UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019
or
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-32729
PotlatchDeltic Corporation
(Exact name of registrant as specified in its charter)
Delaware
82-0156045
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
601 West First Avenue, Suite 1600
Spokane, Washington
99201
(Address of principal executive offices)
(Zip Code)
(509) 835-1500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock
PCH
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange act).
Yes ☐ No ☒
The number of shares of common stock of the registrant outstanding as of July 29, 2019 was 67,187,206.
POTLATCHDELTIC CORPORATION AND CONSOLIDATED SUBSIDIARIES
Table of Contents
PageNumber
PART I. - FINANCIAL INFORMATION
ITEM 1.
Financial Statements (unaudited)
Condensed Consolidated Statements of Income
2
Condensed Consolidated Statements of Comprehensive Income
3
Condensed Consolidated Balance Sheets
4
Condensed Consolidated Statements of Cash Flows
5
Condensed Consolidated Statements of Stockholders’ Equity
6
Notes to Condensed Consolidated Financial Statements
7
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
21
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
35
ITEM 4.
Controls and Procedures
36
PART II. - OTHER INFORMATION
Legal Proceedings
37
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 6.
Exhibits
38
SIGNATURE
39
Part I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PotlatchDeltic Corporation and Consolidated Subsidiaries
(Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands, except per share amounts)
2019
2018
Revenues
$
215,581
268,233
397,297
468,130
Costs and expenses:
Cost of goods sold
175,673
180,906
329,888
320,061
Selling, general and administrative expenses
14,952
16,892
31,522
30,548
Gain on sale of facility
—
(9,176
)
Deltic merger-related costs
1,018
20,273
190,625
198,816
352,234
370,882
Operating income
24,956
69,417
45,063
97,248
Interest expense, net
(7,882
(9,356
(13,346
(15,016
Loss on extinguishment of debt
(5,512
Non-operating pension and other postretirement employee benefit costs
(889
(1,908
(1,869
(3,765
Income before income taxes
16,185
58,153
24,336
78,467
Income tax benefit (expense)
952
(12,005
(639
(17,722
Net income
17,137
46,148
23,697
60,745
Net income per share:
Basic
0.25
0.73
0.35
1.07
Diluted
1.06
Dividends per share
0.40
0.80
Weighted-average shares outstanding:
67,664
62,980
67,774
56,739
67,713
63,316
67,866
57,128
The accompanying notes are an integral part of these condensed consolidated financial statements.
(in thousands)
Other comprehensive (loss) income, net of tax:
Pension and other postretirement employee benefits:
Amortization of prior service credit included in net income, net of tax benefit of $(561), $(565), $(1,122) and $(1,130)
(1,597
(1,608
(3,194
(3,216
Amortization of actuarial loss included in net income, net of tax expense of $915, $1,155, $1,886 and $2,327
2,605
3,290
5,368
6,623
Cash flow hedges, net of tax (benefit) expense of $(549), $187, $(913) and $220
(10,417
1,249
(18,930
259
Other comprehensive (loss) income, net of tax
(9,409
2,931
(16,756
3,666
Comprehensive income
7,728
49,079
6,941
64,411
June 30, 2019
December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents
97,970
76,639
Customer receivables, net
24,479
21,405
Inventories, net
54,121
60,805
Other current assets
19,890
22,675
Assets held for sale
80,674
Total current assets
196,460
262,198
Property, plant and equipment, net
276,592
272,193
Investment in real estate held for development and sale
79,238
79,537
Timber and timberlands, net
1,655,853
1,672,815
Intangible assets, net
17,439
17,828
Other long-term assets
33,359
21,281
Total assets
2,258,941
2,325,852
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
78,492
60,993
Current portion of long-term debt
39,988
39,973
Current portion of pension and other postretirement employee benefits
5,997
Liabilities held for sale
29,321
Total current liabilities
124,477
136,284
Long-term debt
716,094
715,391
Pension and other postretirement employee benefits
110,525
110,659
Deferred tax liabilities, net
14,623
32,009
Other long-term obligations
47,172
16,730
Total liabilities
1,012,891
1,011,073
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 67,186 and 67,570 shares
67,186
67,570
Additional paid-in capital
1,662,381
1,659,031
Accumulated deficit
(337,330
(282,391
Accumulated other comprehensive loss
(146,187
(129,431
Total stockholders’ equity
1,246,050
1,314,779
Total liabilities and stockholders' equity
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization
33,411
34,240
Basis of real estate sold
8,983
6,425
5,512
Change in deferred taxes
(17,238
2,798
5,937
7,999
Equity-based compensation expense
3,449
4,889
Other, net
(1,928
(671
Change in working capital and operating-related activities, net
22,490
(9,008
Real estate development expenditures
(4,481
(1,665
Funding of pension and other postretirement employee benefits
(3,135
(10,397
Net cash provided by operating activities
67,521
95,355
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment additions
(15,502
(11,373
Timberlands reforestation and roads
(8,190
(7,119
Acquisition of timber and timberlands
(278
(163
Proceeds on sale of facility
58,793
433
531
Cash and cash equivalents acquired in Deltic merger
3,419
Net cash provided by (used in) investing activities
35,256
(14,705
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to common stockholders
(53,946
(50,203
Proceeds from Potlatch revolving line of credit
100,000
Repayment of Potlatch revolving line of credit
(100,000
Repayment of Deltic revolving line of credit
(106,000
Proceeds from issue of long-term debt
150,000
Repayment of long-term debt
(150,000
(14,250
Premiums and fees on debt retirement
(4,865
Repurchase of common stock
(25,173
(264
(4,935
Net cash used in financing activities
(84,248
(75,388
Change in cash, cash equivalents and restricted cash
18,529
5,262
Cash, cash equivalents and restricted cash at beginning of period
79,441
120,457
Cash, cash equivalents and restricted cash at end of period
125,719
NONCASH INVESTING AND FINANCING ACTIVITIES
Long-term debt assumed by buyer in sale of facility
29,000
Accrued property, plant and equipment additions
244
747
Accrued timberlands reforestation and roads
592
447
Equity issued as consideration for our merger with Deltic
1,142,775
Additional Paid-
Accumulated
Accumulated Other
Comprehensive
Total Stockholders'
Shares
Amount
in Capital
Deficit
Loss
Equity
Balance, December 31, 2018
6,560
Shares issued for stock compensation
297
(297
1,617
Pension plans and OPEB obligations
1,166
Cash flow hedges
(8,513
Common dividends, $0.40 per share
(27,065
(279
(9,879
(10,158
Other transactions, net
99
(99
Balance, March 31, 2019
67,588
1,660,450
(312,874
(136,778
1,278,386
(5
1,832
1,008
(26,881
(407
(14,608
(15,015
104
(104
Balance, June 30, 2019
Balance, December 31, 2017
40,612
359,144
(104,363
(94,851
200,542
14,597
162
(162
Common stock issued for Deltic merger
21,981
1,120,794
3,279
1,725
(990
Cumulative effects of adoption of accounting standards
24,564
(23,265
1,299
(25,102
(2,653
(30
(2,683
Balance, March 31, 2018
62,755
1,480,402
(90,334
(117,381
1,335,442
(1
1
1,610
1,682
(25,101
(139
Balance, June 30, 2018
62,754
1,482,048
(69,426
(114,450
1,360,926
NOTE 1. BASIS OF PRESENTATION
For purposes of this report, any reference to “PotlatchDeltic,” “Potlatch,” “the company,” “we,” “us” and “our” means PotlatchDeltic Corporation and all of its wholly owned subsidiaries, except where the context indicates otherwise.
We are primarily engaged in activities associated with timberland management, including the sale of timber, the management of approximately 1.9 million acres of timberlands and the purchase and sale of timberlands. We are also engaged in the manufacture and sale of wood products and the development of real estate.
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. Intercompany transactions and accounts have been eliminated in consolidation. Except as otherwise disclosed in these Notes to Condensed Consolidated Financial Statements, such adjustments are of a normal, recurring nature. 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, 2018, as filed with the Securities and Exchange Commission on February 27, 2019. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year.
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 materially adverse effect on our consolidated financial position or net cash flow.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Standards Recently Adopted
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The objective of the new standard is to establish principles for lessees and lessors to report information about the amount, timing and uncertainty of cash flows arising from a lease and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. For leases with a term of 12 months or less, the lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities. The standard, along with subsequent amendments, was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach was required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparable period presented in the financial statements as its date of initial application.
We adopted ASU 2016-02, along with subsequent amendments, on January 1, 2019 and used the effective date as our date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided, for dates and periods before January 1, 2019. The new standard provides several optional practical expedients in transition and for an entity’s ongoing accounting. We elected the following practical expedients as part of our adoption of the standard:
•
to not reassess whether any expired or existing contracts are or contain leases;
to not reassess the lease classification for any expired or existing leases;
to not reassess initial direct costs for any existing leases;
to apply the short-term lease recognition exemption for all leases that qualify;
to not separate non-lease components from lease components; and
to apply the land easement practical expedient for transition of all existing land easements.
Statement of Income and our Condensed Consolidated Statement of Cash Flows. See Note 14: Leases for our expanded disclosures.
New Accounting Standards Being Evaluated
In August 2018, the FASB issued ASU No. 2018-15 Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies that implementation costs incurred by customers in cloud computing arrangements are deferred if they would be capitalized by customers in software licensing arrangements under the internal-use software guidance. Additionally, ASU 2018-15 clarifies that all capitalized costs must be presented in the same financial statement line item as the cloud computing arrangement. The standard will be effective, on either a prospective or retrospective basis, for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, including interim periods within those years; early adoption is permitted. ASU 2018-14 will only impact our pension and other postretirement employee benefits disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies certain disclosure requirements related to fair value measurements including requiring disclosures on changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements and a requirement to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those years; early adoption is permitted. ASU 2018-13 will only impact our fair value measurement disclosures.
NOTE 3. MERGER WITH DELTIC
On February 20, 2018 Deltic Timber Corporation (Deltic) merged with a wholly owned subsidiary of PotlatchDeltic. Deltic owned approximately 530,000 acres of timberland, operated two sawmills, a medium density fiberboard facility (MDF) and was engaged in real estate development primarily in Arkansas.
The acquisition of total assets of $1.4 billion was a noncash investing and financing activity comprised of $1.1 billion in equity consideration transferred to Deltic shareholders and $0.3 billion of liabilities assumed.
We expensed $1.0 million and $20.3 million of merger-related costs during the three and six months ended June 30, 2018, respectively. Total merger-related costs consisted of:
$10.6 million of merger-related costs for professional fees such as investment banker fees, legal, accounting and appraisal services; and
$9.7 million of restructuring costs primarily for termination benefits, which included accelerated share-based payment costs, for qualifying terminations.
These costs are included in Deltic merger-related costs in our Condensed Consolidated Statements of Income.
The amount of revenue and income before income taxes from the acquired Deltic operations included in our Condensed Consolidated Statements of Income from February 21, 2018 to June 30, 2018 were as follows:
Three Months Ended June 30, 2018
Six Months Ended June 30, 2018
Net sales
80,053
108,859
16,724
7,613
8
The following presents the unaudited pro forma consolidated financial information of the company as if the merger with Deltic was completed on January 1, 2017:
506,793
Net earnings attributable to PotlatchDeltic common shareholders
47,225
80,928
Basic earnings per share attributable to PotlatchDeltic common shareholders
0.71
1.22
Diluted earnings per share attributable to PotlatchDeltic common shareholders
1.21
Pro forma net earnings attributable to PotlatchDeltic common shareholders excludes $1.0 million and $25.7 million of non-recurring merger-related costs incurred by both companies during the three and six months ended June 30, 2018, of which $5.4 million were incurred by Deltic prior to the merger. Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.
NOTE 4. SALE OF DELTIC MDF FACILITY
On December 20, 2018, we entered into an Asset Purchase and Sale Agreement (the Agreement) with Roseburg Forest Products Co. to sell the Deltic MDF facility for $92.0 million, consisting of $63.0 million in cash and assumption of $29.0 million of revenue bonds. The purchase price was subject to post-closing adjustments for certain changes in working capital as defined in the Agreement. The transaction closed on February 12, 2019 resulting in a $9.2 million pre-tax gain on sale. Cash proceeds received after working capital adjustments, closing costs and other expenses were approximately $58.8 million. A portion of the purchase price is escrowed pending satisfaction of certain covenants as outlined in the Agreement. In addition, we had a carryover tax basis in the facility from the Deltic merger, and as a result, we recorded a reduction to deferred tax liabilities and increase to income taxes payable of $15.8 million at the date of sale.
At December 31, 2018, the assets and liabilities to be disposed met the criteria to be classified as held for sale and were reflected as such at their carrying value. At December 31, 2018, assets held for sale on the Condensed Consolidated Balance Sheet of $80.7 million consists of $72.1 million property, plant and equipment, $7.7 million related to inventories and $0.9 million of customer list intangibles. The related liabilities held for sale of $29.3 million on the December 31, 2018 Condensed Consolidated Balance Sheet include $29.0 million of revenue bonds. The sale of the MDF facility is not considered a strategic shift that has or will have a major effect on our operations or financial results and therefore does not meet the requirements for presentation as discontinued operations.
NOTE 5. REVENUE RECOGNITION
The majority of our revenues are derived from the sale of delivered logs, manufactured wood products, residual wood by-products and real estate. We recognize revenue in accordance with FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606). Performance obligations associated with real estate sales are generally satisfied at a point in time when all conditions of closing have been met and title transfers to the buyer. Real estate closings are generally facilitated through an escrow process.
At June 30, 2019 and December 31, 2018, we recorded $8.1 million and $4.3 million, respectively, for contract liabilities recorded as deferred revenue. These contract related liabilities predominately relate to hunting and other access rights on our timberlands and member related activities at the Chenal Country Club. These contract liabilities are recognized over the term of the contracts, which is typically twelve months or less, except membership initiation fees at the Chenal Country Club which typically are recognized up to 10 years. Other contract asset and liability balances, such as prepayments, are immaterial. For real estate sales, we typically receive the entire consideration in cash at closing.
9
The following table represents our revenues by major product. For additional information regarding our segments, see Note 6: Segment Information.
Timberlands
Northern region
Sawlogs
30,467
49,627
62,966
99,211
Pulpwood
1,148
3,209
3,079
Stumpage
57
106
136
Other
353
252
564
468
31,968
51,235
66,845
102,894
Southern region
20,979
25,190
39,416
39,220
11,282
13,468
23,093
22,438
144
1,062
466
1,453
2,508
1,556
5,219
3,012
34,913
41,276
68,194
66,123
Total Timberlands revenues
66,881
92,511
135,039
169,017
Wood Products
Lumber
103,054
133,788
193,559
228,781
Residuals and Panels
34,976
59,797
76,777
104,619
Total Wood Products revenues
138,030
193,585
270,336
333,400
Real Estate
Rural real estate
30,315
12,669
34,534
21,502
Development real estate
3,755
1,743
4,428
2,962
Other1
2,362
2,019
3,634
2,522
Total Real Estate revenues
36,432
16,431
42,596
26,986
Total segment revenues
241,343
302,527
447,971
529,403
Intersegment Timberlands revenues2
(25,762
(34,294
(50,674
(61,273
Total consolidated revenues
Other Real Estate revenues primarily relate to the Chenal Country Club.
Intersegment revenues represent logs sold by our Timberlands segment to our Wood Products segment.
10
NOTE 6. SEGMENT INFORMATION
During the second quarter of 2019, we changed the name of our Resource segment to Timberlands. There were no changes in the segment’s business activities, components or information provided to our chief operating decision makers as a result of the change.
Our businesses are organized into three reportable operating 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, biomass production and carbon sequestration. The Wood Products segment manufactures and markets lumber and plywood. The business of our Real Estate segment includes the sale of land holdings deemed non-strategic or identified as having higher and better use alternatives. The Real Estate segment also engages in master planned communities, development activities and includes the Chenal Country Club.
The reportable segments follow the same accounting policies used for our Condensed Consolidated Financial Statements, with the exception of the valuation of inventories. For most of our operations, we use the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s best estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. Inventories not valued under LIFO are recorded at the lower of average cost or net realizable value. All segment inventories are reported using the average cost method. The LIFO reserve and intersegment eliminations are recorded at the corporate level.
Management primarily evaluates the performance of its segments and allocates resources to them based upon Adjusted EBITDDA. EBITDDA is calculated as net income (loss) before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses. Our calculation of Adjusted EBITDDA may not be comparable to that reported by other companies.
11
The following table summarizes information on revenues, intersegment eliminations, Adjusted EBITDDA, depreciation, depletion and amortization, basis of real estate sold and total assets 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.
Revenues:
Intersegment Timberlands revenues1
Consolidated revenues
Adjusted EBITDDA:
26,131
43,691
52,981
81,388
(2,071
51,566
5,155
80,516
31,316
12,300
34,019
20,302
Corporate
(9,346
(11,264
(20,000
(19,980
Eliminations and adjustments
3,050
(2,085
5,177
(3,286
Total Adjusted EBITDDA
49,080
94,208
77,332
158,940
(7,427
(2,820
(8,983
(6,425
(16,727
(20,950
(32,524
(33,146
Interest expense, net2
Non-operating pension and other postretirement employee benefits
Gain (loss) on fixed assets
30
(3
62
9,176
Inventory purchase price adjustment in cost of goods sold3
(1,849
Deltic merger-related costs4
(1,018
(20,273
Depreciation, depletion and amortization:
10,469
14,598
20,734
23,244
5,861
6,069
10,903
9,423
147
77
356
117
250
206
362
16,727
20,950
32,524
33,146
Bond discounts and deferred loan fees2
410
655
887
1,094
Total depreciation, depletion and amortization
21,605
Basis of real estate sold:
7,455
2,896
9,043
6,619
(28
(76
(60
(194
Total basis of real estate sold
7,427
2,820
Bond discounts and deferred loan fees are reported within interest expense, net on the Condensed Consolidated Statements of Income.
The effect on cost of goods sold for fair value adjustments to the carrying amounts of inventory acquired in the Deltic merger.
For integration and restructuring costs related to the merger with Deltic see Note 3: Merger with Deltic.
12
A reconciliation of our business segment total assets to total assets in the Condensed Consolidated Balance Sheets is as follows:
Total assets:
Timberlands1
1,680,766
1,693,162
379,370
456,306
Real Estate2
93,519
93,208
2,153,655
2,242,676
105,286
83,176
Total consolidated assets
We do not report rural real estate separate from Timberlands as we do not report these assets separately to management.
Real Estate assets primarily consist of real estate development acquired with the Deltic merger.
NOTE 7. 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
26
303
299
Restricted stock units
23
33
71
90
Diluted weighted-average shares outstanding
Basic net income per share
Diluted net income per share
For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if later) and assumes the related proceeds were used to repurchase common stock at the average market price during the period. Related proceeds include future compensation cost associated with the stock award.
For the three and six months ended June 30, 2019, there were approximately 95,000 and 71,000 stock-based awards that were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the three and six months ended June 30, 2018, there were approximately 70,000 and 52,000 stock-based awards that were excluded from the calculation of diluted earnings per share because they were anti-dilutive. Anti-dilutive stock-based awards could be dilutive in future periods.
Share Issuances Related to the Deltic Merger
In February 2018 we issued 22.0 million shares in connection with the Deltic merger. Further, on August 30, 2018, the board of directors approved a special distribution of $222.0 million, or approximately $3.54 per share. The special distribution amount equaled our determination of the accumulated earnings and profits of Deltic as of the merger date and was distributed in order to maintain the company’s qualification as a REIT for U.S. federal income tax purposes. The special distribution was paid on November 15, 2018, to stockholders of record on September 27, 2018 through the issuance of 4.8 million shares of our common stock and distribution of $44.4 million in cash. See Note 3: Merger with Deltic for further discussion on the merger.
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). We repurchased 0.4 million shares of common stock (at a total consideration of $15.0 million) and 0.7 million shares of common stock (at a total consideration of $25.2 million), respectively, during the three and six months ended June 30, 2019 under the 2018 Repurchase Program. All
13
common stock purchases under the 2018 Repurchase Programs were made in open-market transactions. No shares were repurchased during the three and six months ended June 30, 2018. At June 30, 2019, we had remaining authorization of $74.8 million for future stock repurchases under the 2018 Repurchase Program.
We record share repurchases upon trade date as opposed to the settlement date when cash is disbursed. We record a liability to account for repurchases that have not been cash settled. There were no unsettled repurchases as of June 30, 2019. We retire shares upon repurchase. Any excess repurchase price over par is recorded in accumulated deficit.
NOTE 8. CERTAIN BALANCE SHEET COMPONENTS
Inventories
Logs
23,965
37,303
Lumber, panels and veneer
33,507
27,420
Materials and supplies
11,877
11,310
Total inventories
69,349
76,033
Less: LIFO reserve
(15,228
Total inventories, net
Property, plant and equipment
488,519
472,695
Less: accumulated depreciation
(211,927
(200,502
Total property, plant and equipment, net
Timber and timberlands
1,574,607
1,590,997
Logging roads
81,246
81,818
Total timber and timberlands, net
Accrued payroll and benefits
15,254
20,130
Accounts payable
14,384
12,073
Accrued interest
7,219
8,642
Accrued taxes
19,421
7,389
Deferred revenue
8,062
4,282
Operating lease liabilities
4,982
Other current liabilities
9,170
8,477
Total accounts payable and accrued liabilities
NOTE 9. DEBT
In January 2019, we refinanced $150.0 million of 7.50% senior notes (Senior Notes) due in 2019 with a $150.0 million term loan that will mature in 2029. The new term loan carries a variable interest rate of one-month LIBOR plus 1.85%. We paid $0.5 million of lender fees on the new term loan. Concurrent with the new term loan, we entered into a $150.0 million interest rate swap to fix the rate at 4.56%. Upon the refinancing, we redeemed and paid all outstanding Senior Notes, including a redemption premium of $4.9 million which is included in the loss on extinguishment of debt in our Condensed Consolidated Statements of Income. Subsequent to the refinancing, $693.5 million was outstanding under our Second Amended and Restated Amended Term Loan Agreement.
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As part of the Deltic merger, we assumed the obligations relating to the letter of credit supporting Deltic’s $29.0 million Union County, Arkansas Taxable Industrial Revenue Bonds 1998 Series due October 1, 2027 associated with the Deltic MDF facility. As of December 31, 2018, the bonds were classified as held for sale as part of the sale of the Deltic MDF facility and excluded from long-term debt. As part of the sale of the MDF facility, the bonds were assumed by the buyer and the letter of credit was terminated. See Note 4: Sale of Deltic MDF Facility.
As of June 30, 2019, we were in compliance with all debt and credit agreement covenants and approximately $1.0 million of our $380.0 million credit facility was utilized by outstanding letters of credit.
NOTE 10. DERIVATIVE INSTRUMENTS
From time to time, we enter into derivative financial instruments to manage certain cash flow and fair value risks. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset or liability to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in the cash flows of a specific asset or liability that is attributable to a particular risk, such as interest rate risk, are considered cash flow hedges.
As of June 30, 2019, we have five interest rate swaps associated with $357.5 million of term loan debt. The cash flow hedges convert variable rates ranging from three-month and one-month LIBOR plus 1.85% to 2.15%, to fixed rates ranging from 3.88% to 4.82%. Our cash flow hedges are expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the hedge. At June 30, 2019, the amount of net losses expected to be reclassified into earnings in the next 12 months is approximately $3.0 million.
The following table presents the gross fair values of derivative instruments on our Condensed Consolidated Balance Sheets:
Asset Derivatives
Liability Derivatives
Location
Derivatives designated in cash flow hedging relationships:
Interest rate contracts
Other assets,
non-current
113
1,510
21,333
2,888
The following table details the effect of derivatives on our Condensed Consolidated Statements of Income:
Derivatives designated in fair value hedging relationships:
Realized loss on interest rate contracts1
Interest expense
(50
(18
(86
Loss on hedged debt basis adjustment included in debt extinguishment
(165
(183
(Loss) income recognized in other comprehensive income, net of tax
(10,598
1,056
(19,192
64
Loss reclassified from accumulated other comprehensive income1
(181
(193
(262
(195
7,882
9,356
13,346
15,016
Realized gain (loss) on hedging instruments consist of net cash settlements and interest accruals on interest rate swaps during the periods.
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NOTE 11. FAIR VALUE MEASUREMENTS
The following table presents the estimated fair values of our financial instruments:
Carrying
Fair
Value
Derivative assets related to interest rate swaps (Level 2)
Derivative liabilities related to interest rate swaps (Level 2)
(21,333
(2,888
Long-term debt, including current portion (Level 2):
Term loans
(689,494
(701,935
(539,169
(539,037
Senior notes
(149,786
(154,328
Revenue bonds
(65,735
(67,819
(94,735
(93,144
Medium-term notes
(3,000
(3,469
(3,419
Total long-term debt1
(758,229
(773,223
(786,690
(789,928
Company owned life insurance asset (COLI) (Level 3)
3,671
3,104
The carrying amount of long-term debt includes principal and unamortized discounts.
The fair value of interest rate swaps are determined using a discounted cash flow analysis on the expected cash flows of each derivative. The analysis reflects the contractual terms of the derivatives, including the period to maturity and uses observable market-based inputs, including interest rate forward curves.
The fair value of our long-term debt is estimated based upon quoted market prices for similar debt issues or estimated based on average market prices for comparable debt when there is no quoted market price.
The contract value of our company owned life insurance is based on the amount at which it could be redeemed and, accordingly, approximates fair value.
We believe that our other financial instruments, including cash and cash equivalents, receivables and payables have net carrying values that approximate their fair values with only insignificant differences. This is primarily due to the short-term nature of these instruments and the allowance for doubtful accounts.
NOTE 12. EQUITY-BASED COMPENSATION
On May 6, 2019 (the Effective Date) the stockholders approved our 2019 Long-Term Incentive Plan (the 2019 Plan). The total amount of PotlatchDeltic common stock authorized for issuance under the 2019 Plan includes, in addition to 1.2 million new shares approved by our stockholders: (i) the total number of shares available for future awards under the Potlatch Corporation 2014 Long-Term Incentive Plan and its predecessor plans (the Prior Plans) as of the Effective Date and (ii) the number of undelivered shares subject to outstanding awards under the Prior Plans that will become available for future issuance as provided for under the 2019 Plan. At June 30, 2019, approximately 1.5 million shares are available for future use under our long-term incentive plans.
Share-based compensation activity during the six months ended June 30, 2019 included the following:
(Shares in thousands)
Granted
Vested
Forfeited
Performance Share Awards (PSAs)
142
Restricted Stock Units (RSUs)
74
17
A total of 0.3 million shares of common stock were issued during the six months ended June 30, 2019 as a result of RSU and PSA vesting during 2018 and 2019.
16
The following table details equity-based compensation expense and the related income tax benefit.
Equity-based compensation expense:
Performance share awards
1,187
1,074
2,231
2,010
629
454
934
Deferred compensation stock equivalent units expense
53
31
181
Accelerated share-based termination benefits in connection with the merger
86
1,764
Total equity-based compensation expense
1,831
1,667
Total tax benefit recognized for equity-based expense
83
73
155
184
Performance Share Awards
PSAs granted under the stock incentive plans have a three-year performance period and shares are issued at the end of the period if the performance measures are met. The performance measures are based on the percentile ranking of our total shareholder return relative to the total shareholder return performance of both a selected peer group of companies and a larger group of indexed companies over the three-year performance period. The number of shares actually issued, as a percentage of the amount subject to the PSA, could range from 0% to 200%. PSAs granted under our stock incentive plans do not have voting rights unless and until shares are issued upon settlement. If shares are issued at the end of the three-year performance measurement period, the recipients will receive dividend equivalents in the form of additional shares at the time of payment equal to the dividends that would have been paid on the shares earned had the recipients owned the shares during the three-year period. Therefore, the shares are not considered participating securities. The fair value of performance shares granted in 2019 was $37.87 per share.
The following table presents the key inputs used in the Monte Carlo simulation to calculate the fair value of the performance share awards in 2019:
Stock price as of valuation date
35.01
Risk-free rate
2.47
%
Expected volatility
25.15
Expected dividend yield (assuming full reinvestment)
Expected term (years)
3.00
Restricted Stock Units
RSU awards accrue dividend equivalents based on dividends paid during the RSU vesting period. The dividend equivalents will be converted into additional RSUs that will vest in the same manner as the underlying RSUs to which they relate. Therefore, the shares are not considered participating securities. The terms of the awards state that the RSUs will vest in a given time period of one to three years and the terms of certain awards follow a vesting schedule within the given time period. The fair value of RSUs granted equaled our common share price on the date of grant. The weighted average fair value of all RSUs granted during the six months ended June 30, 2019 was $36.15.
NOTE 13. INCOME TAXES
As a real estate investment trust (REIT), we generally are not subject to federal and state corporate income taxes on income of the REIT that we distribute to our shareholders. We conduct certain activities through our taxable REIT subsidiaries (TRS), which are subject to corporate level federal and state income taxes. These taxable activities are principally comprised of our wood products manufacturing operations and certain real estate investments. Therefore, income tax expense or benefit is primarily due to income or loss of the TRS, as well as permanent book versus tax differences. In addition, we had carryover tax basis in the MDF facility from the Deltic merger and as a result, during the six months ended June 30, 2019, we recorded a reduction to deferred tax liabilities and increase to income taxes payable of $15.8 million at the date of sale. See Note 4: Sale of Deltic MDF Facility for further details.
NOTE 14. LEASES
We lease certain equipment, office space and land. ROU 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. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. We consider our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. Most leases include one or more options to renew, with renewal terms that can extend the lease term between one to five years. The exercise of lease renewal options is at our sole discretion. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Finance leases at June 30, 2019 were insignificant.
For certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Certain leases also include options to purchase the leased equipment. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants and we do not have any significant sublease income.
Balance Sheet Classification
Classification
Assets
Operating lease assets
17,068
Liabilities
Current operating lease liability
Noncurrent operating lease liability
12,189
Total lease liabilities
17,171
Other Operating Lease Information
Six Months Ended
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
2,960
Leased assets exchanged for new operating lease liabilities
5,789
Weighted-average remaining terms (years)
4.50
Weighted-average discount rate
4.16
Lease costs (excluding short-term leases and variable lease costs, which are immaterial) for the three and six months ended June 30, 2019 were $1.5 million and $2.9 million, respectively.
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Maturity of Operating Lease Liabilities
At June 30, 2019, the future minimum lease payment obligations under noncancelable operating leases were as follows:
2,916
2020
2021
4,157
2022
2,492
2023
1,557
After 2023
2,531
Total lease payments
18,830
Less: interest1
1,659
Present value of lease liabilities
Calculated using the interest rate for each lease.
Disclosures Related to Periods Prior to Adoption of the New Lease Standard
We did not have any capital leases during 2018. Operating lease rent expense primarily for office space, machinery and equipment was $1.2 million and $2.4 million for the three and six months ended June 30, 2018, respectively.
At December 31, 2018, future minimum lease payment obligations under noncancelable operating leases were as follows:
5,130
4,135
3,142
1,538
2024 and thereafter
575
Total
15,149
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NOTE 15. PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS
The following tables detail the components of net periodic cost (benefit) of our pension plans and other postretirement employee benefits (OPEB):
Pension
OPEB
Service cost
1,862
2,178
80
Interest cost
4,692
4,390
375
381
Expected return on plan assets
(5,541
(5,135
Amortization of prior service cost (credit)
47
(2,211
(2,220
Amortization of actuarial loss
3,321
4,144
200
301
Net periodic cost (benefit)
4,387
5,624
(1,556
(1,439
(Dollars in thousands)
3,883
4,091
185
143
9,231
8,304
794
700
(11,095
(9,843
93
(4,422
(4,439
6,748
8,294
507
656
8,873
10,939
(2,936
(2,940
During the six months ended June 30, 2019 and 2018, funding of pension and other postretirement employee benefit plans was $3.1 million and $10.4 million, respectively.
NOTE 16. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
During 2019, changes in amounts included in our accumulated other comprehensive loss (AOCL) by component on our Condensed Consolidated Balance Sheets, net of tax, are:
Pension Plans
Gains and losses on cash flow hedges
Actuarial Loss
Prior Service Cost
Prior Service Credit
Balance at December 31, 2018
1,560
128,849
404
7,269
(8,651
129,431
Amounts arising during the period
19,192
Amounts reclassified from AOCL to earnings
(4,994
(78
(374
3,272
(2,436
Net change
18,930
16,756
Balance at June 30, 2019
20,490
123,855
326
6,895
(5,379
146,187
Amortization of actuarial loss and prior service (cost) credit are components of net periodic benefit cost (credit), see Note 15: Pension and Other Postretirement Employee Benefits and see Note 10: Derivative Instruments for additional information regarding amounts arising for cash flow hedges during the period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, fair value of hedging instruments and swaps, expected return on pension assets, recognition of compensation costs relating to our performance share awards and RSUs, required contributions to pension plans, expected amortization of unrecognized compensation cost of performance share awards and RSUs, amount of net losses on cash flow hedges expected to be reclassified into earnings in the next 12 months, the U.S. housing market, home repair and remodeling activity, the lumber and log markets, sufficiency of cash to meet operating requirements, funding of 2019 dividends with cash generated by operations, 2019 capital expenditures and similar matters. Words such as “anticipate,” “expect,” “will,” “intend,” “plan,” “target,” “project,” “believe,” “seek,” “schedule,” “estimate,” “could,” “can,” “may” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements reflect our current views regarding future events based on estimates and assumptions and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. Our actual results of operations could differ materially from our historical results or those expressed or implied by forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include, but are not limited to, the following:
changes in the United States and international economies;
changes in interest rates and discount rates;
changes in the level of residential and commercial construction and remodeling activity;
changes in tariffs, quotas and trade agreements involving wood products;
changes in demand for our products;
changes in production and production capacity in the forest products industry;
competitive pricing pressures for our products;
unanticipated manufacturing disruptions;
weather; and
transportation disruptions.
For a discussion of some of the factors that may affect our business, results and prospects and a nonexclusive listing of forward-looking statements, refer to Cautionary Statement Regarding Forward-Looking Information on page 1 and Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.
Forward-looking statements contained in this report present our views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of our views to reflect events or circumstances occurring after the date of this report.
Our Company
We are a leading timberland real estate investment trust (REIT) with operations in seven states where we own approximately 1.9 million acres of timberland, six sawmills, an industrial grade plywood mill and real estate development projects.
Our business is organized into three business segments: Timberlands, Wood Products and Real Estate. 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 significant portion of the Timberlands segment’s total revenues. Our other segments generally do not generate intersegment revenues. In the discussion of our consolidated results of operations, our revenues and expenses are reported after elimination of intersegment revenues and expenses. In the business segment discussions, each segment’s revenues and expenses, as applicable, are presented before elimination of intersegment revenues and expenses.
The operating results of our Timberlands, Wood Products and Real Estate business segments have been and will continue to be influenced by a variety of factors, including the cyclical nature of the forest products industry, tariffs, quotas and trade agreements, changes in timber prices and in harvest levels from our timberlands, competition, timberland valuations, demand for our non-strategic timberland for higher and better use purposes, lumber prices, weather conditions, the availability of transportation, the efficiency and level of capacity utilization of our Wood Products manufacturing operations, changes in our principal expenses such as log costs, asset dispositions or acquisitions and other factors.
Non-GAAP Measures
To supplement our financial statements presented in accordance with generally accepted accounting principles in the United States (GAAP), we use certain non-GAAP measures on a consolidated basis, including Adjusted EBITDDA and Cash Available for Distribution (CAD), which are defined and further explained and reconciled to the nearest GAAP measure in the Liquidity and Performance Measures section below. Our definitions of these non-GAAP measures may differ from similarly titled measures used by others. These non-GAAP measures should be considered supplemental to and not a substitute for, financial information prepared in accordance with GAAP.
Adjusted EBITDDA is a non-GAAP measure that management uses as a performance measure to allocate resources between segments, to evaluate performance about the business and that investors can use to evaluate the operational performance of the assets under management. It removes the impact of specific items that management believes do not directly reflect the core business operations on an ongoing basis. This measure should not be considered in isolation from and is not intended to represent an alternative to, our results reported in accordance with GAAP. Management believes that this non-GAAP measure, when read in conjunction with our GAAP financial statements, provides useful information to investors by facilitating the comparability of our ongoing operating results over the periods presented, the ability to identify trends in our underlying business and the comparison of our operating results against analyst financial models and operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.
Our definition of EBITDDA and Adjusted EBITDDA may be different from similarly titled measures reported by other companies. We define EBITDDA as net income (loss) before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses. See Note 6: Segment Information in the Notes to the Condensed Consolidated Financial Statements for information related to the use of segment Adjusted EBITDDA and a reconciliation of such measures.
Business and Economic Trends
The demand for timber is directly affected by the underlying demand for lumber and other wood-products, as well as by the demand for pulp, paper and packaging. Our Timberlands and Wood Products segments are impacted by demand for new homes in the United States housing market and by repair and remodeling activity.
During the first half of 2019, U.S. homebuilding fell and new construction permits dropped to a two-year low in June. These declines are a result of land and labor shortages and rising construction costs which are making it difficult for builders to take advantage of lower borrowing costs and construct more affordable housing units. Further, extended inclement weather across the country for a good portion of the first half of 2019 impacted building conditions and delayed the normal start of the building season. As repair and remodel of a property is often done right after buying, repair and remodeling activity in 2019 has seen modest growth as a result of the softening of the housing market.
Lumber prices have seen increases since year-end but remain significantly below first half of 2018 levels as many buyers have maintained low inventories due to the softening demand. However, industry production curtailment positively impacted lumber pricing towards the end of the second quarter of 2019.
In our Timberlands segment, we index a significant portion of our Idaho sawlogs to the price of lumber under long-term supply agreements. The Northern region experienced a decline in sawlog pricing and volume because of the lower lumber pricing and decreased demand as mills were continuing to work through existing higher cost log inventory. The Southern region has seen softwood sawlog prices increase slightly since year-end due to constrained log supply as a result of wet weather. This price increase is expected to be temporary as weather improves, providing better access for logging. Overall Southern log prices remain at relatively low levels as markets will continue to have ample log availability to meet growing demand.
Our Real Estate segment benefited during the second quarter of 2019 from two large rural land sales. Residential and commercial sales in Chenal Valley mainly follow the national housing market trends but do experience microeconomic factors for the area including economic growth and the availability of builders, contractors and workforce to support development efforts.
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Consolidated Results
The following table sets forth changes in our Condensed Consolidated Statements of Income. Our Business Segment Results provide a more detailed discussion of our segments:
Change
(52,652
(70,833
(5,233
9,827
(1,940
974
(8,191
(18,648
(44,461
(52,185
1,474
1,670
Non-operating pension and other postretirement benefit costs
1,019
1,896
(41,968
(54,131
12,957
17,083
(29,011
(37,048
Total Adjusted EBITDDA1
(45,128
(81,608
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.
Second Quarter 2019 Compared with Second Quarter 2018
Revenues were $215.6 million, a decrease of $52.7 million compared with the same period in 2018. Revenues decreased as a result of lower lumber prices, and lower sawlog prices and volumes in the Northern region. Revenues were further impacted by lower harvest volume in the Southern region as a result of inclement weather. In addition, the second quarter of 2018 included the operations of the Deltic MDF facility which was sold in the first quarter of 2019. These second quarter decreases were partly offset by a 1,787-acre rural real estate sale outside of Little Rock, Arkansas for $11,000 per acre; the property was originally acquired in the Deltic merger. We also completed the sale of 8,000 acres of non-strategic timberlands in Minnesota for just over $800 per acre to a conservation entity representing the second part of a multi-year option with this entity. This conservation entity purchased 8,000 acres of similar non-strategic timberlands in Minnesota for $900 per acre during the second quarter of 2018.
Cost of goods sold decreased $5.2 million compared with the same period in 2018, primarily due to lower logging and hauling costs as a result of decreased harvest activities as well as lower freight costs due to transportation becoming more widely available than during the same period in the prior year. The second quarter of 2018 also reflects the activities of the Deltic MDF facility. These decreases were partially offset by increased basis in land sold due to the two large rural real estate sales discussed above and increased lumber shipments.
Selling, general and administrative expenses for the second quarter of 2019 were $15.0 million compared with $16.9 million during the same period in 2018. The decrease compared to the second quarter of 2018 is primarily due to lower estimated performance-based variable compensation and lower consultant and professional service fees.
Merger-related costs for the second quarter 2018 were $1.0 million. This included $0.4 million in merger costs for various professional fees including legal fees, accounting and appraisal fees. Restructuring costs were $0.6 million, consisting primarily of termination benefits and costs associated with systems integration.
Interest expense, net was $7.9 million, compared with $9.4 million for the same period in 2018. The decline in interest expense is primarily due to refinancing $150.0 million of 7.5% Senior Notes with a new long-term loan and interest rate swap to fix the rate at 4.56% in January 2019. See Note 9: Debt in the Notes to Condensed Consolidated Financial Statements for a more detailed discussion of our borrowings.
Income taxes
The provision for income taxes for the second quarter 2019 was a $1.0 million benefit compared with a $12.0 million expense for the prior year period. Income taxes are primarily due to income or loss from our taxable REIT subsidiaries (TRS). For the three months ended June 30, 2019, the TRS’s loss before income tax was $6.5 million. For the same period last year, the TRS’s income before income tax was $46.1 million. The second quarter of 2019 also includes built-in gains taxes associated with certain sales of land held by the REIT, which were acquired in the Deltic merger.
Total Adjusted EBITDDA for the second quarter of 2019 was $49.0 million compared to $94.2 million in the second quarter of 2018. The decrease in Total Adjusted EBITDDA was driven primarily by decreased lumber pricing, lower realizations on indexed Idaho sawlogs and decreased harvest volumes. These decreases were partially offset by increased lumber shipments, increased sawlog prices in the South and rural land sales in Arkansas. Refer to the Business Segments Results below for further discussions on activities for each of our segments.
Year to Date 2019 Compared with Year to Date 2018
Revenues were $397.3 million, a decrease of $70.8 million compared with the same period in 2018. Revenues decreased as a result of lower lumber prices, and lower sawlog prices and volumes in the Northern region. Revenues were further impacted by lower harvest volumes in the Southern region as a result of inclement weather during the first six months of 2019 hampering logging activities. 2018 also included approximately 4.5 months of incremental activity from the Deltic MDF facility which was sold in the first quarter of 2019. These decreases were partly offset by increased sawlog and pulpwood price realization in the Southern region, increased lumber shipments and a large rural real estate sale in Arkansas discussed above.
Cost of goods sold increased $9.8 million compared with the same period in 2018. This increase was due to higher lumber shipments primarily as a result of a full six months of the acquired Deltic lumber operations. In addition, basis in land sold increased due to the large land sale in Arkansas discussed above. These increases were partially offset by lower logging and hauling costs, less depletion due to lower harvest volumes and operations at the Deltic MDF facility for 4.5 months in 2018 compared to 1.5 months in 2019.
Selling, general and administrative expenses for the first six months of 2019 were $31.5 million compared with $30.5 million during the same period in 2018 primarily due to increased depreciation and amortization, insurance costs and employee benefits. These cost increases are partly offset by lower estimated performance-based variable compensation.
24
Merger-related costs for the six months ended June 30, 2018 were $20.3 million. This included $10.6 million in merger costs for investment banking fees, legal fees, accounting and appraisal fees and other costs related to filing the joint proxy/prospectus for the merger. Also included were restructuring costs of $9.7 million, consisting primarily of termination benefits, which included accelerated share-based payment costs for qualifying terminations.
On December 20, 2018, we entered into an Asset Purchase and Sale Agreement with Roseburg Forest Products Co. to sell the Deltic MDF facility for $92.0 million. The transaction closed on February 12, 2019 resulting in a $9.2 million pre-tax gain on sale. See Note 4: Sale of Deltic MDF Facility in the Notes to Condensed Consolidated Financial Statements.
Interest expense, net was $13.3 million, compared with $15.0 million for the same period in 2018. The decline in interest expense is primarily due to increased patronage dividends from our lenders and reduced interest costs from the $150.0 million refinancing in January 2019 described above. These decreases were partly offset by a full six months of interest expense in 2019 associated with $230.0 million of long-term debt assumed or refinanced in connection with the Deltic merger in 2018.
As part of the $150.0 million Senior Notes redemption in January 2019 we incurred a redemption premium of $4.9 million and wrote off certain unamortized debt costs. See Note 9: Debt in the Notes to Condensed Consolidated Financial Statements.
The provision for income taxes for first six months of 2019 was $0.6 million compared with $17.7 million for the prior year period. Income taxes are primarily due to income or loss from our taxable REIT subsidiaries (TRS). For the six months ended June 30, 2019, the TRS’s income before income tax was $0.7 million, which includes the gain on sale of the Deltic MDF facility. For the same period last year, the TRS’s income before income tax was $69.1 million. Income tax also includes built-in gains taxes associated with certain sales of land held by the REIT during the first half of 2019, which were acquired in the Deltic merger.
Total Adjusted EBITDDA for the first six months of 2019 was $77.3 million compared to $158.9 million for the same period in 2018. The decrease in Total Adjusted EBITDDA was driven primarily by decreased lumber pricing year over year, lower realizations on indexed Idaho sawlogs and decreased harvest volumes. These decreases were partially offset by increased lumber shipments, increased sawlog prices in the South and the rural land sale in Arkansas. Refer to the Business Segments Results below for further discussions on activities for each of our segments.
25
Business Segment Results
Timberlands Segment
Revenues1
(25,630
(33,978
Logging and hauling
30,536
37,306
(6,770
63,452
69,205
(5,753
8,530
9,390
(860
15,194
14,725
469
1,684
2,124
(440
3,412
3,699
(287
Timberlands Adjusted EBITDDA2
(17,560
(28,407
Prior to elimination of intersegment fiber revenues of $25.8 million and $34.3 million for the three months ended June 30, 2019 and 2018, and $50.7 million and $61.3 million for the six months ended June 30, 2019 and 2018, respectively.
Management uses Adjusted EBITDDA to evaluate the performance of the company. See Note 6: Segment Information in the Notes to Condensed Consolidated Financial Statements.
Timberlands Segment Statistics
Harvest Volumes (in tons)
Sawlog
324,556
377,636
(53,080
698,421
826,418
(127,997
30,520
31,389
(869
79,163
76,817
2,346
4,222
(4,222
7,376
10,058
(2,682
355,076
413,247
(58,171
784,960
913,293
(128,333
448,918
580,296
(131,378
861,752
929,880
(68,128
341,909
439,551
(97,642
715,173
738,104
(22,931
22,807
92,988
(70,181
65,156
125,320
(60,164
813,634
1,112,835
(299,201
1,642,081
1,793,304
(151,223
Total harvest volume
1,168,710
1,526,082
(357,372
2,427,041
2,706,597
(279,556
Sales Price/Unit ($ per ton)
Northern region1
94
131
(37
120
41
40
(14
Southern region1
43
46
42
32
-
Sawlog and pulpwood sales prices are on a delivered basis, which includes contracted logging and hauling costs charged to the customer. Stumpage sales provide our customers the right to harvest standing timber. As such, the customer contracts the logging and hauling and bears such costs.
Timberlands Adjusted EBITDDA
The following table summarizes Timberlands Adjusted EBITDDA variances for the three and six months ended June 30, 2019 compared with the three and six months ended June 30, 2018:
Three Months Ended
Timberlands Adjusted EBITDDA June 30, 2018
Sales price and mix
(9,262
(22,833
Harvest volume
(10,032
(7,947
Other revenue
1,052
2,303
Logging and hauling costs per unit
(619
Forest management
624
(240
Administrative, indirect and overhead costs
677
58
Timberlands Adjusted EBITDDA June 30, 2019
Timberlands Adjusted EBITDDA for the second quarter of 2019 was $26.1 million, a decrease of $17.6 million compared with the same period in 2018. The change in Timberlands Adjusted EBITDDA is primarily the result of the following:
Sales Price and Mix: Sawlog prices in the North declined 28.2%, to $94 per ton resulting from the effect of lower lumber price realization on indexed sawlogs in Idaho. This was partially offset by sawlog prices in the South increasing 9.3% to $47 per ton, primarily due to constrained log supply as a result of wet weather resulting in tight mill inventory driving increased competition and prices paid for logs.
Harvest Volume: We harvested 813.6 thousand tons in the South, which was down 26.9% compared to the second quarter of 2018 primarily due to continued wet weather conditions hampering logging activities compared to favorable conditions in the prior year. Harvest volume was further impacted by lower tons harvested in the North primarily due to full log yards in the region and less favorable harvest conditions compared to the prior year.
Other Revenue: Other revenue increased primarily due to the Deltic merger which added more acres generating hunting lease income and natural gas and oil royalties.
Logging and Hauling Cost per Unit: Log and haul costs in the South are approximately half of the costs in the North on a per-ton basis. The decrease in the percentage of Southern production compared to the prior year resulted in an increase on a per unit basis.
Forest Management and Other: Forest management, administrative, indirect and overhead costs favorably impacted Timberlands Adjusted EBITDDA primarily due to timing of forest management expense and selling, general and administrative cost savings associated with the Deltic Merger.
Timberlands Adjusted EBITDDA for the first six months of 2019 was $53.0 million, a decrease of $28.4 million compared with the same period in 2018. The change in Timberlands Adjusted EBITDDA is primarily the result of the following:
Sales Price and Mix: Sawlog prices in the North declined 25.0%, to $90 per ton resulting from the effect of lower lumber price realization on Idaho sawlogs. This was partially offset by sawlog prices in the South increasing 9.5% to $46 per ton, primarily due to constrained log supply as a result of wet weather and increased competition and prices paid for logs.
Harvest Volume: We harvested 1,642.1 thousand tons in the South, which was down 8.4% compared to the prior year, primarily due to extended wet weather during the first six months of 2019 hampering logging operations. Harvest volume has been further impacted by lower harvest volumes in the North due to full log yards in the region and less favorable logging conditions compared to prior year. These decreases were partly offset by the acquired Deltic operations for all of the first half of 2019 and only 4.5 months in the first half of 2018.
27
Logging and Hauling Cost per Unit: Log and haul costs in the South are approximately half of the costs in the North on a per-ton basis. The shift to a higher proportion of Southern harvest during the first half of 2019 versus 2018 resulted in a decrease on a per unit basis.
Forest Management and Other: Forest management costs unfavorably impacted Timberlands Adjusted EBITDDA compared to the first half of 2018 primarily due to six months of Deltic operations in 2019.
Wood Products Segment
(55,555
(63,064
Costs and expenses1
Fiber costs
68,988
75,274
(6,286
138,015
133,964
4,051
Freight, logging and hauling
17,729
19,663
(1,934
33,953
35,618
Manufacturing costs
45,080
49,716
(4,636
92,521
87,068
5,453
Finished goods inventory change
6,213
(4,800
11,013
(3,879
(7,950
4,071
2,093
2,166
(73
4,543
4,180
363
(2
28
Wood Products Adjusted EBITDDA2
(53,637
(75,361
Prior to elimination of intersegment fiber costs of $25.8 million and $34.3 million for the three months ended June 30, 2019 and 2018, and $50.7 million and $61.3 million for the six months ended June 30, 2019 and 2018, respectively.
Wood Products Segment Statistics
Lumber shipments (MBF)1
272,523
259,249
13,274
510,926
463,394
47,532
Lumber sales prices ($ per MBF)
378
517
379
495
(116
MBF stands for thousand board feet.
Wood Products Adjusted EBITDDA
The following table summarizes Wood Products Adjusted EBITDDA variances for the three and six months ended June 30, 2019 compared with the three and six months ended June 30, 2018:
Wood Products Adjusted EBITDDA June 30, 2018
Lumber:
Price
(35,658
(51,401
Manufacturing costs per unit
(3,641
(4,830
Log costs
(593
Inventory charge
(7,396
Residuals, panels and other
(7,180
(11,890
831
339
Wood Products Adjusted EBITDDA June 30, 2019
Lumber shipments were 272.5 million board feet in the second quarter of 2019, an increase of 13.3 million board feet compared to the second quarter of 2018. This increase was due to transportation challenges in the North during the first quarter of 2019 which shifted shipments into the second quarter 2019.
Wood Products Adjusted EBITDDA for second quarter 2019 was $(2.1) million, a decrease of $53.7 million compared with the second quarter of 2018 primarily due to the following:
Lumber Price: Average lumber sales prices decreased to $378 per MBF compared with $517 per MBF during the second quarter of 2018.
Manufacturing Costs Per Unit: Wet weather in the South during the second quarter of 2019 reduced the availability of larger diameter logs requiring us to source more smaller diameter logs compared to the second quarter of 2018. This shift in the mix to smaller diameter logs resulted in unfavorable log recoveries and production rates compared to the second quarter of 2018. In addition, we completed significant planned capital and maintenance projects which required downtime that was not present in the second quarter of 2018 and unfavorably impacted manufacturing costs per unit.
Inventory Charge: Lumber inventory at the end of the second quarter was written down $7.4 million to net realizable value. There were no similar charges during the three months ended June 30, 2018.
Residual Sales, Panels and Other: Residual sales increased due to the addition of the Deltic mills, including residual sales during the second quarter 2019 to the former Deltic MDF facility which are now included in residual revenue following the sale of the facility to a third-party. These favorable variances were more than offset by lower Adjusted EBITDDA generated by the panel operations. The second quarter of 2018 includes 3 months of operations at the Deltic MDF facility that was sold in February 2019.
Lumber shipments increased 47.5 million board feet to 510.9 million board feet in the first half of 2019 compared to 463.4 million board feet during the first half of 2018. This increase was primarily due to a full six months of operations and increased production at the Deltic mills in 2019. Wood Products Adjusted EBITDDA for the first six months of 2019 was $5.2 million, a decrease of $75.4 million compared with the same period in 2018 primarily due to the following:
Lumber Price: Average lumber sales prices decreased to $379 per MBF compared with $495 per MBF during the same period in 2018.
Manufacturing Costs Per Unit: Cold temperatures in the North during the first quarter of 2019 and into April, and wet weather in the South requiring us to source smaller diameter logs in the South during the first half of 2019 resulted in unfavorable log recoveries and production rates compared to the first half of 2018. In addition, we completed significant planned capital and maintenance projects which required more downtime than projects during the first half of 2018. The first six months of 2018 includes 4.5 months of operations at the Deltic MDF facility that was sold in February 2019.
Inventory Charge: Lumber inventory at the end of the second quarter was written down $7.4 million to net realizable value. There were no similar charges during the six months ended June 30, 2018.
Residual Sales, Panels and Other: Residual sales increased due to the addition of the Deltic mills, including residual sales to the former Deltic MDF facility which are now included in residual revenue following the sale of the facility to a third-party in February 2019. These favorable variances were more than offset by lower EBITDDA generated by the panel operations.
29
Real Estate Segment
20,001
15,610
Costs and expenses
Costs of goods sold
3,787
3,184
603
6,041
4,611
1,430
1,329
947
382
2,536
2,073
463
Real Estate Adjusted EBITDDA1
19,016
13,717
Real Estate Segment Statistics
Rural Real Estate
Acres Sold
Average
Price/Acre
Higher and better use (HBU)
2,498
8,551
1,133
2,113
Recreation real estate
1,636
1,382
2,280
1,290
Non-strategic timberland
8,241
813
8,158
899
12,375
2,450
11,571
1,095
Development Real Estate
Lots Sold
$/ Lot
Residential lots
44
85,345
74,054
3,257
7,302
2,929
2,286
2,779
1,315
5,741
1,161
8,681
818
9,045
900
14,717
2,347
17,715
1,214
For the Six Months Ended June 30,
Residential Lots
51
86,825
86,016
Real Estate Adjusted EBITDDA
The following table summarizes Real Estate Adjusted EBITDDA variances for the three and six months ended June 30, 2019 compared with the three and six months ended June 30, 2018:
Real Estate Adjusted EBITDDA June 30, 2018
Rural real estate sales
17,645
13,033
Development real estate sales
2,356
2,578
(380
(461
Other costs, net
(605
(1,433
Real Estate Adjusted EBITDDA June 30, 2019
Real Estate Adjusted EBITDDA for the second quarter of 2019 was $31.3 million, an increase of $19.0 million compared with the same period in 2018. The increase in Real Estate Adjusted EBITDDA is primarily the result of the following:
Rural Real Estate Sales: Rural real estate sales can vary quarter-to-quarter. Second quarter 2019 included the sale of 1,787 acres outside of Little Rock, Arkansas for $11,000 per acre and the sale of 8,000 acres of non-strategic timberlands in Minnesota to a conservation entity representing the second part of a multi-year option with this entity. Second quarter of 2018 included the sale of 8,000 acres of non-strategic timberlands in Minnesota to this same conservation entity at a slightly higher price per acre. The average price per acre fluctuates based on both the geographic area of the real estate and product mix.
Development Real Estate Sales: Real estate development sales favorably impacted Real Estate Adjusted EBITDDA during the second quarter of 2019 due to increased lot sales at Chenal Valley. During the second quarter of 2019 we sold 44 lots at an average lot price of $85.3 thousand compared to 13 lots at an average lot price of $74.1 thousand during the second quarter of 2018. The average price per lot fluctuates based on a variety of factors including location within the developments and lot type.
Real Estate Adjusted EBITDDA for the first half of 2019 was $34.0 million, an increase of $13.7 million compared with the same period in 2018. The increase in Real Estate Adjusted EBITDDA is primarily the result of the following:
Rural Real Estate Sales: The first six months of 2019 benefitted from the 1,787-acre sale in Arkansas and the 8,000-acre non-strategic timberlands sales in Minnesota. The first six months of 2018 included the sale of 8,000 acres of non-strategic timberlands in Minnesota to this same conservation entity at a slightly higher price per acre. In addition, during the first six months of 2019 we sold fewer recreation real estate acres, but at a higher price per acre, compared to 2018.
Development Real Estate Sales: Real estate development sales favorably impacted Real Estate Adjusted EBITDDA during the first six months of 2019 due to increased lot sales at Chenal Valley. During the first six months of 2019 we sold 51 lots at an average lot price of $86.8 thousand compared to 25 lots at an average lot price of $86.0 thousand during the first six months of 2018.
Liquidity and Capital Resources
As of June 30, 2019, our cash and cash equivalents were $98.0 million, an increase of $21.3 million from December 31, 2018. Changes in significant sources of cash for the six months ended June 30, 2019 and 2018 are presented by categories as follows:
Net Cash from Operations
Net cash provided by operating activities was $67.5 million for the first half of 2019, compared with $95.4 million for the first half of 2018. This $27.8 million decrease was primarily attributable to decreased cash receipts from customers of $41.8 million due to lower lumber and log prices as well as changes in sales volume year over year. Cash payments to vendors increased $25.0 million during the first six months of 2019 compared to 2018 as a result of the addition of the Deltic operations for the first half of 2019 and only 4.5 months during the first half of 2018. See Business Segment Results for additional information.
In addition to decreases in customer receipts and increases in vendor payments in 2019, cash provided by operating activities in 2019 compared to 2018 was affected by:
Cash payments of $19.7 million associated with the $20.3 million of merger expense during the first six months of 2018 that did not reoccur during 2019.
Cash contributions of $3.1 million to our pension and other postretirement employee benefit plans compared to $10.4 million during the first six months of 2018.
Tax refunds of $0.6 million during the first six months of 2019 compared to $9.8 million tax payments during the first six months of 2018.
Net Cash Flows from Investing Activities
Net cash provided by investing activities was $35.3 million for the six months ended June 30, 2019, compared with $14.7 million used in 2018.
We spent $24.0 million for timberland and timberlands and property, plant and equipment capital expenditures in the first half of 2019 compared to $18.7 million during the first half of 2018.
We received $58.8 million of net cash proceeds from the Deltic MDF facility sale in February 2019. See Note 4: Sale of Deltic MDF Facility in the Notes to Condensed Consolidated Financial Statements.
We acquired $3.4 million of cash from the merger with Deltic during the first quarter of 2018.
Net Cash Flows from Financing Activities
Net cash used in financing activities was $84.2 million and $75.4 million for the six months ended June 30, 2019 and 2018, respectively.
In January 2019, we refinanced $150.0 million of Senior Notes due in 2019 with a $150.0 million variable rate term loan that will mature in 2029. Concurrent with the borrowing, we entered into an interest rate swap associated with the new term loan to fix the rate at 4.56%. Upon the refinancing, we redeemed and paid all outstanding Senior Notes, including a redemption premium of $4.9 million.
During the six months ended June 2018, we repaid $20.3 million of net debt and paid $2.4 million in loan fees.
Cash distributions to stockholders were $53.9 million in the first half of 2019, compared with $50.2 million in the first six months of 2018. Our quarterly dividend increased approximately $1.6 million due to the issuance of approximately 4.8 million additional shares in November of 2018 related to the special distribution of Deltic’s accumulated earnings and profits as of the merger date net of the 0.7 million shares repurchased under the 2018 Repurchase Program. See Note 6: Earnings Per Share in the Notes to Condensed Consolidated Financial Statements.
During the first six months of 2019 we repurchased 686,240 shares of our common stock totaling $25.2 million.
Future Cash Requirements
We expect to fund our 2019 dividends primarily with cash generated by our operations. There are limits on our ability to utilize cash dividends from PotlatchDeltic TRS to our REIT to fund our dividend. In particular, at least 75% of our gross income for each taxable year as a REIT must be derived from sales of our standing timber and other types of real estate income. No more than 25% of our gross income may consist of dividends from PotlatchDeltic TRS and other non-qualifying types of income. This requirement may limit our ability to fund dividends to stockholders using cash flows from PotlatchDeltic TRS.
We invest cash in maintenance and discretionary capital expenditures for our facilities in our Wood Products operations. We evaluate discretionary capital improvements based on an expected level of return on investment. 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. In total, we expect we will spend approximately $65 to $70 million in Woods Products, Timberlands and Real Estate segments in 2019.
On August 30, 2018, the board of directors authorized the repurchase up to $100.0 million of common stock with no time limit set for the repurchase. At June 30, 2019, we had remaining authorization of $74.8 million for future stock repurchase under the 2018 repurchase program. Stock repurchases in the future will depend on a variety of factors including our cash position, our desired level of liquidity, debt covenant restrictions and our stock price.
Capital Structure
June 30,
December 31,
756,082
755,364
(97,970
(76,639
Net debt
658,112
678,725
Market capitalization1
2,618,910
2,137,915
Enterprise value
3,277,022
2,816,640
Net debt to enterprise value
20.1
24.1
Dividend yield2
4.1
5.1
Weighted-average cost of debt, after tax3
3.4
3.5
Market capitalization is based on outstanding shares of 67.2 million and 67.6 million times closing share prices of $38.98 and $31.64 as of June 30, 2019, and December 31, 2018, respectively.
Dividend yield is based on annualized dividends per share of $1.60 and share prices of $38.98 and $31.64 as of June 30, 2019, and December 31, 2018, respectively.
Weighted-average cost of debt excludes deferred debt costs and credit facility fees and includes estimated annual patronage credit on term loan debt.
Liquidity and Performance Measures
The discussion below is presented to enhance the reader’s understanding of our operating performance, ability to generate cash and satisfy rating agency and creditor requirements. This information includes two measures: Adjusted EBITDDA and Cash Available for Distribution (CAD). These measures are not defined by GAAP and the discussion of Adjusted EBITDDA and CAD is not intended to conflict with or change any of the GAAP disclosures described herein.
Adjusted EBITDDA is a non-GAAP measure that management uses as a performance measure to allocate resources between segments, to evaluate performance of the business and that investors can use to evaluate the operational performance of the assets under management. It removes the impact of specific items that management believes do not directly reflect the core business operations on an ongoing basis. This measure should not be considered in isolation from and is not intended to represent an alternative to, our results reported in accordance with GAAP. Management believes that this non-GAAP measure, when read in conjunction with our GAAP financial statements, provides useful information to investors by facilitating the comparability of our ongoing operating results over the periods presented, the ability to identify trends in our underlying business and the comparison of our operating results against analyst financial models and operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.
Our definition of EBITDDA may be different from similarly titled measures reported by other companies. We define EBITDDA as net income (loss) before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses.
We reconcile Total Adjusted EBITDDA to net income for the consolidated company as it is the most comparable GAAP measure. See Note 6: Segment Information to the Notes to Condensed Consolidated Financial Statements included herein for the reconciliation for our segments.
The following table provides a reconciliation of net income to Total Adjusted EBITDDA for the respective periods:
Interest, net
Income tax (benefit) expense
(952
12,005
639
17,722
889
1,908
1,869
3,765
Deltic merger related costs
Inventory purchase price adjustment in cost of goods sold
1,849
(Gain) loss on fixed assets
(62
We define CAD as cash provided by operating activities adjusted for capital spending for purchases of property, plant and equipment, timberlands reforestation and roads and acquisition of timber and timberlands. Management believes CAD is a useful indicator of the company’s overall liquidity, as it provides a measure of cash generated that is available for dividends to common stockholders (an important factor in maintaining our REIT status), repurchase of the company’s common shares, debt repayment, acquisitions and other discretionary and nondiscretionary activities. Our definition of CAD is limited in that it does not solely represent residual cash flows available for discretionary expenditures since the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view CAD as a measure that provides supplemental information to our Condensed Consolidated Statements of Cash Flows. Our definition of CAD may be different from similarly titled measures reported by other companies, including those in our industry. CAD is not necessarily indicative of the CAD that may be generated in future periods.
The following table provides a reconciliation of Cash Provided by Operating Activities to CAD:
Cash provided by operating activities1
Capital expenditures
(23,970
(18,655
CAD
43,551
76,700
Net cash provided by (used in) investing activites2
Cash from operating activities for the six months ended June 30, 2019 and 2018 includes cash paid for Deltic merger-related costs of $0.0 million and $19.7 million, respectively, and cash paid for real estate development expenditures of $4.5 million and $1.7 million, respectively.
Net cash from investing activities includes payments for capital expenditures, which is also included in our reconciliation of CAD.
Sources of Financing
Credit and Term Loan Agreements
In January 2019, we refinanced $150.0 million of 7.50% Senior Notes due in 2019 with a $150.0 million term loan that will mature in 2029. The new term loan carries a variable interest rate of one-month LIBOR plus 1.85%. Concurrent with the new term loan, we entered into an interest rate swap to fix the rate at 4.56%. Upon the refinancing, we redeemed and paid all outstanding Senior Notes, including a redemption premium of $4.9 million, and paid $0.5 million of lender fees on the new term loan. Subsequent to the refinancing, $693.5 million was outstanding under the Amended Term Loan Agreement.
As of June 30, 2019, we were in compliance with all debt and credit agreement covenants, there were no borrowings under the revolving line of credit and approximately $1.0 million of the $380.0 million credit facility was utilized by outstanding letters of credit.
34
The following table sets forth the financial covenants in the credit and term loan agreements and our status with respect to these covenants as of June 30, 2019:
Covenant Requirement
Actual at
Interest coverage ratio
≥
3.00 to 1.00
6.65
Leverage ratio
≤
40%
20%
Contractual Obligations
Other than the $150.0 million refinance of the 7.50% Senior Notes described in Note 9: Debt in the Notes to Condensed Consolidated Financial Statements and the associated $150.0 million interest rate swap associated with our refinance of the Senior Notes, which are incorporated herein by reference, there have been no material changes to our contractual obligations in the six months ended June 30, 2019 outside the ordinary course of business.
Credit Ratings
Two major debt rating agencies routinely evaluate our debt and our cost of borrowing can increase or decrease depending on our credit rating. During 2018, both Moody’s and Standard and Poor upgraded our debt rating to investment grade. There have been no changes in our credit rating during the six months ended June 30, 2019.
Off-Balance Sheet Arrangements
We currently are not a party to off-balance sheet arrangements that would require disclosure under this section.
Critical Accounting Policies and Estimates
There have been no significant changes during 2019 to our critical accounting policies presented in our 2018 Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than the $150.0 million refinance of the Senior Notes described in Note 9: Debt in the Notes to Condensed Consolidated Financial Statements and the $150.0 million interest rate swap associated with our refinance of the Senior Notes, which are incorporated herein by reference, our exposures to market risk have not changed materially since December 31, 2018. For quantitative and qualitative disclosures about market risk, see Item 7A – Quantitative and Qualitative Disclosure about Market Risk in our 2018 Annual Report on Form 10-K.
Quantitative Information about Market Risks
The table below provides information about our outstanding long-term debt, weighted-average interest rates and interest rate swaps as of June 30, 2019. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted-average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted-average variable rates are based on implied forward rates in the yield curve.
EXPECTED MATURITY DATE
THEREAFTER
TOTAL
FAIR VALUE
Variable rate debt:
Principal due
40,000
277,500
397,500
Average interest rate
3.76
3.78
3.70
3.82
3.80
Fixed rate debt:
6,000
43,000
275,735
364,735
375,723
4.60
4.49
3.98
4.10
Interest rate swaps:
Variable to fixed
357,500
(21,220
Average pay rate
2.84
2.92
2.66
2.71
Average receive rate
1.88
1.80
1.90
1.89
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act)), under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of June 30, 2019. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, the CEO and CFO have concluded that these disclosure controls and procedures were effective as of June 30, 2019.
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 six months ended June 30, 2019 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, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
On August 30, 2018, our board of directors authorized management to repurchase up to $100.0 million of common stock with no time limit set for the repurchase (the 2018 Repurchase Program). During the six months ended June 30, 2019, we repurchased 686,240 shares of common stock for $25.2 million (including transaction costs) under the 2018 Repurchase Program. Transaction costs are not counted against authorized funds. All common stock purchases were made in open-market transactions. At June 30, 2019, we had remaining authorization of $74.8 million for future stock repurchases under the 2018 Repurchase Program.
The following table provides information with respect to purchases of common stock made by the company during second quarter 2019:
Common Share Purchases
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of a Publicly Announced Plan
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan
April 1 - April 30
89,850,409
May 1 - May 31
348,342
37.33
76,845,710
June 1 - June 30
58,951
33.90
74,847,525
407,293
36.84
ITEM 6. EXHIBITS
EXHIBIT
NUMBER
DESCRIPTION
(3)(a)*
Third Restated Certificate of Incorporation of the Registrant, effective February 20, 2018, filed as Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on February 21, 2018.
(3)(b)*
Bylaws of the Registrant, as amended through February 18, 2009, filed as Exhibit (3)(b) to the Current Report on Form 8-K filed by the Registrant on February 20, 2009.
(4)
See Exhibits (3)(a) and (3)(b). The registrant undertakes to furnish to the Commission, upon request, any instrument defining the rights of holders of long-term debt.
10(a)*
PotlatchDeltic Corporation 2019 Long-Term Incentive Plan filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on May 10, 2019.
10(a)(i)*
Form of 2019 Long-Term Incentive Plan RSU Notice and Agreement filed as Exhibits 10.2 and 10.3 to the Current Report on Form 8-K filed by the Registrant on May 10, 2019.
10(a)(ii)*
Form of 2019 Long-Term Incentive Plan Performance Share Award Notice and Agreement filed as Exhibits 10.5 and 10.6 to the Current Report on Form 8-K filed by the Registrant on May 10, 2019.
10(a)(iii)*
Form of 2019 Long-Term Incentive Plan Award Director Notice and RSU Agreement filed as Exhibit 10.7 to the Current Report on Form 8-K filed by the Registrant on May 10, 2019.
(31)
Rule 13a-14(a)/15d-14(a) Certifications.
(32)
Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350.
(101)
The following financial information from PotlatchDeltic Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, filed on July 31, 2019 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2019 and 2018, (ii) the Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months June 30, 2019 and 2018, (iii) the Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018, (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018, (v) the Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018 and (vi) the Notes to Condensed Consolidated Financial Statements.
* Incorporated by reference
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
By
/s/ WAYNE WASECHEK
Wayne Wasechek
Corporate Controller
(Duly Authorized; Principal Accounting Officer)
Date:
July 31, 2019