

 

$

3,282

 

 

$

3,282

 

 

$

1,601

 

 

$

1,601

 

Derivative liabilities related to interest rate swaps (Level 2)

 

$

(54,161

)

 

$

(54,161

)

 

$

(22,398

)

 

$

(22,398

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loans

 

$

(690,307

)

 

$

(717,946

)

 

$

(689,820

)

 

$

(703,437

)

Revenue bonds

 

 

(65,735

)

 

 

(66,885

)

 

 

(65,735

)

 

 

(68,200

)

Medium-term notes

 

 

(3,000

)

 

 

(3,558

)

 

 

(3,000

)

 

 

(3,480

)

Total long-term debt1

 

$

(759,042

)

 

$

(788,389

)

 

$

(758,555

)

 

$

(775,117

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

3,028

 

 

$

3,028

 

 

$

4,157

 

 

$

4,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

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

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

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

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

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

NOTE 11. EQUITY-BASED COMPENSATION

At September 30, 2020, approximately 1.2 million shares are available for future use under our long-term incentive plan.

Share-based compensation activity during the nine months ended September 30, 2020 included the following:

 

(Shares in thousands)

 

Granted

 

 

Vested

 

 

Forfeited

 

Performance Share Awards (PSAs)

 

 

125,001

 

 

 

—

 

 

 

4,286

 

Restricted Stock Units (RSUs)

 

 

68,263

 

 

 

28,671

 

 

 

1,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Approximately 0.1 million shares of common stock were issued during the nine months ended September 30, 2020 as a result of PSA and RSU vesting during 2019 and 2020.

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Equity-based compensation expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance share awards

 

$

1,315

 

 

$

1,186

 

 

$

3,716

 

 

$

3,417

 

Restricted stock units

 

 

729

 

 

 

705

 

 

 

2,155

 

 

 

1,892

 

Deferred compensation stock equivalent units expense

 

 

19

 

 

 

22

 

 

 

57

 

 

 

53

 

Total equity-based compensation expense

 

$

2,063

 

 

$

1,913

 

 

$

5,928

 

 

$

5,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total tax benefit recognized for equity-based expense

 

$

97

 

 

$

79

 

 

$

273

 

 

$

234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

Performance Share Awards

PSAs granted under the stock incentive plans have a three-year performance period and shares are issued at the end of the period if the performance measures are met. The performance measures are based on the percentile ranking of our total shareholder return relative to the total shareholder return performance of both a selected peer group of companies and a larger group of indexed companies over the three-year performance period. The number of shares actually issued, as a percentage of the amount subject to the PSA, could range from 0% to 200%. PSAs granted under our stock incentive plans do not have voting rights unless and until shares are issued upon settlement. If shares are issued at the end of the three-year performance measurement period, the recipients will receive dividend equivalents in the form of additional shares at the time of payment equal to the dividends that would have been paid on the shares earned had the recipients owned the shares during the three-year period. Therefore, the shares are not considered participating securities. The fair value of performance shares granted in 2020 was $45.04 per share.

The following table presents the key inputs used in the Monte Carlo simulation to calculate the fair value of the performance share awards in 2020:

 

Stock price as of valuation date

 

$

42.16

 

Risk-free rate

 

 

1.42

%

Expected volatility

 

 

25.74

%

Expected dividend yield (assuming full reinvestment)

 

 

—

 

Expected term (years)

 

 

3.00

 

 

 

 

 

 

Restricted Stock Units

RSU awards accrue dividend equivalents based on dividends paid during the RSU vesting period. The dividend equivalents will be converted into additional RSUs that will vest in the same manner as the underlying RSUs to which they relate. Therefore, the shares are not considered participating securities. The terms of the awards state that the RSUs will vest in a given time period of one to three years and the terms of certain awards follow a vesting schedule within the given time period. The fair value of RSUs granted equaled our common share price on the date of grant factoring in any required post-vesting holding periods. The weighted average fair value of all RSUs granted during the nine months ended September 30, 2020 was $38.77 per share.

NOTE 12. INCOME TAXES

As a real estate investment trust (REIT), we generally are not subject to federal and state corporate income taxes on income of the REIT that we distribute to our shareholders. We conduct certain activities through our taxable REIT subsidiaries (TRS), which are subject to corporate level federal and state income taxes. These taxable activities are principally comprised of our wood products manufacturing operations and certain real estate investments. Therefore, income tax expense or benefit is primarily due to income or loss of the TRS, as well as permanent book versus tax differences. During the nine months ended September 30, 2020, we recorded income tax expense of $6.4 million, which was net of an income tax benefit of approximately $11.2 million associated with the $43.0 million pension settlement charge recorded in the first quarter of 2020. Additionally, during the first quarter of 2020, we recorded an increase in deferred tax assets of $6.8 million associated with the $26.2 million remeasurement of our pension plan obligations. See Note 14: Pension and Other Postretirement Employee Benefits for further details. During the nine months ended September 30, 2019, we recorded a reduction to deferred tax liabilities and an increase to income taxes payable of $15.8 million related to the sale of the Deltic MDF facility. See Note 3: Sale of Deltic MDF Facility for further details.

19

 

NOTE 13. 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, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

 

Operating lease assets

Other long-term assets

 

$

12,159

 

 

$

15,772

 

Finance lease assets1

Property, plant and equipment, net

 

 

7,086

 

 

 

2,360

 

Total lease assets

 

 

$

19,245

 

 

$

18,132

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

Operating lease liabilities

Accounts payable and accrued liabilities

 

$

4,538

 

 

$

4,998

 

Finance lease liabilities

Accounts payable and accrued liabilities

 

 

2,046

 

 

 

644

 

Noncurrent:

 

 

 

 

 

 

 

 

 

Operating lease liabilities

Other long-term obligations

 

 

7,651

 

 

 

10,775

 

Finance lease liabilities

Other long-term obligations

 

 

4,963

 

 

 

1,703

 

Total lease liabilities

 

 

$

19,198

 

 

$

18,120

 

 

 

 

 

 

 

 

 

 

 

 

1     Finance lease assets are presented net of accumulated amortization of $1.2 million and $0.3 million as of September 30, 2020 and December 31, 2019, respectively.

The following table presents the components of lease expense:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating lease costs1

 

$

1,413

 

 

$

1,576

 

 

$

4,252

 

 

$

4,497

 

Finance lease costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of leased assets

 

 

432

 

 

80

 

 

 

905

 

 

126

 

Interest on lease liabilities

 

 

44

 

 

12

 

 

 

103

 

 

22

 

Net lease costs

 

$

1,889

 

 

$

1,668

 

 

$

5,260

 

 

$

4,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

 

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

 

2020

 

 

2019

 

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

 

 

 

 

 

 

 

 

Operating cash flows for operating leases

 

$

4,244

 

 

$

4,503

 

Operating cash flows for finance leases

 

$

103

 

 

$

22

 

Financing cash flows for finance leases

 

$

968

 

 

$

121

 

Leased assets exchanged for new lease liabilities:

 

 

 

 

 

 

 

 

Operating leases

 

$

255

 

 

$

6,317

 

Finance leases

 

$

5,630

 

 

$

2,067

 

 

 

 

 

 

 

 

 

 

 

 

20

 

NOTE 14. PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS

In February 2020, we purchased a group annuity contract from an insurance company to transfer $101.1 million of our outstanding pension benefit obligation related to our qualified pension plans to the insurance company. This transaction was funded with plan assets. As a result of the transaction, the insurance company assumed responsibility for annuity administration and benefit payments to select retirees, with no change to their monthly retirement benefit payment amounts. In connection with this transaction we recorded a non-cash pretax settlement charge of $43.0 million during the three months ended March 31, 2020 in non-operating expense, net, accelerating the recognition of actuarial losses included in accumulated other comprehensive loss that would have been recognized in future periods.

The settlement triggered a remeasurement of plan assets and liabilities. We updated the discount rate used to measure our projected benefit obligation for the qualified pension plans as of February 29, 2020 and to calculate the related net periodic benefit cost for the remainder of 2020 to 2.95% from 3.40%. All other pension assumptions remain unchanged. The net effect of the remeasurement was a reduction in the funded status of our qualified pension plans of approximately $26.2 million, primarily driven by the decrease in the discount rate.  

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

 

 

Three Months Ended September 30,

 

 

 

Pension

 

 

OPEB

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Service cost

 

$

2,233

 

 

$

1,942

 

 

$

127

 

 

$

93

 

Interest cost

 

 

3,066

 

 

 

4,618

 

 

 

376

 

 

 

397

 

Expected return on plan assets

 

 

(3,869

)

 

 

(5,548

)

 

 

—

 

 

 

—

 

Amortization of prior service cost (credit)

 

 

29

 

 

 

52

 

 

 

(319

)

 

 

(2,211

)

Amortization of actuarial loss

 

 

3,856

 

 

 

3,374

 

 

 

418

 

 

 

253

 

Total net periodic cost (benefit)

 

$

5,315

 

 

$

4,438

 

 

$

602

 

 

$

(1,468

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

Pension

 

 

OPEB

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Service cost

 

$

6,699

 

 

$

5,825

 

 

$

381

 

 

$

278

 

Interest cost

 

 

9,198

 

 

 

13,849

 

 

 

1,127

 

 

 

1,191

 

Expected return on plan assets

 

 

(11,606

)

 

 

(16,643

)

 

 

—

 

 

 

—

 

Amortization of prior service cost (credit)

 

 

85

 

 

 

158

 

 

 

(957

)

 

 

(6,633

)

Amortization of actuarial loss

 

 

11,569

 

 

 

10,122

 

 

 

1,254

 

 

 

760

 

Net periodic cost (benefit) before pension settlement charge

 

 

15,945

 

 

 

13,311

 

 

 

1,805

 

 

 

(4,404

)

Pension settlement charge

 

 

42,988

 

 

 

—

 

 

 

—

 

 

 

—

 

Net periodic cost (benefit)

 

$

58,933

 

 

$

13,311

 

 

$

1,805

 

 

$

(4,404

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the nine months ended September 30, 2020 and 2019, funding of pension and other postretirement employee benefit plans was $8.5 million and $4.6 million, respectively.

21

 

NOTE 15. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table details changes in amounts included in our accumulated other comprehensive loss (AOCL) by component on our Condensed Consolidated Balance Sheets, net of tax:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Pension Plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

98,870

 

 

$

124,181

 

 

$

117,028

 

 

$

129,253

 

Net loss arising during the period

 

 

—

 

 

 

—

 

 

 

19,402

 

 

 

—

 

Effect of pension settlement

 

 

—

 

 

 

—

 

 

 

(31,811

)

 

 

—

 

Amounts reclassified from AOCL to earnings

 

 

(2,874

)

 

 

(2,535

)

 

 

(8,623

)

 

 

(7,607

)

Balance at end of period

 

$

95,996

 

 

$

121,646

 

 

$

95,996

 

 

$

121,646

 

Other Postretirement Benefit Plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

10,184

 

 

$

1,516

 

 

$

10,331

 

 

$

(1,382

)

Amounts reclassified from AOCL to earnings

 

 

(74

)

 

 

1,448

 

 

 

(221

)

 

 

4,346

 

Balance at end of period

 

$

10,110

 

 

$

2,964

 

 

$

10,110

 

 

$

2,964

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

60,372

 

 

$

20,490

 

 

$

20,000

 

 

$

1,560

 

Net (income) loss arising during the period

 

 

(8,920

)

 

 

7,384

 

 

 

34,112

 

 

 

26,576

 

Amounts reclassified from AOCL to earnings

 

 

(2,412

)

 

 

(406

)

 

 

(5,072

)

 

 

(668

)

Balance at end of period

 

$

49,040

 

 

$

27,468

 

 

$

49,040

 

 

$

27,468

 

Accumulated other comprehensive loss, end of period

 

$

155,146

 

 

$

152,078

 

 

$

155,146

 

 

$

152,078

 

See Note 14: Pension and Other Postretirement Employee Benefits and Note 9: Derivative Instruments for additional information.

22

 

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, expected impacts of COVID-19 on our business and our ability to continue operations during the pandemic, fair value of hedging instruments and swaps, expected return on pension assets, recognition of compensation costs relating to our performance share awards (PSAs) and restricted stock units (RSUs), required contributions to pension plans, expected amortization of unrecognized compensation cost of PSAs and RSUs, amount of net losses on cash flow hedges expected to be reclassified into earnings in the next 12 months, expected tax payments and deferrals, anticipated share repurchases and dividend payments, anticipated cash balances, cash flows from operations and expected liquidity, potential uses of our credit facility, the U.S. housing market, home repair and remodeling activity, the lumber and log markets, expected harvest volumes, expected lumber shipments, expected rural real estate and residential real estate development sales, including the closing of the sale of approximately 72,000 rural acres in the fourth quarter of 2020, the average price per acre and developed lot, sufficiency of cash to meet operating requirements, 2020 capital expenditures and similar matters. Words such as “anticipate,” “expect,” “will,” “intend,” “plan,” “target,” “project,” “believe,” “seek,” “schedule,” “estimate,” “could,” “can,” “may” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements reflect our current views regarding future events based on estimates and assumptions and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. Our actual results of operations could differ materially from our historical results or those expressed or implied by forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include, but are not limited to, the following: 

 

•

changes in the United States and international economies;

 

•

changes in interest rates and discount rates;

 

•

credit availability including homebuyers’ ability to qualify for 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 production and production capacity in the forest products industry;

 

•

competitive pricing pressures for our products;

 

•

unanticipated manufacturing disruptions;

 

•

weather conditions, fires or other natural disasters;

 

•

changes in the cost or availability of transportation;

 

•

changes in principle expenses;

 

•

impact of the recent coronavirus (COVID-19) outbreak on our business, suppliers, consumers, customers and employees; and

 

•

disruptions or inefficiencies in our supply chain and/or operations.

For a discussion of some of the factors that may affect our business, results and prospects and a nonexclusive listing of forward-looking statements, refer to Cautionary Statement Regarding Forward-Looking Information on page 1 and Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and Risk Factors in Part II, Item 1A in this Form 10-Q.

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.

23

 

Our Company

We are a leading timberland real estate investment trust (REIT) with operations in seven states where we own approximately 1.8 million acres of timberland, six sawmills, an industrial grade plywood mill and real estate development projects.

Our business is organized into three business segments: Timberlands, Wood Products and Real Estate. The Timberlands segment includes 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. The Real Estate segment includes the sale of land holdings deemed non-strategic or identified as having higher and better use alternatives, 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. In the discussion of our consolidated results of operations, our revenues and expenses are reported after elimination of intersegment revenues and expenses. In the business segment discussions, each segment’s revenues and expenses, as applicable, are presented before elimination of intersegment revenues and expenses.

The operating results of our Timberlands, Wood Products and Real Estate business segments have been and will continue to be influenced by a variety of factors, including the cyclical nature of the forest products industry, tariffs, quotas and trade agreements, changes in timber prices and in harvest levels from our timberlands, competition, timberland valuations, demand for our non-strategic timberland for higher and better use purposes, lumber prices, weather conditions, 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, asset dispositions or acquisitions, impact of pandemics, fires, other natural disasters and other factors. 

Non-GAAP Measures

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

Adjusted EBITDDA is a non-GAAP measure that management uses in evaluating performance, 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 5: Segment Information in the Notes to the Condensed Consolidated Financial Statements for information related to the use of segment Adjusted EBITDDA.

24

 

Business and Economic Trends

The demand for timber is directly affected by the underlying demand for lumber and other wood products, as well as by the demand for pulp, paper and packaging. Our Timberlands and Wood Products segments are impacted by demand for new homes in the United States and by repair and remodeling activity. The actions taken by various state and municipalities to contain and combat the outbreak and spread of the COVID-19 pandemic has introduced significant economic and business uncertainty, along with volatile financial market conditions during the first nine months of 2020 which is expected to continue into the future. Although the restrictions began to ease by the end of the second quarter, such directives are subject to change and may, depending on direction from governmental authorities and the pandemic’s effects on the public, require us, our suppliers or our customers to limit or suspend operations.

A housing construction slowdown in the spring due to social-distancing rules and delayed permits and inspections led to a massive destocking of lumber in the supply chain as well as significant curtailment of North American lumber manufacturing capacity. The atypical early spring pullback in lumber production coupled with strong demand led to an acute shortage that underpinned a historic run in lumber prices that began in the second quarter and peaked in September. While lumber prices have declined the last few weeks, we believe the demand for wood products remains strong driven by favorable industry fundamentals including the demand for new single-family homes, historically low mortgage rates, scarce re-sale housing inventory and old age housing stock.

In our Wood Products segment, we shipped 291 million board feet during the third quarter of 2020. Our lumber order file extends into early November at strong prices. For the fourth quarter of 2020, we plan to ship 260 to 270 million board feet of lumber.

In our Timberlands segment, harvest volumes were higher in the first nine months of 2020 due to favorable harvest conditions compared to the prior year. Approximately 70% of our Idaho sawlog deliveries in the fourth quarter will benefit from being indexed to high lumber prices on an approximate six-week lag. Southern pine sawlog prices remain stable. We expect total harvest volumes to be between 1.3 and 1.4 million tons in the fourth quarter of 2020.

On June 21, 2020, we announced an agreement to sell approximately 72,000 acres of rural timberland in Minnesota to The Conservation Fund for approximately $48.0 million in cash, subject to certain adjustments as defined in the agreement. The transaction is subject to customary closing conditions and is expected to close in the fourth quarter of 2020. For the fourth quarter of 2020, we expect to sell 73,000 to 74,000 acres of rural land, including the 72,000-acre Minnesota transaction. Residential and commercial sales in Chenal Valley mainly follow the national housing market trends but do experience microeconomic factors for the area including economic growth and the availability of builders, contractors and workforce to support development efforts. We anticipate selling 60 to 70 residential lots in the fourth quarter of 2020.    

Finally, we anticipate our current cash balances, cash flows from operations and our available sources of liquidity will be more than adequate to meet our cash requirements and allow us flexibility as we continue to focus on building shareholder value. At September 30, 2020 we had approximately $149.0 million in cash and cash equivalents and availability of $379.0 million on our revolving line of credit.

25

 

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)

 

2020

 

 

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Revenues

 

$

313,046

 

 

 

 

$

226,302

 

 

$

86,744

 

 

$

703,481

 

 

$

623,599

 

 

$

79,882

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

182,039

 

 

 

 

 

182,634

 

 

 

(595

)

 

 

503,921

 

 

 

512,522

 

 

 

(8,601

)

Selling, general and administrative expenses

 

 

21,046

 

 

 

 

 

12,472

 

 

 

8,574

 

 

 

52,064

 

 

 

43,994

 

 

 

8,070

 

Gain on sale of facility

 

 

—

 

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(9,176

)

 

 

9,176

 

 

 

 

203,085

 

 

 

 

 

195,106

 

 

 

7,979

 

 

 

555,985

 

 

 

547,340

 

 

 

8,645

 

Operating income

 

 

109,961

 

 

 

 

 

31,196

 

 

 

78,765

 

 

 

147,496

 

 

 

76,259

 

 

 

71,237

 

Interest expense, net

 

 

(8,557

)

 

 

 

 

(8,475

)

 

 

(82

)

 

 

(20,594

)

 

 

(21,821

)

 

 

1,227

 

Loss on extinguishment of debt

 

 

—

 

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(5,512

)

 

 

5,512

 

Pension settlement charge

 

 

—

 

 

 

 

 

—

 

 

 

—

 

 

 

(42,988

)

 

 

—

 

 

 

(42,988

)

Non-operating pension and other postretirement benefit costs

 

 

(3,557

)

 

 

 

 

(935

)

 

 

(2,622

)

 

 

(10,670

)

 

 

(2,804

)

 

 

(7,866

)

Income before income taxes

 

 

97,847

 

 

 

 

 

21,786

 

 

 

76,061

 

 

 

73,244

 

 

 

46,122

 

 

 

27,122

 

Income taxes

 

 

(16,840

)

 

 

 

 

(1,221

)

 

 

(15,619

)

 

 

(6,431

)

 

 

(1,860

)

 

 

(4,571

)

Net income

 

$

81,007

 

 

 

 

$

20,565

 

 

$

60,442

 

 

$

66,813

 

 

$

44,262

 

 

$

22,551

 

Total Adjusted EBITDDA1

 

$

135,386

 

 

 

 

$

55,012

 

 

$

80,374

 

 

$

218,330

 

 

$

132,344

 

 

$

85,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 2020 Compared with Third Quarter 2019

Revenues

Revenues were $313.0 million, an increase of $86.7 million compared with the third quarter of 2019. Historically high lumber prices along with increased Northern sawlog prices and rural real estate acres sold more than offset declines in lumber shipments and real estate development lot sales.  

Cost of goods sold

Cost of goods sold decreased $0.6 million compared with the third quarter of 2019 due primarily to lower lumber shipments and reduced repairs and maintenance costs. These decreases were mostly offset by higher logging and hauling costs.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $8.6 million compared with the third quarter of 2019 primarily as a result of a year-to-date adjustment to incentive compensation to reflect strong company performance. In addition, the third quarter of 2019 benefitted from the reversal of a workers’ compensation reserve.

Non-operating pension and other postretirement benefit costs

Non-operating pension and other postretirement benefit costs increased $2.6 million compared to the third quarter of 2019. This increase was primarily because prior service credits of $1.9 million per quarter were fully amortized at the end of 2019. Non-operating pension and other postretirement benefit costs in 2020 were also impacted by a decrease in expected return on plan assets and the discount rate used to determine the benefit obligations.

Income taxes

Income tax expense was $16.8 million for the third quarter of 2020 compared with $1.2 million for the third quarter of 2019. Income taxes are primarily due to income from our taxable REIT subsidiaries (TRS). For the three months ended September 30, 2020, the TRS’s pre-tax income was $65.2 million. For the same period in 2019, the TRS’s income before income tax was $4.7 million.

26

 

Total Adjusted EBITDDA

Total Adjusted EBITDDA for the third quarter of 2020 increased $80.4 million compared to the third quarter of 2019. The increase in Total Adjusted EBITDDA was driven primarily by historically high lumber prices. Refer to the Business Segment Results below for further discussions on activities for each of our segments.

 

Year to Date 2020 Compared with Year to Date 2019

Revenues

Revenues were $703.5 million, an increase of $79.9 million compared with the first nine months of 2019 primarily due to historically high lumber prices along with increased sawlog prices in the Northern region.

Cost of goods sold

Cost of goods sold decreased $8.6 million compared with the same period in 2019 primarily due to the temporary curtailment and reduced operating posture at our plywood facility during the second quarter of 2020 and because 2019 included approximately 1.5 months of activity related to the Deltic Medium Density Fiberboard (MDF) Facility. These decreases were partially offset by higher harvest volume and lumber shipments.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $8.1 million compared with the first nine months of 2019 primarily as a result of higher incentive compensation related to strong company performance.

Gain on sale of facility

In February 2019, we sold our Deltic MDF facility to Roseburg Forest Products Co. for $92.0 million, before certain working capital adjustments, resulting in a $9.2 million pre-tax gain on sale.

Interest expense, net

Net interest expense decreased $1.2 million compared with the first nine months of 2019 primarily due to the refinancing of $150.0 million of 7.5% Senior Notes (Senior Notes) during the first quarter of 2019 and higher patronage dividends received during 2020.

Loss on extinguishment of debt

As part of the $150.0 million Senior Notes redemption during the first quarter of 2019 we incurred a redemption premium of $4.9 million and wrote off certain unamortized debt costs.

Pension settlement charge

In February 2020, we purchased a group annuity contract from an insurance company to transfer $101.1 million of our outstanding pension benefit obligation related to our qualified pension plans. This transaction was funded with plan assets. In connection with this transaction, we recorded a non-cash pretax settlement charge of $43.0 million.

Non-operating pension and other postretirement benefit costs

Non-operating pension and other postretirement benefit costs increased $7.9 million compared with the first nine months of 2019. This increase was primarily because prior service credits of $1.9 million per quarter were fully amortized at the end of 2019. Non-operating pension and other postretirement benefit costs were also impacted by a decrease in expected return on plan assets and the discount rate used to determine the benefit obligations.

Income taxes

Income tax expense was $6.4 million for the first nine months of 2020 compared with $1.9 million for the first nine months of 2019. For the nine months ended September 30, 2020, the TRS’s income before income tax was $23.9 million, which included the pension settlement charge recorded during the first quarter. For the same period in 2019, the TRS’s income before income tax was $5.3 million, which included the gain on sale of the Deltic MDF facility.

Total Adjusted EBITDDA

Total Adjusted EBITDDA for the first nine months of 2020 increased $86.0 million compared to the first nine months of 2019. The increase in Total Adjusted EBITDDA was driven primarily by historically high lumber prices during the third quarter of 2020. Refer to the Business Segment Results below for further discussions on activities for each of our segments.

27

 

Business Segment Results

Timberlands Segment

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Revenues1

 

$

116,985

 

 

$

98,809

 

 

$

18,176

 

 

$

266,755

 

 

$

233,848

 

 

$

32,907

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Logging and hauling

 

 

47,158

 

 

 

45,099

 

 

 

2,059

 

 

 

117,417

 

 

 

108,551

 

 

 

8,866

 

Other

 

 

8,539

 

 

 

9,063

 

 

 

(524

)

 

 

24,107

 

 

 

24,257

 

 

 

(150

)

Selling, general and administrative expenses

 

 

1,639

 

 

 

1,651

 

 

 

(12

)

 

 

4,941

 

 

 

5,063

 

 

 

(122

)

Timberlands Adjusted EBITDDA2

 

$

59,649

 

 

$

42,996

 

 

$

16,653

 

 

$

120,290

 

 

$

95,977

 

 

$

24,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Prior to elimination of intersegment fiber revenues of $40.4 million and $35.0 million for the three months ended September 30, 2020 and 2019, and $95.0 million and $85.7 million for the nine months ended September 30, 2020 and 2019, respectively.

2

Management uses Adjusted EBITDDA to evaluate the performance of the company. See Note 5: Segment Information in the Notes to Condensed Consolidated Financial Statements.

Timberlands Segment Statistics

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Harvest Volumes (in tons)

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Northern region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sawlog

 

 

554,845

 

 

 

529,030

 

 

 

25,815

 

 

 

1,291,632

 

 

 

1,227,451

 

 

 

64,181

 

Pulpwood

 

 

29,910

 

 

 

39,371

 

 

 

(9,461

)

 

 

99,174

 

 

 

118,534

 

 

 

(19,360

)

Stumpage

 

 

—

 

 

 

602

 

 

 

(602

)

 

 

23,178

 

 

 

7,978

 

 

 

15,200

 

Total

 

 

584,755

 

 

 

569,003

 

 

 

15,752

 

 

 

1,413,984

 

 

 

1,353,963

 

 

 

60,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southern region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sawlog

 

 

577,975

 

 

 

496,388

 

 

 

81,587

 

 

 

1,617,196

 

 

 

1,358,140

 

 

 

259,056

 

Pulpwood

 

 

462,571

 

 

 

475,313

 

 

 

(12,742

)

 

 

1,201,904

 

 

 

1,190,486

 

 

 

11,418

 

Stumpage

 

 

65,085

 

 

 

58,659

 

 

 

6,426

 

 

 

255,553

 

 

 

123,815

 

 

 

131,738

 

Total

 

 

1,105,631

 

 

 

1,030,360

 

 

 

75,271

 

 

 

3,074,653

 

 

 

2,672,441

 

 

 

402,212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total harvest volume

 

 

1,690,386

 

 

 

1,599,363

 

 

 

91,023

 

 

 

4,488,637

 

 

 

4,026,404

 

 

 

462,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales Price/Unit ($ per ton)1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sawlog

 

$

131

 

 

$

100

 

 

$

31

 

 

$

112

 

 

$

95

 

 

$

17

 

Pulpwood

 

$

42

 

 

$

38

 

 

$

4

 

 

$

39

 

 

$

40

 

 

$

(1

)

Stumpage

 

$

—

 

 

$

5

 

 

$

(5

)

 

$

14

 

 

$

14

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southern region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sawlog

 

$

44

 

 

$

48

 

 

$

(4

)

 

$

44

 

 

$

47

 

 

$

(3

)

Pulpwood

 

$

29

 

 

$

33

 

 

$

(4

)

 

$

30

 

 

$

33

 

 

$

(3

)

Stumpage

 

$

12

 

 

$

13

 

 

$

(1

)

 

$

9

 

 

$

10

 

 

$

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

28

 

Timberlands Adjusted EBITDDA

The following table summarizes Timberlands Adjusted EBITDDA variances for the three and nine months ended September 30, 2020 compared with the three and nine months ended September 30, 2019:

 

(in thousands)

 

Three Months

 

 

Nine Months

 

Timberlands 2019 Adjusted EBITDDA

 

$

42,996

 

 

$

95,977

 

Sales price and mix

 

 

3,182

 

 

 

11,238

 

Harvest volume

 

 

12,843

 

 

 

13,107

 

Other revenue

 

 

(309

)

 

 

(217

)

Logging and hauling costs per unit

 

 

411

 

 

 

(78

)

Forest management

 

 

533

 

 

 

260

 

Administrative, indirect and overhead costs

 

 

(7

)

 

 

3

 

Timberlands 2020 Adjusted EBITDDA

 

$

59,649

 

 

$

120,290

 

 

 

 

 

 

 

 

 

 

Third Quarter 2020 Compared with Third Quarter 2019

Timberlands Adjusted EBITDDA for the third quarter of 2020 increased $16.7 million compared with the same period in 2019, primarily as a result of the following:

 

•

Sales Price and Mix: Sawlog prices in the Northern region increased 31.0%, to $131 per ton resulting from the effect of higher lumber price realizations on indexed sawlogs and an increase in cedar log prices in Idaho. Southern sawlog pricing decreased 8.3% compared to the third quarter of 2019 as timber supply constraints caused by wet weather drove up pricing during the third quarter of 2019.

 

•

Harvest Volume: We harvested 1.1 million tons in the Southern region during the third quarter of 2020, which was up 7.3% compared to the third quarter of 2019. The increase was primarily due to scaled back harvesting during the third quarter of 2019 as Southern mill log inventories had shifted to high levels after mill operations were impacted by wet weather conditions earlier in 2019.

Year to Date 2020 Compared with Year to Date 2019

Timberlands Adjusted EBITDDA for the first nine months of 2020 increased $24.3 million compared with the same period in 2019, primarily as a result of the following:

 

•

Sales Price and Mix: Sawlog prices in the Northern region increased 17.9%, to $112 per ton resulting from the effect of higher lumber price realization on indexed sawlogs and an increase in cedar log prices in Idaho. Southern sawlog pricing decreased 6.4% year on year as timber supply constraints caused by wet weather drove up pricing during the nine months of 2019.

 

•

Harvest Volume: We harvested 3.1 million tons in the Southern region during the first nine months of 2020, which was up 15.1% compared to the first nine months of 2019. The increase was primarily because 2019 was disrupted by wet weather. Harvest volume increased in the Northern region compared to the first nine months of 2019 as a result of favorable harvest conditions in the first quarter of 2020.

29

 

Wood Products Segment

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Revenues

 

$

218,291

 

 

$

143,643

 

 

$

74,648

 

 

$

489,507

 

 

$

413,979

 

 

$

75,528

 

Costs and expenses1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiber costs

 

 

72,239

 

 

 

67,579

 

 

 

4,660

 

 

 

196,201

 

 

 

205,594

 

 

 

(9,393

)

Freight, logging and hauling

 

 

17,677

 

 

 

19,769

 

 

 

(2,092

)

 

 

48,601

 

 

 

53,722

 

 

 

(5,121

)

Manufacturing costs

 

 

45,893

 

 

 

45,224

 

 

 

669

 

 

 

132,848

 

 

 

137,745

 

 

 

(4,897

)

Finished goods inventory change

 

 

(1,595

)

 

 

3,426

 

 

 

(5,021

)

 

 

(1,602

)

 

 

(453

)

 

 

(1,149

)

Selling, general and administrative expenses

 

 

2,433

 

 

 

2,082

 

 

 

351

 

 

 

7,483

 

 

 

6,625

 

 

 

858

 

Other

 

 

—

 

 

 

(340

)

 

 

340

 

 

 

196

 

 

 

(312

)

 

 

508

 

Wood Products Adjusted EBITDDA2

 

$

81,644

 

 

$

5,903

 

 

$

75,741

 

 

$

105,780

 

 

$

11,058

 

 

$

94,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Prior to elimination of intersegment fiber costs of $40.4 million and $35.0 million for the three months ended September 30, 2020 and 2019, and $95.0 million and $85.7 million for the nine months ended September 30, 2020 and 2019, respectively.

2

Management uses Adjusted EBITDDA to evaluate the performance of the company. See Note 5: Segment Information in the Notes to Condensed Consolidated Financial Statements.

Wood Products Segment Statistics

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Lumber shipments (MBF)1

 

 

291,391

 

 

 

298,807

 

 

 

(7,416

)

 

 

823,597

 

 

 

809,733

 

 

 

13,864

 

Lumber sales prices ($ per MBF)

 

$

637

 

 

$

363

 

 

$

274

 

 

$

486

 

 

$

373

 

 

$

113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

MBF stands for thousand board feet.

Wood Products Adjusted EBITDDA

The following table summarizes Wood Products Adjusted EBITDDA variances for the three and nine months ended September 30, 2020 compared with the three and nine months ended September 30, 2019:

 

(in thousands)

 

Three Months

 

 

Nine Months

 

Wood Products 2019 Adjusted EBITDDA

 

$

5,903

 

 

$

11,058

 

Lumber:

 

 

 

 

 

 

 

 

Price

 

 

79,493

 

 

 

92,678

 

Manufacturing costs per unit

 

 

(2,420

)

 

 

(2,409

)

Log costs per unit

 

 

(4,486

)

 

 

3,442

 

Inventory charge

 

 

3,479

 

 

 

3,479

 

Residuals, panels and other

 

 

(325

)

 

 

(2,468

)

Wood Products 2020 Adjusted EBITDDA

 

$

81,644

 

 

$

105,780

 

 

 

 

 

 

 

 

 

 

Third Quarter 2020 Compared with Third Quarter 2019

Wood Products Adjusted EBITDDA for the third quarter of 2020 increased $75.7 million compared with the same period in 2019 primarily as a result of the following:  

 

•

Lumber Price: Average lumber sales prices increased to $637 per MBF during the third quarter of 2020 as a result of the historic run in lumber prices compared with $363 per MBF during the third quarter of 2019.

 

•

Manufacturing Cost Per Unit: Reduced operating hours in the third quarter of 2020, particularly due to labor constraints, coupled with lower production led to higher manufacturing costs per unit during the third quarter of 2020 compared to 2019.

 

•

Log Costs Per Unit: Log costs were higher per unit in Idaho in the third quarter of 2020 due to higher lumber-indexed log prices.

30

 

 

•

Inventory Charge:  Lumber inventory at the end of the third quarter of 2019 was written down $3.5 million to net realizable value. There were no inventory charges at the end of the third quarter of 2020.

Year to Date 2020 Compared with Year to Date 2019

Wood Products Adjusted EBITDDA for the first nine months of 2020 increased $94.7 million compared with the same period in 2019 primarily as a result of the following:

 

•

Lumber Price: Average lumber sales prices increased to $486 per MBF in the first nine months of 2020 as a result of the historic run in lumber prices compared with $373 per MBF during the first nine months of 2019.

 

•

Manufacturing Cost Per Unit: Higher manufacturing costs per unit year over year was a result of reduced operating hours in 2020 due to labor related constraints and lost productivity in April at two Arkansas mills due to hurricane-caused power outages.

 

•

Log Costs Per Unit:   Log costs per unit were higher in 2019 both because wet weather constrained log availability in the South and Idaho started the year with high cost lumber-indexed logs.

 

•

Inventory Charge:  Lumber inventory at the end of the third quarter of 2019 was written down $3.5 million to net realizable value. There were no inventory charges at the end of the third quarter of 2020.

 

•

Residual Sales, Panels and Other: A market curtailment and reduced operating posture at our industrial grade plywood mill during the second quarter of 2020 along with lower residual sales during the first nine months of 2020 had a negative effect on Adjusted EBITDDA.

Real Estate Segment

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2020

 

 

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Revenues

 

$

18,151

 

 

 

 

$

18,863

 

 

$

(712

)

 

$

42,225

 

 

$

61,459

 

 

$

(19,234

)

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

 

3,554

 

 

 

 

 

2,902

 

 

 

652

 

 

 

8,595

 

 

 

8,943

 

 

 

(348

)

Selling, general and administrative expenses

 

 

1,131

 

 

 

 

 

1,283

 

 

 

(152

)

 

 

3,568

 

 

 

3,819

 

 

 

(251

)

Real Estate Adjusted EBITDDA1

 

$

13,466

 

 

 

 

$

14,678

 

 

$

(1,212

)

 

$

30,062

 

 

$

48,697

 

 

$

(18,635

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Management uses Adjusted EBITDDA to evaluate the performance of the company. See Note 5: Segment Information in the Notes to Condensed Consolidated Financial Statements.

Real Estate Segment Statistics

 

Rural Real Estate

 

Three Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

 

Acres Sold

 

 

Average

Price/Acre

 

 

Acres Sold

 

 

Average

Price/Acre

 

Higher and better use (HBU)

 

 

1,599

 

 

$

3,103

 

 

 

975

 

 

$

3,225

 

Recreation real estate

 

 

1,201

 

 

$

1,366

 

 

 

5,037

 

 

$

1,261

 

Non-strategic timberland

 

 

8,248

 

 

$

810

 

 

 

213

 

 

$

906

 

Total

 

 

11,048

 

 

$

1,202

 

 

 

6,225

 

 

$

1,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

 

Acres Sold

 

 

Average

Price/Acre

 

 

Acres Sold

 

 

Average

Price/Acre

 

Higher and better use (HBU)

 

 

4,486

 

 

$

2,828

 

 

 

4,231

 

 

$

6,363

 

Recreation real estate

 

 

4,297

 

 

$

1,394

 

 

 

7,817

 

 

$

1,281

 

Non-strategic timberland

 

 

12,241

 

 

$

962

 

 

 

8,894

 

 

$

820

 

Total

 

 

21,024

 

 

$

1,449

 

 

 

20,942

 

 

$

2,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31

 

Development Real Estate

 

Three Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

 

Lots or Acres Sold

 

 

 

 

Average Price/

Lot or Acre

 

 

Lots or Acres Sold

 

 

Average Price/

Lot or Acre

 

Residential lots

 

 

26

 

 

 

 

$

82,573

 

 

 

42

 

 

$

110,504

 

Commercial acres

 

 

—

 

 

 

 

$

—

 

 

 

6

 

 

$

512,506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

 

Lots or Acres Sold

 

 

 

 

Average Price/

Lot or Acre

 

 

Lots or Acres Sold

 

 

Average Price/

Lot or Acre

 

Residential lots

 

 

66

 

 

 

 

 

92,256

 

 

 

93

 

 

$

97,519

 

Commercial acres

 

 

—

 

 

 

 

$

—

 

 

 

6

 

 

$

512,506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Adjusted EBITDDA

The following table summarizes Real Estate Adjusted EBITDDA variances for the three and nine months ended September 30, 2020 compared with the three and nine months ended September 30, 2019:

 

(in thousands)

 

Three Months

 

 

Nine Months

 

Real Estate 2019 Adjusted EBITDDA

 

$

14,678

 

 

$

48,697

 

Rural real estate sales

 

 

3,596

 

 

 

(13,767

)

Development real estate sales

 

 

(4,307

)

 

 

(5,467

)

Selling, general and administrative expenses

 

 

151

 

 

 

252

 

Other costs, net

 

 

(652

)

 

 

347

 

Real Estate 2020 Adjusted EBITDDA

 

$

13,466

 

 

$

30,062

 

 

 

 

 

 

 

 

 

 

 

Third Quarter 2020 Compared with Third Quarter 2019

Real Estate Adjusted EBITDDA for the third quarter of 2020 decreased $1.2 million compared with the same period in 2019 primarily as a result of the following:

 

•

Rural Real Estate Sales: The third quarter of 2020 included the sale of approximately 8,100 acres of non-strategic timberlands in Minnesota to a conservation entity representing the third year of a five-year option. There were no comparable transactions in the third quarter of 2019. 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 Real Estate Sales: During the third quarter of 2020 we sold 26 residential lots at an average lot price of $82,573 at Chenal Valley compared to 42 lots at an average lot price of $110,504 during the third quarter of 2019. The third quarter of 2019 also includes the sale of approximately 6 acres of commercial land in Chenal Valley for approximately $512,500 per acre. The average price per lot or acre fluctuates based on a variety of factors including location within the developments.

 

Year to Date 2020 Compared with Year to Date 2019

Real Estate Adjusted EBITDDA for the first nine months of 2020 decreased $18.6 million compared with the same period in 2019 primarily as a result of the following:

 

•

Rural Real Estate Sales: The first nine months of 2019 included a 1,787 acre sale in Arkansas for $11,000 per acre with no comparable transactions in the first nine months of 2020.  

 

•

Development Real Estate Sales: During the first nine months of 2020, we sold 66 residential lots at an average lot price of $92,256 at Chenal Valley compared to 93 lots at an average lot price of $97,519 during the first nine months of 2019.  The first nine months of 2019 also included the sale of 6 acres of commercial land.  

 

32

 

Liquidity and Capital Resources

Changes in significant sources of cash for the nine months ended September 30, 2020 and 2019 are presented by categories as follows:

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2020

 

 

2019

 

Net cash provided by operating activities

 

$

190,845

 

 

$

105,427

 

Net cash (used in) provided by investing activities

 

$

(28,265

)

 

$

22,187

 

Net cash used in financing activities

 

$

(96,830

)

 

$

(111,265

)

 

 

 

 

 

 

 

 

 

Net Cash Flows from Operations

Net cash provided by operating activities increased $85.4 million compared to the first nine months of 2019. Changes in cash provided by operating activities was impacted by the following:

 

•

Cash received from customers increased $110.0 million primarily due to significantly higher lumber prices in 2020 compared to 2019, increased harvest activities and increased lumber shipments. These increases were partially offset by the temporary curtailment of our industrial plywood mill during the second quarter of 2020. Additionally, 2019 included an Arkansas rural land sale for $19.6 million and 1.5 months of activity at the Deltic MDF facility prior to its sale.  

 

•

Cash payments to vendors increased $24.4 million primarily due to increased harvest activities and lumber shipments. The increase was partially offset by the temporary curtailment of our industrial plywood mill during the second quarter of 2020 and operations in 2019 included 1.5 months of activity at the Deltic MDF facility prior to its sale.

 

•

Net cash paid for interest decreased $3.6 million primarily due to increased patronage dividends from our lenders and lower net interest costs as a result of refinancing our $150.0 million Senior Notes during the first quarter of 2019.

 

•

Increased cash contributions for pension and other postretirement employee benefits of $3.8 million in 2020.

Net Cash Flows from Investing Activities

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

 

•

We spent $27.0 million on capital expenditures for property, plant and equipment, timberlands reforestation and road construction projects during the first nine months of 2020 compared to $38.9 million during the first nine months of 2019.

 

•

We spent $4.7 million on timberland acquisitions during the first nine months of 2020 compared to $0.3 million during the first nine months of 2019.

 

•

We received $58.8 million of net cash proceeds from the Deltic MDF facility sale in February 2019. Additionally, we received $1.0 million in the first quarter of 2020 related to the satisfaction of certain covenants associated with the Deltic MDF facility sale.

Net Cash Flows from Financing Activities

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

 

•

During the first nine months of 2020, we repurchased 489,850 shares of our common stock totaling $15.4 million compared to 686,240 shares repurchased totaling $25.2 million during the first nine months of 2019. This reduced our distributions to shareholders slightly from $80.8 million in the first nine months of 2019 to $80.4 million in the comparable 2020 period.

 

•

In January 2019, we refinanced $150.0 million of Senior Notes due in 2019 with a $150.0 million term loan that will mature in 2029. Upon the refinancing, we redeemed and paid all outstanding Senior Notes, including a redemption premium of $4.9 million.

33

 

Future Sources and Uses of Cash

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 currently expect to spend a total of approximately $46.0 to $49.0 million for capital expenditures during 2020.

We are deferring payments of approximately $4.0 million for our 2020 employer portion of social security payroll tax as allowed under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). These payments will be funded in 2021 and 2022 as required under the CARES Act.

On August 30, 2018, the board of directors authorized the repurchase of up to $100.0 million of common stock with no time limit set for the repurchase. At September 30, 2020, we had remaining authorization of $59.5 million for future stock repurchase under the 2018 Repurchase Program. Stock repurchases in the future will depend on a variety of factors including our cash position, alternative investment opportunities, our desired level of liquidity, debt covenant restrictions and our stock price.

On June 21, 2020, we announced an agreement to sell approximately 72,000 acres of rural timberland in Minnesota to The Conservation Fund for approximately $48.0 million in cash, subject to certain adjustments as defined in the agreement. The transaction is subject to customary closing conditions and is expected to close in the fourth quarter of 2020.

Capital Structure

 

(in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

Long-term debt

 

$

757,249

 

 

$

756,469

 

Cash and cash equivalents

 

 

(148,919

)

 

 

(83,310

)

Net debt

 

 

608,330

 

 

 

673,159

 

Market capitalization1

 

 

2,815,311

 

 

 

2,908,653

 

Enterprise value

 

$

3,423,641

 

 

$

3,581,812

 

 

 

 

 

 

 

 

 

 

Net debt to enterprise value

 

 

17.8

%

 

 

18.8

%

Dividend yield2

 

 

3.8

%

 

 

3.7

%

Weighted-average cost of debt, after tax3

 

 

3.3

%

 

 

3.3

%

 

 

 

 

 

 

 

 

 

 

1

Market capitalization is based on outstanding shares of 66.9 million and 67.2 million times closing share prices of $42.10 and $43.27 as of September 30, 2020, and December 31, 2019, respectively.

2

Dividend yield is based on annualized dividends per share of $1.60 and share prices of $42.10 and $43.27 as of September 30, 2020, and December 31, 2019, respectively.

3

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

Liquidity and Performance Measures

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

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

Our definition of EBITDDA may be different from similarly titled measures reported by other companies. We define EBITDDA as net income before interest expense, income taxes, basis of real estate sold, depreciation, depletion and

34

 

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)

 

2020

 

 

 

 

2019

 

 

2020

 

 

2019

 

Net income

 

$

81,007

 

 

 

 

$

20,565

 

 

$

66,813

 

 

$

44,262

 

Interest expense, net

 

 

8,557

 

 

 

 

 

8,475

 

 

 

20,594

 

 

 

21,821

 

Income taxes

 

 

16,840

 

 

 

 

 

1,221

 

 

 

6,431

 

 

 

1,860

 

Depreciation, depletion and amortization

 

 

20,187

 

 

 

 

 

18,786

 

 

 

56,590

 

 

 

51,310

 

Basis of real estate sold

 

 

5,249

 

 

 

 

 

5,228

 

 

 

14,440

 

 

 

14,211

 

Loss on extinguishment of debt

 

 

—

 

 

 

 

 

—

 

 

 

—

 

 

 

5,512

 

Pension settlement charge

 

 

—

 

 

 

 

 

—

 

 

 

42,988

 

 

 

—

 

Non-operating pension and other postretirement benefit costs

 

 

3,557

 

 

 

 

 

935

 

 

 

10,670

 

 

 

2,804

 

Gain on sale of facility

 

 

—

 

 

 

 

 

—

 

 

 

—

 

 

 

(9,176

)

Gain on disposal of fixed assets

 

 

(11

)

 

 

 

 

(198

)

 

 

(196

)

 

 

(260

)

Total Adjusted EBITDDA

 

$

135,386

 

 

 

 

$

55,012

 

 

$

218,330

 

 

$

132,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We define CAD as cash provided by operating activities adjusted for capital spending for purchases of property, plant and equipment, timberlands reforestation and roads and 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.

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

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2020

 

 

2019

 

Cash provided by operating activities1

 

$

190,845

 

 

$

105,427

 

Capital expenditures

 

 

(31,749

)

 

 

(39,143

)

CAD

 

$

159,096

 

 

$

66,284

 

Net cash (used in) provided by investing activities2

 

$

(28,265

)

 

$

22,187

 

Net cash used in financing activities

 

$

(96,830

)

 

$

(111,265

)

 

 

 

 

 

 

 

 

 

 

1

Cash from operating activities for the nine months ended September 30, 2020 and 2019 includes cash paid for real estate development expenditures of $4.2 million and $5.7 million, respectively.

2

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

35

 

Sources of Financing

Credit and Term Loan Agreements

At September 30, 2020, our total outstanding net long-term debt was $757.0 million, of which $46.0 million matures in December 2020. We expect to refinance the $46.0 million term loan debt at maturity. Included in total outstanding long-term debt was $693.5 million of term loan principal balances under our Second Amended and Restated Term Loan Agreement (Amended Term Loan Agreement) with our primary lender. Certain borrowings under the Amended Term Loan Agreement are at variable rates of one or three-month LIBOR plus a spread between 1.85% and 2.15%. We entered into interest rate swaps for these variable rate term loans to fix the interest rates.

At September 30, 2020 there were no borrowings under our $380.0 million revolving line of credit and approximately $1.0 million of the 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 $420.0 million. 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.

As of September 30, 2020, we were in compliance with all debt and credit agreement covenants. The following table sets forth the financial covenants in the credit and term loan agreements and our status with respect to these covenants as of September 30, 2020:

 

 

 

Covenant Requirement

 

 

Actual at

September 30, 2020

 

Interest coverage ratio

 

≥

 

3.00 to 1.00

 

 

8.93

 

Leverage ratio

 

≤

 

40%

 

 

21%

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual Obligations

In March 2020, we entered into $653.5 million of forward starting interest rate swaps. These forward starting interest rate swaps effectively hedge the variability in future benchmark interest payments attributable to changes in interest rates on future debt refinancing by converting the benchmark interest rates to fixed interest rates on our anticipated future refinancing of $653.5 million of term loan debt maturing December 2020 through January 2029. The fixed interest rate components for these forward starting interest rate swaps range from 0.85% to 1.17%. The variable rate component on these forward starting interest rate swaps is one-month LIBOR. Accordingly, the forward starting rate swaps were designated as cash flow hedges. In addition, these cash flow hedges require settlement on the stated maturity date for each respective term loan currently outstanding. See Note 9: Derivatives in the Notes to Condensed Consolidated Financial Statements for additional information.

Other than these new forward starting interest rate swaps, there have been no material changes to our contractual obligations during the nine months ended September 30, 2020 outside the ordinary course of business.

Credit Ratings

Two major debt rating agencies routinely evaluate our debt and our cost of borrowing can increase or decrease depending on our credit rating. Both Moody’s and S&P rate our debt investment grade. In August 2020, S&P revised their outlook on the company to stable from negative.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

There have been no significant changes during 2020 to our critical accounting policies presented in our 2019 Annual Report on Form 10-K.

36

 

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, 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 interest rate 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.  

At September 30, 2020, we have six interest rate swaps associated with $397.5 million of term loan debt. The cash flow hedges convert variable rates ranging from three-month and one-month LIBOR plus 1.85% to 2.15%, to fixed rates ranging from 3.17% to 4.82%. Our cash flow hedges are expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the hedge.  

In March 2020, we entered into $653.5 million of forward starting interest rate swaps. These forward starting interest rate swaps effectively hedge the variability in future benchmark interest payments attributable to changes in interest rates on future debt refinancing by converting the benchmark interest rates to fixed interest rates on our anticipated future refinancing of $653.5 million of term loan debt maturing December 2020 through January 2029. The fixed interest rate components for these forward starting interest rate swaps range from 0.85% to 1.17%. The variable rate component on these forward starting interest rate swaps is one-month LIBOR. Accordingly, the forward starting rate swaps were designated as cash flow hedges. In addition, these cash flow hedges require settlement on the stated maturity date for each respective term loan currently outstanding.

At September 30, 2020, the total outstanding principal balance on our debt agreements was $762.2 million. Interest rates on all outstanding debt is fixed, either through a fixed interest rate or corresponding interest rate swap.

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, 2020. 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, 2020.

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 three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

37

 

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

Our business and results of operations are subject to numerous risks and uncertainties, many of which are beyond our control. The following discussion supplements and updates the Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.  The impacts of the COVID-19 pandemic on the economy is affecting and is expected to continue to affect our business and financial results and should be considered carefully, in addition to the information set forth elsewhere in this Form 10-Q and the Annual Report on Form 10-K for the year-ended December 31, 2019, including under Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

Events beyond our control such as pandemics (including the COVID-19 outbreak) could negatively impact our business.

We face risks related to health epidemics and other outbreaks, including the global outbreak of a novel strain of coronavirus (“COVID-19”).  In March 2020 the World Health Organization declared the outbreak of COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. Shortly thereafter, the United States declared a national emergency concerning the outbreak, and all states and several municipalities subsequently declared public health emergencies. These declarations have resulted in a wide-range of actions taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19. Such actions included quarantines, “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. Although many of the restrictions have eased across the United States, the pandemic has not shown substantial signs of decline and some jurisdictions are re-imposing certain restrictions due to increasing rates of COVID-19 cases. As a result, the pandemic has caused, and is likely to continue to cause significant economic disruption and volatility in capital markets.

Pandemics, such as COVID-19, that bring about widespread national or global economic disruption, have had and will have impacts on pricing and demand for our timber, lumber, and real estate businesses. We have experienced and expect to continue to experience unpredictable demand for certain of our products and continue to adjust production as necessary to match demand. There have been adverse effects on the demand for our products and disruptions to our supply chain, the manufacturing and distribution of our timber and wood products and demand for our real estate properties, all of which could worsen in the future.  We are actively monitoring the COVID-19 outbreak and its potential impact on our operations, workforce, supply chain and our consolidated results of operations.

Our predictions about the impact that COVID-19 will have on our business, financial condition, or results of operations may not be accurate as they depend on future developments, which are highly uncertain and cannot be predicted with confidence. Such developments include, but are not limited to, the severity of the virus’s impact on the economy, the future geographic spread or mutation of COVID-19 or the outbreak of another virulent disease, continuation of or changes in governmental responses to disease outbreak, the duration of disease outbreak, the timing and effectiveness of treatment and testing options, including availability of a vaccine, and consequential restrictions, business disruptions, the effectiveness of responsive actions taken in the United States and other countries to contain the disease and actions that may be taken by our competitors, suppliers or customers. A recession, further market correction, or depression resulting from the spread of COVID-19 could materially affect our business, financial condition, results of operations, liquidity, our stock price and access to capital markets. The impact of COVID-19 or other virulent disease may also trigger the occurrence, or exacerbate, other risks discussed in Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, any of which could have a material adverse effect on our business, results of operation, cash flows and financial condition.

38

 

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). In September 2020 we entered into a trading plan with an independent broker for the purpose of repurchasing a limited number of the Company’s common shares under the 2018 Repurchase Program in accordance with the guidelines in Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. This trading plan became effective on October 29, 2020 and expires upon expenditure of the principal specified in the plan, an early termination event (as specified in the plan), or the close of business on October 26, 2022, whichever occurs first.

During the nine months ended September 30, 2020, we repurchased 489,850 shares of common stock for $15.4 million (including transaction costs) under the 2018 Repurchase Program. There were no shares repurchased during the third quarter of 2020. At September 30, 2020, we had remaining authorization of $59.5 million for future stock repurchases under the 2018 Repurchase Program. Transaction costs are not counted against authorized funds. All common stock purchases are made in open-market transactions.

 

ITEM 6. EXHIBITS

 

EXHIBIT

NUMBER

DESCRIPTION

(3)(a)*

 

Third Restated Certificate of Incorporation of the Registrant, effective February 20, 2018, filed as Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on February 21, 2018. 

(3)(b)*

Bylaws of the Registrant, as amended through February 18, 2009, filed as Exhibit (3)(b) to the Current Report on Form 8-K filed by the Registrant on February 20, 2009.

(4)

See Exhibits (3)(a) and (3)(b). The registrant undertakes to furnish to the Commission, upon request, any instrument defining the rights of holders of long-term debt.

(10)(a)*

Group annuity contract, effective March 6, 2020, between NY Life Insurance Company and the Registrant filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on October 16, 2020.

(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 2020, filed on October 30, 2020 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019, (iii) the Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019, (v) the Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019 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.

 

39

 

SIGNATURE

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

 

 

 

PotlatchDeltic Corporation

 

 

(Registrant)

 

 

 

 

 

 

By

 /s/ WAYNE WASECHEK

 

 

 

Wayne Wasechek

 

 

 

Corporate Controller

(Duly Authorized; Principal Accounting Officer)

 

 

 

 

 

 

 

 

Date:

October 30, 2020

 

 

 

40