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 June 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 July 29, 2020 was 66,871,281.
POTLATCHDELTIC CORPORATION AND CONSOLIDATED SUBSIDIARIES
Table of Contents
PageNumber
PART I. - FINANCIAL INFORMATION
ITEM 1.
Financial Statements (unaudited)
Condensed Consolidated Statements of Operations
2
Condensed Consolidated Statements of Comprehensive Income (Loss)
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
8
Notes to Condensed Consolidated Financial Statements
9
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
37
ITEM 4.
Controls and Procedures
PART II. - OTHER INFORMATION
Legal Proceedings
38
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
39
ITEM 6.
Exhibits
40
SIGNATURE
41
Part I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PotlatchDeltic Corporation and Consolidated Subsidiaries
(Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands, except per share amounts)
2020
2019
Revenues
$
181,555
215,581
390,435
397,297
Costs and expenses:
Cost of goods sold
149,836
175,673
321,882
329,888
Selling, general and administrative expenses
16,811
14,952
31,018
31,522
Gain on sale of facility
—
(9,176
)
166,647
190,625
352,900
352,234
Operating income
14,908
24,956
37,535
45,063
Interest expense, net
(8,339
(7,882
(12,037
(13,346
Loss on extinguishment of debt
(5,512
Pension settlement charge
(42,988
Non-operating pension and other postretirement employee benefit costs
(3,478
(889
(7,113
(1,869
Income (loss) before income taxes
3,091
16,185
(24,603
24,336
Income taxes
(453
952
10,409
(639
Net income (loss)
2,638
17,137
(14,194
23,697
Net income (loss) per share:
Basic
0.04
0.25
(0.21
0.35
Diluted
Dividends per share
0.40
0.80
Weighted-average shares outstanding:
67,176
67,664
67,321
67,774
67,359
67,713
67,866
The accompanying notes are an integral part of these condensed consolidated financial statements.
(in thousands)
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 (loss), net of tax benefit of $75, $561, $152 and $1,122
(215
(1,597
(430
(3,194
Amortization of actuarial loss included in net income (loss), net of tax expense of $1,034, $915, $2,223 and $1,886
2,942
2,605
6,326
5,368
Cash flow hedges, net of tax expense (benefit) of $4, $(549), $(1,806) and $(913)
(1,847
(10,417
(40,372
(18,930
Other comprehensive income (loss), net of tax
880
(9,409
(22,067
(16,756
Comprehensive income (loss)
3,518
7,728
(36,261
6,941
June 30, 2020
December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents
80,987
83,310
Customer receivables, net
24,588
14,167
Inventories, net
52,215
65,781
Other current assets
22,107
20,183
Total current assets
179,897
183,441
Property, plant and equipment, net
286,169
286,383
Investment in real estate held for development and sale
73,541
74,233
Timber and timberlands, net
1,618,975
1,638,663
Intangible assets, net
16,660
17,049
Other long-term assets
29,928
35,290
Total assets
2,205,170
2,235,059
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
75,937
60,577
Current portion of long-term debt
45,988
45,974
Current portion of pension and other postretirement employee benefits
6,701
Total current liabilities
128,626
113,252
Long-term debt
711,001
710,495
Pension and other postretirement employee benefits
142,708
115,463
Deferred tax liabilities, net
10,942
20,165
Other long-term obligations
86,417
48,853
Total liabilities
1,079,694
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 66,871 and 67,221 shares
66,871
67,221
Additional paid-in capital
1,670,184
1,666,299
Accumulated deficit
(442,153
(359,330
Accumulated other comprehensive loss
(169,426
(147,359
Total stockholders’ equity
1,125,476
1,226,831
Total liabilities and stockholders' equity
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion and amortization
37,215
33,411
Basis of real estate sold
9,191
8,983
5,512
Change in deferred taxes
(13,849
(17,238
11,833
5,937
42,988
Equity-based compensation expense
3,865
3,449
Other, net
(177
(1,928
Change in working capital and operating-related activities, net
16,397
22,490
Real estate development expenditures
(2,487
(4,481
Funding of pension and other postretirement employee benefits
(2,839
(3,135
Net cash provided by operating activities
87,943
67,521
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment additions
(10,295
(15,502
Timberlands reforestation and roads
(7,776
(8,190
Acquisition of timber and timberlands
(4,730
(278
Proceeds on sale of facility
1,000
58,793
2,113
433
Net cash (used in) provided by investing activities
(19,688
35,256
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to common stockholders
(53,685
(53,946
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
(526
(264
Net cash used in financing activities
(69,575
(84,248
Change in cash, cash equivalents and restricted cash
(1,320
18,529
Cash, cash equivalents and restricted cash at beginning of period
84,254
79,441
Cash, cash equivalents and restricted cash at end of period
82,934
97,970
NONCASH INVESTING AND FINANCING ACTIVITIES
Long-term debt assumed by buyer in sale of facility
29,000
Accrued property, plant and equipment additions
706
244
Accrued timberlands reforestation and roads
462
592
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.
June 30, 2019
Restricted cash included in other long-term assets1
1,947
Total cash, cash equivalents, and restricted cash
1
Amounts included in restricted cash represent proceeds held by a qualified intermediary that are intended to be reinvested in timber and timberlands.
6
Additional Paid-
Accumulated
Accumulated Other
Comprehensive
Total Stockholders'
Shares
Amount
in Capital
Deficit
Loss
Equity
Balance, December 31, 2019
Net loss
(16,832
Shares issued for stock compensation
131
(131
1,885
Pension plans and OPEB obligations
15,578
Cash flow hedges
(38,525
Common dividends, $0.40 per share
(26,941
(401
(11,954
(12,355
Other transactions, net
69
(96
(27
Balance, March 31, 2020
66,951
1,668,122
(415,153
(170,306
1,149,614
Net income
(9
1,980
2,727
(26,744
(89
(2,920
(3,009
91
26
117
Balance, June 30, 2020
Balance, December 31, 2018
67,570
1,659,031
(282,391
(129,431
1,314,779
6,560
297
(297
1,617
1,166
(8,513
(27,065
(279
(9,879
(10,158
99
(99
Balance, March 31, 2019
67,588
1,660,450
(312,874
(136,778
1,278,386
(5
1,832
1,008
(26,881
(407
(14,608
(15,015
104
(104
Balance, June 30, 2019
67,186
1,662,381
(337,330
(146,187
1,246,050
INDEX FOR NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
Note 2: Recent Accounting Pronouncements
10
Note 3: Sale of Deltic MDF Facility
Note 4: Revenue Recognition
11
Note 5: Segment Information
12
Note 6: Earnings Per Share
14
Note 7: Certain Balance Sheet Components
15
Note 8: Debt
Note 9: Derivative Instruments
16
Note10: Fair Value Measurements
17
Note 11: Equity Based Compensation
Note 12: Income Taxes
18
Note 13: Leases
19
Note 14: Pension and Other Postretirement Benefits
20
Note 15: Components of Accumulated Other Comprehensive Loss
21
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.
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.
NOTE 4. REVENUE RECOGNITION
The following table represents our revenues by major product. For additional information regarding our segments, see Note 5: Segment Information.
Timberlands
Northern region
Sawlogs
30,638
30,467
72,045
62,966
Pulpwood
1,236
1,148
2,671
3,209
Stumpage
-
316
106
Other
292
353
595
564
Total Northern revenues
32,166
31,968
75,627
66,845
Southern region
21,205
20,979
45,144
39,416
10,872
11,282
22,073
23,093
817
144
1,646
466
2,285
2,508
5,280
5,219
Total Southern revenues
35,179
34,913
74,143
68,194
Total Timberlands revenues
67,345
66,881
149,770
135,039
Wood Products
Lumber
102,793
103,054
214,732
193,559
Residuals and Panels
23,423
34,976
56,484
76,777
Total Wood Products revenues
126,216
138,030
271,216
270,336
Real Estate
Rural real estate
9,879
30,315
17,171
34,534
Development real estate
1,672
3,755
3,964
4,428
1,554
2,362
2,939
3,634
Total Real Estate revenues
13,105
36,432
24,074
42,596
Total segment revenues
206,666
241,343
445,060
447,971
Intersegment Timberlands revenues1
(25,111
(25,762
(54,625
(50,674
Total consolidated revenues
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 June 30, 2020 and December 31, 2019, we recorded deferred revenue of $10.4 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 the Chenal Country Club. These contract liabilities are recognized over the term of the contracts, which is typically twelve months or less, except membership initiation fees at the 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.
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 (loss) before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses. 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.
The following table summarizes information for each of the company’s reportable segments and includes a reconciliation of Total Adjusted EBITDDA to income (loss) before income taxes. Corporate information is included to reconcile segment data to the Condensed Consolidated Financial Statements.
Revenues:
Consolidated revenues
Adjusted EBITDDA:
25,659
26,131
60,641
52,981
10,907
(2,071
24,136
5,155
9,256
31,316
16,596
34,019
Corporate
(10,534
(9,346
(19,206
(20,000
Eliminations and adjustments
85
3,050
777
5,177
Total Adjusted EBITDDA
35,373
49,080
82,944
77,332
Interest expense, net2
(17,765
(16,727
(36,403
(32,524
(2,693
(7,427
(9,191
(8,983
Non-operating pension and other postretirement employee benefits
9,176
(Loss) gain on disposal of fixed assets
(7
30
185
62
Depreciation, depletion and amortization:
11,566
10,469
24,157
20,734
5,798
5,861
11,428
10,903
156
147
356
245
250
502
531
17,765
16,727
36,403
32,524
Bond discounts and deferred loan fees2
406
410
812
887
Total depreciation, depletion and amortization
18,171
Basis of real estate sold:
3,212
7,455
9,716
9,043
(519
(28
(525
(60
Total basis of real estate sold
2,693
7,427
Bond discounts and deferred loan fees are reported within interest expense, net on the Condensed Consolidated Statements of Operations.
13
NOTE 6. EARNINGS PER SHARE
The following table reconciles the number of shares used in calculating basic and diluted earnings per share:
Basic weighted-average shares outstanding
Incremental shares due to:
Performance shares
153
Restricted stock units
23
71
Diluted weighted-average shares outstanding
Basic net income (loss) per share
Diluted net income (loss) per share
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 six months ended June 30, 2020 there were approximately 39,000 and 490,000 stock-based awards, respectively, that were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the three and six months ended June 30, 2019 there were approximately 95,000 and 71,000 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). During the three and six months ended June 30, 2020, we repurchased 88,933 and 489,850 shares of common stock (at a total consideration of $3.0 million and $15.4 million), respectively, under the 2018 Repurchase Program. During the three and six months ended June 30, 2019 we repurchased 407,293 and 686,240 shares of common stock (at a total consideration of $15.0 million and $25.2 million), respectively, under the 2018 Repurchase Program. All common stock purchases under the 2018 Repurchase Program were made in open-market transactions. At June 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 June 30, 2020. We retire shares upon repurchase. Any excess repurchase price over par is recorded in accumulated deficit.
NOTE 7. CERTAIN BALANCE SHEET COMPONENTS
Inventories
Logs
19,999
33,313
Lumber, panels and veneer
30,189
31,639
Materials and supplies
14,029
12,831
Total inventories
64,217
77,783
Less: LIFO reserve
(12,002
Total inventories, net
Property, plant and equipment
508,874
498,113
Less: accumulated depreciation
(222,705
(211,730
Total property, plant and equipment, net
Timber and timberlands
1,536,576
1,554,882
Logging roads
82,399
83,781
Total timber and timberlands, net
Accrued payroll and benefits
17,716
12,920
Accounts payable
17,106
12,734
Deferred revenue
10,395
5,514
Accrued taxes
9,269
6,638
Accrued interest
6,829
6,946
Operating lease liabilities
4,783
4,998
Other current liabilities
9,839
10,827
Total accounts payable and accrued liabilities
NOTE 8. DEBT
At June 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 June 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 June 30, 2020.
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 June 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 locking in 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
Location
Derivatives designated in cash flow hedging relationships:
Interest rate contracts
Other assets, current1
Accounts payable and accrued liabilities1
1,768
Other assets, non-current
1,601
61,207
22,398
62,975
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:
Loss recognized in other comprehensive loss, net of tax
(3,669
(10,598
(43,032
(19,192
Loss reclassified from accumulated other comprehensive loss1
Interest expense
(1,822
(181
(2,660
(262
8,339
7,882
12,037
13,346
1Realized loss on hedging instruments consist of net cash settlements and interest accruals on interest rate swaps during the periods.
At June 30, 2020, approximately $9.1 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 cash settlement.
NOTE 10. FAIR VALUE MEASUREMENTS
The following table presents the estimated fair values of our financial instruments:
Carrying
Fair
Value
Derivative assets related to interest rate swaps (Level 2)
Derivative liabilities related to interest rate swaps (Level 2)
(62,975
(22,398
Long-term debt, including current portion (Level 2):
Term loans
(690,144
(718,225
(689,820
(703,437
Revenue bonds
(65,735
(65,945
(68,200
Medium-term notes
(3,000
(3,568
(3,480
Total long-term debt1
(758,879
(787,738
(758,555
(775,117
Company owned life insurance asset (COLI) (Level 3)
2,967
4,157
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 June 30, 2020, approximately 1.2 million shares are available for future use under our long-term incentive plan.
Share-based compensation activity during the six months ended June 30, 2020 included the following:
(Shares in thousands)
Granted
Vested
Forfeited
Performance Share Awards (PSAs)
125,001
2,879
Restricted Stock Units (RSUs)
68,263
27,671
959
Approximately 0.1 million shares of common stock were issued during the six months ended June 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:
Equity-based compensation expense:
Performance share awards
1,243
1,187
2,401
2,231
718
629
1,426
Deferred compensation stock equivalent units expense
31
Total equity-based compensation expense
1,831
Total tax benefit recognized for equity-based expense
93
83
176
155
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 six months ended June 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 six months ended June 30, 2020 we recorded an income tax benefit of approximately $11.2 million associated with the $43.0 million pension settlement charge recorded in the first quarter. 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 six months ended June 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.
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:
Classification
Assets
Operating lease assets
13,425
15,772
Finance lease assets1
4,448
2,360
Total lease assets
17,873
18,132
Liabilities
Current
Finance lease liabilities
1,218
644
Noncurrent
8,647
10,775
3,201
1,703
Total lease liabilities
17,849
18,120
1 Finance lease assets are presented net of accumulated amortization of $0.7 million and $0.3 million as of June 30, 2020 and December 31, 2019, respectively.
The following table presents the components of lease expense:
Operating lease costs1
1,414
1,511
2,839
2,922
Finance lease costs
Amortization of leased assets
260
25
473
46
Interest on lease liabilities
32
59
Net lease costs
1,706
1,541
3,371
2,978
1 Excludes short-term leases and variable lease costs, which are immaterial
The following tables presents supplemental cash flow information related to leases:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
2,884
2,960
Operating cash flows for finance leases
Financing cash flows for finance leases
486
50
Leased assets exchanged for new lease liabilities:
Operating leases
248
5,789
Finance leases
2,558
675
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):
Pension
OPEB
Service cost
2,176
1,862
112
80
Interest cost
2,568
4,692
376
375
Expected return on plan assets
(3,151
(5,541
Amortization of prior service cost (credit)
28
53
(319
(2,211
Amortization of actuarial loss
3,559
3,321
417
200
Total net periodic cost (benefit)
5,180
4,387
586
(1,556
4,466
3,883
254
6,132
9,231
751
794
(7,737
(11,095
56
(638
(4,422
7,713
6,748
836
507
Net periodic cost (benefit) before pension settlement charge
10,630
8,873
1,203
(2,936
Net periodic cost (benefit)
53,618
During the six months ended June 30, 2020 and 2019, funding of pension and other postretirement employee benefit plans was $2.8 million and $3.1 million, respectively. Further, as allowed under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed in March 2020, we will defer approximately $4.4 million of required 2020 contributions for our qualified pension plans until 2021.
NOTE 15. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
During 2020, changes in amounts included in our accumulated other comprehensive loss (AOCL) by component on our Condensed Consolidated Balance Sheets, net of tax, are:
Pension Plans
Balance at beginning of period
101,524
126,678
117,028
129,253
Net loss arising during the period
19,402
Effect of pension settlement
(31,811
Amounts reclassified from AOCL to earnings
(2,654
(2,497
(5,749
(5,072
Balance at end of period
98,870
124,181
Other Postretirement Benefit Plans
10,257
27
10,331
(1,382
(73
1,489
(147
2,898
10,184
1,516
Cash Flow Hedges
58,525
10,073
20,000
1,560
3,669
10,598
43,032
19,192
60,372
20,490
Accumulated other comprehensive loss, end of period
169,426
146,187
See Note 14: Pension and Other Postretirement Employee Benefits and Note 9: Derivative Instruments for additional information.
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 and RSUs, required contributions to pension plans, expected amortization of unrecognized compensation cost of performance share awards and RSUs, amount of net losses on cash flow hedges expected to be reclassified into earnings in the next 12 months, expected tax payments and deferrals, anticipated share repurchases and dividend payments, 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;
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.
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 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 (loss) before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses. See Note 5: Segment Information in the Notes to the Condensed Consolidated Financial Statements for information related to the use of segment Adjusted EBITDDA.
Business and Economic Trends
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 began to declare public health emergencies. These declarations resulted in a wide-range of actions taken to contain and combat the outbreak and spread of COVID-19 including quarantines, “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to reduce or cease normal operations. 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 local authorities and the pandemic’s effects on the public, require us, our suppliers or our customers to limit or suspend operations.
The United States Department of Homeland Security has designated the forest and wood products industry as an "essential critical infrastructure workforce," which recognizes the importance of these operations in supporting critical infrastructure and construction projects. 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 COVID-19 pandemic has introduced significant economic and business uncertainty, along with volatile financial market conditions during the first half of 2020 which is expected to continue into the future.
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 underpins a historic run in lumber prices that began in the second quarter and is continuing.
In our Wood Products segment, lumber shipments of 249 million board feet during the second quarter of 2020 were constrained by lower production hours, particularly in April when we lost a week of production at our Warren, Arkansas sawmill due to a tornado-caused power outage. For the third quarter of 2020, we plan to ship 270 to 280 million board feet of lumber and expect our average lumber price to be significantly higher in the third quarter compared to the second quarter.
The demand for our industrial grade plywood product line was adversely affected in the second quarter as these products are used in boat, recreational vehicle and furniture industries, many of which were forced to temporarily shut down. As a result, we temporarily suspended operations at our St. Maries, Idaho industrial plywood facility for three weeks and ran at a reduced operating posture for the balance of the second quarter after restarting production in May. Our plywood mill returned to normal operating posture in July 2020.
In our Timberlands segment, the Northern region experienced an increase in sawlog volume in the first half of 2020 because of favorable harvest conditions compared to the prior year. Southern pine sawlog prices remain stable and our harvest volumes improved in the first half of 2020 as a result of favorable harvest conditions. However, our Southern region harvest volumes were adversely impacted by third-party mill curtailments due to COVID-19 during the second quarter of 2020. We do not anticipate making up the pulpwood shortfall during the remainder of 2020. We expect total harvest volumes to be between 1.5 and 1.7 million tons in the third quarter of 2020. Because we index approximately 70% of our Idaho sawlogs to the price of lumber under long-term supply agreements, we expect Idaho sawlog prices to increase significantly in the third quarter.
On June 21, 2020, we announced an agreement to sell approximately 72,000 acres of rural timberland in Minnesota to The Conservation Fund (TCF) 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 year, we expect to sell 93,000 to 97,000 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 expect the economic impacts from COVID-19 to negatively affect our Chenal Valley real estate development sales. We anticipate selling approximately 20 residential lots in the third 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. At June 30, 2020 we had approximately $81.0 million in cash and cash equivalents and availability of $379.0 million on our revolving line of credit. Additionally, expected net proceeds from the Minnesota timberlands transaction discussed above will further enhance our liquidity position and flexibility. As the impact of COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. See Liquidity and Capital Resources section below for further discussion of our liquidity.
24
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:
Change
(34,026
(6,862
(25,837
(8,006
1,859
(504
(23,978
666
(10,048
(7,528
(457
1,309
Non-operating pension and other postretirement benefit costs
(2,589
(5,244
(13,094
(48,939
(1,405
11,048
(14,499
(37,891
Total Adjusted EBITDDA1
(13,707
5,612
See Liquidity and Performance Measures for a reconciliation of Total Adjusted EBITDDA to net income (loss), the closest comparable GAAP measure, for each of the periods presented.
Second Quarter 2020 Compared with Second Quarter 2019
Revenues were $181.6 million, a decrease of $34.0 million compared with the second quarter of 2019. Declines in lumber and plywood shipments, rural acres sold, and development real estate lot sales were partially offset by increases in lumber prices, Northern sawlog prices and Southern harvest volumes.
Cost of goods sold decreased $25.8 million compared with the second quarter of 2019 due primarily to lower lumber shipments and the temporary curtailment and reduced operating posture at our plywood facility.
Selling, general and administrative expenses increased $1.9 million compared with the second quarter of 2019 primarily as a result of mark-to-market adjustments for deferred equity compensation plans and higher estimated performance-based variable compensation.
Non-operating pension and other postretirement benefit costs increased $2.6 million compared to the second quarter of 2019. This increase was 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 the discount rate used to determine the benefit obligations and a decrease in expected return on plan assets.
Income taxes for the second quarter of 2020 was a $0.5 million income tax expense compared with $1.0 million income tax benefit for the second quarter of 2019. Income taxes are primarily due to income or loss from our taxable REIT subsidiaries (TRS). For the three months ended June 30, 2020, the TRS’s pre-tax income was $1.5 million. For the same period in 2019, the TRS’s loss before income tax was $6.5 million.
Total Adjusted EBITDDA for the second quarter of 2020 decreased $13.7 million compared to the second quarter of 2019. The decrease in Total Adjusted EBITDDA was driven primarily by decreased operating results in our Real Estate segment as 2019 included a large sale in Arkansas with no similar sales during the second quarter of 2020. 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 were $390.4 million, a decrease of $6.9 million compared with the first half of 2019. Revenues in the first half of 2019 included revenues related to our Deltic Medium Density Fiberboard (MDF) facility that we sold in the first quarter of 2019 and a 1,787-acre rural real estate sale for $11,000 per acre with no similar transactions in the first half of 2020. In addition, we shipped less plywood in 2020 due to a temporary curtailment and reduced operating posture. These decreases were mostly offset by increased lumber prices, lumber shipments, sawlog prices in the Northern Region and harvest volumes.
Cost of goods sold decreased $8.0 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 MDF Facility. These decreases were partly offset by increased harvest activities and increased lumber shipments.
In February 2019 we closed on the sale of 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.
Net interest expense decreased $1.3 million compared with the first half of 2019 primarily due to the refinancing of $150.0 million of 7.5% Senior Notes (Senior Notes) during the first quarter of 2019.
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.
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 increased $5.2 million compared to the first half of 2019. This increase was 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 the discount rate used to determine the benefit obligations and a decrease in expected return on plan assets.
Income taxes for the first half of 2020 was a $10.4 million income tax benefit compared with a $0.6 million income tax expense for the first half of 2019. Income taxes are primarily due to income or loss from our taxable REIT subsidiaries (TRS). For the six months ended June 30, 2020, the TRS’s loss before income tax was $41.3 million, which included a $43.0 million pension settlement charge. For the same period in 2019, the TRS’s income before income tax was $0.7 million which included the gain on sale of the Deltic MDF facility.
Total Adjusted EBITDDA for the first half of 2020 increased $5.6 million compared to the first half of 2019. The increase in Total Adjusted EBITDDA was driven primarily by increased operating results in our Timberlands and Wood Products business segments partially offset by a decrease in rural real estate acres and development lots sold in our Real Estate segment. Refer to the Business Segment Results below for further discussions on activities for each of our segments.
Business Segment Results
Timberlands Segment
Revenues1
464
14,731
Logging and hauling
31,655
30,536
1,119
70,259
63,452
6,807
8,277
8,530
(253
15,568
15,194
374
1,754
1,684
70
3,302
3,412
(110
Timberlands Adjusted EBITDDA2
(472
7,660
Prior to elimination of intersegment fiber revenues of $25.1 million and $25.8 million for the three months ended June 30, 2020 and 2019, and $54.6 million and $50.7 million for the six months ended June 30, 2020 and 2019, respectively.
Management uses Adjusted EBITDDA to evaluate the performance of the company. See Note 5: Segment Information in the Notes to Condensed Consolidated Financial Statements.
Timberlands Segment Statistics
Harvest Volumes (in tons)
Sawlog
302,917
324,556
(21,639
736,787
698,421
38,366
31,463
30,520
943
69,264
79,163
(9,899
23,178
7,376
15,802
Total
334,380
355,076
(20,696
829,229
784,960
44,269
490,754
448,918
41,836
1,039,221
861,752
177,469
372,234
341,909
30,325
739,333
715,173
24,160
100,231
22,807
77,424
190,468
65,156
125,312
963,219
813,634
149,585
1,969,022
1,642,081
326,941
Total harvest volume
1,297,599
1,168,710
128,889
2,798,251
2,427,041
371,210
Sales Price/Unit ($ per ton)1
101
94
98
90
(2
43
47
(4
(3
29
33
Sawlog and pulpwood sales prices are on a delivered basis, which includes contracted logging and hauling costs charged to the customer. Stumpage sales provide our customers the right to harvest standing timber. As such, the customer contracts the logging and hauling and bears such costs.
Timberlands Adjusted EBITDDA
The following table summarizes Timberlands Adjusted EBITDDA variances for the three and six months ended June 30, 2020 compared with the three and six months ended June 30, 2019:
Three Months Ended
Six Months Ended
Timberlands Adjusted EBITDDA June 30, 2019
Sales price and mix
(2,561
828
Harvest volume
7,584
Other revenue
(284
92
Logging and hauling costs per unit
(580
Forest management
282
(273
Administrative, indirect and overhead costs
(100
Timberlands Adjusted EBITDDA June 30, 2020
Timberlands Adjusted EBITDDA for the second quarter of 2020 decreased $0.5 million compared with the same period in 2019, primarily as a result of the following:
Sales Price and Mix: Stronger Northern sawlog price realizations were more than offset by a shift in mix to more volume in the Southern region coupled with a decrease in Southern sawlog price realizations. This drove the unfavorable price variance. Sawlog prices in the Northern region increased 7.4%, to $101 per ton resulting from the effect of higher lumber price realizations on indexed sawlogs and favorable cedar prices in Idaho. Southern sawlog pricing decreased 8.5% compared to the second quarter of 2019, during which supply constraints caused by wet weather drove up pricing.
Harvest Volume: We harvested 963 thousand tons in the Southern region during the second quarter of 2020, which was up 18.4% compared to the second quarter of 2019. The increase was primarily due to favorable harvest conditions compared to the second quarter of 2019 which experienced wet weather.
Timberlands Adjusted EBITDDA for the first half of 2020 increased $7.7 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 8.9%, to $98 per ton resulting from the effect of higher lumber price realization on indexed sawlogs and favorable cedar prices in Idaho. Southern sawlog pricing decreased 6.5% year on year as a result of timber supply constraints caused by wet weather which drove up pricing during the first half of 2019.
Harvest Volume: We harvested 2.0 million tons in the Southern region during the first half of 2020, which was up 19.9% compared to the first half of 2019. The increase was primarily due to improved harvest conditions compared to the first half of 2019 which experienced wet weather conditions. Harvest volume increased 5.6% in the Northern region compared to the first half of the 2019 as a result of favorable harvest conditions in the first quarter of 2020.
Wood Products Segment
(11,814
Costs and expenses1
Fiber costs
58,950
68,988
(10,038
123,962
138,015
(14,053
Freight, logging and hauling
13,522
17,729
(4,207
30,924
33,953
(3,029
Manufacturing costs
41,951
45,080
(3,129
86,955
92,521
(5,566
Finished goods inventory change
(1,898
6,213
(8,111
(3,879
3,872
2,779
2,093
686
5,050
4,543
196
168
Wood Products Adjusted EBITDDA2
12,978
18,981
Prior to elimination of intersegment fiber costs of $25.1 million and $25.8 million for the three months ended June 30, 2020 and 2019, and $54.6 million and $50.7 million for the six months ended June 30, 2020 and 2019, respectively.
Wood Products Segment Statistics
Lumber shipments (MBF)1
249,239
272,523
(23,284
532,206
510,926
21,280
Lumber sales prices ($ per MBF)
412
378
34
404
379
MBF stands for thousand board feet.
Wood Products Adjusted EBITDDA
The following table summarizes Wood Products Adjusted EBITDDA variances for the three and six months ended June 30, 2020 compared with the three and six months ended June 30, 2019:
Wood Products Adjusted EBITDDA June 30, 2019
Lumber:
Price
9,556
13,476
Manufacturing costs per unit
(952
(2,900
Log costs per unit
1,244
3,150
Inventory charge
7,396
Residuals, panels and other
(4,266
(2,141
Wood Products Adjusted EBITDDA June 30, 2020
Wood Products Adjusted EBITDDA for the second quarter of 2020 increased $13.0 million compared with the same period in 2019 primarily as a result of the following:
Lumber Price: Average lumber sales prices increased to $412 per MBF compared with $378 per MBF during the second quarter of 2019.
Manufacturing Cost Per Unit: Reduced operating hours in the second quarter, particularly in April when we lost a week of production at our Warren, Arkansas sawmill due to a tornado-caused power outage, led to higher manufacturing costs per unit during the second quarter of 2020 compared to 2019.
Inventory Charge: Lumber inventory at the end of the second quarter of 2019 was written down $7.4 million to net realizable value. There were no inventory charges at the end of the second quarter of 2020.
Log Costs Per Unit: Lower log costs quarter on quarter were driven by our Southern mills which experienced higher log costs during the second quarter of 2019 because unusually wet weather constrained supply and led to increased log prices.
Residual Sales, Panels and Other: Decreased shipments at our industrial grade plywood mill as a result of a temporary production curtailment and reduced residual revenue as a result of lower sawmill production negatively impacted Adjusted EBITDDA during second quarter of 2020.
Wood Products Adjusted EBITDDA for the first half of 2020 increased $19.0 million compared with the same period in 2019 primarily as a result of the following:
Lumber Price: Average lumber sales prices increased to $404 per MBF compared with $379 per MBF during the first half of 2019.
Manufacturing Cost Per Unit: Reduced operating hours in 2020, particularly in April when we lost a week of production at our Warren, Arkansas sawmill due to a tornado-caused power outage, led to higher manufacturing costs per unit.
Log Costs Per Unit: Log costs per unit were lower due to our Southern mills experiencing higher log costs during the first half of 2019 as unusually wet weather led to supply constraints and drove up log prices. In addition, log inventories in Idaho are built during the third and fourth quarter of each year to ensure an adequate level of log inventories for spring breakup when harvest activities are restricted. During the first half of 2019, log costs per-unit in Idaho were higher than during the first half of 2020 because indexed sawlog prices were higher during the 2018 log inventory build utilized in 2019 compared to the 2019 log inventory build utilized in 2020.
Residual Sales, Panels and Other: Decreased shipments at our industrial grade plywood mill as a result of a temporary production curtailment negatively impacted Adjusted EBITDDA which more than offset impacts in 2019 from the operations at the Deltic MDF facility, which we sold in February 2019.
Real Estate Segment
(23,327
(18,522
Costs and expenses
Costs of goods sold
2,610
3,787
(1,177
5,041
6,041
(1,000
1,239
1,329
(90
2,437
2,536
Real Estate Adjusted EBITDDA1
(22,060
(17,423
Real Estate Segment Statistics
Rural Real Estate
Acres Sold
Average
Price/Acre
Higher and better use (HBU)
2,257
2,545
2,497
8,551
Recreation real estate
2,216
1,364
1,637
1,382
Non-strategic timberland
1,064
1,045
8,241
813
5,537
1,784
12,375
2,450
2,887
2,676
3,257
7,302
3,096
1,404
1,315
3,993
1,277
8,681
818
9,976
1,721
14,717
2,347
Development Real Estate
Lots Sold
Price/ Lot
Residential lots
97,059
44
85,345
98,550
51
86,825
Real Estate Adjusted EBITDDA
The following table summarizes Real Estate Adjusted EBITDDA variances for the three and six months ended June 30, 2020 compared with the three and six months ended June 30, 2019:
Real Estate Adjusted EBITDDA June 30, 2019
Rural real estate sales
(20,435
(17,363
Development real estate sales
(2,892
(1,160
100
Other costs, net
1,177
Real Estate Adjusted EBITDDA June 30, 2020
Real Estate Adjusted EBITDDA for the second quarter of 2020 decreased $22.1 million compared with the same period in 2019 primarily as a result of the following:
Rural Real Estate Sales: Rural real estate sales can vary quarter-to-quarter with the average price per acre fluctuating based on both the geographic area of the real estate and product mix. The second quarter of 2019 included a sale of 1,787 acres outside of Little Rock, Arkansas for $11,000 per acre. The second quarter of 2019 also included the sale of 8,000 acres of non-strategic timberlands in Minnesota to a conservation entity representing the second part of a multi-year option with this entity. There were no comparable transactions in 2020.
Development Real Estate Sales: During the second quarter of 2020 we sold 17 residential lots at an average lot price of $97,059 at Chenal Valley compared to 44 lots at an average lot price of $85,345 during the second quarter of 2019.
Real Estate Adjusted EBITDDA for the first half of 2020 decreased $17.4 million compared with the same period in 2019 primarily as a result of the following:
Rural Real Estate Sales: The first half of 2019 included the 1,787-acre sale in Arkansas and the 8,000-acre non-strategic timberlands sale in Minnesota with no comparable transactions in the first half of 2020.
Development Real Estate Sales: During the first half of 2020 we sold 40 residential lots at an average lot price of $98,550 at Chenal Valley compared to 51 lots at an average lot price of $86,825 during the first half of 2019.
Liquidity and Capital Resources
Changes in significant sources of cash for the six months ended June 30, 2020 and 2019 are presented by categories as follows:
Net Cash Flows from Operations
Net cash provided by operating activities increased $20.4 million compared to the first half of 2019. Changes in cash provided by operating activities was impacted by the following:
Cash received from customers increased $0.5 million. Harvest activities, lumber prices and lumber shipments were all higher in 2020. These increases were mostly 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. There were no comparable activities in 2020.
Cash payments to vendors decreased $18.6 million primarily due to the temporary curtailment of our industrial plywood mill during the second quarter of 2020, whereas operations in 2019 included 1.5 months of activity at the Deltic MDF facility prior to its sale. These decreases were partly offset by payments associated with increased harvest activities.
Net cash paid for interest decreased $3.1 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.
Tax payments were $1.5 million during the first half of 2020 compared to tax refunds of $0.6 million during the first half of 2019.
Net Cash Flows from Investing Activities
Changes in cash flows from investing activities were primarily a result of the following:
We spent $18.1 million on capital expenditures for property, plant and equipment, timberlands reforestation and road construction projects during the first half of 2020 compared to $23.7 million during the first half of 2019.
We spent $4.7 million on timberland acquisitions during the first half of 2020 compared to $0.3 million during the first half 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 half 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 half of 2019. This reduced our distributions to shareholders slightly from $53.9 million in the first half of 2019 to $53.7 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 variable rate 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.
Future Cash Requirements
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. While we currently expect to spend a total of approximately $40 to $44 million for capital expenditures during 2020, we are reviewing options to pull some 2021 high return mill projects forward to this year.
We are deferring payments of approximately $8.4 million for our 2020 employer portion of social security payroll tax and contributions to qualified pension plans 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 June 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 (TCF) 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
756,989
756,469
(80,987
(83,310
Net debt
676,002
673,159
Market capitalization1
2,543,104
2,908,653
Enterprise value
3,219,106
3,581,812
Net debt to enterprise value
21.0
18.8
Dividend yield2
4.2
3.7
Weighted-average cost of debt, after tax3
3.3
Market capitalization is based on outstanding shares of 66.9 million and 67.2 million times closing share prices of $38.03 and $43.27 as of June 30, 2020, and December 31, 2019, respectively.
Dividend yield is based on annualized dividends per share of $1.60 and share prices of $38.03 and $43.27 as of June 30, 2020, and December 31, 2019, respectively.
Weighted-average cost of debt excludes deferred debt costs and credit facility fees and includes estimated annual patronage credit on term loan debt.
Liquidity and Performance Measures
The discussion below is presented to enhance the reader’s understanding of our operating performance, ability to generate cash and satisfy rating agency and creditor requirements. This information includes two measures: Adjusted EBITDDA and Cash Available for Distribution (CAD). These measures are not defined by GAAP and the discussion of Adjusted EBITDDA and CAD is not intended to conflict with or change any of the GAAP disclosures described herein.
Adjusted EBITDDA is a non-GAAP measure that management uses in evaluating performance, to allocate resources between segments, and that investors can use to evaluate the operational performance of the assets under management. It removes the impact of specific items that management believes do not directly reflect the core business operations on an ongoing basis. This measure should not be considered in isolation from and is not intended to represent an alternative to our results reported in accordance with GAAP. Management believes that this non-GAAP measure, when read in conjunction with our GAAP financial statements, provides useful information to investors by facilitating the comparability of our ongoing operating results over the periods presented, the ability to identify trends in our underlying business and the comparison of our operating results against analyst financial models and operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.
Our definition of EBITDDA may be different from similarly titled measures reported by other companies. We define EBITDDA as net income (loss) before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses.
We reconcile Total Adjusted EBITDDA to net income (loss) for the consolidated company as it is the most comparable GAAP measure.
The following table provides a reconciliation of net income (loss) to Total Adjusted EBITDDA for the respective periods:
453
(10,409
639
3,478
889
7,113
1,869
Loss (gain) on disposal of fixed assets
(30
(185
(62
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:
Cash provided by operating activities1
Capital expenditures
(22,801
(23,970
CAD
65,142
43,551
Net cash (used in) provided by investing activities2
Cash from operating activities for the six months ended June 30, 2020 and 2019 includes cash paid for real estate development expenditures of $2.5 million and $4.5 million, respectively.
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.
Sources of Financing
Credit and Term Loan Agreements
At June 30, 2020, our total outstanding net long-term debt was $757.0 million, of which $46.0 million matures in December 2020. 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 June 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
35
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 June 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 June 30, 2020:
Covenant Requirement
Actual at
Interest coverage ratio
≥
3.00 to 1.00
6.28
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 locking 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 1-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 six months ended June 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. There have been no changes in our credit rating during the six months ended June 30, 2020.
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 June 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 locking 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 June 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 June 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 June 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 June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We believe there is no pending or threatened litigation that could have a material adverse effect on our financial position, operations or liquidity.
ITEM 1A. RISK FACTORS
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.
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 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. These restrictions have prevented or significantly restricted us, our employees, vendors and customers from conducting some or all business activities for an indefinite period of time. Under the governmental restrictions put in place, our Timberlands and Wood Products segments were designated as an essential business in states that had issued stay-at-home orders and as such, we have continued to operate each of our businesses at full capacity where market conditions allow while maintaining the health and safety of our employees, contractors, suppliers and customers. This outbreak has spread widely throughout the United States and while governmental restrictions began to ease by the end of the second quarter in several states, they are subject to change and may, depending on direction from local authorities and the pandemic’s effects on the public, require us, our suppliers or our customers to limit or suspend operations.
We have introduced measures to protect the health and well-being of our workforce and customers. Such measures include, among other things, encouraging office employees to work remotely where their duties allow, restricting travel and group meetings, increasing the frequency of cleaning and disinfecting, screening visitors and vendors at our locations, implementing mask-wearing protocols, and requiring physical distancing where it is practical. However, such measures will not be sufficient to eliminate all exposure to the COVID-19 virus. We have experienced exposure to the virus at certain of our facilities. We have implemented plans and procedures in the event of a workplace exposure to aid in the protection of our workforce including a temporary shutdown of certain production areas in the facility in order to perform proper cleaning and disinfection procedures. If additional exposures to the virus occur in the future we may be required to temporarily shut down certain operations for additional cleaning and disinfecting.
Pandemics, such as COVID-19, that bring about widespread national or global economic hardship, 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
On August 30, 2018, our board of directors authorized management to repurchase up to $100.0 million of common stock with no time limit set for the repurchase (the 2018 Repurchase Program). During the six months ended June 30, 2020, we repurchased 489,850 shares of common stock for $15.4 million (including transaction costs) under the 2018 Repurchase Program. Transaction costs are not counted against authorized funds. All common stock purchases were made in open-market transactions. At June 30, 2020, we had remaining authorization of $59.5 million for future stock repurchases under the 2018 Repurchase Program.
The following table provides information with respect to purchases of common stock made by the company during second quarter 2020:
Common Share Purchases
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of a Publicly Announced Plan
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan
April 1 - April 30
62,504,102
May 1 - May 31
88,933
33.81
59,496,899
June 1 - June 30
ITEM 6. EXHIBITS
EXHIBIT
NUMBER
DESCRIPTION
(3)(a)*
Third Restated Certificate of Incorporation of the Registrant, effective February 20, 2018, filed as Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on February 21, 2018.
(3)(b)*
Bylaws of the Registrant, as amended through February 18, 2009, filed as Exhibit (3)(b) to the Current Report on Form 8-K filed by the Registrant on February 20, 2009.
(4)
See Exhibits (3)(a) and (3)(b). The registrant undertakes to furnish to the Commission, upon request, any instrument defining the rights of holders of long-term debt.
(31)
Rule 13a-14(a)/15d-14(a) Certifications.
(32)
Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350.
(101)
The following financial information from PotlatchDeltic Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30 2020, filed on July 31, 2020 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019, (iii) the Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019, (v) the Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 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.
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.
(Registrant)
By
/s/ WAYNE WASECHEK
Wayne Wasechek
Corporate Controller
(Duly Authorized; Principal Accounting Officer)
Date:
July 31, 2020