UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2022
or
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-32729
PotlatchDeltic Corporation
(Exact name of registrant as specified in its charter)
Delaware
82-0156045
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
601 West First Avenue, Suite 1600
Spokane, Washington
99201
(Address of principal executive offices)
(Zip Code)
(509) 835-1500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock ($1 par value)
PCH
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☒
Accelerated Filer
☐
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange act).
Yes ☐ No ☒
The number of shares of common stock of the registrant outstanding as of October 25, 2022, was 80,776,600.
POTLATCHDELTIC CORPORATION AND CONSOLIDATED SUBSIDIARIES
Table of Contents
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
23
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
39
ITEM 4.
Controls and Procedures
PART II. - OTHER INFORMATION
Legal Proceedings
40
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 6.
Exhibits
41
SIGNATURE
42
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)
2022
2021
Revenues
$
306,693
287,330
1,077,640
1,089,029
Costs and expenses:
Cost of goods sold
220,876
190,602
592,057
537,683
Selling, general and administrative expenses
18,878
18,512
55,584
54,782
CatchMark merger-related expenses
26,007
—
Gain on fire damage
(24,913
)
(4,394
(34,505
240,848
204,720
639,143
588,071
Operating income
65,845
82,610
438,497
500,958
Interest expense, net
(8,280
(8,641
(18,593
(20,414
Pension settlement charge
(14,165
Non-operating pension and other postretirement employee benefit costs
(1,808
(3,271
(5,546
(9,956
Other
(1
Income before income taxes
55,756
70,698
400,192
470,588
Income taxes
(9,801
(5,031
(70,135
(85,910
Net income
45,955
65,667
330,057
384,678
Net income per share:
Basic
0.64
0.98
4.70
5.72
Diluted
0.97
4.69
5.69
Dividends per share
0.44
0.41
1.32
1.23
Weighted-average shares outstanding
71,486
67,315
70,171
67,275
71,632
67,648
70,308
67,588
The accompanying notes are an integral part of these condensed consolidated financial statements.
(in thousands)
Other comprehensive income (loss):
Pension and other postretirement employee benefits:
Net loss arising during the period, net of tax benefit of $0, $0, $1,570 and $0
(4,587
Effect of pension settlement, net of tax expense of $0, $0, $3,612 and $0
10,553
Amortization of actuarial loss included in net income, net of tax expense of $270, $1,073, $1,012 and $3,254
784
3,050
2,954
9,258
Amortization of prior service cost (credit) included in net income, net of tax expense (benefit) of $44, $(73), $133 and $(217)
130
(204
389
(614
Cash flow hedges, net of tax (benefit) expense of $(4,093), $397, $973 and $2,249
32,725
6,636
118,530
39,580
Other comprehensive income, net of tax
33,639
9,482
127,839
48,224
Comprehensive income
79,594
75,149
457,896
432,902
September 30, 2022
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents
484,018
296,151
Customer receivables, net
37,224
31,028
Inventories, net
62,584
72,369
Other current assets
41,551
21,630
Total current assets
625,377
421,178
Property, plant and equipment, net
319,232
292,320
Investment in real estate held for development and sale
57,458
65,604
Timber and timberlands, net
2,520,505
1,682,671
Intangible assets, net
17,906
15,491
Other long-term assets
184,310
57,951
Total assets
3,724,788
2,535,215
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
111,607
78,209
Current portion of long-term debt
39,996
42,977
Current portion of pension and other postretirement employee benefits
4,993
Total current liabilities
156,596
126,179
Long-term debt
992,507
715,279
Pension and other postretirement employee benefits
92,990
83,674
Deferred tax liabilities, net
38,469
34,874
Other long-term obligations
38,807
49,076
Total liabilities
1,319,369
1,009,082
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 4,000 shares, no shares issued
Common stock, $1 par value, authorized 100,000 shares, issued and outstanding 80,777 and 69,064 shares
80,777
69,064
Additional paid-in capital
2,292,130
1,781,217
Accumulated deficit
(52,089
(280,910
Accumulated other comprehensive income (loss)
84,601
(43,238
Total stockholders’ equity
2,405,419
1,526,133
Total liabilities and stockholders' equity
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, depletion and amortization
67,960
57,365
Basis of real estate sold
25,024
22,733
Change in deferred taxes
(1,359
3,221
10,936
16,595
14,165
Equity-based compensation expense
16,141
6,345
Other, net
(455
633
Change in working capital and operating-related activities, net
14,071
(20,082
Real estate development expenditures
(6,986
(6,434
Funding of pension and other postretirement employee benefits
(3,290
(7,418
Proceeds from insurance recoveries
26,678
Net cash from operating activities
458,437
453,242
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment additions
(44,000
(26,291
Timberlands reforestation and roads
(12,220
(12,236
Acquisition of timber and timberlands
(96,081
(2,450
Proceeds from property insurance
13,250
Cash acquired in CatchMark merger
23,571
935
993
Net cash from investing activities
(127,795
(26,734
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to common stockholders
(96,578
(82,462
Repurchase of common stock
(4,527
Proceeds from issuance of long-term debt
277,500
Repayment of long-term debt
(303,000
(6,120
(3,619
Net cash from financing activities
(132,725
(86,081
Change in cash, cash equivalents and restricted cash
197,917
340,427
Cash, cash equivalents and restricted cash at beginning of period
296,772
252,340
Cash, cash equivalents and restricted cash at end of period
494,689
592,767
NONCASH INVESTING AND FINANCING ACTIVITIES
Accrued property, plant and equipment additions
4,429
2,695
Accrued timberlands reforestation and roads
2,749
1,590
Equity issued as consideration in the CatchMark merger
508,314
Long-term debt and other liabilities assumed in our merger with CatchMark
323,102
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the amounts shown in the Condensed Consolidated Statements of Cash Flows.
September 30, 2021
Restricted cash included in other long-term assets1
10,671
Total cash, cash equivalents, and restricted cash
1
Amounts included in restricted cash represent proceeds held by a qualified intermediary that are intended to be reinvested in timber and timberlands.
7
Common Stock
Additional Paid-
Accumulated
Accumulated OtherComprehensive
Total Stockholders'
Shares
Amount
in Capital
Deficit
Income (Loss)
Equity
Balance, December 31, 2021
163,880
Shares issued for stock compensation
308
(308
2,056
Pension plans and OPEB obligations, net of tax
7,480
Cash flow hedges, net of tax
43,276
Dividends on common stock, $0.44 per share
(30,524
Other transactions, net
(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
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
914
(35,530
Common stock issued for CatchMark merger
11,474
504,292
515,766
77
(77
Balance, September 30, 2022
Loss
Balance, December 31, 2020
66,876
1,674,576
(315,510
(120,989
1,304,953
131,106
166
(166
1,930
2,953
64,107
Dividends on common stock, $0.41 per share
(27,484
81
(97
(16
Balance, March 31, 2021
67,042
1,676,421
(211,985
(53,929
1,477,549
187,905
2,140
2,845
(31,163
(27,489
103
(101
2
Balance, June 30, 2021
67,045
1,678,661
(51,670
(82,247
1,611,789
55
(55
2,275
2,846
(1,549
(69
(1,618
Balance, September 30, 2021
67,100
1,679,332
(13,561
(72,765
1,660,106
INDEX FOR THE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
Note 2: Segment Information
12
Note 3: Earnings Per Share
14
Note 4: Certain Balance Sheet Components
Note 5: Debt
16
Note 6: Derivative Instruments
Note 7: Fair Value Measurements
17
Note 8: Equity-Based Compensation
18
Note 9: Income Taxes
19
Note 10: Leases
Note 11: Pension and Other Postretirement Employee Benefits
20
Note 12: Components of Accumulated Other Comprehensive Income (Loss)
21
Note 13: CatchMark Merger
NOTE 1. BASIS OF PRESENTATION
General
PotlatchDeltic Corporation and its subsidiaries (collectively referred to in this report as the company, us, we or our) is a leading timberland Real Estate Investment Trust (REIT) with operations in nine states. We are engaged in activities associated with timberland management, including the sale of timber, the management of approximately 2.2 million acres of timberlands and the purchase and sale of timberlands. We are also engaged in the manufacturing and sale of wood products and the development of real estate. Our timberlands, real estate development projects and all of our wood products facilities are located within the continental United States. The primary market for our products is the United States. We converted to a REIT effective January 1, 2006.
Condensed Consolidated Financial Statements
The accompanying unaudited Condensed Consolidated Financial Statements provide an overall view of our results and financial condition and reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Except as otherwise disclosed in these Notes to Condensed Consolidated Financial Statements, such adjustments are of a normal, recurring nature. Intercompany transactions and accounts have been eliminated in consolidation. The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. Certain disclosures normally provided in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted. This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on February 17, 2022. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year.
Use of Estimates
The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and requires judgments affecting the amounts reported in the financial statements and the accompanying notes. Actual results may differ materially from our estimates.
Business Combinations and Acquisitions
We apply the principles provided in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations, to determine whether an acquisition involves an asset or a business. In determining whether an acquisition should be accounted for as a business combination or asset acquisition, we first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the single identifiable asset or the group of similar assets is accounted for as an asset acquisition. If this is not the case, we then further evaluate whether the single identifiable asset or group of similar identifiable assets and activities includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the transaction is accounted for as a business combination.
We account for business combinations using the acquisition method of accounting which requires that (i) identifiable assets acquired (including identifiable intangible assets) and liabilities assumed generally be measured and recognized at fair value as of the acquisition date and (ii) the excess of the purchase price over the net fair value of identifiable assets acquired and liabilities assumed be recognized as goodwill, which is not amortized for accounting purposes but is subject to testing for impairment at least annually. We measure and recognize asset acquisitions that are not deemed to be business combinations based on the cost to acquire the assets. Goodwill is not recognized in an asset acquisition with any consideration in excess of net assets acquired allocated to acquired assets on a relative estimated fair value basis. Transaction costs are expensed in a business combination and transaction costs directly attributable to the acquisition are considered a component of the cost of the acquisition in an asset acquisition. See Note 13: CatchMark Merger for additional information.
Commitments and Contingencies
At any given time, we are subject to claims and actions incidental to the operations of our business. Based on information currently available, we do not expect that any sums we may receive or have to pay in connection with any legal proceeding would have a material adverse effect on our consolidated financial position, operating results or net cash flow.
New Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 contains practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by this guidance apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued as a result of reference rate reform. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rate Committee, a steering committee comprised of large U.S. financial institutions, has recommended replacing LIBOR with the Secured Overnight Financing Rate (SOFR). The guidance in ASU 2020-04, which can be applied immediately, is optional and may be elected over time as reference rate reform activities occur. This guidance is not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity was expected to be completed. Our credit agreement, variable rate term loans with $403.5 million in principal and the associated interest rate swaps, and $290.0 million of forward starting interest rate swaps have an interest rate tied to LIBOR. We are working with our lenders and counterparties to modify the benchmark rate from LIBOR to SOFR in our variable rate term loans and interest rate derivative agreements. We expect to complete this conversion by the end of 2022. We do not expect our adoption of ASU 2020-04 will have a material impact on our consolidated financial statements.
11
NOTE 2. SEGMENT INFORMATION
Our operations are organized into three reportable segments: Timberlands, Wood Products and Real Estate. Management activities in the Timberlands segment include planting and harvesting trees and building and maintaining roads. The Timberlands segment also generates revenues from non-timber resources such as hunting leases, recreation permits and leases, mineral rights contracts, oil and gas royalties and carbon sequestration. The Wood Products segment manufactures and markets lumber and plywood. Activities in the Real Estate segment include our rural timberland-holdings sales program, master planned community development and a country club.
Our Timberlands segment supplies our Wood Products segment with a portion of its wood fiber needs. These intersegment revenues are based on prevailing market prices and typically represent a sizeable portion of the Timberlands segment’s total revenues. Our other segments generally do not generate intersegment revenues. These intercompany transactions are eliminated in consolidation.
The reportable segments follow the same accounting policies used for our Condensed Consolidated Financial Statements, with the exception of the valuation of inventories, which are reported using the average cost method for purposes of reporting segment results.
The following table presents our revenues by major product:
Timberlands
Northern region
Sawlogs
78,668
88,244
223,102
251,198
Pulpwood
582
119
1,561
815
281
205
797
740
Total Northern revenues
79,531
88,568
225,460
252,753
Southern region
29,618
22,191
77,364
65,620
17,694
13,843
41,542
33,167
Stumpage
4,028
9,494
3,310
3,705
2,666
9,859
7,825
Total Southern revenues
55,045
40,975
138,259
109,922
Total Timberlands revenues
134,576
129,543
363,719
362,675
Wood Products
Lumber
151,540
141,255
622,228
679,417
Residuals and Panels
41,891
46,505
133,578
135,312
Total Wood Products revenues
193,431
187,760
755,806
814,729
Real Estate
Rural real estate
6,182
6,939
44,268
28,469
Development real estate
10,205
4,260
28,429
14,087
2,621
2,298
7,112
7,252
Total Real Estate revenues
19,008
13,497
79,809
49,808
Total segment revenues
347,015
330,800
1,199,334
1,227,212
Intersegment Timberlands revenues1
(40,322
(43,470
(121,694
(138,183
Total consolidated revenues
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:
64,482
76,023
198,806
221,140
31,258
26,566
288,465
356,654
14,140
9,069
66,080
37,450
Corporate
(12,629
(11,496
(36,125
(35,028
Eliminations and adjustments
3,839
7,021
4,596
(3,063
Total Adjusted EBITDDA
101,090
107,183
521,822
577,153
Interest expense, net1
(27,329
(21,131
(66,838
(56,156
(6,845
(6,697
(25,024
(22,733
(26,007
24,913
4,394
34,505
Non-operating pension and other postretirement employee benefits
Gain (loss) on disposal of fixed assets
(1,139
(1,700
Depreciation, depletion and amortization:
16,963
11,893
40,687
33,792
10,069
8,879
25,226
21,261
175
162
518
477
122
197
407
626
27,329
21,131
66,838
56,156
Bond discounts and deferred loan fees1
378
403
1,122
1,209
Total depreciation, depletion and amortization
27,707
21,534
Basis of real estate sold:
6,845
6,703
25,033
22,751
(6
(9
(18
Total basis of real estate sold
6,697
Bond discounts and deferred loan fees are reported within interest expense, net on the Condensed Consolidated Statements of Operations.
13
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
111
272
104
257
Restricted stock units
35
61
33
56
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, 2022, there were approximately 117,000 and 136,000 stock-based awards, respectively, that were excluded from the calculation of diluted earnings per share as they were anti-dilutive. For the three and nine months ended September 30, 2021, there were approximately 101,000 and 88,000 stock-based awards, respectively, that were excluded from the calculation of diluted earnings per share as they were anti-dilutive. Anti-dilutive stock-based awards could be dilutive in future periods.
Share Repurchase Program
On August 30, 2018, our board of directors authorized management to repurchase up to $100.0 million of common stock with no time limit set for the repurchase (the 2018 Repurchase Program). During the three and nine months ended September 30, 2022, we repurchased 8,444 and 103,010 shares of our common stock (at a total consideration of $0.4 million and $4.5 million), respectively, under the 2018 Repurchase Program. All common stock purchases were made in open-market transactions. We did not repurchase any shares during the nine months ended September 31, 2021.
On August 31, 2022, our board of directors authorized management to repurchase up to $200.0 million of our common stock with no set time limit for the repurchase (the 2022 Repurchase Program). Concurrently, the board of directors terminated the remaining repurchase authorization under the 2018 Repurchase Program.
Shares under the 2022 Repurchase Program may be repurchased in open market transactions, including pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934 (the Trading Plan). The timing, manner, price and amount of repurchases will be determined according to, and subject to, the terms of the Trading Plan, and, subject to the terms of the Trading Plan, the 2022 Repurchase Program may be suspended, terminated or modified at any time for any reason. No shares were repurchased under the 2022 Repurchase Program during the nine months ended September 30, 2022. At September 30, 2022, we had remaining authorization of $200.0 million for future stock repurchases under the 2022 Repurchase Program. Transaction costs are not counted against authorized funds.
We record share repurchases upon trade date as opposed to the settlement date when cash is disbursed. We record a liability to account for repurchases that have not been cash settled. We retire shares upon repurchase. Any excess repurchase price over par is recorded in accumulated deficit.
NOTE 4. CERTAIN BALANCE SHEET COMPONENTS
Inventories
Logs
25,179
41,199
Lumber, panels and veneer
37,893
34,528
Materials and supplies
20,650
17,780
Total inventories
83,722
93,507
Less: LIFO reserve
(21,138
Total inventories, net
Property, plant and equipment
583,747
532,324
Less: accumulated depreciation
(264,515
(240,004
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 planer mill, kiln, and shipping department were not affected. We have adequate property damage and business interruption insurance and expect to be reimbursed for both property damage and business interruption losses by our insurance carriers, subject to an applicable deductible, under which we filed a claim with the insurance carriers. Insurance recoveries are recorded when deemed probable and reasonably estimable. The new equipment has been installed and the start-up phase and log processing began in late September 2022, with expected completion by the end of 2022. We also expect to finalize our insurance claim and receive the remaining insurance proceeds in 2023.
Damaged and obsolete fixed asset write-offs, disposal costs and insurance recoveries for the Ola, Arkansas sawmill fire and gain on fire damage consists of the following:
Fixed asset write-offs
7,436
9,544
Disposal costs
87
1,062
924
Total fixed asset loss on disposal
8,498
10,606
Insurance recoveries
(25,000
(12,892
(35,000
(15,000
Gain on fire damage at Ola
(34,076
Insurance recoveries on timberlands fire damage
(429
Timber and timberlands
2,428,840
1,597,011
Logging roads
91,665
85,660
Total timber and timberlands, net
During the nine months ended September 30, 2022, we were the successful bidder for three bolt-on timberland transactions, aggregating approximately $101 million, consisting of approximately 46,000 acres in Mississippi and Arkansas. Additionally, on September 14, 2022, we completed our merger with CatchMark Timber Trust, Inc. (CatchMark) which consists of approximately 348,000 acres in Alabama, Georgia and South Carolina. See Note 13: CatchMark Merger for additional information.
Income taxes payable
9,457
1,134
Accrued payroll and benefits
30,812
28,944
Accounts payable
15,898
12,749
Deferred revenue1
13,201
8,392
Other accrued taxes
9,793
5,714
Accrued interest
5,274
6,046
Other current liabilities
27,172
15,230
Total accounts payable and accrued liabilities
Deferred revenue predominately relates to hunting and other access rights on our timberlands, payments received for lumber shipments where control of goods has not transferred, member-related activities at an owned country club and certain post-close obligations for real estate sales. These contract liabilities are recognized over the term of the contracts, which is typically twelve months or less, except for country club initiation fees which are recognized over the average life of club membership.
15
NOTE 5. DEBT
TERM LOANS
On September 14, 2022, through a seventh amendment to the Second Amended and Restated Term Loan Agreement (Amended Term Loan Agreement) with our primary lender, we refinanced $277.5 million of long-term debt assumed in the CatchMark merger. See Note 13: CatchMark Merger for additional information.
The amendment to the Amended Term Loan Agreement provided for a new 5-year term loan in the principal amount of $138.75 million maturing on September 1, 2027, and a new 8-year term loan in the principal amount of $138.75 million maturing on September 1, 2030 (collectively the New Term Loans). The New Term Loans bear interest at a rate equal to one-month SOFR plus 2.0% per annum. In addition, the 8-year term loan provides for a cost-of-capital reset at year five. In connection with the refinance, we entered into two one-month SOFR based interest rate swaps to fix the interest rates on the New Term Loans at 2.50% and 2.66% respectively, before patronage credits from lenders.
At September 30, 2022, our total outstanding principal on our long-term debt of $1.04 billion included $971.0 million of term loans under the Amended Term Loan Agreement, including the New Term Loans and a $40.0 million term loan that we expect to refinance upon its maturity in December 2022. In addition to the New Term Loans, certain borrowings under the Amended Term Loan Agreement are at variable rates of one or three-month LIBOR plus a spread between 1.68% and 2.10%. We have entered into LIBOR based interest rate swaps to fix the interest rate on these LIBOR base rate term loans.
See Note: 6 Derivative Instruments for additional information.
CREDIT AGREEMENT
At September 30, 2022, there were no borrowings under our $300.0 million revolving line of credit and approximately $11.0 million of our revolving line of credit was utilized for outstanding letters of credit. As provided in the revolving line of credit agreement, borrowings may be increased by up to an additional $500.0 million. The revolving line of credit agreement also includes a sublimit of $75.0 million for the issuance of standby letters of credit and a sublimit of $25.0 million for swing line loans. Usage under either or both sub facilities reduce availability under the revolving line of credit. We may utilize borrowings under the credit facility to, among other things, refinance existing indebtedness and provide funding for working capital requirements, capital projects, acquisitions and other general corporate expenditures.
We were in compliance with all debt and credit agreement covenants at September 30, 2022.
NOTE 6. DERIVATIVE INSTRUMENTS
From time to time, we enter into derivative financial instruments to manage certain cash flow and fair value risks. Derivatives designated and qualifying as a hedge of the exposure to variability in the cash flows of a specific asset or liability that is attributable to a particular risk, such as interest rate risk, are considered cash flow hedges. All our cash flow hedges are expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the hedges.
As of September 30, 2022, we have interest rate swaps associated with $403.5 million of LIBOR based term loans. These swaps are cash flow hedges that convert variable rates ranging from one-month and three-month LIBOR plus 1.68% to 2.10%, to fixed rates ranging from 3.04% to 4.75% before patronage credits from lenders.
We held $567.5 million of one-month LIBOR based forward starting interest rate swaps designated as cash flow hedges prior to the termination of certain forward starting swaps noted below. These forward starting interest rate swaps were entered into in March 2020, to effectively hedge the variability in future benchmark interest payments attributable to changes in interest rates on $567.5 million of expected future debt refinances through January 2029, with expected interest payments through January 2039, by converting the benchmark interest rate. On September 15, 2022, we terminated $277.5 million of these forward starting interest rate swaps and transferred the value realized from their termination into two new swaps to hedge the variability in future cash flows on the SOFR based New Term Loans of $277.5 million. These two new one-month SOFR based interest rate swaps with a notional amount of $138.75 million each effectively fix the interest rates at 2.50% and 2.66% on the New Term Loans before patronage credits from lenders. See Note 5: Debt for additional information. As of September 30, 2022, we have $290.0 million of remaining forward starting interest rate swaps. These cash flow hedges for expected future debt refinances require settlement on the stated maturity date.
Additionally, in connection with the CatchMark merger, we acquired two LIBOR based interest rate swaps with a combined notional amount of $275.0 million which were used to fix the interest rates on CatchMark’s long-term debt. These interest rate swaps had a fair value of $19.2 million at the date of the CatchMark merger. We terminated these interest rate swaps and transferred the value realized from their termination into an existing $150.0 million LIBOR based interest rate swap associated with a $150.0 million term loan maturing January 1, 2029, resulting in the reduction of the LIBOR based swap rate from 2.71% to 0.49%.
At September 30, 2022, the amount of net gains expected to be reclassified into earnings in the next 12 months is approximately $11.5 million. However, this expected amount to be reclassified into earnings is subject to volatility as the ultimate amount recognized in earnings is based on the LIBOR and SOFR rates, as applicable, at the time of net swap cash payments.
The gross fair values of derivative instruments on our Condensed Consolidated Balance Sheets are as follows:
Asset Derivatives
Liability Derivatives
Location
Derivatives designated in cash flow hedging relationships:
Interest rate contracts
Other assets, current1
8,889
2,191
Accounts payable and accrued liabilities1
Other assets, non-current
138,795
31,306
24,060
147,684
33,497
Derivative instruments that mature within one year, as a whole, are classified as current.
The following table details the effect of derivatives on our Condensed Consolidated Statements of Operations:
Income recognized in other comprehensive income, net of tax
32,895
4,310
115,256
32,741
Amounts reclassified from accumulated other comprehensive income (loss), net of tax1
Interest expense
170
(2,326
(3,274
(6,839
8,280
8,641
18,593
20,414
Realized gains and losses on interest rate contracts consist of realized net cash received or paid and interest accruals on the interest rate swaps during the periods in addition to amortization of amounts out of other comprehensive income related to certain terminated hedges and adjustments to interest expense resulting from amortization of inception value of certain off-market designated hedges. Net cash received or paid is included in the supplemental cash flow information within interest, net of amounts capitalized in the Condensed Consolidated Statements of Cash Flows.
NOTE 7. FAIR VALUE MEASUREMENTS
The following table presents the estimated fair values of our financial instruments:
CarryingAmount
FairValue
Derivative assets related to interest rate swaps (Level 2)
Derivative liabilities related to interest rate swaps (Level 2)
(24,060
Long-term debt, including current portion (Level 2):
Term loans
(969,107
(961,581
(691,119
(705,135
Revenue bonds
(65,735
(64,349
(69,278
Medium-term notes
(3,000
(3,007
Total long-term debt1
(1,034,842
(1,025,930
(759,854
(777,420
Company owned life insurance asset (COLI) (Level 3)
4,305
3,923
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
On May 2, 2022, our stockholders approved the PotlatchDeltic Corporation Amended and Restated 2019 Long-Term Incentive Plan to increase the number of shares available for issuance by 1.4 million shares. At September 30, 2022, approximately 2.1 million shares are available for future use under our long-term incentive plans.
Share-based compensation activity during the nine months ended September 30, 2022, included the following:
(Shares in thousands)
Granted
Vested
Forfeited
Performance Share Awards (PSAs)
92,490
971
Restricted Stock Units (RSUs)
58,549
39,594
1,323
Approximately 0.3 million shares of common stock were issued to employees during the nine months ended September 30, 2022, as a result of PSA and RSU vesting during 2021 and 2022.
The following details compensation expense and the related income tax benefit for company specific equity-based awards:
Equity-based compensation expense:
Performance share awards
1,535
1,416
4,351
4,012
825
805
2,335
2,197
Deferred compensation stock equivalent units expense
49
54
147
136
Total equity-based compensation expense
6,833
Total tax benefit recognized for equity-based expense
125
338
321
Additionally, during the three months ended September 30, 2022, we recognized a $9.3 million expense for the accelerated vesting of CatchMark equity awards related to the CatchMark merger which is included in CatchMark merger-related expenses on the Condensed Consolidated Statements of Operations. See Note 13: CatchMark Merger for additional information.
Performance Share Awards
The weighted average grant date fair value of PSAs granted in 2022 was $76.18 per share. PSAs granted under the stock incentive plans have a three-year performance period and shares are issued at the end of the period if the performance measures are met. The number of shares actually issued, as a percentage of the amount subject to the PSA, could range from 0% to 200%. PSAs granted under the stock incentive plans do not have voting rights unless and until shares are issued upon settlement. If shares are issued at the end of the performance measurement period, the recipients will receive dividend equivalents in the form of additional shares at the time of payment equal to the dividends that would have been paid on the shares earned had the recipients owned the shares during the three-year period. Therefore, the shares are not considered participating securities.
The following table presents the key inputs used in the Monte Carlo simulation to calculate the fair value of the performance share awards granted in 2022:
Stock price as of valuation date
55.02
Risk-free rate
1.79
%
Expected volatility
45.69
Expected dividend yield1
Expected term (years)
3.00
Full dividend reinvestment assumed.
Restricted Stock Units
The weighted average fair value of all RSUs granted during the nine months ended September 30, 2022, was $53.73 per share. The fair value of RSUs granted equaled our common share price on the date of grant factoring in any required post-vesting holding periods. The RSU awards granted accrue dividend equivalents based on dividends paid during the RSU vesting period. Recipients will receive dividend equivalents in the form of additional shares of common stock at the date the vested RSUs are settled. Any forfeited RSUs will not receive dividends. Therefore, the shares are not considered participating securities.
NOTE 9. INCOME TAXES
As a REIT, we generally are not subject to federal and state corporate income taxes on income from investments in real estate, including our timberlands, that we distribute to our shareholders. We conduct certain activities through our PotlatchDeltic taxable REIT subsidiaries (TRS) which are subject to corporate level federal and state income taxes. These activities are principally comprised of our wood products manufacturing operations and certain real estate investments. Therefore, income tax expense or benefit is primarily due to pre-tax book income or loss of the TRS, as well as permanent book versus tax differences. In conjunction with the CatchMark merger (see Note 13: CatchMark Merger), we recorded uncertain tax position liabilities totaling $9.4 million, including $0.5 million for accrued interest, related to the treatment of certain intercompany transactions between CatchMark's REIT and its taxable REIT subsidiary. These liabilities are included in Other long-term obligations in our Condensed Consolidated Balance Sheets.
NOTE 10. LEASES
We lease certain equipment, office space and land. Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
The following table presents supplemental balance sheet information related to lease assets and liabilities:
Classification
Assets
Operating lease assets
10,071
8,514
Finance lease assets1
13,365
10,663
Total lease assets
23,436
19,177
Liabilities
Current:
Operating lease liabilities
2,819
3,021
Finance lease liabilities
4,883
3,577
Noncurrent:
7,219
5,598
8,318
6,972
Total lease liabilities
23,239
19,168
Finance lease assets are presented net of accumulated amortization of $7.6 million and $4.5 million as of September 30, 2022 and December 31, 2021, respectively.
The following table presents the components of lease expense:
Operating lease costs1
1,156
2,633
3,769
Finance lease costs:
Amortization of leased assets
1,137
741
3,061
1,963
Interest on lease liabilities
90
60
226
Net lease costs
2,032
1,957
5,920
5,894
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
2,733
3,723
Operating cash flows for finance leases
Financing cash flows for finance leases
3,110
Leased assets exchanged for new lease liabilities:
Operating leases1
3,931
213
Finance leases
5,761
3,916
Includes $2.4 million for an office lease assumed in the CatchMark merger. See Note 13: CatchMark Merger.
NOTE 11. PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS
In March 2022, we transferred $75.6 million of our qualified pension plan (the Plan) assets to an insurance company for the purchase of a group annuity contract. As a result of the transaction, the insurance company assumed responsibility for annuity administration and benefit payments to select retirees and terminated vested participants, with no change to participants' pension benefits. We recorded a non-cash pretax settlement charge of $14.2 million as a result of accelerating the recognition of actuarial losses included in Accumulated Other Comprehensive Income (Loss) that would have been recognized in future periods.
The settlement triggered a remeasurement of the Plan's assets and liabilities. We updated the discount rate used to measure our projected benefit obligation for the Plan as of March 31, 2022, and to calculate the related net periodic benefit cost for the remainder of 2022 to 3.95% from 3.00%. All other pension assumptions remain unchanged. The net effect of the remeasurement was a $6.2 million reduction in the funded status of the Plan, primarily driven by lower returns on Plan assets.
The following table details the components of net periodic cost (benefit) of our pension plans and other postretirement employee benefits (OPEB):
Pension
OPEB
Service cost
1,652
2,045
79
168
Interest cost
2,611
228
317
Expected return on plan assets
(2,259
(3,525
Amortization of prior service cost (credit)
155
(298
Amortization of actuarial loss (gain)
1,150
3,578
(96
545
Total net periodic cost
3,173
4,752
366
732
5,153
6,135
237
504
8,034
7,899
686
951
(7,662
(10,575
63
467
(894
4,252
10,877
(286
1,635
Net periodic cost before pension settlement charge
9,832
14,399
1,104
2,196
Net periodic cost
23,997
During the nine months ended September 30, 2022 and 2021, funding of pension and other postretirement employee benefit plans was $3.3 million and $7.4 million, respectively.
NOTE 12. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table details changes in amounts included in our Accumulated Other Comprehensive Income (Loss) (AOCI) by component on our Condensed Consolidated Balance Sheets, net of tax:
Pension Plans
Balance at beginning of period
41,274
73,592
49,579
79,025
Net loss arising during the period
4,587
Effect of pension settlement
(10,553
Amounts reclassified from AOCI to earnings
(869
(2,664
(3,208
(8,097
Balance at end of period
40,405
70,928
Other Postretirement Benefit Plans
1,700
14,418
1,790
14,783
(45
(182
(135
(547
1,655
14,236
Cash Flow Hedges
(93,936
(5,763
(8,131
27,181
Amounts arising during the period
(32,895
(4,310
(115,256
(32,741
(126,661
(12,399
Accumulated other comprehensive (income) loss, end of period
(84,601
72,765
See Note 11: Pension and Other Postretirement Employee Benefits and Note 6: Derivative Instruments for additional information.
NOTE 13. CATCHMARK MERGER
On September 14, 2022, CatchMark and CatchMark Timber Operating Partnership, L.P. (the Partnership) merged into a wholly owned subsidiary (Merger Sub) of PotlatchDeltic, pursuant to the terms of a merger agreement dated May 29, 2022, with the Merger Sub surviving the mergers. CatchMark owned approximately 348,000 acres of superior site index timberlands located in Alabama, Georgia and South Carolina.
Under the terms of the merger agreement, immediately prior to the mergers all outstanding unvested CatchMark equity awards and Partnership Long-term Incentive Plan (LTIP) Units were deemed fully vested, at maximum performance to the extent applicable, and converted to shares of CatchMark common stock and common partnership units of the Partnership (Partnership OP Units), respectively. CatchMark stockholders and the holders of the Partnership OP Units received 0.230 shares of PotlatchDeltic common stock for each share of CatchMark common stock and for each Partnership OP Unit and cash in lieu of fractional shares at the effective time of the merger.
As a result of the merger, we issued approximately 11.5 million shares of PotlatchDeltic common stock, including (i) 11.3 million shares in exchange for the outstanding shares of CatchMark common stock, which included unvested CatchMark share-based awards that fully vested upon closing of the merger; and (ii) 0.2 million shares in exchange for the Partnership OP Units.
Immediately following the merger, we refinanced $277.5 million of CatchMark's $300.0 million outstanding long-term debt and repaid the remaining $22.5 million with cash on hand. We also entered into $277.5 million of interest rate swaps to fix the interest rates on the refinanced long-term debt. Refer to Note 5: Debt and Note 6: Derivative Instruments for further information.
Based on guidance of ASC Topic 805, Business Combinations, we accounted for the transaction as an asset acquisition due to the determination that substantially all of the fair value of the assets acquired was concentrated in the acquired timber and timberlands asset group. See Note 1: Basis of Presentation for information on accounting and significant estimates associated with business combinations and asset acquisitions. The CatchMark timber and timberlands assets and operations are included in our Timberlands segment within the Southern region.
The following table summarizes the cost of the acquisition for accounting purposes:
(in thousands, except shares and per share amounts)
Total CatchMark shares and Partnership OP units outstanding to be converted1
48,688,754
Exchange ratio2
0.23
PotlatchDeltic shares issued as merger consideration
11,198,413
Price per PotlatchDeltic common share3
44.95
Value of PotlatchDeltic common shares issued as merger consideration
503,369
Attribution to consideration transferred for pre-merger services4
4,945
Total value of equity consideration
Cash paid in lieu of fractional shares
101
Transaction costs capitalized5
9,341
Purchase consideration
517,756
The following table reflects the fair value of assets acquired and liabilities assumed:
2,764
Intangible assets
3,000
782,258
Other long-term assets1
29,265
Total assets acquired
840,858
LIABILITIES
10,781
300,000
795
Other long-term liabilities2
11,526
Total liabilities assumed
Net assets acquired
During the three months ended September 30, 2022, we incurred non-capitalizable merger costs in connection with the CatchMark merger as follows:
Severance benefits1
7,513
Partnership OP Units' tax gross-up2
8,124
Share-based compensation3
9,307
1,063
Total merger expenses
These costs are included in CatchMark merger related expenses in our Condensed Consolidated Statements of Operations.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, expectations regarding economic conditions, including interest rates and our ability to offset the impact of inflation; expected seasonal fluctuations in our business segments; expected effectiveness of our hedging instruments and swaps; expected return on pension assets; anticipated share repurchases and regular and special dividend payments; anticipated cash balances, cash flows from operations and expected liquidity; potential uses of our credit facility; the expected impact from the Ola, Arkansas sawmill fire, anticipated insurance coverage and expected timing to finalize the insurance claim and receive the remaining insurance proceeds, and expected timing to return to full operation; expectations regarding debt obligations, interest payments and debt refinancing; expectations regarding the market transition away from LIBOR and our ability and expected timing to replace LIBOR with SOFR under our variable rate term loans and interest rate derivative agreements; maintenance of our investment grade credit rating; expectations regarding the U.S. housing market and home repair and remodeling activity; the lumber and log markets and pricing; lumber shipment volumes; timber harvest volumes; rural real estate and residential and commercial real estate development sales; sufficiency of cash and any necessary borrowings to meet operating requirements; expected 2022 and future capital expenditures; costs associated with the expansion and modernization of our Waldo, Arkansas sawmill, the expected timing of completion of the project, and expected increases in productivity resulting from the project; expectations regarding the development of the forest carbon sequestration market; and similar matters. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often involve use of words such as expects, may, could, should, will, believes, anticipates, estimates, projects, intends, plans, targets or approximately, or similar words or terminology. These forward-looking statements reflect our current views regarding future events based on estimates and assumptions and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. The realization of our expectations and the accuracy of our assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to:
For a discussion of some of the factors that may affect our business, results and prospects and a nonexclusive listing of forward-looking statements, refer to Cautionary Statement Regarding Forward-Looking Information on page 1, Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. Investors should not interpret the disclosure of a risk to imply that the risk has not already materialized.
Forward-looking statements contained in this report present our views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of our views to reflect events or circumstances occurring after the date of this report.
Our Company
We are a leading timberland REIT with ownership of approximately 2.2 million acres of timberland. We also own six sawmills and an industrial grade plywood mill, a residential and commercial real estate development business and a rural timberland sales program.
Our operations are organized into three business segments: Timberlands, Wood Products and Real Estate. Our Timberlands segment supplies our Wood Products segment with a portion of its wood fiber needs. These intersegment revenues are based on prevailing market prices and typically represent a sizeable portion of the Timberlands segment’s total revenues. Our other segments generally do not generate intersegment revenues. In the discussion of our consolidated results of operations, our revenues and expenses are reported after elimination of intersegment revenues and expenses. In the Business Segment Results discussion below, each segment’s revenues and expenses, as applicable, are presented before elimination of intersegment revenues and expenses.
The operating results of our Timberlands, Wood Products and Real Estate business segments have been and will continue to be affected by the cyclical nature of the forest products industry. Log and pulpwood sales volumes in our Timberlands segment are typically lower in the first half of each year as winter rains in the Southern region and spring thaw in the Northern region limit timber harvesting operations due to softened roadbeds and wet logging conditions that restrict access to logging sites. The third quarter is typically our Timberlands segment's strongest production quarter. Demand for our manufactured wood products typically decreases in the winter months when construction activity is slower, while demand typically increases during the spring, summer and fall when construction activity is generally higher. Rural real estate dispositions and acquisitions can be adversely affected when access to any properties to be sold or considered for acquisition are limited due to adverse weather conditions. Development real estate sales at Chenal Valley occur throughout the year, though historically most sales take place in the second half of the year as builders prepare for the following year's spring and summer traditional home building and buying season. The timing of development real estate sales can also be impacted by contractor availability needed to complete infrastructure and other improvements prior to bringing developed real estate to market.
Our business segments have been and will continue to be influenced by a variety of other factors, including tariffs, quotas and trade agreements, changes in timber prices and in harvest levels from our timberlands, competition, timberland valuations, demand for our non-strategic timberland for higher and better use purposes, lumber prices, weather conditions, disruptions or inefficiencies in our supply chain including the availability of transportation, the efficiency and level of capacity utilization of our Wood Products manufacturing operations, changes in our principal expenses such as log costs, inflation, asset dispositions or acquisitions, impact of pandemics (such as COVID-19 and its variants), fires (such as the Ola, Arkansas sawmill fire and fires on our timberlands), other natural disasters and other factors.
Additionally, governments and businesses across the globe are taking action on climate change and are making significant commitments towards reducing greenhouse gas emissions to net zero. Achieving these commitments will require governments and companies to take major steps to modify operations, invest in low-carbon activities and purchase offsets to reduce environmental impacts. We believe we are well positioned to help entities achieve these commitments through natural climate solutions, including forest carbon sequestration and carbon capture and storage activities.
Non-GAAP Measures
To supplement our financial statements presented in accordance with generally accepted accounting principles in the United States (GAAP), we present certain non-GAAP measures on a consolidated basis, including Adjusted EBITDDA and Cash Available for Distribution (CAD), which are defined and further explained and reconciled to the nearest GAAP measure in the Liquidity and Performance Measures section below. Our definitions of these non-GAAP measures may differ from similarly titled measures used by others. These non-GAAP measures should be considered supplemental to and not a substitute for, financial information prepared in accordance with GAAP.
24
Adjusted EBITDDA is a non-GAAP measure that management uses in evaluating performance and allocating resources between segments, and that investors can use to evaluate the operational performance of the assets under management. It removes the impact of specific items that management believes do not directly reflect the core business operations on an ongoing basis. This measure should not be considered in isolation from and is not intended to represent an alternative to, our results reported in accordance with GAAP. Management believes that this non-GAAP measure, when read in conjunction with our GAAP financial statements, provides useful information to investors by facilitating the comparability of our ongoing operating results over the periods presented, the ability to identify trends in our underlying business and the comparison of our operating results against analyst financial models and operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.
Our definition of EBITDDA and Adjusted EBITDDA may be different from similarly titled measures reported by other companies. We define EBITDDA as net income before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses. See Note 2: Segment Information in the Notes to the Condensed Consolidated Financial Statements for information related to the use of segment Adjusted EBITDDA.
Business and Economic Trends Affecting Our Operations
The demand for timber is directly affected by the underlying demand for lumber and other wood-products, as well as by the demand for pulp, paper and packaging. Our Timberlands and Wood Products segments are impacted by demand for new homes in the United States and by repair and remodeling activity, both of which were very strong until recently. Higher interest rates and inflation have caused consumer confidence and the pace of housing starts to decline in recent months. In October 2022, the National Association of Home Builders (NAHB) reported the NAHB/Wells Fargo Housing Market Index (HMI) was at 38, the tenth straight month of decline and half the level it was in April 2022. The repair and remodel sector, which has experienced growth during the pandemic-driven home improvement movement that began in early 2020, is expected to continue to grow, but at a slower rate. Rising construction costs, a persistently tight labor pool, supply chain challenges and rising mortgage rates could negatively impact the pace of housing starts and repair and remodel projects.
While housing starts have tempered in recent months, we believe long-term housing fundamentals remain favorable, due to a shortage of homes, lower than historical average existing inventory for sale, a large millennial demographic in their prime home-buying years, the continued remote work evolution, and an aging existing housing stock supporting repair and remodel demand. These fundamentals are key drivers for our business, and we continue to expect that lumber prices will remain structurally higher than long-term historical averages.
Inflation has impacted our business, especially for fuel, energy and repair and maintenance costs, although we believe there are offsetting impacts including wood product prices. Over the last twelve months, the Consumer Price Index (all items) increased by 8.2 percent before seasonal adjustments, while the Producer Price Index (final demand) increased by 8.5 percent on an unadjusted basis.
In our Timberlands segment, sawlogs pricing benefitted from strong demand for Southern pine sawlogs. Idaho sawlog prices continue to benefit from being indexed on a four-week lag to lumber prices. Our Southern harvest volume of 1.4 million tons in the third quarter of 2022 was higher than the third quarter of 2021, primarily due to favorable harvest conditions and strong log demand. We expect to harvest between 1.8 and 1.9 million tons during the fourth quarter of 2022, with approximately 75% of the volume in the Southern region. For 2022, we expect to harvest approximately 6.5 million tons, with approximately 75% of the volume in the Southern region.
During the second quarter of 2021 we experienced a fire at our Ola, Arkansas sawmill. The damage was principally limited to the large log primary breakdown machine center. The planer mill, kiln, and shipping department were not affected. We have adequate property damage and business interruption insurance, subject to an applicable deductible. The new equipment has been installed and the start-up phase and log processing began in late September 2022. We expect the start-up phase to be completed by the end of 2022.
In our Wood Products segment, we shipped 265 million board feet of lumber during the third quarter of 2022 and expect to ship between 265 and 275 million board feet of lumber during the fourth quarter of 2022. For 2022, we expect to ship approximately 1.0 billion board feet of lumber. This estimate assumes that the Ola, Arkansas sawmill start-up remains on track.
Our Real Estate segment benefitted from strong Chenal Valley residential lot and commercial land sales in the third quarter of 2022. We expect to sell approximately 1,475 acres of rural land and 23 residential lots during the fourth quarter of 2022. For 2022, we expect to sell approximately 20,600 acres of rural land and 180 residential lots.
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CatchMark Merger
On September 14, 2022, CatchMark Timber Trust, Inc. (CatchMark) and CatchMark Timber Operating Partnership, L.P. (the Partnership) merged into a wholly owned subsidiary (Merger Sub) of PotlatchDeltic, pursuant to the terms of a merger agreement dated May 29, 2022, with the Merger Sub surviving the mergers. The mergers result in PotlatchDeltic owning approximately 2.2 million acres of diversified timberlands, including over 1.5 million acres in strengthening markets in the U.S. South. See Note 13: CatchMark Merger in the Notes to the Condensed Consolidated Financial Statements for additional details surrounding the merger.
Consolidated Results
The following table sets forth changes in our Condensed Consolidated Statements of Operations. Our Business Segment Results provide a more detailed discussion of our segments:
Change
19,363
(11,389
30,274
54,374
802
(20,519
(30,111
36,128
51,072
(16,765
(62,461
361
1,821
Non-operating pension and other postretirement benefit costs
1,463
4,410
(14,942
(70,396
(4,770
15,775
(19,712
(54,621
Total Adjusted EBITDDA1
(6,093
(55,331
See Liquidity and Performance Measures for a reconciliation of Total Adjusted EBITDDA to net income, the closest comparable GAAP measure, for each of the periods presented.
Third Quarter 2022 Compared with Third Quarter 2021
Revenues were $306.7 million, an increase of $19.4 million compared with the third quarter of 2021 primarily due to higher lumber prices, increased harvest volumes in our Southern region and increased commercial acres sold in our Chenal Valley master planned community. These increases were partially offset by lower Northern sawlog prices.
Cost of goods sold increased $30.3 million compared with the third quarter of 2021 mainly due to higher manufacturing and log and haul costs primarily from inflationary price increases in areas such as diesel fuel, energy, and repair and maintenance, and increased harvest volumes in the Southern region.
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.
26
In June 2021, a fire occurred at our Ola, Arkansas sawmill. During the third quarter of 2022, we recognized insurance recoveries of $25.0 million and $0.1 million in disposal costs compared with insurance recoveries of $12.9 million and an $8.5 million charge for the write-off of damaged and obsolete equipment and disposal costs during the third quarter of 2021.
Income taxes are primarily due to income from our PotlatchDeltic taxable REIT subsidiaries (TRS). For the three months ended September 30, 2022, we recorded income tax expense of $9.8 million on TRS income before tax of $40.9 million which included the $24.9 million gain on fire damage. For the three months ended September 30, 2021, we recorded income tax expense of $5.0 million on TRS income before tax of $18.2 million, which included the 2021 gain on fire damage of $4.4 million.
Total Adjusted EBITDDA for the third quarter of 2022 decreased $6.1 million compared to the third quarter of 2021 primarily due to higher manufacturing and log and haul costs. These higher costs were partially offset by increased lumber price realization, increased Southern harvest volumes, and increased commercial acres sold in Chenal Valley. Refer to the Business Segment Results below for further discussions on activities for each of our segments. See Liquidity and Performance Measures for a reconciliation of Total Adjusted EBITDDA to net income, the closest comparable GAAP measure, for each of the periods presented.
Year to Date 2022 Compared with Year to Date 2021
Revenues of $1.1 billion were $11.4 million lower compared with the first nine months of 2021 primarily due to lower lumber prices and shipments and decreased Northern harvest volumes. Lumber shipments in the first nine months of 2022 were more impacted compared to the first nine months of 2021 by the loss of production at our Ola, Arkansas sawmill following a fire in June 2021. These decreases were partially offset by increased Southern harvest volumes and sawlog prices and increases in development real estate sales.
Cost of goods sold increased $54.4 million compared with the first nine months of 2021 mainly due to higher manufacturing and log and haul costs primarily from inflationary price increases in areas such as diesel fuel, energy, and repair and maintenance along with increased Southern harvest volumes.
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 2022, we recognized insurance recoveries of $35.4 million for fire damage and incurred $0.9 million of disposal costs at our Ola, Arkansas sawmill. For the first nine months of 2021, we recognized insurance recoveries of $15.0 million for fire damage and recorded a $10.6 million charge for the write-off of damaged and obsolete equipment and disposal costs at the Ola sawmill.
In March 2022 we transferred $75.6 million of our qualified pension plan (the Plan) assets to an insurance company for the purchase of a group annuity contract. In connection with this transaction, we recorded a non-cash pretax settlement charge of $14.2 million.
27
Non-operating pension and other postretirement benefit costs decreased $4.4 million compared to the first nine months of 2021. This decrease is primarily a result of an increase in the discount rate used to determine the benefit obligation partially offset by a decrease in expected return on plan assets.
Income taxes are primarily due to income from our TRS. For the nine months ended September 30, 2022, we recorded income tax expense of $70.1 million on TRS income before tax of $279.1 million, which included the $14.2 million pension settlement charge and the $34.5 million gain on fire damage. For the nine months ended September 30, 2021, we recorded income tax expense of $85.9 million on TRS income before tax of $329.4 million, which included the $4.4 million gain on fire damage in 2021.
Total Adjusted EBITDDA for the first nine months of 2022 decreased $55.3 million compared to the first nine months of 2021 primarily due to lower lumber prices and shipments and higher manufacturing and log and haul costs. These decreases were partially offset by higher harvest activity and sawlog prices in the Southern region and increases in development real estate sales. Refer to the Business Segment Results below for further discussions on activities for each of our segments. See Liquidity and Performance Measures for a reconciliation of Total Adjusted EBITDDA to net income, the closest comparable GAAP measure, for each of the periods presented.
Business Segment Results
Timberlands Segment
Revenues1
5,033
1,044
Logging and hauling
57,221
42,397
14,824
134,426
112,168
22,258
11,249
9,108
2,141
25,310
23,792
1,518
1,624
2,015
(391
5,177
5,575
(398
Timberlands Adjusted EBITDDA2
(11,541
(22,334
Prior to elimination of intersegment fiber revenues of $40.3 million and $43.5 million for the three months ended September 30, 2022 and 2021, and $121.7 million and $138.2 million for the nine months ended September 30, 2022 and 2021, respectively.
Management uses Adjusted EBITDDA to evaluate the performance of the segment. See Note 2: Segment Information in the Notes to Condensed Consolidated Financial Statements.
28
Timberlands Segment Statistics
Harvest Volumes (in tons)
Sawlog
459,128
462,492
(3,364
1,120,765
1,243,539
(122,774
11,197
4,039
7,158
30,839
24,736
6,103
Total
470,325
466,531
3,794
1,151,604
1,268,275
(116,671
613,303
460,840
152,463
1,611,075
1,449,106
161,969
539,856
467,138
72,718
1,296,350
1,145,572
150,778
287,929
109,469
178,460
602,060
211,234
390,826
1,441,088
1,037,447
403,641
3,509,485
2,805,912
703,573
Total harvest volume
1,911,413
1,503,978
407,435
4,661,089
4,074,187
586,902
Sales Price/Unit ($ per ton)1
171
191
(20
199
202
52
30
51
48
45
32
29
(7
Sawlog and pulpwood sales prices are on a delivered basis, which includes logging and hauling costs. Stumpage sales provide our customers the right to harvest standing timber. As such, the customer contracts the logging and hauling and bears such costs.
Timberlands Adjusted EBITDDA
The following table summarizes Timberlands Adjusted EBITDDA variances for the three and nine months ended September 30, 2022, compared with the three and nine months ended September 30, 2021:
Three Months
Nine Months
Timberlands Adjusted EBITDDA - prior year
Sales price and mix
(8,568
3,057
Harvest volume
6,957
(6,092
Logging and hauling costs per unit
(9,348
(20,323
Forest management, indirect and other
(582
1,024
Timberlands Adjusted EBITDDA - current year
Timberlands Adjusted EBITDDA for the third quarter of 2022 decreased $11.5 million compared with the third quarter of 2021, primarily as a result of the following:
Timberlands Adjusted EBITDDA for the first nine months of 2022 decreased $22.3 million compared to the first nine months of 2021, primarily as a result of the following:
Wood Products Segment
5,671
(58,923
Costs and expenses1
Fiber costs
82,638
75,629
7,009
249,226
242,719
6,507
Freight, logging and hauling
18,766
17,760
1,006
56,739
56,223
516
Manufacturing costs
52,952
52,976
(24
159,318
152,195
7,123
Finished goods inventory change
4,717
12,681
(7,964
(7,814
(7,904
2,964
3,288
(324
8,758
724
(1,140
1,276
390
(1,910
2,300
Wood Products Adjusted EBITDDA2
4,692
(68,189
Prior to elimination of intersegment fiber costs of $40.3 million and $43.5 million for the three months ended September 30, 2022 and 2021, and $121.7 million and $138.2 million for the nine months ended September 30, 2022 and 2021, respectively.
Wood Products Segment Statistics
Lumber shipments (MBF)1
264,748
264,855
(107
752,161
783,235
(31,074
Lumber sales prices ($ per MBF)
572
533
827
867
(40
MBF stands for thousand board feet.
Wood Products Adjusted EBITDDA
The following table summarizes Wood Products Adjusted EBITDDA variances for the three and nine months ended September 30, 2022, compared with the three and nine months ended September 30, 2021:
Wood Products Adjusted EBITDDA - prior year
Lumber:
Price
10,345
(33,869
Volume
(12,030
Manufacturing costs per unit
(2,603
(13,069
Log costs per unit
981
(6,458
Inventory charge
4,214
Residuals, panels and other
(8,239
(6,977
Wood Products Adjusted EBITDDA - current year
Wood Products Adjusted EBITDDA for the third quarter of 2022 increased $4.7 million compared with the third quarter of 2021, primarily as a result of the following:
Wood Products Adjusted EBITDDA for the first nine months of 2022 decreased $68.2 million compared with the first nine months of 2021, primarily as a result of the following:
Real Estate Segment
5,511
30,001
Costs and expenses
Costs of goods sold
3,685
3,263
422
10,395
8,612
1,783
1,183
1,165
3,334
3,746
(412
Real Estate Adjusted EBITDDA1
5,071
28,630
Real Estate Segment Statistics
Rural Real Estate
Acres sold
1,622
2,303
19,122
11,991
Average price per acre
3,811
3,013
2,315
2,374
Development Real Estate
Residential lots
157
Average price per lot
78,344
81,923
108,418
90,301
Commercial acres
182,520
273,568
277,425
Real Estate Adjusted EBITDDA
The following table summarizes Real Estate Adjusted EBITDDA variances for the three and nine months ended September 30, 2022, compared with the three and nine months ended September 30, 2021:
Real Estate Adjusted EBITDDA - prior year
Rural real estate sales
(757
15,788
Real estate development sales
6,268
14,213
(19
412
Other costs, net
(421
(1,783
Real Estate Adjusted EBITDDA - current year
Real Estate Adjusted EBITDDA for the third quarter of 2022 was $14.1 million, an increase of $5.1 million compared with the third quarter of 2021, primarily as a result of the following:
Real Estate Adjusted EBITDDA for the first nine months of 2022 was $66.1 million, an increase of $28.6 million compared with the first nine months of 2021, primarily as a result of the following:
Liquidity and Capital Resources
Cash generated by our operations is highly dependent on selling prices of our products and can vary from period to period. Changes in significant sources and uses of cash for the nine months ended September 30, 2022 and 2021 are presented by category as follows:
5,195
(101,061
(46,644
Net Cash Flows from Operating Activities
Net cash from operating activities increased $5.2 million in the first nine months of 2022, compared to the first nine months of 2021 primarily as a result of the following:
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, 2022, we had cash and cash equivalents of $484.0 million. We expect cash and cash equivalents on hand, generated from our operating activities, and supplemented by borrowings under our credit agreement, if needed, to be adequate to meet our future cash requirements.
At September 30, 2022, there were no significant changes in our cash commitments arising in the normal course of business under our known contractual and other obligations as described in our Annual Report on Form 10-K for the year ended December 31, 2021.
Returning cash to shareholders through a secure regular dividend and opportunistic share repurchases is an important and durable part of our disciplined capital allocation strategy. Our board of directors, in its sole discretion, determines the actual amount of dividends to be made to stockholders based on consideration of a number of factors, including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions in our industry and in the markets for our products, borrowing capacity, debt covenant restrictions, future acquisitions and dispositions, and REIT requirements. Generally, a REIT must distribute its taxable income each year and there is a 20% limit on the value of our TRS, including cash, that can be retained. Based on our strong performance during the first nine months of 2022, we generated large cash balances in both our REIT and TRS and expect to pay a special dividend to stockholders in December 2022.
Capital Expenditures
We invest cash in maintenance and discretionary capital expenditures at our Wood Products facilities. We also invest cash in the reforestation of timberlands and construction of roads in our Timberlands operations and to develop land in our Real Estate development operations. We evaluate discretionary capital improvements based on an expected level of return on investment. We expect to spend a total of approximately $85 to $90 million for capital expenditures during 2022.
In June 2022, we announced a project to expand and modernize our Waldo, Arkansas sawmill. The project is expected to increase the mill’s annual capacity from 190 million board feet of dimensional lumber to approximately 275 million board feet. The investment is also expected to reduce the mill’s operating costs significantly. The Waldo investment includes upgrades to the log yard and planer, a new saw line, and a new continuous dry kiln. The existing mill will continue to operate during the project and completion is expected by the end of 2024. We expect to spend approximately $131.0 million on the project, including a $12 million deposit paid in 2022.
Our 2022 planned capital spend also includes approximately $18.0 million of capital expenditures for the reconstruction of our fire-damaged Ola sawmill, which is largely covered by insurance. The new equipment has been installed and the initial start-up phase and log processing began in late September 2022. We expect the start-up phase to be completed by the end of the year.
Bolt-On Timberland Acquisitions
During the nine months ended September 30, 2022, we were the successful bidder on three bolt-on timberland transactions, aggregating approximately $101 million, covering approximately 46,000 acres in Mississippi and Arkansas. We used cash to pay for the acquisitions, including approximately $15.0 million for the third transaction that closed in October 2022.
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On August 31, 2022, our board of directors authorized management to repurchase up to $200.0 million of our common stock with no set time limit for the repurchase (the 2022 Repurchase Program). Concurrently, the board of directors terminated the remaining repurchase authorization under a repurchase program approved in August 2018. At September 30, 2022, we had remaining authorization of $200.0 million for future stock repurchases under the 2022 Repurchase Program. The timing, manner, price and amount of repurchases will be determined according to the trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934 (the Trading Plan), and, subject to the terms of the Trading Plan, the Repurchase Program may be suspended, terminated or modified at any time for any reason.
Term Loans and Credit Agreement
On September 14, 2022, through a seventh amendment to the Second Amended and Restated Term Loan Agreement (Amended Term Loan Agreement) with our primary lender, we refinanced $277.5 million of long-term debt acquired in the CatchMark merger. The amendment to the Amended Term Loan Agreement provided for a new 5-year term loan in the principal amount of $138.75 million maturing on September 1, 2027, and a new 8-year term loan in the principal amount of $138.75 million maturing on September 1, 2030 (collectively the New Term Loans). The New Term Loans bear interest at a rate equal to one-month SOFR plus 2.0% per annum. In addition, the 8-year term loan provides for a cost-of-capital reset at year five. In connection with the refinance, we entered into two one-month SOFR based interest rate swaps to fix the interest rates on the New Term Loans at 2.50% and 2.66% respectively, before patronage credits from lenders.
At September 30, 2022, our total outstanding net long-term debt was $1.0 billion. We expect to refinance a $40.0 million term loan expiring in December 2022 at maturity, which is covered by forward starting interest rate swaps that hedges the variability in future benchmark interest payments attributable to changes in interest rates. All interest rates on our outstanding long-term debt are fixed rates under fixed rate loans or variable rate loans with an associated interest rate swap that fixes the variable benchmark interest rate component.
We have a $300.0 million revolving line of credit with a syndicate of lenders that matures February 14, 2027. Under the terms of the Amended Credit Agreement, the amount of available principal may be increased up to an additional $500.0 million. We may also utilize borrowings under the Amended Credit Agreement to, among other things, refinance existing indebtedness and provide funding for working capital requirements, capital projects, acquisitions, and other general corporate expenditures. At September 30, 2022, there were no borrowings under the revolving line of credit and approximately $11.0 million of the credit facility was utilized by outstanding letters of credit.
On March 5, 2021, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that the US Dollar LIBOR will no longer be published after June 30, 2023. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rate Committee, a steering committee comprised of large U.S. financial institutions, has recommended replacing LIBOR with the Secured Overnight Financing Rate (SOFR). Our credit agreement, variable rate term loans with $403.5 million in principal and the associated interest rate swaps, and $290.0 million of forward starting interest rate swaps designated as cash flow hedges have an interest rate tied to LIBOR. We are working with our lenders and counterparties to modify the benchmark rate from LIBOR to SOFR in our variable rate term loans and interest rate derivative agreements. We expect to complete this conversion by the end of 2022. We do not expect the transition from LIBOR to SOFR to have a material impact on our consolidated financial statements.
Financial Covenants
The Amended Term Loan Agreement and Amended Credit Agreement (collectively referred to as the Agreements) contain certain covenants that limit our ability and that of our subsidiaries to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates or change the nature of our business. The Agreements also contain financial maintenance covenants including the maintenance of a minimum interest coverage ratio and a maximum leverage ratio. We are permitted to pay dividends to our stockholders under the terms of the Agreements so long as we expect to remain in compliance with the financial maintenance covenants.
The following table presents the components and applicable limits of Total Asset Value (TAV), a component of the Leverage Ratio, at September 30, 2022:
Estimated timberland fair value
4,836,528
Wood Products manufacturing facilities book basis (limited to 10% of TAV)
290,166
Other1
22,587
Total Asset Value
5,633,299
Includes, as applicable, Company Owned Life Insurance (limited to 5% of TAV), Construction in Progress (limited to 10% of TAV) and Investments in Affiliates (limited to 15% TAV) as defined in the Agreements.
At September 30, 2022, we were in compliance with all covenants under the Agreements. The following table sets forth the financial covenants for the Agreements and our status with respect to these covenants at September 30, 2022:
Covenant Requirement
Actual atSeptember 30, 2022
Interest coverage ratio
≥
3.00 to 1.00
22.39
Leverage ratio
≤
40%
19%
See Note 5: Debt in the Notes to the Condensed Consolidated Financial Statements for additional information on our debt and credit agreements.
Credit Ratings
Two major debt rating agencies routinely evaluate our debt, and our cost of borrowing can increase or decrease depending on our credit rating. Both Moody’s and S&P rate our debt as investment grade.
Capital Structure
Long-term debt (including current portion)
1,032,503
758,256
(484,018
(296,151
Net debt
548,485
462,105
Market capitalization1
3,315,072
4,159,034
Enterprise value
3,863,557
4,621,139
Net debt to enterprise value
14.2
10.0
Dividend yield2
4.3
2.9
Weighted-average cost of debt, after tax3
2.4
3.1
Market capitalization is based on outstanding shares of 80.8 million and 69.1 million times closing share prices of $41.04 and $60.22 as of September 30, 2022, and December 31, 2021, respectively.
Dividend yield is based on annualized dividends per share of $1.76 and share prices of $41.04 and $60.22 as of September 30, 2022, and December 31, 2021, respectively.
Weighted-average cost of debt excludes deferred debt costs and credit facility fees and includes estimated annual patronage credit on term loan debt.
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Liquidity and Performance Measures
The discussion below is presented to enhance the reader’s understanding of our operating performance, ability to generate cash and satisfy rating agency and creditor requirements. This information includes two measures: Adjusted EBITDDA and Cash Available for Distribution (CAD). These measures are not defined by GAAP and the discussion of Adjusted EBITDDA and CAD is not intended to conflict with or change any of the GAAP disclosures described herein.
Adjusted EBITDDA is a non-GAAP measure that management uses in evaluating performance and to allocate resources between segments, and that investors can use to evaluate the operational performance of the assets under management. It removes the impact of specific items that management believes do not directly reflect the core business operations on an ongoing basis. This measure should not be considered in isolation from and is not intended to represent an alternative to our results reported in accordance with GAAP. Management believes that this non-GAAP measure, when read in conjunction with our GAAP financial statements, provides useful information to investors by facilitating the comparability of our ongoing operating results over the periods presented, the ability to identify trends in our underlying business, and the comparison of our operating results against analyst financial models and the operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.
Our definition of EBITDDA may be different from similarly titled measures reported by other companies. We define EBITDDA as net income before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses.
We reconcile Total Adjusted EBITDDA to net income for the consolidated company as it is the most comparable GAAP measure.
The following table provides a reconciliation of net income to Total Adjusted EBITDDA for the respective periods:
9,801
5,031
70,135
85,910
1,808
3,271
5,546
9,956
(Gain) loss on disposal of fixed assets
(23
1,139
(39
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.
37
The following table provides a reconciliation of cash from operating activities to CAD:
Twelve Months Ended September 30,
Net cash from operating activities1
510,081
597,660
Capital expenditures2
(152,301
(40,977
(186,738
(55,013
CAD
306,136
412,265
323,343
542,647
Net cash from investing activities3
(160,206
(40,662
(447,953
(114,235
Net cash from operating activities for the nine months and twelve months ended September 30, 2022, includes cash paid for CatchMark merger-related expenses of $12.1 million and cash paid for real estate development expenditures of $7.0 million and $9.8 million, respectively. Net cash from operating activities for the nine and twelve months ended September 30, 2021, includes cash paid for real estate development expenditures of $6.4 million and $8.9 million, respectively.
The nine and twelve months ended September 30, 2022, includes fire related capital expenditures for the Ola, Arkansas sawmill of $12.4 million and $14.3 million, respectively, and excludes $0 and $1.8 million, respectively, of insurance proceeds for property losses at the sawmill. The nine and twelve months ended September 30, 2021, includes fire related capital expenditures for the Ola, Arkansas sawmill of $4.8 million and excludes $13.3 million of insurance proceeds for property losses at the sawmill.
Net cash from investing activities includes payment for capital expenditures and acquisition of non-strategic timber and timberlands, which is also included in our reconciliation of CAD.
Critical Accounting Policies and Estimates
Pension Annuitization. In March 2022, we transferred $75.6 million of our qualified pension plan (the Plan) assets to an insurance company for the purchase of a group annuity contract. This transaction triggered a remeasurement of the Plan's assets and liabilities. We updated the discount rate used to measure our projected benefit obligation for the Plan as of March 31, 2022. All other pension assumptions remain unchanged. See Note 11: Pension and Other Postretirement Employee Benefits for further information on the pension settlement and change to the projected benefit obligation.
Business Combinations and Asset Acquisitions. We apply the principles provided in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations, to determine whether an acquisition involves an asset or a business. In determining whether an acquisition should be accounted for as a business combination or asset acquisition, we first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the single identifiable asset or the group of similar assets is accounted for as an asset acquisition. If this is not the case, we then further evaluate whether the single identifiable asset or group of similar identifiable assets and activities includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the transaction is accounted for as a business combination.
We account for business combinations using the acquisition method of accounting which requires that (i) identifiable assets acquired (including identifiable intangible assets) and liabilities assumed generally be measured and recognized at fair value as of the acquisition date and (ii) the excess of the purchase price over the net fair value of identifiable assets acquired and liabilities assumed be recognized as goodwill, which is not amortized for accounting purposes but is subject to testing for impairment at least annually. We measure and recognize asset acquisitions that are not deemed to be business combinations based on the cost to acquire the assets. Goodwill is not recognized in an asset acquisition with any consideration in excess of net assets acquired allocated to acquired assets on a relative estimated fair value basis. Transaction costs are expensed in a business combination and transaction costs directly attributable to the acquisition are considered a component of the cost of the acquisition in an asset acquisition. See Note 13: CatchMark Merger in the Notes to Condensed Consolidated Financial Statements for additional information.
There have been no other significant changes during 2022 to our critical accounting policies or estimates as presented in our 2021 Annual Report on Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk exposure on financial instruments includes interest rate risk on our bank credit facility, term loans and interest rate swap agreements and forward starting interest rate swap agreements. We are exposed to interest rate volatility on existing variable rate debt instruments and future incurrences of fixed or variable rate debt, which exposure primarily relates to movements in various interest rates. We use interest rate swaps and forward starting swaps to hedge our exposure to the impact of interest rate changes on existing debt and future debt issuances, respectively. All market risk sensitive instruments were entered into for purposes other than trading purposes.
For quantitative and qualitative disclosures about market risk, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our annual report on Form 10-K for the year ended December 31, 2021. Our exposures to market risk have not changed materially since December 31, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act)), under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2022. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, the CEO and CFO have concluded that these disclosure controls and procedures were effective as of September 30, 2022.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Internal Control over Financial Reporting
No changes occurred in our internal control over financial reporting during the nine months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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, 2021
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
On August 30, 2018, our board of directors authorized management to repurchase up to $100.0 million of common stock with no time limit set for the repurchase (the 2018 Repurchase Program). During the third quarter of 2022 we repurchased 8,444 common shares for approximately $0.4 million (including transaction fees) under the 2018 Repurchase Program in open-market transactions.
On August 31, 2022, our board of directors authorized management to repurchase up to $200.0 million of our common stock with no set time limit for the repurchase (the 2022 Repurchase Program). Concurrently, the board of directors terminated the remaining repurchase authorization under the 2018 Repurchase Program. No shares were repurchased under the 2022 Repurchase Program during the three months ended September 30, 2022. At September 30, 2022, we had remaining authorization of $200.0 million for future stock repurchases under the 2022 Repurchase Program.
The following table provides information with respect to purchases of common stock made by the company during the third quarter of 2022:
Common Share Purchases
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of a Publicly Announced Plan
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan
July 1 - July 31
8,444
43.93
54,972,337
August 1 - August 31
September 1 - September 30
200,000,000
ITEM 6. EXHIBITS
EXHIBIT
NUMBER
DESCRIPTION
2.1*
Agreement and Plan of Merger, dated as of May 29, 2022, by and among PotlatchDeltic Corporation, Horizon Merger Sub 2022, LLC, CatchMark Timber Trust, Inc. and CatchMark Timber Operating Partnership, L.P., filed as Exhibit 2.1 to the Current Report on Form 8-K filed by the Registrant on May 31, 2022.
3.1*
Third Restated Certificate of Incorporation of the Registrant, effective February 20, 2018, filed as Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on February 21, 2018.
3.2*
Bylaws of the Registrant, as amended through February 18, 2009, filed as Exhibit (3)(b) to the Current Report on Form 8-K filed by the Registrant on February 20, 2009.
See Exhibits (3)(a) and (3)(b). The registrant undertakes to furnish to the Commission, upon request, any instrument defining the rights of holders of long-term debt.
10.1
Summary of PotlatchDeltic Corporation Non-Employee Director Compensation, effective December 1, 2022.
10.2*
Seventh Amendment to Second Amended and Restated Term Loan Agreement dated as of September 14, 2022 among PotlatchDeltic Corporation and its wholly owned subsidiaries, PotlatchDeltic Forest Holdings, Inc. and PotlatchDeltic Land & Lumber, LLC, as borrowers, the guarantors party thereto, the lenders party thereto, the voting participants party thereto and Northwest Farm Credit Services, PCA, as administrative agent, filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on September 14, 2022.
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.
The following financial information from PotlatchDeltic Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022, filed on October 28, 2022 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021, (iii) the Condensed Consolidated Balance Sheets at September 30, 2022 and December 31, 2021, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021, (v) the Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 and (vi) the Notes to Condensed Consolidated Financial Statements.
Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101).
* Incorporated by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
By
/s/ WAYNE WASECHEK
Wayne Wasechek
Corporate Controller
(Duly Authorized; Principal Accounting Officer)
Date:
October 28, 2022