UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2023
or
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-32729
PotlatchDeltic Corporation
(Exact name of registrant as specified in its charter)
Delaware
82-0156045
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
601 West First Avenue, Suite 1600
Spokane, Washington
99201
(Address of principal executive offices)
(Zip Code)
(509) 835-1500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock ($1 par value)
PCH
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☒
Accelerated Filer
☐
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of common stock of the registrant outstanding (in thousands) as of October 31, 2023, was 79,364.
POTLATCHDELTIC CORPORATION AND CONSOLIDATED SUBSIDIARIES
Table of Contents
PageNumber
PART I. - FINANCIAL INFORMATION
ITEM 1.
Financial Statements (unaudited)
Condensed Consolidated Statements of Operations
3
Condensed Consolidated Statements of Comprehensive Income
4
Condensed Consolidated Balance Sheets
5
Condensed Consolidated Statements of Cash Flows
6
Condensed Consolidated Statements of Stockholders’ Equity
8
Index for the Notes to Condensed Consolidated Financial Statements
9
Notes to Condensed Consolidated Financial Statements
10
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
36
ITEM 4.
Controls and Procedures
PART II. - OTHER INFORMATION
Legal Proceedings
37
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 5.
Other Information
ITEM 6.
Exhibits
38
SIGNATURE
39
Part I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PotlatchDeltic Corporation and Consolidated Subsidiaries
(Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands, except per share amounts)
2023
2022
Revenues
$
265,509
306,693
769,572
1,077,640
Costs and expenses:
Cost of goods sold
226,303
220,876
665,716
592,057
Selling, general and administrative expenses
19,303
18,878
55,118
55,584
CatchMark merger-related expenses
—
26,007
2,453
Gain on fire damage
(16,326
)
(24,913
(39,436
(34,505
229,280
240,848
683,851
639,143
Operating income
36,229
65,845
85,721
438,497
Interest expense, net
(7,971
(8,280
(15,783
(18,593
Pension settlement charge
(14,165
Non-operating pension and other postretirement employee benefit costs
(228
(1,808
(685
(5,546
Other
370
(1
638
Income before income taxes
28,400
55,756
69,891
400,192
Income taxes
(4,725
(9,801
(7,650
(70,135
Net income
23,675
45,955
62,241
330,057
Net income per share:
Basic
0.30
0.64
0.78
4.70
Diluted
0.29
4.69
Dividends per share
0.45
0.44
1.35
1.32
Weighted-average shares outstanding
80,132
71,486
80,102
70,171
80,379
71,632
80,279
70,308
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
(132
914
(607
9,309
Cash flow hedges
28,464
32,725
28,848
118,530
Other comprehensive income, net of tax
28,332
33,639
28,241
127,839
Comprehensive income
52,007
79,594
90,482
457,896
September 30, 2023
December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents
302,799
343,809
Customer receivables, net
30,762
22,813
Inventories, net
82,537
67,958
Other current assets
56,606
36,955
Total current assets
472,704
471,535
Property, plant and equipment, net
334,350
318,184
Investment in real estate held for development and sale
55,928
55,490
Timber and timberlands, net
2,459,508
2,508,372
Intangible assets, net
16,085
17,420
Other long-term assets
209,703
179,554
Total assets
3,548,278
3,550,555
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
115,334
94,861
Current portion of long-term debt
39,996
39,979
Current portion of pension and other postretirement employee benefits
4,926
Total current liabilities
160,256
139,766
Long-term debt
993,562
992,701
80,581
77,396
Deferred tax liabilities, net
38,419
41,790
Other long-term obligations
36,363
35,749
Total liabilities
1,309,181
1,287,402
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 4,000 shares, no shares issued
Common stock, $1 par value, 200,000 and 100,000 shares authorized and 79,628 and 79,683 shares issued and outstanding
79,628
79,683
Additional paid-in capital
2,301,301
2,294,797
Accumulated deficit
(267,725
(208,979
Accumulated other comprehensive income
125,893
97,652
Total stockholders’ equity
2,239,097
2,263,153
Total liabilities and stockholders' equity
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, depletion and amortization
90,327
67,960
Basis of real estate sold
21,624
25,024
Change in deferred taxes
(3,979
(1,359
4,833
10,936
14,165
Equity-based compensation expense
6,472
16,141
Interest received under swaps with other-than-insignificant financing element
(18,651
Other, net
5,648
(455
Change in working capital and operating-related activities, net
(24,107
14,071
Real estate development expenditures
(7,243
(6,986
Funding of pension and other postretirement employee benefits
(2,176
(3,290
Proceeds from insurance recoveries
21,755
26,678
Net cash from operating activities
117,308
458,437
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment additions
(28,068
(44,000
Timberlands reforestation and roads
(17,013
(12,220
Acquisition of timber and timberlands
(1,676
(96,081
Proceeds from property insurance
1,356
Cash acquired in CatchMark merger
23,571
17,279
700
935
Net cash from investing activities
(27,422
(127,795
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to common stockholders
(107,880
(96,578
Repurchase of common stock
(11,406
(4,527
Proceeds from issuance of long-term debt
277,500
Repayment of long-term debt
(303,000
(2,315
(6,120
Net cash from financing activities
(121,601
(132,725
Change in cash, cash equivalents and restricted cash
(31,715
197,917
Cash, cash equivalents and restricted cash at beginning of period
345,591
296,772
Cash, cash equivalents and restricted cash at end of period
313,876
494,689
NONCASH INVESTING AND FINANCING ACTIVITIES
Accrued property, plant and equipment additions
20,141
4,429
Accrued timberlands reforestation and roads
2,834
2,749
Repurchase of common stock pending settlement
1,723
Equity issued as consideration in the CatchMark merger
508,314
Long-term debt and other liabilities assumed in merger with CatchMark
323,102
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 above in the Condensed Consolidated Statements of Cash Flows.
September 30, 2022
484,018
Restricted cash included in other current and long-term assets1
11,077
10,671
Total cash, cash equivalents, and restricted cash
1
Amounts included in restricted cash represent proceeds held by a qualified intermediary that were or are intended to be reinvested in timber and timberlands.
At September 30, 2023 and 2022, $1.8 million and $0, respectively, was classified as Other current assets.
7
Common Stock
Additional Paid-
Accumulated
Accumulated OtherComprehensive
Total Stockholders'
Shares
Amount
in Capital
Deficit
Income
Equity
Balance, December 31, 2022
16,260
Shares issued for stock compensation
233
(233
2,279
Pension plans and OPEB obligations, net of tax
(131
Cash flow hedges, net of tax
(17,335
Common dividends, $0.45 per share
(35,962
Other transactions, net
84
(85
Balance, March 31, 2023
79,916
2,296,927
(228,766
80,186
2,228,263
22,306
(4
1,577
(9
(385
(394
(344
17,719
Dividends on common stock, $0.45 per share
(35,958
93
(93
Balance, June 30, 2023
79,911
2,298,593
(242,896
97,561
2,233,169
2,616
(283
(12,452
(12,735
(35,960
92
(92
Balance, September 30, 2023
Income (Loss)
Balance, December 31, 2021
69,064
1,781,217
(280,910
(43,238
1,526,133
163,880
308
(308
2,056
7,480
43,276
Common dividends, $0.44 per share
(30,524
(25
(78
(103
Balance, March 31, 2022
69,372
1,782,940
(147,632
7,518
1,712,198
120,222
(3
2,368
(95
(4,061
(4,156
915
42,529
Dividends on common stock, $0.44 per share
78
(79
Balance, June 30, 2022
69,280
1,785,383
(62,074
50,962
1,843,551
31
(31
2,409
(8
(363
(371
(35,530
Common stock issued for CatchMark merger
11,474
504,292
515,766
77
(77
Balance, September 30, 2022
80,777
2,292,130
(52,089
84,601
2,405,419
INDEX FOR THE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
Note 2: Segment Information
11
Note 3: Earnings Per Share
13
Note 4: Certain Balance Sheet Components
14
Note 5: Debt
Note 6: Derivative Instruments
15
Note 7: Fair Value Measurements
16
Note 8: Equity-Based Compensation
Note 9: Income Taxes
17
Note 10: Leases
18
Note 11: Pension and Other Postretirement Employee Benefits
19
Note 12: Components of Accumulated Other Comprehensive Income
20
Note 13: CatchMark Merger
21
Note 14: Commitments and Contingencies
NOTE 1. BASIS OF PRESENTATION
General
PotlatchDeltic Corporation and its subsidiaries (collectively referred to in this report as the company, us, we or our) is a leading timberland Real Estate Investment Trust (REIT) with operations in nine states. We are engaged in activities associated with timberland management, including the sale of timber, the management of nearly 2.2 million acres of timberlands and the purchase and sale of timberlands. We are also engaged in the manufacturing and sale of wood products and the development of real estate. Our timberlands, real estate development projects and all of our wood products facilities are located within the continental United States. The primary market for our products is the United States. We converted to a REIT effective January 1, 2006.
Condensed Consolidated Financial Statements
The accompanying unaudited Condensed Consolidated Financial Statements provide an overall view of our results and financial condition and reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Except as otherwise disclosed in these Notes to Condensed Consolidated Financial Statements, such adjustments are of a normal, recurring nature. Intercompany transactions and accounts have been eliminated in consolidation. The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. Certain disclosures normally provided in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted. This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on February 16, 2023. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year.
Increased Authorized Shares of Common Stock
On May 1, 2023, the stockholders of the company approved an amendment (the “Amendment”) to the Company’s Third Restated Certificate of Incorporation (the “Charter”) to increase the number of authorized shares of the company’s common stock from 100 million to 200 million. The Amendment became effective upon the filing of the Certificate of Amendment to the Charter with the Secretary of State of the State of Delaware on May 1, 2023.
Use of Estimates
The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and requires judgments affecting the amounts reported in the financial statements and the accompanying notes. Actual results may differ materially from our estimates.
Recent Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies and are adopted by the company as of the specified effective date. For the nine months ended September 30, 2023, there were no new accounting pronouncements that management believes materially affect the company’s present or future results of operations, overall financial condition, liquidity or disclosures.
NOTE 2. SEGMENT INFORMATION
Our operations are organized into three reportable segments: Timberlands, Wood Products and Real Estate. Management activities in the Timberlands segment include planting and harvesting trees and building and maintaining roads. The Timberlands segment also generates revenues from non-timber resources such as hunting leases, recreation permits and leases, mineral rights contracts, oil and gas royalties and carbon sequestration. The Wood Products segment manufactures and sells 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, a 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 sizable portion of the Timberlands segment’s total revenues. Our other segments generally do not generate intersegment revenues. These intercompany transactions are eliminated in consolidation.
The reportable segments follow the same accounting policies used for our Condensed Consolidated Financial Statements, with the exception of the valuation of inventories, which are reported using the average cost method for purposes of reporting segment results.
The following table presents our revenues by major product:
Timberlands
Northern region
Sawlogs
48,538
78,668
138,685
223,102
Pulpwood
330
582
1,102
1,561
362
281
995
797
Total Northern revenues
49,230
79,531
140,782
225,460
Southern region
31,863
29,618
91,419
77,364
17,503
17,694
48,641
41,542
Stumpage
7,057
4,028
20,438
9,494
4,155
3,705
12,383
9,859
Total Southern revenues
60,578
55,045
172,881
138,259
Total Timberlands revenues
109,808
134,576
313,663
363,719
Wood Products
Lumber
132,852
151,540
379,939
622,228
Residuals and Panels
32,256
41,891
105,633
133,578
Total Wood Products revenues
165,108
193,431
485,572
755,806
Real Estate
Rural real estate
11,616
6,182
34,005
44,268
Development real estate
4,289
10,205
16,498
28,429
3,247
2,621
9,576
7,112
Total Real Estate revenues
19,152
19,008
60,079
79,809
Total segment revenues
294,068
347,015
859,314
1,199,334
Intersegment Timberlands revenues1
(28,559
(40,322
(89,736
(121,694
Other intersegment revenues
(6
Total consolidated revenues
Intersegment revenues represent logs sold by our Timberlands segment to our Wood Products segment.
Management uses Adjusted EBITDDA to evaluate the operating performance and effectiveness of operating strategies of our segments and allocation of resources to them. EBITDDA is calculated as net income before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses. Our calculation of Adjusted EBITDDA may not be comparable to that reported by other companies.
The following table summarizes information for each of the company’s reportable segments and includes a reconciliation of Total Adjusted EBITDDA to income before income taxes. Corporate information is included to reconcile segment data to the Condensed Consolidated Financial Statements.
Adjusted EBITDDA:
42,062
64,482
118,017
198,806
15,039
31,258
26,975
288,465
14,140
45,867
66,080
Corporate
(11,696
(12,629
(32,958
(36,125
Eliminations and adjustments
(3,292
3,839
1,599
4,596
Total Adjusted EBITDDA
56,278
101,090
159,500
521,822
Interest expense, net1
(30,248
(27,329
(89,099
(66,838
(6,109
(6,845
(21,624
(25,024
(26,007
(2,453
16,326
24,913
39,436
34,505
(Loss) gain on disposal of fixed assets
(18
23
(39
Depreciation, depletion and amortization:
19,267
16,963
55,623
40,687
10,740
10,069
32,723
25,226
120
175
397
518
121
122
356
407
30,248
27,329
89,099
66,838
Bond discounts and deferred loan fees1
410
378
1,228
1,122
Total depreciation, depletion and amortization
30,658
27,707
Basis of real estate sold:
6,111
6,845
21,629
25,033
(2
(5
Total basis of real estate sold
6,109
Bond discounts and deferred loan fees are reported within interest expense, net on the Condensed Consolidated Statements of Operations.
12
NOTE 3. 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
182
111
137
104
Restricted stock units
65
35
40
33
Diluted weighted-average shares outstanding
For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if later) and assumes the related proceeds were used to repurchase common stock at the average market price during the period. Related proceeds include future compensation cost associated with the stock award.
For the three and nine months ended September 30, 2023, there were approximately 2,000 and 28,000 stock-based awards, respectively, that were excluded from the calculation of diluted earnings per share as they were anti-dilutive. For the three and nine months ended September 30, 2022, there were approximately 117,000 and 136,000 stock-based award shares, respectively, that were excluded from the calculation of diluted earnings per share as they were anti-dilutive.
Share Repurchase Program
On August 30, 2018, our board of directors authorized management to repurchase up to $100.0 million of common stock with no time limit set for the repurchase (the 2018 Repurchase Program). During the three and nine months ended September 30, 2022, we repurchased 8,444 and 103,010 shares of our common stock (for total consideration of $0.4 million and $4.5 million), respectively, in open-market transactions under the 2018 Repurchase Program.
On August 31, 2022, our board of directors authorized management to repurchase up to $200.0 million of our common stock with no set time limit for the repurchase (the 2022 Repurchase Program). Concurrently, the board of directors terminated the remaining repurchase authorization under the 2018 Repurchase Program.
Shares under the 2022 Repurchase Program may be repurchased in open market transactions, including pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934 (the Trading Plan), or through privately negotiated transactions. The timing, manner, price and amount of repurchases will be determined according to, and subject to, the terms of the Trading Plan, and, subject to the terms of the Trading Plan, the 2022 Repurchase Program may be suspended, terminated or modified at any time for any reason.
During the three and nine months ended September 30, 2023, we repurchased 282,988 and 291,749 shares of our common stock (for total consideration of $12.7 million and $13.1 million) respectively, in open-market transactions under the 2022 Repurchase Program. No shares were repurchased under the 2022 Repurchase Program during the nine months ended September 30, 2022. At September 30, 2023, we had remaining authorization of $136.9 million for future stock repurchases under the 2022 Repurchase Program. Transaction costs are not counted against authorized funds.
We record share repurchases upon trade date as opposed to the settlement date when cash is disbursed. We record a liability to account for repurchases that have not been cash settled. We retire shares upon repurchase. Any excess repurchase price over par is recorded in accumulated deficit.
NOTE 4. CERTAIN BALANCE SHEET COMPONENTS
Inventories
Logs
40,300
30,586
Lumber, panels and veneer
38,662
35,888
Materials and supplies
23,353
21,262
Total inventories
102,315
87,736
Less: LIFO reserve
(19,778
Total inventories, net
Property, plant and equipment
634,096
588,935
Less: accumulated depreciation
(299,746
(270,751
Total property, plant and equipment, net
Ola, Arkansas sawmill fire
On June 13, 2021, a fire occurred at our Ola, Arkansas sawmill. There were no injuries or environmental issues from the fire. The damage was principally limited to the large log primary breakdown area of the mill. The new equipment has been installed and the large log line restarted in September 2022. We have adequate property damage and business interruption insurance, subject to a $2.0 million deductible. Insurance recoveries are recorded when deemed probable and reasonably estimable. In September 2023, we finalized our claim with the insurance carriers resulting in $89.4 million of total insurance recoveries, net of a $2.0 million deductible, for both the property damage and business interruption claims. During the three and nine months ended September 30, 2023, we recorded insurance recoveries of $16.3 million and $39.4 million, respectively, from the Ola sawmill claim, all of which was recognized as a gain on fire damage in the Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2022, we recorded $24.9 million and $34.1 million, respectively, as gain on fire damage.
Timber and timberlands
2,366,877
2,416,134
Logging roads
92,631
92,238
Total timber and timberlands, net
Accounts payable
37,845
12,241
Accrued payroll and benefits
20,006
29,051
Deferred revenue1
14,858
10,860
Accrued taxes
6,878
7,161
Accrued interest
6,912
7,778
Other current liabilities
28,835
27,770
Total accounts payable and accrued liabilities
Deferred revenue predominately relates to hunting and other access rights on our timberlands, payments received for lumber shipments where control of goods has not transferred, member-related activities at an owned country club and any post-close obligations for real estate sales. These deferred revenues are recognized over the term of the contracts, which is typically twelve months or less, except for country club initiation fees which are recognized over the average life of club membership.
NOTE 5. DEBT
TERM LOANS
At September 30, 2023, our total outstanding principal on our long-term debt of $1.0 billion included $971.0 million of term loans under our Second Amended and Restated Term Loan Agreement (Amended Term Loan Agreement) with our primary lender, which includes a $40 million term loan that we expect to refinance upon its maturity in December 2023. Certain
borrowings under the Amended Term Loan Agreement are at the one-month Secured Overnight Financing Rate ("SOFR")-indexed variable rates, plus a spread between 1.66% and 2.30%. We have entered into SOFR-indexed interest rate swaps to fix the interest rate on these variable rate term loans. See Note: 6 Derivative Instruments for additional information.
CREDIT AGREEMENT
On May 18, 2023, we entered into a First Amendment to the Third Amended and Restated Credit Agreement (Amended Credit Agreement). The Amended Credit Agreement provides for loans based on SOFR instead of the London Inter-Bank Offered Rate (“LIBOR”), provides us the option to borrow based on a daily SOFR or term SOFR basis, and provides mechanics relating to the transition from the use of SOFR to a replacement benchmark rate upon the occurrence of certain transition events.
The Amended Credit Agreement provides for a $300.0 million revolving line of credit that matures February 14, 2027. As provided in the Amended Credit Agreement, borrowing capacity may be increased by up to an additional $500.0 million. The revolving line of credit also includes a sublimit of $75.0 million for the issuance of standby letters of credit and a sublimit of $25.0 million for swing line loans. Usage under either or both sub facilities reduces availability under the revolving line of credit. We may utilize borrowings under the Amended Credit Agreement to, among other things, refinance existing indebtedness and provide funding for working capital requirements, capital projects, acquisitions and other general corporate expenditures. At September 30, 2023, there were no borrowings under the revolving line of credit and approximately $0.7 million of our revolving line of credit was utilized for outstanding letters of credit.
We were in compliance with all debt and credit agreement covenants at September 30, 2023.
NOTE 6. DERIVATIVE INSTRUMENTS
From time to time, we enter into derivative financial instruments to manage certain cash flow and fair value risks. Derivatives designated and qualifying as a hedge of the exposure to variability in the cash flows of a specific asset or liability that is attributable to a particular risk, such as interest rate risk, are considered cash flow hedges. All our cash flow hedges are expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the hedges.
At September 30, 2023, we have interest rate swaps associated with $721.0 million of SOFR-indexed term loan debt. These cash flow hedges convert variable rates ranging from one-month SOFR plus 1.66% to 2.30%, to fixed rates ranging from 2.19% to 4.79% before patronage credits from lenders. At September 30, 2023, we also have $250.0 million of forward-starting interest rate swaps designated as cash flow hedges for expected future debt refinances that require settlement on the stated maturity date.
The gross fair values of derivative instruments at September 30, 2023 and December 31, 2022, were $166.3 million and $144.6 million, respectively, all of which were classified in Other assets, non-current on our Condensed Consolidated Balance Sheets. Derivative instruments that mature within one year, as a whole, are classified as current.
The following table details the effect of derivatives on the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Income:
Location
Derivatives designated in cash flow hedging relationships:
Interest rate contracts
Income recognized in other comprehensive income (loss), net of tax
33,607
32,900
42,353
115,408
Amounts reclassified from accumulated other comprehensive income (loss), net of tax1
5,143
13,505
(3,122
7,971
8,280
15,783
18,593
1 Realized gains and losses on interest rate contracts consist of realized net cash received or paid and interest accruals on the interest rate swaps during the periods in addition to amortization of amounts out of other comprehensive (loss) income related to certain terminated hedges and adjustments to interest expense resulting from amortization of inception value of certain off-market designated hedges. Net cash received or paid is included within Interest expense, net in the Condensed Consolidated Statements of Operations.
At September 30, 2023, the amount of net gains expected to be reclassified into earnings in the next 12 months is approximately $20.9 million. However, this expected amount to be reclassified into earnings is subject to volatility as the ultimate amount recognized in earnings is based on the SOFR rates at the time of net swap cash payments.
NOTE 7. FAIR VALUE MEASUREMENTS
The following table presents the estimated fair values of our financial instruments:
CarryingAmount
FairValue
Derivative assets related to interest rate swaps (Level 2)
166,256
144,583
Long-term debt, including current portion (Level 2):
Term loans
(969,757
(962,843
(969,269
(961,632
Revenue bonds
(65,735
(64,549
(64,602
Total long-term debt1
(1,035,492
(1,027,392
(1,035,004
(1,026,234
Company owned life insurance asset (COLI) (Level 3)
4,923
4,311
The carrying amount of long-term debt includes principal and unamortized discounts.
The fair value of interest rate swaps is determined using a discounted cash flow analysis, based on third-party sources, on the expected cash flows of each derivative. The analysis reflects the contractual terms of the derivatives, including the period to maturity and uses observable market-based inputs, including interest rate forward curves.
The fair value of our long-term debt is estimated based upon quoted market prices for similar debt issues or estimated based on average market prices for comparable debt when there is no quoted market price.
The contract value of our company owned life insurance is based on the amount at which it could be redeemed and, accordingly, approximates fair value.
We believe that our other financial instruments, including cash and cash equivalents, restricted cash, receivables and payables have net carrying values that approximate their fair values with only insignificant differences. This is primarily due to the short-term nature of these instruments.
NOTE 8. EQUITY-BASED COMPENSATION
We issue new shares of common stock to settle performance stock awards (PSAs), restricted stock units (RSUs) and deferred compensation stock equivalent units. At September 30, 2023, approximately 1.8 million shares were available for future use under our long-term incentive plans.
Share-based compensation activity during the nine months ended September 30, 2023, included the following:
Granted
Vested
Forfeited
Performance Share Awards (PSAs)
106,342
28,177
Restricted Stock Units (RSUs)
127,079
17,225
12,727
Approximately 0.2 million shares of common stock were issued to employees during the nine months ended September 30, 2023 as a result of PSA and RSU vesting during 2022 and 2023.
The following table details compensation expense and the related income tax benefit for company specific equity-based awards:
Equity-based compensation expense:
Performance share awards
1,483
1,535
3,623
4,351
1,084
825
2,702
2,335
Deferred compensation stock equivalent units expense
49
147
Total equity-based compensation expense
6,833
Total tax benefit recognized for equity-based expense
135
119
394
338
Additionally, during the three months ended September 30, 2022, we recognized a $9.3 million expense for the accelerated vesting of CatchMark equity awards related to the CatchMark merger which is included in CatchMark merger-related expenses on the Condensed Consolidated Statements of Operations. See Note 13: CatchMark Merger for additional information.
Performance Share Awards
The weighted average grant date fair value of PSAs granted in 2023 was $61.21 per share. PSAs granted under the stock incentive plans have a three-year performance period and shares are issued at the end of the period if the performance measures are met. The number of shares actually issued, as a percentage of the amount subject to the PSA, could range from 0% to 200%. PSAs granted under the stock incentive plans do not have voting rights unless and until shares are issued upon settlement. If shares are issued at the end of the performance measurement period, the recipients will receive dividend equivalents in the form of additional shares of common stock at the date of settlement equal to the dividends that would have been paid on the shares earned had the recipients owned the shares during the three-year period. The share awards are not considered participating securities.
The following table presents the key inputs used in the Monte Carlo simulation to calculate the fair value of the performance share awards granted in 2023:
Stock price as of valuation date
47.55
Risk-free rate
4.14
%
Expected volatility
36.24
Expected dividend yield1
Expected term (years)
3.00
Full dividend reinvestment assumed.
Restricted Stock Units
The weighted average fair value of all RSUs granted during the nine months ended September 30, 2023, was $47.01 per share. The fair value of RSUs granted equaled our common share price on the date of grant factoring in any required post-vesting holding periods. The RSU awards granted accrue dividend equivalents based on dividends paid during the RSU vesting period. Recipients will receive dividend equivalents in the form of additional shares of common stock at the date the vested RSUs are settled. Any forfeited RSUs will not receive dividends. The share awards are not considered participating securities.
NOTE 9. INCOME TAXES
As a REIT, we generally are not subject to federal and state corporate income taxes on income from investments in real estate, including our timberlands, that we distribute to our stockholders. We conduct certain activities through our PotlatchDeltic taxable REIT subsidiaries (TRS) which are subject to corporate level federal and state income taxes. These activities are principally comprised of our wood products manufacturing operations and certain real estate investments. Therefore, income tax expense or benefit is primarily due to pre-tax book income or loss of the TRS, as well as permanent book versus tax differences and discrete items.
During the second quarter of 2023, we reduced our federal-effected deferred blended state tax rate as a result of changes in tax rates and tax laws enacted during the quarter in certain states in which our TRS subsidiaries operate. The effect of the change resulted in a $1.0 million reduction to our net deferred tax liability and an offsetting reduction to tax expense, all of which was recorded as a discrete item in the second quarter of 2023.
NOTE 10. LEASES
We lease certain equipment, office space and land. Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
The following table presents supplemental balance sheet information related to lease assets and liabilities:
Classification
Assets
Operating lease assets
9,456
9,306
Finance lease assets1
11,608
13,213
Total lease assets
21,064
22,519
Liabilities
Current:
Operating lease liabilities
2,379
2,570
Finance lease liabilities
4,390
4,834
Noncurrent:
7,067
6,716
7,090
8,179
Total lease liabilities
20,926
22,299
Finance lease assets are presented net of accumulated amortization of $8.8 million and $7.9 million as of September 30, 2023 and December 31, 2022, respectively.
The following table presents the components of lease expense:
Operating lease costs1
772
805
2,454
2,633
Finance lease costs:
Amortization of leased assets
1,206
1,137
3,768
3,061
Interest expense
115
90
339
226
Net lease costs
2,093
2,032
6,561
5,920
Excludes short-term leases and variable lease costs, which are immaterial.
The following table 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
2,498
2,733
Operating cash flows for finance leases
Financing cash flows for finance leases
3,662
3,110
Leased assets exchanged for new lease liabilities:
Operating leases
2,407
3,931
Finance leases
2,604
5,761
NOTE 11. PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS
The following table details the components of net periodic cost (benefit) of our pension plans and other postretirement employee benefits (OPEB):
Pension
OPEB
Service cost
1,355
1,652
27
79
Interest cost
3,139
2,611
294
228
Expected return on plan assets
(3,028
(2,259
Amortization of prior service cost
155
Amortization of actuarial (gain) loss
(21
1,150
(166
(96
Total net periodic cost
1,455
3,173
366
4,066
5,153
82
237
9,414
8,034
881
686
(9,081
(7,662
32
55
467
(63
4,252
(498
(286
Net periodic cost before pension settlement charge
4,368
9,832
465
1,104
Net periodic cost
23,997
During the nine months ended September 30, 2023 and 2022, funding of pension and other postretirement employee benefit plans was $2.2 million and $3.3 million, respectively.
Pension Annuitization
In March 2022, we transferred $75.6 million of our qualified pension plan (the Plan) assets to an insurance company for the purchase of a group annuity contract. As a result of the transaction, the insurance company assumed responsibility for annuity administration and benefit payments to select retirees and terminated vested participants, with no change to participants' pension benefits. We recorded a non-cash pretax settlement charge of $14.2 million in non-operating expense, net, as a result of accelerating the recognition of actuarial losses included in Accumulated Other Comprehensive Income that would have been recognized in future periods. The settlement triggered a remeasurement of plan assets and liabilities.
NOTE 12. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table details changes in amounts included in our Accumulated Other Comprehensive Income (AOCI) by component on our Condensed Consolidated Balance Sheets, net of tax:
Pension and Other Postretirement Employee Benefits
Balance at beginning of period
(28,969
(42,974
(28,494
(51,369
Unrecognized gains (losses) arising in AOCI during the period:
Gross
(6,157
Tax effect
1,570
Reclassifications from AOCI to earnings:
Pension settlement1
Other1
(177
(529
4,488
45
(314
133
(4,757
Net of tax amount
(396
Other reclassifications
(211
Balance at end of period
(29,101
(42,060
Cash Flow Hedges
126,530
93,936
126,146
8,131
Unrecognized gains arising in AOCI during the period:
34,334
28,802
43,207
116,229
(727
4,098
(899
(821
Gross2
(5,266
(170
(13,829
3,274
123
324
(152
28,803
154,994
126,661
Accumulated other comprehensive income, end of period
1 Included in the computation of net periodic pension costs.
2 Included in Interest expense, net on the Condensed Consolidated Statement of Operations.
See Note 11: Pension and Other Postretirement Employee Benefits and Note 6: Derivative Instruments for additional information.
NOTE 13. CATCHMARK MERGER
On September 14, 2022, CatchMark Timber Trust, Inc. (CatchMark) and CatchMark Timber Operating Partnership, L.P. (the Partnership) merged into a wholly owned subsidiary (Merger Sub) of PotlatchDeltic, pursuant to the terms of a merger agreement dated May 29, 2022, with the Merger Sub surviving the mergers. CatchMark owned approximately 348,000 acres of superior site index timberlands located in Alabama, Georgia and South Carolina. The CatchMark timber and timberlands assets and operations are included in our Timberlands segment within the Southern region.
As a result of the merger, we issued approximately 11.5 million shares of PotlatchDeltic common stock, including: (i) 11.3 million shares in exchange for the outstanding shares of CatchMark common stock, which included unvested CatchMark share-based awards that fully vested upon closing of the merger; and (ii) 0.2 million shares in exchange for the Partnership OP Units. We capitalized transaction costs of $9.3 million for items such as investment banking fees, legal services, and other professional fees directly attributable to the merger.
We accounted for the transaction as an asset acquisition as substantially all the value of the acquisition was concentrated in the acquired timber and timberlands. We allocated the cost of the acquisition to the net assets acquired based on their relative estimated fair value on the acquisition date. This resulted in an allocation of $782.3 million to timber and timberlands, $3.0 million to intangible assets, $32.0 million to other assets and $23.6 million for cash acquired in the merger. Additionally, we assumed $323.1 million of liabilities, including $300.0 million of outstanding long-term debt. Immediately following the merger, we refinanced $277.5 million of the long-term debt assumed in the merger and repaid the remaining $22.5 million with cash on hand. We also entered into $277.5 million of interest rate swaps to fix the interest rates on the refinanced long-term debt.
During the three and nine months ended September 30, 2023, we incurred non-capitalizable merger costs in connection with the CatchMark merger of approximately $0 and $2.5 million, respectively, primarily consisting of post-merger fees for professional services. During the three and nine months ended September 30, 2022, we incurred non-capitalizable merger costs of $26.0 million in connection with the CatchMark merger, primarily for severance benefits, tax gross-up payments to holders of Partnership OP Units and share-based compensation for the acceleration of CatchMark equity awards that fully vested upon closing of the merger and were allocated to the post-merger period. These non-capitalizable merger costs are included in CatchMark merger-related expenses in our Condensed Consolidated Statements of Operation.
NOTE 14. 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, operating results or net cash flow.
ENVIRONMENTAL MATTER
Pursuant to the 2002 Asset Purchase Agreement under which Sappi Cloquet LLC (Sappi) purchased our Cloquet, Minnesota pulp and paper mill (the Plant), we agreed to indemnify Sappi from certain environmental liabilities accruing from the pre-sale operations of the Plant. In February 2021, we were notified by Sappi that the Environmental Protection Agency (EPA) contacted Sappi about the opportunity to participate with the Minnesota Pollution Control Agency (MPCA) and the EPA in a voluntary federal sediment remediation program under the Great Lakes Legacy Act (GLLA) for a project in the St. Louis River Area of Concern, which runs from Cloquet, Minnesota to Lake Superior. The GLLA is a sediment remediation program administered by EPA that provides up to 65% federal funding for the remediation of contaminated sediments in the Great Lakes region. The GLLA program requires at least 35% cash or in-kind contributions from non-federal sponsors (NFS). The EPA’s invitation to Sappi made no demands on or claims against Sappi, nor have EPA or MPCA made any demands or claims against PotlatchDeltic.
The identified sediment remediation project (the Project) at Thomson Reservoir is downstream from the Plant. The Plant was identified for potential partnership with EPA and MPCA on the Project based on the Plant’s historic direct discharges of wastewater and leachate from the Plant’s landfill into the St. Louis River prior to the re-routing of the discharges in 1979 to a public wastewater treatment facility. After multiple discussions with the MPCA and completion of our extensive due diligence on this matter, we informed the MPCA in January 2023 that we were interested in voluntarily participating in the Project, subject to an equitable division with the MPCA of the NFS share of the costs.
We executed a Project agreement with the EPA and the MPCA in October 2023. Although no contracts for the remediation work itself have been executed to date, our share of the total Project costs is estimated between $5.6 million and $6.7 million. At September 30, 2023, we have accrued $5.6 million for our estimated contribution to the Project. While it is reasonably possible that costs may change as the Project develops and work contracts are executed, we are unable to estimate at this time the amount of change, if any, which may be required for our share of this matter in the future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, expectations regarding economic conditions, including interest rates and our ability to offset the impact of inflation; expected seasonal fluctuations in our business segments; expected effectiveness of our hedging instruments and swaps; amount of net earnings on cash flow hedges expected to be reclassified into earnings in the next 12 months; expected return on pension assets; anticipated share repurchases and dividend payments; anticipated cash balances, cash flows from operations and expected liquidity; potential uses of our credit facility; expected timing to receive the remaining insurance proceeds for the Ola, Arkansas sawmill fire; expectations regarding debt obligations, interest payments and debt refinancing; maintenance of our investment grade credit rating; expectations regarding the U.S. housing market and home repair and remodeling activity; the lumber and log markets and pricing; lumber shipment volumes; timber harvest volumes; rural real estate and real estate development sales; sufficiency of cash and any necessary borrowings to meet operating requirements; expected 2023 and future capital expenditures; costs associated with the expansion and modernization of our Waldo, Arkansas sawmill, the expected timing of completion of the project, and expected increases in productivity and reduction in operating costs resulting from the project; the expected dollar amount of our share of the total sediment remediation project costs related to Thompson Reservoir; expectations regarding our ability to participate in the development of the natural climate solutions and forest carbon sequestration markets; and similar matters. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often involve use of words such as expects, may, could, should, will, believes, anticipates, estimates, projects, intends, plans, or approximately, or similar words or terminology. These forward-looking statements reflect our current views regarding future events based on estimates and assumptions and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. The realization of our expectations and the accuracy of our assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to:
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, 2022. Investors should not interpret the disclosure of a risk to imply that the risk has not already materialized. Forward-looking statements contained in this report present our views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of our views to reflect events or circumstances occurring after the date of this report.
Our Company
We are a leading timberland REIT with ownership of nearly 2.2 million acres of timberland. We also own six sawmills and an industrial grade plywood mill, a residential and commercial real estate development business and a rural timberland sales program.
Our operations are organized into three business segments: Timberlands, Wood Products and Real Estate. Our Timberlands segment supplies our Wood Products segment with a portion of its wood fiber needs. These intersegment revenues are based on prevailing market prices and typically represent a sizable portion of the Timberlands segment’s total revenues. Our other segments generally do not generate intersegment revenues. In the discussion of our consolidated results of operations, our revenues and expenses are reported after elimination of intersegment revenues and expenses. In the Business Segment Results discussion below, each segment’s revenues and expenses, as applicable, are presented before elimination of intersegment revenues and expenses.
Our business segments have been and will continue to be influenced by a variety of factors, including tariffs, quotas and trade agreements, changes in timber prices and in harvest levels from our timberlands, competition, timberland valuations, demand for our non-strategic timberland for higher and better use purposes, lumber prices, weather conditions, disruptions or inefficiencies in our supply chain including the availability of transportation, the efficiency and level of capacity utilization of our Wood Products manufacturing operations, changes in our principal expenses such as log costs, inflation, asset dispositions or acquisitions, impact of pandemics (such as COVID-19 and its variants), fires (such as the Ola, Arkansas sawmill fire and fires on our timberlands), other natural disasters and other factors.
Additionally, governments and businesses across the globe are taking action on climate change and are making significant commitments towards reducing greenhouse gas emissions to net zero. Achieving these commitments will require governments and companies to take major steps to modify operations, invest in low-carbon activities and purchase offsets to reduce environmental impacts. We believe we are well positioned to help entities achieve these commitments through natural climate solutions, including forest carbon sequestration and carbon capture, selling or leasing our non-core timberlands to entities focused on developing solar or wind power generation facilities, and selling pulpwood and sawmill residuals for green energy production.
Non-GAAP Measures
To supplement our financial statements presented in accordance with generally accepted accounting principles in the United States (GAAP), we present certain non-GAAP measures on a consolidated basis, including Total 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. The presentation of these non-GAAP financial measures should be considered only as supplemental to, and are not intended to be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP. Our definitions of these non-GAAP measures may differ from similarly titled measures used by other companies and may not be the same as or comparable to other similarly titled non-GAAP measures presented by other companies due to potential inconsistencies in methods of calculation.
See Note 2: Segment Information in the Notes to the Condensed Consolidated Financial Statements for information related to the use of Adjusted EBITDDA for our segments.
Business and Economic Trends Affecting Our Operations
The operating results of our Timberlands, Wood Products and Real Estate business segments have been and will continue to be affected by the cyclical nature of the forest products industry. Log and pulpwood sales volumes in our Timberlands segment are typically lower in the first half of each year as winter rains in the Southern region and spring thaw in the Northern region limit timber harvesting operations due to softened roadbeds and wet logging conditions that restrict access to logging sites. The third quarter is typically our Timberlands segment's strongest production quarter. Demand for our manufactured wood products typically decreases in the winter months when construction activity is slower, while demand typically increases during the spring, summer and fall when construction activity is generally higher.
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 both demand for new
homes and home improvement and repair of existing homes in the United States. Our Timberlands segment is also influenced by the availability of harvestable timber. In general, our Idaho log market is typically in balance but can be tensioned from time to time, while Southern log markets have more available supply. However, additional mill capacity being added in the U.S. South has led to tightening of markets in certain geographies.
Rural real estate dispositions and acquisitions can also be adversely affected when access to any properties to be sold or considered for acquisition is limited due to adverse weather conditions. Development real estate sales occur throughout the year and are dependent upon when our construction of residential neighborhoods and commercial lots are substantially completed. The timing of these sales can also be impacted by contractor availability to complete the necessary infrastructure and other improvements, in addition to weather.
Uncertainty on the overall direction of the U.S. economy and housing affordability, which has been negatively impacted by higher interest rates and rising construction costs, have dampened consumer confidence and contributed to a decline in new home construction and existing home sales activity in 2023. Actions by the U.S. Federal Reserve, the overall condition of the economy, and fluctuations in financial markets are all factors that have influenced long-term interest rates with the average 30-year fixed mortgage rate climbing to a nearly 23-year high of 7.3% at the end of September 2023. Further, the National Association of Home Builders (NAHB) reported the NAHB/Wells Fargo Housing Market Index (HMI) was 40 in October 2023, below the key break-even measure of 50 for the second consecutive month, as builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are being priced out of the market because of higher interest rates.
Additionally, in October 2023, the U.S. Census bureau reported total privately-owned housing starts for September 2023 were 1.4 million on a seasonally adjusted annual basis, which was down 7.2% from September 2022. However, authorized building permits for privately-owned single-family housing was above 960,000 units on a seasonally adjusted annual basis for September 2023, which was the fifth month in a row above 900,000 units and 11.6% higher than September 2022. Overall, we believe long-term underlying housing fundamentals remain favorable, due to a shortage of homes, lower than historical-average existing inventory for sale and a large millennial demographic in their prime home-buying years.
The repair and remodel sector is the largest market segment for lumber demand. In the current high interest rate environment, prospective homebuyers with lower mortgage rates on their existing home are more likely to stay and undertake remodeling projects versus move into a new home. While this dynamic has created some stability in the sector, higher interest rates and falling existing home sales are expected to put pressure on the repair and remodel market. While spending in the sector for owner-occupied homes is expected to decrease at a moderate rate over the coming year, we believe long-term favorable underlying fundamentals including solid household balance sheets, strong levels of home equity and an aging existing housing stock will continue to support repair and remodel demand for our products.
In our Timberlands segment, a significant portion of our Idaho sawlog prices are indexed on a four-week lag to lumber prices. The Northern region experienced a decrease in sawlog prices during the first nine months of the year because of lower indexed lumber prices compared to the prior year. In the Southern region, sawlog and pulpwood prices have been relatively stable year over year. Our total harvest volume of 2.0 million tons in the third quarter of 2023 was slightly higher than the third quarter of 2022, primarily due to the addition of the CatchMark timberlands in September 2022, which more than offset lower Northern harvest volume due to the acceleration of our harvest schedule to earlier in 2023 as a result of favorable harvesting conditions. We expect to harvest between 1.8 and 1.9 million tons during the fourth quarter of 2023, with approximately 83% of the volume in the Southern region.
During the second quarter of 2021, we experienced a fire at our Ola, Arkansas sawmill. The damage was principally limited to the large log primary breakdown machine center, which significantly impacted the sawmill’s lumber production. We installed the new equipment and the large log line restarted in September 2022. In September 2023, we finalized our insurance claim on the Ola, Arkansas sawmill fire with the insurance carriers. See Note 4: Certain Balance Sheet Components in the Notes to the Condensed Consolidated Financial Statements for additional details.
In our Wood Products segment, lumber shipments increased compared to the prior year primarily due to greater lumber production at our Ola sawmill. We shipped 276 million board feet of lumber during the third quarter of 2023 and expect to ship between 270 and 280 million board feet of lumber during the fourth quarter of 2023.
Our Real Estate segment benefited from increased rural real estate acres sold during the third quarter of 2023. We anticipate selling approximately 6,800 acres of rural land and approximately 37 residential lots during the fourth quarter of 2023.
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
(41,184
(308,068
5,427
73,659
425
(466
(23,554
8,587
(4,931
(11,568
44,708
(29,616
(352,776
309
2,810
1,580
4,861
371
639
(27,356
(330,301
5,076
62,485
(22,280
(267,816
Total Adjusted EBITDDA1
(44,812
(362,322
See Liquidity and Performance Measures for a reconciliation of Total Adjusted EBITDDA to net income, the closest comparable GAAP measure, for each of the periods presented.
Third Quarter 2023 Compared with Third Quarter 2022
Revenues were $265.5 million, a decrease of $41.2 million compared with the third quarter of 2022, primarily due to declines in lumber prices, Northern sawlog prices, and fewer real estate development sales in Chenal Valley. These decreases were partially offset by increases in lumber shipments, harvest volumes in the Southern region, and rural real estate acres sold.
Cost of goods sold increased $5.4 million compared with the third quarter of 2022, mainly due to higher manufacturing costs driven by increased lumber shipments, including shipments from the Ola sawmill following the large log line restart in September 2022. These increases were partially offset by lower shipping costs, lower log and haul costs from a decline in harvest activities in the Northern region, and lower land basis on fewer real estate development sales.
There were no CatchMark merger-related expenses for the three months ended September 30, 2023. CatchMark merger-related expenses for the three months ended September 30, 2022, were $26.0 million. This included $7.5 million for severance benefits, $9.3 million for accelerated vesting of CatchMark equity awards that fully vested upon closing of the merger and were allocated to the post-merger period, and $8.1 million for tax gross-up payments to holders of CatchMark Partnership OP Units.
During the third quarter of 2023, we recognized insurance recoveries of $16.3 million for fire damage at our Ola, Arkansas sawmill, compared to the third quarter of 2022, when we recognized insurance recoveries for fire damage of $25.0 million and disposal costs of $0.1 million.
25
Non-operating pension and other postretirement benefit costs
Non-operating pension and other postretirement benefit costs decreased $1.6 million compared to the third quarter of 2022 primarily as a result of an increase in the discount rate used to determine the benefit obligations and an increase in the expected return on plan assets for our qualified pension plan.
Income taxes are primarily due to income or loss from our PotlatchDeltic taxable REIT subsidiaries (TRS). For the three months ended September 30, 2023, we recorded income tax expense of $4.7 million on TRS income before tax of $18.4 million, which included the $16.3 million gain on fire damage. For the three months ended September 30, 2022, we recorded income tax expense of $9.8 million on TRS income before tax of $40.9 million which included the $24.9 million gain on fire damage.
Total Adjusted EBITDDA for the third quarter of 2023 decreased $44.8 million compared to the third quarter of 2022 primarily due to lower lumber and Northern sawlog prices, fewer real estate development sales and lower harvest volume in the Northern region. These decreases in Total Adjusted EBITDDA were partially offset by increases in lumber shipments, harvest volumes in the Southern region, and rural real estate acres sold. Refer to the Business Segment Results below for further discussions on activities for each of our segments. See Liquidity and Performance Measures for a reconciliation of Total Adjusted EBITDDA to net income, the closest comparable GAAP measure, for each of the periods presented
Year to Date 2023 Compared with Year to Date 2022
Revenues were $769.6 million, a decrease of $308.1 million compared with the first nine months of 2022, primarily due to declines in lumber and Northern sawlog prices, fewer rural real estate acres sold, and fewer real estate development sales in Chenal Valley. These decreases were partially offset by increased harvest volumes primarily from harvest activity on acquired CatchMark timberlands, and increased lumber shipments primarily from our Ola, Arkansas sawmill.
Cost of goods sold increased $73.7 million compared with the first nine months of 2022, driven mainly by higher manufacturing, logging, and hauling costs as a result of increased lumber shipments and harvest volumes. These increases were partially offset by lower shipping costs and lower land basis on fewer rural and development real estate sales.
Merger-related expenses were $2.5 million during the first nine months of 2023, primarily related to post-merger fees for professional services. CatchMark merger-related expenses for the nine months ended September 30, 2022, were $26.0 million. This included $7.5 million for severance benefits, $9.3 million for accelerated vesting of CatchMark equity awards that fully vested upon closing of the merger and were allocated to the post-merger period, and $8.1 million for tax gross-up payments to holders of CatchMark Partnership OP Units.
During the first nine months of 2023, we recognized insurance recoveries of $39.4 million for fire damage at our Ola, Arkansas sawmill. During the first nine months of 2022, we recognized insurance recoveries of $35.4 million for fire damage and incurred $0.9 million of disposal costs at our Ola, Arkansas sawmill.
Interest expense, net, decreased $2.8 million compared to the first nine months of 2022, primarily due to higher interest income earned on cash and cash equivalents as a result of higher short-term interest rates, partially offset by increased net interest expense associated with $277.5 million in long-term debt assumed and refinanced in connection with the CatchMark merger in September 2022.
In March 2022, we transferred $75.6 million of our qualified pension plan assets to an insurance company for the purchase of a group annuity contract. In connection with this transaction, we recorded a non-cash pretax settlement charge of $14.2 million.
26
Non-operating pension and other postretirement benefit costs decreased $4.9 million compared to the first nine months of 2022 primarily as a result of an increase in the discount rate used to determine the benefit obligations and an increase in the expected return on plan assets for our qualified pension plan.
Income taxes are primarily due to income or loss from our TRS. For the nine months ended September 30, 2023, we recorded income tax expense of $7.7 million on TRS income before tax of $33.8 million, which included the $39.4 million gain on fire damage. Income taxes for the nine months ended September 30, 2023, also included an approximate $1.0 million tax benefit from the reduction of our blended deferred tax rate recorded in the second quarter of 2023. For the nine months ended September 30, 2022, we recorded income tax expense of $70.1 million on TRS income before tax of $279.1 million, which included the $14.2 million pension settlement charge and the $34.5 million gain on fire damage.
Total Adjusted EBITDDA for the first nine months of 2023 decreased $362.3 million compared to the first nine months of 2022, primarily due to lower lumber and Northern sawlog prices, higher manufacturing, logging, and hauling costs, and fewer rural and development real estate sales. The decrease in Total Adjusted EBITDDA was partially offset by increased lumber shipments and harvest volume. Refer to the Business Segment Results below for further discussions on activities for each of our segments. See Liquidity and Performance Measures for a reconciliation of Total Adjusted EBITDDA to net income, the closest comparable GAAP measure, for each of the periods presented.
Business Segment Results
Timberlands Segment
Revenues1
(24,768
(50,056
Logging and hauling
54,918
57,221
(2,303
161,287
134,426
26,861
10,843
11,249
(406
28,354
25,310
3,044
1,985
1,624
361
6,005
5,177
828
Timberlands Adjusted EBITDDA2
(22,420
(80,789
Prior to elimination of intersegment fiber revenues of $28.6 million and $40.3 million for the three months ended September 30, 2023 and 2022, and $89.7 million and $121.7 million for the nine months ended September 30, 2023 and 2022, respectively.
2
Management uses Adjusted EBITDDA to evaluate the performance of the segment. See Note 2: Segment Information in the Notes to Condensed Consolidated Financial Statements.
Timberlands Segment Statistics
Harvest Volumes (in tons)
Sawlog
376,607
459,128
(82,521
1,166,570
1,120,765
45,805
7,081
11,197
(4,116
23,099
30,839
(7,740
Total
383,688
470,325
(86,637
1,189,669
1,151,604
38,065
661,225
613,303
47,922
1,906,805
1,611,075
295,730
558,905
539,856
19,049
1,531,620
1,296,350
235,270
400,426
287,929
112,497
1,074,380
602,060
472,320
1,620,556
1,441,088
179,468
4,512,805
3,509,485
1,003,320
Total harvest volume
2,004,244
1,911,413
92,831
5,702,474
4,661,089
1,041,385
Sales Price/Unit ($ per ton)1
129
171
(42
199
(80
47
52
48
51
Sawlog and pulpwood sales prices are on a delivered basis, which includes logging and hauling costs. Stumpage sales provide our customers the right to harvest standing timber. As such, the customer contracts the logging and hauling and bears such costs.
Timberlands Adjusted EBITDDA
The following table summarizes Timberlands Adjusted EBITDDA variances for the three and nine months ended September 30, 2023, compared with the three and nine months ended September 30, 2022:
Three Months
Nine Months
Timberlands Adjusted EBITDDA - prior year
Sales price and mix
(16,970
(87,096
Harvest volume
(4,877
19,059
Logging and hauling costs per unit
(1,120
(11,580
Forest management, indirect and other
547
(1,172
Timberlands Adjusted EBITDDA - current year
Timberlands Adjusted EBITDDA for the third quarter of 2023 decreased $22.4 million compared with the third quarter of 2022, primarily as a result of the following:
28
Timberlands Adjusted EBITDDA for the first nine months of 2023 decreased $80.8 million compared with the first nine months of 2022, primarily as a result of the following:
Wood Products Segment
(28,323
(270,234
Costs and expenses1
Fiber costs
72,273
82,638
(10,365
225,393
249,226
(23,833
Freight, logging and hauling
20,199
18,766
1,433
59,843
56,739
3,104
Manufacturing costs
54,537
52,952
1,585
163,787
159,318
4,469
Finished goods inventory change
(690
4,717
(5,407
(633
(7,814
7,181
3,674
2,964
710
9,954
9,482
472
76
136
(60
253
390
(137
Wood Products Adjusted EBITDDA2
(16,219
(261,490
Prior to elimination of intersegment fiber costs of $28.6 million and $40.3 million for the three months ended September 30, 2023 and 2022, and $89.7 million and $121.7 million for the nine months ended September 30, 2023 and 2022, respectively.
Wood Products Segment Statistics
Lumber shipments (MBF)1
276,071
264,748
11,323
817,955
752,161
65,794
Lumber sales prices ($ per MBF)
481
572
(91
827
(362
MBF stands for thousand board feet.
29
Wood Products Adjusted EBITDDA
The following table summarizes Wood Products Adjusted EBITDDA variances for the three and nine months ended September 30, 2023, compared with the three and nine months ended September 30, 2022:
Wood Products Adjusted EBITDDA - prior year
Lumber:
Price
(23,093
(268,267
Log costs per unit
10,153
20,664
Manufacturing costs per unit
3,400
9,142
Volume
412
848
Residuals, panels and other
(7,091
(23,877
Wood Products Adjusted EBITDDA - current year
Wood Products Adjusted EBITDDA for the third quarter of 2023 decreased $16.2 million compared with the third quarter of 2022, primarily as a result of the following:
Wood Products Adjusted EBITDDA for the first nine months of 2023 decreased $261.5 million compared with the first nine months of 2022, primarily as a result of the following:
Real Estate Segment
144
(19,730
Costs and expenses
Costs of goods sold
3,709
3,685
10,012
10,395
(383
1,278
1,183
95
4,200
3,334
866
Real Estate Adjusted EBITDDA1
(20,213
30
Real Estate Segment Statistics
Rural Real Estate
Acres sold
3,275
1,622
11,155
19,122
Average price per acre
3,546
3,811
3,048
2,315
Development Real Estate
Residential lots
98
157
Average price per lot
89,122
78,344
103,526
108,418
Commercial acres
41
972,222
182,520
848,828
273,568
Real Estate Adjusted EBITDDA
The following table summarizes Real Estate Adjusted EBITDDA variances for the three and nine months ended September 30, 2023, compared with the three and nine months ended September 30, 2022:
Real Estate Adjusted EBITDDA - prior year
Rural real estate sales
5,434
(9,718
Real estate development sales
(5,747
(11,151
(857
Other costs, net
433
1,513
Real Estate Adjusted EBITDDA - current year
Real Estate Adjusted EBITDDA for the third quarter of 2023 of $14.1 million was flat compared to the third quarter of 2022, primarily as a result of the following:
Real Estate Adjusted EBITDDA for the first nine months of 2023 was $45.9 million, a decrease of $20.2 million compared with the first nine months of 2022, primarily as a result of the following:
Liquidity and Capital Resources
Cash generated by our operations is highly dependent on the selling prices of our products and can vary from period to period. Changes in significant sources and uses of cash for the nine months ended September 30, 2023 and 2022 are presented by category as follows:
(341,129
100,373
11,124
Net Cash Flows from Operating Activities
Net cash from operating activities decreased $341.1 million in the first nine months of 2023, compared to the first nine months of 2022 primarily as a result of the following:
Net Cash Flows from Investing Activities
Changes in cash flows from investing activities were primarily a result of the following:
Net Cash Flows from Financing Activities
Changes in cash flows from financing activities were primarily a result of the following:
Future Sources and Uses of Cash
At September 30, 2023, we had cash and cash equivalents of $302.8 million. We expect cash and cash equivalents on hand, cash generated from our operating activities, and available borrowing capacity under our credit agreement, if needed, to be adequate to meet our future cash requirements. At September 30, 2023, there were no significant changes in our cash commitments arising in the normal course of business under our known contractual and other obligations as described in our Annual Report on Form 10-K for the year ended December 31, 2022.
Capital Expenditures
We invest cash in maintenance and discretionary capital expenditures at our Wood Products facilities. We also invest cash in the reforestation of timberlands and construction of roads in our Timberlands operations and to develop land in our Real Estate development operations. We evaluate discretionary capital improvements based on an expected level of return on investment. We expect to spend a total of approximately $135 million to $140 million for capital expenditures during 2023, including capital expenditures for the Waldo sawmill expansion and modernization project discussed below.
In June 2022, we announced a project to expand and modernize our Waldo, Arkansas sawmill. The project is expected to increase the mill’s annual capacity from 190 million board feet of dimensional lumber to approximately 275 million board feet. The investment is also expected to reduce the mill’s operating costs significantly. The Waldo investment includes upgrades to the log yard and planer, a new saw line, and a new continuous dry kiln. The existing mill will continue to operate during the project and completion is expected by the end of 2024. We expect to spend approximately $131.0 million on the project, of which $12.2 million was spent in 2022, $14.8 million was spent during the nine months ended September 30, 2023, and approximately $59 million is expected to be spent during the fourth quarter of 2023.
During 2022, we completed the installation of new equipment at our fire damaged Ola, Arkansas sawmill. The large log line restarted in September 2022. We finalized our insurance claim on the Ola, Arkansas sawmill with the insurance carriers in September 2023. The total approved insurance claim, covering both property damage and business interruption, was $89.4 million, net of a $2.0 million deductible. Through September 30, 2023, we received a total of $73.1 million in proceeds from the insurance carriers. The remaining $16.3 million of insurance recoveries are expected to be received during the fourth quarter of 2023.
On August 31, 2022, our board of directors authorized management to repurchase up to $200.0 million of our common stock with no set time limit for the repurchase (the 2022 Repurchase Program). Concurrently, the board of directors terminated the remaining repurchase authorization under a repurchase program approved in August 2018. At September 30, 2023, we had remaining authorization of $136.9 million for future stock repurchases under the 2022 Repurchase Program. The timing, manner, price and amount of repurchases will be determined according to the trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934 (the Trading Plan), and, subject to the terms of the Trading Plan, the Repurchase Program may be suspended, terminated or modified at any time for any reason.
Term Loans and Credit Agreement
At September 30, 2023, our total outstanding net long-term debt was $1.0 billion, including $971.0 million of term loans under our Second Amended and Restated Term Loan Agreement (Amended Term Loan Agreement) with our primary lender. We expect to refinance a $40.0 million term loan maturing in December 2023, which we expect to cover with a forward starting interest rate swap that hedges the variability in future benchmark interest payments attributable to changes in interest rates. All interest rates on our outstanding long-term debt are fixed rates under fixed rate loans or variable rate loans with an associated interest rate swap that fixes the variable benchmark interest rate component.
Our Amended Credit Agreement provides for a $300.0 million revolving line of credit that matures February 14, 2027. Under the terms of the Amended Credit Agreement, the amount of available principal may be increased up to an additional $500.0 million. We may also utilize borrowings under the Amended Credit Agreement to, among other things, refinance existing indebtedness and provide funding for working capital requirements, capital projects, acquisitions, and other general corporate expenditures. At September 30, 2023, there were no borrowings under the revolving line of credit and approximately $0.7 million of the credit facility was utilized by outstanding letters of credit.
Financial Covenants
The Amended Term Loan Agreement and Amended Credit Agreement (collectively referred to as the Agreements) contain certain covenants that limit our ability and that of our subsidiaries to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates or change the nature of our business. The Agreements also contain financial maintenance covenants including the maintenance of a minimum interest coverage ratio and a maximum leverage ratio. We are permitted to pay dividends to our stockholders under the terms of the Agreements so long as we expect to remain in compliance with the financial maintenance covenants.
The following table presents the components and applicable limits of Total Asset Value (TAV), a component of the Leverage Ratio, at September 30, 2023:
Estimated timberland fair value
4,829
Wood Products manufacturing facilities book basis (limited to 10% of TAV)
292
303
Total Asset Value
5,461
Includes, as applicable, Company Owned Life Insurance (limited to 5% of TAV), Construction in Progress (limited to 10% of TAV) and Investments in Affiliates (limited to 15% TAV) as defined in the Agreements.
At September 30, 2023, we were in compliance with all covenants under the Agreements. The following table sets forth the financial covenants for the Agreements and our status with respect to these covenants at September 30, 2023:
Covenant Requirement
Actual
Interest coverage ratio
≥
3.00 to 1.00
10.1
Leverage ratio
≤
40%
19%
See Note 5: Debt in the Notes to the Condensed Consolidated Financial Statements for additional information on our debt and credit agreements.
Credit Ratings
Two major debt rating agencies routinely evaluate our debt, and our cost of borrowing can increase or decrease depending on our credit rating. Both Moody’s and S&P rate our debt as investment grade.
Capital Structure
Long-term debt (including current portion)
1,033,558
1,032,680
(302,799
(343,809
Net debt
730,759
688,871
Market capitalization1
3,614,328
3,505,255
Enterprise value
4,345,087
4,194,126
Net debt to enterprise value
16.8
16.4
Dividend yield2
4.0
4.1
Weighted-average cost of debt, after tax3
2.4
Market capitalization is based on outstanding shares of 79.6 million and 79.7 million times closing share prices of $45.39 and $43.99 at September 29, 2023 and December 30, 2022, respectively.
Dividend yield is based on annualized dividends per share of $1.80 and share prices of $45.39 and $43.99 at September 29, 2023 and December 30, 2022, respectively.
Weighted-average cost of debt excludes deferred debt costs and credit facility fees and includes estimated annual patronage credit on term loan debt.
34
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: Total Adjusted EBITDDA and Cash Available for Distribution (CAD). These measures are not defined by GAAP and the discussion of Total Adjusted EBITDDA and CAD is not intended to conflict with or change any of the GAAP disclosures described herein. These non-GAAP financial measures should be considered only as supplemental to, are not intended to be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP. Additionally, these non-GAAP financial measures may not be the same as or comparable to other similarly titled non-GAAP financial measures presented by other companies due to potential inconsistencies in methods of calculation.
Total Adjusted EBITDDA is a non-GAAP measure that management uses in evaluating performance and to allocate resources between segments. Total Adjusted EBITDDA removes the impact of specific items that management believes do not directly reflect the core business operations on an ongoing basis. Management believes that this non-GAAP measure, when read in conjunction with our GAAP financial statements, provides useful information to investors and other interested parties by facilitating the comparability of our ongoing operating results over the periods presented, the ability to identify trends in our underlying business, can be used to evaluate the operational performance of the assets under management, and the comparison of our operating results against analyst financial models and the operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.
We define EBITDDA as net income before interest expense, net, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses.
We reconcile Total Adjusted EBITDDA to net income for the consolidated company as it is the most comparable GAAP measure.
The following table provides a reconciliation of net income to Total Adjusted EBITDDA for the respective periods:
4,725
9,801
7,650
70,135
1,808
685
5,546
Loss (gain) on disposal of fixed assets
(23
(370
(638
We define CAD as cash from operating activities adjusted for capital spending for purchases of property, plant and equipment, timberlands reforestation and roads and timberland acquisitions not classified as strategic. Management believes CAD is a useful indicator of the company’s overall liquidity, as it provides a measure of cash generated that is available for dividends to common stockholders (an important factor in maintaining our REIT status), repurchase of the company’s common shares, debt repayment, acquisitions and other discretionary and nondiscretionary activities. Our definition of CAD is limited in that it does not solely represent residual cash flows available for discretionary expenditures since the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view CAD as a measure that provides supplemental information to our Condensed Consolidated Statements of Cash Flows. Our definition of CAD may be different from similarly titled measures reported by other companies, including those in our industry. CAD is not necessarily indicative of the CAD that may be generated in future periods.
The following table provides a reconciliation of cash from operating activities to CAD:
Twelve Months Ended September 30,
Net cash from operating activities1
150,772
510,081
Capital expenditures2
(46,757
(152,301
(79,260
(186,738
CAD
70,551
306,136
71,512
323,343
Net cash from investing activities3
(47,147
(160,206
(284,438
(447,953
Net cash from operating activities for the nine and twelve months ended September 30, 2023, includes cash paid for CatchMark merger-related expenses of $0.9 million and $6.6 million, respectively, and cash paid for real estate development expenditures of $7.2 million and $8.4 million, respectively. Net cash from operating activities for the nine and twelve months ended September 30, 2022, includes cash paid for CatchMark merger-related expenses of $12.1 million, and cash paid for real estate development expenditures of $7.0 million and $9.8 million, respectively.
The nine and twelve months ended September 30, 2023, includes fire related capital expenditures for the Ola, Arkansas sawmill of $0.6 million and $6.4 million, respectively, and excludes $1.4 million and $10.1 million, respectively, of insurance proceeds for the Ola, Arkansas sawmill property losses. The nine and twelve months ended September 30, 2022, includes fire related capital expenditures for the Ola, Arkansas sawmill of $12.4 million and $14.3 million, respectively, and excludes $0 and $1.8 million, respectively, of insurance proceeds for the Ola, Arkansas sawmill property losses. The nine and twelve months ended September 30, 2023, includes Waldo, Arkansas sawmill expansion and modernization related capital expenditures of $14.8 million. The nine and twelve months ended September 30, 2022, includes Waldo, Arkansas sawmill expansion and modernization related capital expenditures of $12.2 million.
Net cash from investing activities include payment for capital expenditures and acquisition of non-strategic timber and timberlands, which is also included in our reconciliation of CAD.
Critical Accounting Policies and Estimates
There have been no significant changes during 2023 to our critical accounting policies or estimates as presented in our 2022 Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk exposure on financial instruments includes interest rate risk on our bank credit facility, term loans and interest rate swap agreements and forward starting interest rate swap agreements. We are exposed to interest rate volatility on existing variable rate debt instruments and future incurrences of fixed or variable rate debt, which exposure primarily relates to movements in various interest rates. We use interest rate swaps and forward starting swaps to hedge our exposure to the impact of interest rate changes on existing debt and future debt issuances, respectively. All market risk sensitive instruments were entered into for purposes other than for trading purposes.
For quantitative and qualitative disclosures about market risk, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our annual report on Form 10-K for the year ended December 31, 2022. Our exposures to market risk have not changed materially since December 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act)), under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2023. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, the CEO and CFO have concluded that these disclosure controls and procedures were effective as of September 30, 2023.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Internal Control over Financial Reporting
No changes occurred in our internal control over financial reporting during the nine months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We believe there is no pending or threatened litigation that could have a material adverse effect on our financial position, operations or liquidity.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors previously disclosed in Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
On August 31, 2022, our board of directors authorized management to repurchase up to $200.0 million of our common stock with no set time limit for the repurchase (the 2022 Repurchase Program). Concurrently, the board of directors terminated the remaining repurchase authorization under a previously authorized repurchase program. The 2022 Repurchase Program may be suspended, terminated or modified at any time for any reason. Shares under the 2022 Repurchase Program may be repurchased in open market transactions, including pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934 (the Exchange Act), or through privately negotiated transactions. In September 2023, we repurchased shares through a trading plan adopted in accordance with Rule10b5-1 of the Exchange Act (the Trading Plan).
The following table provides information with respect to purchases of common stock made by the company during the three months ended September 30, 2023:
Common Share Purchases
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - July 31
149,605,776
August 1 - August 31
September 1 - September 30
282,988
44.98
136,877,115
At September 30, 2023, we had remaining authorization of $136.9 million for future stock repurchases under the 2022 Repurchase Program. We record share repurchases upon trade date as opposed to settlement date when cash is disbursed.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2023, none of the company's officers or directors adopted, modified or terminated any "Rule 10b5-1 trading arrangements" or "non-Rule 10b5-1 trading arrangements," as each term is defined in Item 408(a) of Regulation S-K under the Exchange Act.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER
DESCRIPTION
3.1*
Fourth Restated Certificate of Incorporation of the Registrant, effective May 1, 2023, filed as Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on May 4, 2023.
3.2*
Bylaws of the Registrant, as amended through February 18, 2009, filed as Exhibit (3)(b) to the Current Report on Form 8-K filed by the Registrant on February 20, 2009.
See Exhibits 3.1 and 3.2. The registrant undertakes to furnish to the Commission, upon request, any instrument defining the rights of holders of long-term debt.
10.1*
Group annuity contract, effective March 17, 2022, between American General Life Insurance Company and PotlatchDeltic Corporation, filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on July 21, 2023.
Rule 13a-14(a)/15d-14(a) Certifications.
Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350.
101
The following financial information from PotlatchDeltic Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023, filed on November 3, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and 2022, (iii) the Condensed Consolidated Balance Sheets at September 30, 2023 and December 31, 2022, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022, (v) the Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022, and (vi) the Notes to Condensed Consolidated Financial Statements.
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/ GLEN F. SMITH
Glen F. Smith
Chief Accounting Officer
(Duly Authorized; Principal Accounting Officer)
Date:
November 3, 2023