The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
We are primarily engaged in activities associated with timberland management, including the sale of timber, the management of approximately 1.4 million acres of timberlands and the purchase and sale of timberlands. We are also engaged in the manufacture and sale of wood products. Our timberlands and all of our wood products facilities are located within the continental United States. The primary market for our products is the United States. We converted to a Real Estate Investment Trust (REIT) effective January 1, 2006.
CONSOLIDATION
The
Consolidated Financial Statements
include the accounts of Potlatch Corporation and its subsidiaries after the elimination of intercompany transactions and accounts. There are no unconsolidated subsidiaries.
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, which we refer to in this report as U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
Significant estimates include timber volumes, pension and postretirement obligation assumptions, contingent liabilities and the fair value of derivative instruments. These significant estimates are described in further detail below.
Cash and Cash Equivalents
Cash equivalents are investments that are highly liquid with maturities of three months or less when purchased.
INVENTORIES
For most of our operations, the last-in, first-out method is used to determine the cost of logs, lumber and plywood. The average cost method is used to determine the cost of all other inventories. Inventories are stated at the lower of cost or net realizable value. Expenses associated with idle capacity or other curtailments of production are reflected in cost of goods sold in the periods incurred.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are valued at cost less accumulated depreciation. Depreciation of buildings, equipment and other depreciable assets is determined using the straight-line method of depreciation.
Major improvements and replacements of property are capitalized. Maintenance, repairs and minor improvements and replacements are expensed. Upon retirement or other disposition of property, applicable cost and accumulated depreciation are removed from the accounts. Any gains or losses are included in earnings.
TIMBER AND TIMBERLANDS
Timber and timberlands are valued at cost less accumulated depletion and amortization. We capitalize costs related to stand establishment, which include the preparation of the land for planting, seeds or seedlings and tree planting costs, which include third-party labor costs, materials and other contract services. Upon completion of
48
planting activities and field inspection to confirm the planting operation was successful, a plantation will be considered “established.”
Subsequent expenditures to maintain the integrity or enhance the growth of an established plantation or stand are expensed. Post-establishment expenses include vegetation control, fertilization, thinning operations and the replanting of seedlings lost through mortality. Forest management costs are considered current operating expenses and include property taxes and insurance, silviculture costs incurred subsequent to stand establishment, cruising (physical inventory), property maintenance, salaries, supplies, travel, record-keeping, fire protection and other normal recurring administrative personnel costs.
Timberland acquisitions are capitalized based on the relative appraised values of timberland, merchantable sawlogs, merchantable pulpwood, pre-production timber (young growth that is not yet merchantable timber), logging roads and other land improvements.
The estimated volume of current standing merchantable timber inventory, which is a component of calculating our depletion rates, is updated at least annually to reflect increases due to the reclassification of pre-production timber to merchantable timber when it meets defined diameter specifications, the annual growth of merchantable timber and the acquisition of additional merchantable timber, decreases due to timber harvests and land sales and changes resulting from other factors, such as environmental or casualty losses. Timber volumes are estimated from cruises of the timber tracts, which are completed on our timberlands on approximately a five to ten year cycle.
Depletion represents the amount charged to expense as timber is harvested. Rates at which timber is depleted are calculated annually for each of our depletion pools by dividing the beginning of year balance of the merchantable timber accounts by the forest inventory volume, after inventory updates.
The base cost of logging roads, such as clearing, grading and ditching, is not amortized and remains a capitalized item until disposition. Other portions of the initial logging road cost, such as bridges, culverts and gravel surfacing are amortized over their useful lives, which range from 5 to 20 years. Costs associated with temporary logging road spurs, which are typically used for one harvest season, are expensed as incurred.
REAL ESTATE SALES
Sales of non-core timberland are considered to be part of our normal operations. We therefore classify revenue and costs associated with real estate sold in revenues and cost of goods sold, respectively, in our
Consolidated Statements of Income
. Cash generated from real estate sales is included as an operating activity in our
Consolidated Statements of Cash Flows
.
Sales of large parcels of property, such as our sale of central Idaho timberlands in 2016, which do not represent our core operations and are of such a size as to not be indicative of our ongoing operations, are presented as a net gain or loss in our
Consolidated Statements of Income
. Cash generated from these sales is included as an investing activity in our
Consolidated Statements of Cash Flows
.
LONG-LIVED ASSETS
Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, as measured by its undiscounted estimated future cash flows. We use our operational budgets to estimate future cash flows. The estimates are adjusted periodically to reflect changing business conditions. Impaired assets are written down to fair value. Assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
We recognize a liability and an asset equal to the fair value of our legal obligations to perform asset retirement activities if the amount can be reasonably estimated. We review these obligations annually and do not expect them to have a material effect on our financial position, results of operations or cash flows.
49
INCOME TAXES
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are measured pursuant to tax laws using rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. We recognize the effect of a change in income tax rates on deferred tax assets and liabilities in the
Consolidated Statements of Income
and
Consolidated Statements of Comprehensive Income
in the period that includes the enactment date of the rate change. We record a valuation allowance to reduce the carrying amounts of deferred tax assets if it is more likely than not that such deferred tax assets will not be realized.
REVENUE RECOGNITION
We recognize revenue from the sale of timber when risk of loss transfers to the buyer and the quantity sold is determinable. These sales usually take the form of delivered logs, pay-as-cut stumpage contracts, lump sum stumpage contracts or timber deeds. On delivered log sales, revenue includes amounts billed for logging and hauling and is recognized at the point the logs are delivered and scaled. Revenue is recognized on timber deeds and lump sum stumpage contracts generally upon closing or when the contracts are effective, which is the point at which the buyer assumes risk of loss associated with the standing timber.
We recognize revenue from the sale of manufactured wood products and residual by-products when there is persuasive evidence of a sales agreement, the price to the customer is fixed and determinable, collection is reasonably assured and title and the risk of loss passes to the customer. Shipping terms generally indicate when title and the risk of loss have passed. Revenue is recognized at shipment when shipping terms are FOB (free on board) shipping point. For sales where shipping terms are FOB destination, revenue is recognized when the goods are received by the customer.
We receive cash consideration in full and recognize revenue at closing on substantially all of our real estate sales.
While sales taxes are not typical, in the event sales taxes are collected, revenue is recognized net of any sales tax and sales taxes are recorded as a current liability and remitted to the appropriate governmental entities.
Costs for shipping and handling are included in cost of goods sold in our
Consolidated Statements of Income
.
EQUITY-BASED COMPENSATION
Equity-based awards are measured at fair value on the dates they are granted or modified. These measurements establish the cost of the equity-based awards for accounting purposes. The cost of the equity-based award is then recognized in the
Consolidated Statements of Income
over each employee’s required service period. See
Note 14: Equity-Based Compensation Plans
for more information about our equity-based compensation.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which changes several aspects of the accounting for share-based payment award transactions, including accounting for income taxes, diluted shares outstanding, classification of excess tax benefits on the statement of cash flows, forfeitures and minimum statutory tax withholding requirements. We prospectively adopted the provisions of this ASU on January 1, 2017, which include recording the tax effects related to share-based payments through the income statement. As a Real Estate Investment Trust (REIT), we are generally not subject to federal and state corporate income taxes, except through our taxable REIT subsidiaries. Therefore, the adoption of this guidance was not material to our consolidated financial statements. We will continue to estimate forfeitures each period. We consider many factors when estimating expected forfeitures, including types of awards, employee class and historical experience.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers: Topic 606
(ASU No. 2014-09), which requires an entity to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or
50
services. ASU 2014-09 also included other guidance, including the presentation of a gain or loss recognized on the sale of a long-lived asset
or a nonfinancial asset. Subsequent ASUs have been issued that provide clarity, technical corrections and improvements to ASU No. 2014-09. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606), Deferral of the E
ffective Date
, which deferred the effective date of ASU No. 2014-09 by one year. ASU No. 2014-09 is effective for us on January 1, 2018. For most of our sales, which consist of logs, manufactured wood products, residual by-products and real estate, we have
identified no change to the timing or amount of revenue recognized because our contracts are legally enforceable, the transaction price is fixed and performance
obligations are satisfied
at a point in time, typically
with control transferring to the buyer
when risk of loss and title pass. For our other sales, which include stumpage contracts, timber deeds, land use permits and royalties, we have also identified no change to the timing or amount of revenue recognized. We will have minor refinements to our c
ontrols over financial reporting
as a result of this ASU
. Our expanded disclosures will disaggregate revenues along the lines of the sales categories mentioned above. The guidance permits a retrospective application of the new standard with certain
practical expedients (contracts completed within the same annual reporting period need not be restated and other allowances for contracts with variable consideration) or retrospective application with a cumulative effect adjustment to the beginning balance
of retained earnings. Upon adoption of this ASU on January 1, 2018, if there is a difference in the amount of revenue recorded for any of the prior reporting periods presented, we will record a cumulative adjustment to retained earnings in the first quart
er of 2018. The adoption of this guidance is not expected to have a significant effect on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07,
Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which requires an entity to present service cost within compensation expense and the other components of net benefit cost outside of income from operations. This ASU is effective for us on January 1, 2018. The amendments in this update require retrospective presentation in the income statement. Changes to the capitalized portion of both service cost and the other components of net benefit cost within inventory will be applied prospectively. In 2017, net periodic pension and other postretirement employee benefit cost reported within operating income totaled $13.2 million of which $6.8 million represented service cost.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
, which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, the income tax consequence of an intra-entity asset transfer was not recognized until the asset was sold to an outside party. This amendment should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. There are no new disclosure requirements. This ASU is effective for us on January 1, 2018. The adoption of this guidance is not expected to have a significant effect on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-1,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The standard provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or a business. This ASU is effective for us on January 1, 2018 on a prospective basis.
In August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities
, which simplifies and expands the application of hedge accounting. ASU 2017-12 requires that when a hedge is deemed effective, hedge accounting must be applied to the entire change in fair value of the hedging instrument eliminating the notion of ineffective portions of the hedge relationship. The entire change in the fair value of the hedging instrument will be recorded in the same income statement line item as the hedged item and the ineffective portion will no longer be separately recognized in earnings. This ASU is effective for us on January 1, 2019, with early application permitted in any interim period. The presentation and disclosure guidance are required prospectively upon adoption. Our cash flow hedges currently have no ineffectiveness, but in the event they did, as of the beginning of the fiscal year that we adopt this ASU, a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness would be recorded to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which, among other things, requires lessees to recognize most leases on the balance sheet. We have operating leases covering office space, equipment and
51
vehicles expiring at various dates through 2033, which would require a right-of-use asset and a lease
liability, initially measured at the present value of the lease payments, to be recognized in the statement of financial position. Lease costs would generally continue to be recognized on a straight-line basis. We expect our right-of-use asset and lease l
iability will approximate our current future minimum lease payments required under our operating leases, which were $1
4.4
million at December 31, 2017. The ASU is effective for us on January 1, 2019.
In February 2018, the FASB issued ASU No. 2018-2,
Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the December 22, 2017, H.R. 1, Tax Cuts and Jobs Act (the Act). See
Note 15: Income Taxes
for additional information regarding the Act. This ASU is effective for us on January 1, 2019, with early adoption permitted. We expect to adopt this ASU on January 1, 2018 and elect to reclassify the income tax effects of the Act on pension and other postretirement employee benefits and a cash flow hedge within accumulated other comprehensive loss to accumulated deficit. Accordingly, at March 31, 2018, accumulated other comprehensive loss will increase by approximately $20 million and the change will be recorded as a decrease to accumulated deficit.
RECLASSIFICATIONS
Prior year environmental charges for Avery Landing within the
Consolidated Statements of Income
have been reclassified to conform to the 2017 presentation. There was no change to revenues, cost of goods sold, operating income or net income.
Prior year receivables not due from customers within the
Consolidated Balance Sheets
have been reclassified to other current assets to conform to the 2017 presentation. There was no change to previously reported total current assets. See
Note 7: Other Current Assets
for additional information.
Certain 2016 and 2015 amounts within cash flows from operations on the
Consolidated Statements of Cash Flows
have been reclassified to conform to the 2017 presentation. There was no change to previously reported net cash from operating, investing or financing activities.
NOTE 2.
Pending Merger with Deltic
On October 22, 2017, Potlatch, Portland Merger, LLC (Merger Sub), a wholly-owned subsidiary of Potlatch, and Deltic Timber Corporation (Deltic) entered into an Agreement and Plan of Merger (Merger Agreement) pursuant to which Deltic will merge with and into Merger Sub. Following the merger, Potlatch will be renamed PotlatchDeltic Corporation. Under the terms of the Merger Agreement, Deltic shareholders will receive 1.80 shares of Potlatch common stock for each share of Deltic common stock at the closing date. Deltic owns approximately 530,000 acres of timberland, operates two sawmills and a medium density fiberboard plant and is engaged in real estate development primarily in Arkansas.
Because the exchange ratio was fixed at the time of the Merger Agreement and the market value of our common stock will continue to fluctuate, the total value of the consideration exchanged will not be determinable until the closing date. The number of shares to be issued with respect to Deltic stock awards will not be determinable until the closing of the transaction.
We estimated that approximately 22 million shares of our common stock will be issued to Deltic shareholders in the merger based on the 1.80 exchange ratio and the number of shares of Deltic common stock issued and outstanding as of January 31, 2018.
The Merger Agreement provides that, upon termination of the Merger Agreement by a party under certain circumstances, such party may be obligated to pay the other party a termination fee equal to $66 million with respect to the fee payable by Potlatch and $33 million with respect to the fee payable by Deltic.
Subsequent to the completion of the transaction, as part of the REIT conversion process, Deltic’s earnings and profits are expected to be distributed to shareholders of the combined company through a dividend or special distribution consisting of 80% stock and 20% cash.
52
The closing of the merger is subject to approval by the shareholders of Deltic and Potlatch and other conditions specified in the Merger Agreement. The respective shareholder meetings are scheduled for February 20, 2018, as published in the joint proxy statement/prospectus dated January 18, 2018. If approved by the shareholders, the merger is expected to close the same day
.
NOTE 3. EARNINGS PER SHARE
The following table reconciles the number of shares used in calculating the basic and diluted earnings per share for the years ended December 31:
(Dollars in thousands, except per share amounts)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net income
|
|
$
|
86,453
|
|
|
$
|
10,938
|
|
|
$
|
31,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
40,824,420
|
|
|
|
40,797,806
|
|
|
|
40,842,126
|
|
Incremental shares due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance shares
|
|
|
362,509
|
|
|
|
200,164
|
|
|
|
122,334
|
|
Restricted stock units
|
|
|
40,459
|
|
|
|
35,470
|
|
|
|
23,359
|
|
Diluted weighted-average shares outstanding
|
|
|
41,227,388
|
|
|
|
41,033,440
|
|
|
|
40,987,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
2.12
|
|
|
$
|
0.27
|
|
|
$
|
0.78
|
|
Diluted net income per share
|
|
$
|
2.10
|
|
|
$
|
0.27
|
|
|
$
|
0.77
|
|
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.
At December 31, 2017 and 2016, there were 250 and 503 stock-based awards, respectively, which were excluded from the calculation of earnings per share because they were anti-dilutive. At December 31, 2015, there were no anti-dilutive stock-based awards.
On April 26, 2016, we announced that our board of directors had authorized management to repurchase up to $60 million of common stock over a period of 24 months (the “Repurchase Plan”). We repurchased 169,625 shares of common stock during the second quarter of 2016 at an average price of $35.08 per share. We retire shares upon repurchase. Any excess repurchase price over par is recorded in accumulated deficit. No shares were repurchased during 2017 and $54 million remains available on the authorization.
NOTE 4. INVENTORIES
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Logs
|
|
$
|
20,133
|
|
|
$
|
23,342
|
|
Lumber, plywood and veneer
|
|
|
20,889
|
|
|
|
20,500
|
|
Materials and supplies
|
|
|
9,110
|
|
|
|
8,780
|
|
|
|
$
|
50,132
|
|
|
$
|
52,622
|
|
Valued at lower of cost or net realizable value:
|
|
|
|
|
|
|
|
|
Last-in, first-out basis
|
|
$
|
25,127
|
|
|
$
|
29,769
|
|
Average cost basis
|
|
|
25,005
|
|
|
|
22,853
|
|
Total inventories
|
|
$
|
50,132
|
|
|
$
|
52,622
|
|
If the last-in, first-out inventory had been carried at average cost, the values would have been higher by approximately $10.9 million, $11.1 million and $10.6 million at December 31, 2017, 2016 and 2015, respectively.
53
NOTE
5
.
PROPERTY, PLANT AND EQUIPMENT
(Dollars in thousands)
|
Range of useful lives
|
|
2017
|
|
|
2016
|
|
Land
|
|
|
$
|
4,707
|
|
|
$
|
4,712
|
|
Buildings and improvements
|
10-40 years
|
|
|
55,734
|
|
|
|
54,448
|
|
Machinery and equipment
|
2-25 years
|
|
|
197,648
|
|
|
|
190,316
|
|
Construction in progress
|
|
|
|
1,348
|
|
|
|
1,437
|
|
|
|
|
|
259,437
|
|
|
|
250,913
|
|
Less: accumulated depreciation
|
|
|
|
(182,208
|
)
|
|
|
(178,093
|
)
|
Total property, plant and equipment, net
|
|
|
$
|
77,229
|
|
|
$
|
72,820
|
|
Depreciation charged against operating income totaled $8.1 million, $8.3 million and $8.2 million in 2017, 2016 and 2015, respectively.
Interest expense capitalized was inconsequential in 2017 and 2016, and $0.2 million 2015.
NOTE 6. TIMBER AND TIMBERLANDS
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Timber and timberlands
|
|
$
|
581,648
|
|
|
$
|
572,273
|
|
Logging roads
|
|
|
72,828
|
|
|
|
69,583
|
|
Total timber and timberlands, net
|
|
$
|
654,476
|
|
|
$
|
641,856
|
|
Depletion from company-owned lands totaled $17.0 million, $20.8 million and $25.3 million in 2017, 2016 and 2015, respectively. Amortization of road costs, such as bridges, culverts and gravel surfacing, totaled $3.2 million, $3.1 million and $3.1 million in 2017, 2016 and 2015, respectively.
Future payments due under timber cutting contracts as of December 31, 2017 are as follows:
(Dollars in thousands)
|
|
|
|
|
2018
|
|
$
|
11,280
|
|
2019
|
|
|
2,730
|
|
2020
|
|
|
1,085
|
|
2021
|
|
|
5,370
|
|
2022
|
|
|
281
|
|
Total
|
|
$
|
20,746
|
|
NOTE 7. OTHER CURRENT ASSETS
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Real estate held for sale
|
|
$
|
7,721
|
|
|
$
|
9,184
|
|
Prepaid expenses
|
|
|
2,862
|
|
|
|
1,939
|
|
Other receivables
|
|
|
882
|
|
|
|
2,442
|
|
Interest rate swaps
|
|
|
13
|
|
|
|
32
|
|
Total other current assets
|
|
$
|
11,478
|
|
|
$
|
13,597
|
|
NOTE 8.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Accrued payroll and benefits
|
|
$
|
18,110
|
|
|
$
|
13,634
|
|
Accounts payable
|
|
|
9,361
|
|
|
|
8,382
|
|
Accrued interest
|
|
|
6,385
|
|
|
|
6,237
|
|
Avery Landing accrual
|
|
|
6,000
|
|
|
|
1,022
|
|
Accrued taxes
|
|
|
5,103
|
|
|
|
4,956
|
|
Other current liabilities
|
|
|
10,242
|
|
|
|
9,479
|
|
Total accounts payable and accrued liabilities
|
|
$
|
55,201
|
|
|
$
|
43,710
|
|
54
NOTE
9
.
DEBT
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Term loans
|
|
$
|
343,500
|
|
|
$
|
349,500
|
|
Senior notes
|
|
|
150,000
|
|
|
|
150,000
|
|
Revenue bonds
|
|
|
65,735
|
|
|
|
65,735
|
|
Medium-term notes
|
|
|
17,250
|
|
|
|
22,250
|
|
Long-term principal
|
|
|
576,485
|
|
|
|
587,485
|
|
Interest rate swaps
|
|
|
(373
|
)
|
|
|
247
|
|
Debt issuance costs
|
|
|
(2,321
|
)
|
|
|
(3,015
|
)
|
Unamortized discounts
|
|
|
(472
|
)
|
|
|
(729
|
)
|
Total long-term debt (includes current portion)
|
|
|
573,319
|
|
|
|
583,988
|
|
Less current portion of long-term debt
|
|
|
(14,263
|
)
|
|
|
(11,032
|
)
|
Long-term debt
|
|
$
|
559,056
|
|
|
$
|
572,956
|
|
TERM LOANS
We repaid $6 million of our term loans in 2017. The remaining term loans include eight tranches consisting of the following:
|
•
|
one
$6 million tranche with a rate of 3.70% maturing in 2020;
|
|
•
|
three $40 million tranches maturing each year from 2019 through 2021 at variable rates based on three-month LIBOR plus a spread between 1.65% and 1.90% (term loan variable rates are based on three-month LIBOR of 1.34%, which is the rate incurred during the fourth quarter of 2017);
|
|
•
|
two $40 million tranches with rates of 4.29% maturing in 2022 and 4.49% maturing in 2023;
|
|
•
|
one tranche of $110 million with a rate of 4.64% maturing in 2024; and
|
|
•
|
one tranche of $27.5 million with a rate of 2.15% plus three-month LIBOR maturing in 2026.
|
SENIOR NOTES
In 2009, we sold $150 million aggregate principal amount of 7.50% senior notes due in 2019. The terms of these notes limit our ability, and the ability of any subsidiary guarantors, to borrow money, pay dividends, redeem or repurchase capital stock, enter into sale and leaseback transactions and create liens.
MEDIUM-TERM NOTES AND REVENUE BONDS
The medium-term notes were originally issued during 1991 and 1992 with fixed rates of 8.75% to 8.89% due 2018 through 2022. Repayment of $5 million of our medium-term notes occurred in 2017.
In 2016, we repaid $42.6 million of revenue bonds. The bonds carried a rate of 5.90% and matured in 2026. In 2016, we also refinanced $65.7 million of revenue bonds at a rate of 2.75%. The original bonds, which carried a rate of 6.00%, were extinguished and a new debt obligation was simultaneously issued. The principal balance and maturity date in 2024 remain unchanged.
DEBT ISSUANCE COSTS
Debt issuance costs represent the capitalized direct costs incurred related to the issuance of debt. These costs are amortized to interest expense over the terms of the respective borrowings.
55
DEBT MATURITIES
Scheduled principal payments due on long-term debt as of December 31, 2017 are as follows:
(Dollars in thousands)
|
|
|
|
|
2018
|
|
$
|
14,250
|
|
2019
|
|
|
190,000
|
|
2020
|
|
|
46,000
|
|
2021
|
|
|
40,000
|
|
2022
|
|
|
43,000
|
|
Thereafter
|
|
|
243,235
|
|
Total
|
|
$
|
576,485
|
|
Principal repayments on long-term debt occur at maturity. Our debt obligations are of equal priority.
CREDIT AGREEMENT
In 2014, we entered into an amended and restated credit agreement with an expiration date of February 12, 2020. The credit agreement provides for a revolving line of credit with an initial aggregate principal amount not to exceed $250 million, which may be increased by up to an additional $250 million. It also includes a sublimit of $40 million for the issuance of standby letters of credit and a sublimit of $25 million for swing line loans. Usage under either or both subfacilities reduces availability under the revolving line of credit. As of December 31, 2017, there were no
borrowings outstanding under the revolving line of credit, and approximately $0.9 million of the letter of credit subfacility was being used to support several outstanding letters of credit. Available borrowing capacity at December 31, 2017 was $249.1 million.
Pricing is set according to the type of borrowing. LIBOR Loans are issued at a rate equal to the British Bankers Association LIBOR Rate, while Base Rate Loans are issued at a rate equal to the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 1/2 of 1.00%, (b) the rate of interest in effect for such day as publicly announced from time to time by KeyBank as its “prime rate” and (c) the sum of the LIBOR that would apply to a one month Interest Period plus 1.00%. The interest rates we pay for borrowings under either type of loan include an additional Applicable Rate, which can range from 0.875% to 1.70% for LIBOR loans and from 0% to 0.70% for Base Rate loans, depending on our current credit rating. As of December 31, 2017, we were able to borrow under the bank credit facility with the additional applicable rate of 1.50% for LIBOR Loans and 0.50% for Base Rate Loans, with facility fees of 0.25% on the $250 million of the bank credit facility.
On February 14, 2018, we entered into a second amended and restated credit agreement (the Amended Credit Agreement) with an expiration date of April 14, 2023. The Amended Credit Agreement increases our revolving line of credit to $380 million,
which may be increased by up to an additional $420 million
.
It also includes a sublimit of $75 million for the issuance of standby letters of credit and a sublimit of $25 million for swing line loans. Usage under either or both subfacilities reduces availability under the revolving line of credit. Pricing is consistent with the 2014 amended and restated credit agreement. The interest coverage ratio and leverage ratio financial covenants are unchanged. The limitation on timberland acre sales was eliminated.
56
NOTE
10
.
DERIVATIVE INSTRU
MENTS
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. We have three fair value interest rate swaps with notional amounts totaling $14.3 million associated with our medium-term notes. The fair value swaps convert interest payments with fixed rates ranging between 8.88% and 8.89% to a variable rate of 3-month LIBOR plus a spread of 6.17%. Our fair value swaps terminate at various dates in the first quarter of 2018. A $50 million notional fair value swap associated with our senior notes was terminated in December 2017 at a cost of $0.4 million. The termination cost has been recorded as a reduction to the carrying value of our long-term debt and will be amortized to earnings through the original maturity date of November 2019. Approximately $0.2 million will be recorded as interest expense over the next twelve months.
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. We have one interest rate swap with a notional amount of $27.5 million associated with $27.5 million of term loan debt. The cash flow hedge converts a variable rate of 2.15% plus 3-month LIBOR to a fixed rate of 3.88% and terminates in February 2026. Our cash flow hedge is expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the hedge. Therefore, changes in the fair value of the interest rate swap are recorded as a component of other comprehensive income and will be recognized in earnings when the hedged interest rate affects earnings. Changes in the fair value of the ineffective portion are recognized immediately in earnings. There has been no impact on earnings due to ineffectiveness to date. As of December 31, 2017, the amount of net losses expected to be reclassified into earnings in the next 12 months is inconsequential.
Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements, commodity price movements or other identified risks, but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly into income. In April 2017, we entered into a lumber price swap to fix the price on a total of 36 million board feet (MMBF) of southern yellow pine. The lumber price swap expired on December 31, 2017, resulting in a realized gain of $1.1 million for the period then ended.
The fair values of our cash flow and fair value derivative instruments on our
Consolidated Balance Sheets
as of December 31 are as follows:
|
|
|
|
Asset Derivatives
|
|
|
|
|
Liability Derivatives
|
|
(Dollars in thousands)
|
|
Location
|
|
2017
|
|
|
2016
|
|
|
Location
|
|
2017
|
|
|
2016
|
|
Derivatives designated in fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Other assets, current
|
|
$
|
13
|
|
|
$
|
32
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate contracts
|
|
Other assets,
non-current
|
|
|
|
|
|
|
215
|
|
|
Other long-term obligations
|
|
|
|
|
|
|
91
|
|
|
|
|
|
$
|
13
|
|
|
$
|
247
|
|
|
|
|
$
|
—
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Other assets,
non-current
|
|
$
|
1,156
|
|
|
$
|
1,148
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
The following table details the effect of derivatives on our
Consolidated Statements of Income
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Location
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Derivatives designated in fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on interest rate contracts
1
|
|
Interest expense
|
|
$
|
413
|
|
|
$
|
805
|
|
|
$
|
1,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income, net of tax (effective portion)
|
|
|
|
$
|
(145
|
)
|
|
$
|
916
|
|
|
$
|
—
|
|
Loss reclassified from accumulated other comprehensive income (effective portion)
1
|
|
Interest expense
|
|
$
|
(149
|
)
|
|
$
|
(215
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Lumber price contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on lumber price swap
|
|
Gain on lumber price swap
|
|
$
|
1,088
|
|
|
$
|
—
|
|
|
$
|
—
|
|
1
|
Realized gains and losses on interest rate contracts consist of net cash received or paid and interest accruals on the interest rate swaps during the periods. Net cash received or paid is included in the supplemental cash flow information within interest, net of amounts capitalized in the
Consolidated Statements of Cash Flows
.
|
NOTE 11.
FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of our financial instruments as of December 31 are as follows:
|
|
2017
|
|
|
2016
|
|
(Dollars in thousands)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Cash and cash equivalents (Level 1)
|
|
$
|
120,457
|
|
|
$
|
120,457
|
|
|
$
|
82,584
|
|
|
$
|
82,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets related to interest rate
swaps (Level 2)
|
|
$
|
1,169
|
|
|
$
|
1,169
|
|
|
$
|
1,395
|
|
|
$
|
1,395
|
|
Derivative liabilities related to interest rate
swaps (Level 2)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(91
|
)
|
|
$
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion (Level 2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans
|
|
$
|
(343,500
|
)
|
|
$
|
(345,222
|
)
|
|
$
|
(349,500
|
)
|
|
$
|
(350,909
|
)
|
Senior notes
|
|
|
(149,528
|
)
|
|
|
(161,063
|
)
|
|
|
(149,271
|
)
|
|
|
(164,250
|
)
|
Revenue bonds
|
|
|
(65,735
|
)
|
|
|
(63,967
|
)
|
|
|
(65,735
|
)
|
|
|
(62,205
|
)
|
Medium-term notes
|
|
|
(17,250
|
)
|
|
|
(18,227
|
)
|
|
|
(22,250
|
)
|
|
|
(23,926
|
)
|
Total long-term debt
1
|
|
$
|
(576,013
|
)
|
|
$
|
(588,479
|
)
|
|
$
|
(586,756
|
)
|
|
$
|
(601,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company owned life insurance (COLI) (Level 3)
|
|
$
|
1,996
|
|
|
$
|
1,996
|
|
|
$
|
70
|
|
|
$
|
70
|
|
1
|
The carrying amount of long-term debt includes principal and unamortized discounts
.
|
A framework has been established for measuring fair value, which provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are described below.
Level 1
inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2
inputs to the valuation methodology include:
|
•
|
quoted prices for similar assets or liabilities in active markets;
|
|
•
|
quoted prices for identical or similar assets or liabilities in inactive markets;
|
58
|
•
|
inputs other than quoted prices that are observable for the as
set or liability; and
|
|
•
|
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
If the asset or liability has a specified (contractual) term, the Level 2 input must correspond to substantially the full term of the asset or liability.
The fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
|
•
|
For cash and cash-equivalents, the carrying amount approximates fair value due to the short-term nature of these financial instruments.
|
|
•
|
The fair value of the interest rate swaps was determined using 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 the quoted market prices for the same or 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 COLI, the amount at which it could be redeemed, is used to estimate fair value because market prices are not readily available.
|
COMPANY OWNED LIFE INSURANCE
We are the beneficiary of insurance policies on the lives of certain current and past officers and employees. We have recognized the amount that could be realized upon surrender of the insurance policies in other assets in our
Consolidated Balance Sheets
. COLI expense and income are included in selling, general and administrative expenses and interest expense, respectively, in the
Consolidated Statements of Income
. The net effect of these amounts on income was not significant for the years ended December 31, 2017, 2016 and 2015. Cash receipts and disbursements are recorded as investing activities in the
Consolidated Statements of Cash Flows
.
NOTE 12.
SAVINGS PLANS, PENSION PLANS AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS
SAVINGS PLANS
Substantially all of our employees are eligible to participate in 401(k) savings plans. In 2017, 2016 and 2015, we made matching 401(k) contributions on behalf of our employees of $2.4 million, $2.1 million and $2.1 million, respectively.
Certain eligible employees who earn awards under our annual incentive plan are permitted to defer receipt of those awards. These employees may defer receipt of a minimum of 50% and a maximum of 100% of the award pursuant to rules established under our Management Deferred Compensation Plan. Eligible employees may also defer up to 50% of their base salary under the Management Deferred Compensation Plan. At the employee's election, deferrals may be deemed invested in a company stock unit account, a directed investment account with certain deemed investments available under the 401(k) Plan or a combination of these investment vehicles. If company stock units are elected, dividend equivalents are credited to the units
.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
On January 1, 2011, we froze our pension plans to any new salaried and hourly non-represented employees hired after that date.
59
Effective January 1, 2010
, we restructured our other postretirement benefit plans
(OPEB)
. The level of health care subsidy was frozen for reti
rees so that all future increments in health care costs will be borne by the retirees. In addition, for retirees under age 65, a high deductible medical plan was created and all other existing health care plans were terminated. For retirees age 65 or over,
the medical plan is divided into two components, with the company continuing to self-insure prescription drugs and providing a fully-insured medical supplemental plan through AARP/United Healthcare. Both health care plans require the retiree to contribute
amounts in excess of the company subsidy in order to continue coverage. Finally, vision, dental and life insurance coverage for these retirees were terminated. The effect of these retiree plan changes was a reduction in the accumulated postretirement bene
fit obligation of $76.7 million, which was recognized
in
Accumulated Other Comprehensive Loss
as of December 31, 2009
and will be amortized through 2019
.
We use a December 31 measurement date for our benefit plans and obligations. We recognize the underfunded status of our defined benefit pension plans and OPEB obligations on our
Consolidated Balance Sheets
. We recognize changes in the funded status in the year in which changes occur through accumulated other comprehensive income and amortize actuarial gains and losses through the
Consolidated Statements of Income
as net periodic cost (benefit).
The change in benefit obligation, change in plan assets and funded status for company-sponsored benefit plans and obligations are as follows:
|
|
Pension Plans
|
|
|
OPEB
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Benefit obligation at beginning of year
|
|
$
|
(385,461
|
)
|
|
$
|
(382,071
|
)
|
|
$
|
(33,337
|
)
|
|
$
|
(35,471
|
)
|
Service cost
|
|
|
(6,753
|
)
|
|
|
(6,508
|
)
|
|
|
(14
|
)
|
|
|
(14
|
)
|
Interest cost
|
|
|
(16,096
|
)
|
|
|
(17,020
|
)
|
|
|
(1,262
|
)
|
|
|
(1,421
|
)
|
Actuarial (loss) gain
|
|
|
(15,876
|
)
|
|
|
(13,997
|
)
|
|
|
471
|
|
|
|
(313
|
)
|
Benefits paid
|
|
|
31,815
|
|
|
|
34,135
|
|
|
|
3,793
|
|
|
|
3,882
|
|
Benefit obligation at end of year
|
|
$
|
(392,371
|
)
|
|
$
|
(385,461
|
)
|
|
$
|
(30,349
|
)
|
|
$
|
(33,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
289,675
|
|
|
$
|
292,200
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
|
|
49,158
|
|
|
|
28,626
|
|
|
|
—
|
|
|
|
—
|
|
Employer contributions and benefit payments
|
|
|
6,844
|
|
|
|
2,984
|
|
|
|
3,794
|
|
|
|
3,882
|
|
Benefits paid
|
|
|
(31,815
|
)
|
|
|
(34,135
|
)
|
|
|
(3,794
|
)
|
|
|
(3,882
|
)
|
Fair value of plan assets at end of year
|
|
$
|
313,862
|
|
|
$
|
289,675
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
(1,629
|
)
|
|
$
|
(1,824
|
)
|
|
$
|
(3,705
|
)
|
|
$
|
(4,015
|
)
|
Noncurrent liabilities
|
|
|
(76,880
|
)
|
|
|
(93,962
|
)
|
|
|
(26,644
|
)
|
|
|
(29,322
|
)
|
Funded status
|
|
$
|
(78,509
|
)
|
|
$
|
(95,786
|
)
|
|
$
|
(30,349
|
)
|
|
$
|
(33,337
|
)
|
The accumulated benefit obligation for all defined benefit pension plans is determined using the actuarial present value of the vested benefits to which the employee is currently entitled and the employee’s expected date of separation for retirement and was $389.6 million and $379.5 million at December 31, 2017 and 2016, respectively.
PENSION ASSETS
We utilize formal investment policy guidelines for our company-sponsored pension plan assets. Management’s responsibility is that the investment policy and guidelines are adhered to and the investment objectives are met.
The general policy states that plan assets will be invested to seek the greatest return consistent with the fiduciary character of the pension funds and to allow the plans to meet the need for timely pension benefit payments. The specific investment guidelines stipulate that management will maintain adequate liquidity for meeting expected benefit payments by reviewing, on a timely basis, contribution and benefit payment levels and appropriately revise long-term and short-term asset allocations. Management takes reasonable and prudent steps to preserve the value of pension fund assets and to avoid the risk of large losses. Major steps taken to provide this protection include the following:
60
|
•
|
Assets are diversified among various asset classes, such as domestic equities, global equities, fixed income, convertible securities and liquid reserves. The lo
ng-term asset allocation ranges are as follows:
|
Domestic and international equities
|
24%
|
-
|
48%
|
Fixed income securities
|
38%
|
-
|
58%
|
Alternatives, which may include equities and fixed income securities
|
12%
|
-
|
18%
|
Cash and cash equivalents
|
0%
|
-
|
5%
|
|
•
|
Periodic reviews of allocations within these ranges are made to determine what adjustments should be made based on changing economic and market conditions and specific liquidity requirements.
|
|
•
|
Assets are managed by professional investment managers and may be invested in separately managed accounts or commingled funds. Assets are diversified by selecting different investment managers for each asset class and by limiting assets under each manager to no more than 25% of the total pension fund.
|
|
•
|
Assets are not invested in Potlatch stock.
|
The investment guidelines also provide that the individual investment managers are expected to achieve a reasonable rate of return over a market cycle. Emphasis will be placed on long-term performance versus short-term market aberrations. Factors to be considered in determining reasonable rates of return include performance achieved by a diverse cross section of other investment managers, performance of commonly used benchmarks (e.g., Russell 2500 Index, Barclays Long Credit Index, Morgan Stanley Capital International Index), actuarial assumptions for return on plan investments and specific performance guidelines given to individual investment managers.
The asset allocations of the pension benefit plans’ assets at December 31 by asset category are as follows:
|
|
Pension Plans
|
|
Asset Category
|
|
|
2017
|
|
|
|
2016
|
|
Domestic and international equities
|
|
|
37
|
%
|
|
|
36
|
%
|
Fixed income securities
|
|
|
47
|
|
|
|
48
|
|
Other (includes cash and cash equivalents and alternatives)
|
|
|
16
|
|
|
|
16
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
The pension assets are stated at fair value. Refer to
Note 11: Financial Instruments
for a discussion of the framework used to measure fair value.
Following is a description of the valuation methodologies used for assets measured at fair value:
|
•
|
Level 1 assets include cash and cash equivalents, corporate common and preferred stocks with quoted market prices on major securities markets, and investments in registered investment company funds for which market quotations are generally readily available on the primary market or exchange on which they are traded.
|
|
•
|
Level 2 assets consist primarily of collective investment trust funds, which are valued at their respective net asset value (NAV) and fully redeemable in the near-term.
|
|
•
|
Investments in funds that may not be fully redeemed in the near-term are generally classified in Level 3. We had no Level 3 investments at December 31, 2017 or 2016.
|
61
Fair value measurements are as follows:
(Dollars in thousands)
|
|
December 31, 2017
|
|
Asset Category
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
3,004
|
|
|
$
|
—
|
|
|
$
|
3,004
|
|
Domestic equity securities
1
|
|
|
29,178
|
|
|
|
28,382
|
|
|
|
57,560
|
|
International equity securities
2
|
|
|
—
|
|
|
|
28,413
|
|
|
|
28,413
|
|
Emerging markets
3
|
|
|
12
|
|
|
|
29,245
|
|
|
|
29,257
|
|
Fixed income securities
4
|
|
|
148,833
|
|
|
|
—
|
|
|
|
148,833
|
|
Alternatives
5
|
|
|
—
|
|
|
|
46,795
|
|
|
|
46,795
|
|
Total
|
|
$
|
181,027
|
|
|
$
|
132,835
|
|
|
$
|
313,862
|
|
(Dollars in thousands)
|
|
December 31, 2016
|
|
Asset Category
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
2,845
|
|
|
$
|
—
|
|
|
$
|
2,845
|
|
Domestic equity securities
1
|
|
|
25,409
|
|
|
|
26,279
|
|
|
|
51,688
|
|
International equity securities
2
|
|
|
—
|
|
|
|
26,555
|
|
|
|
26,555
|
|
Emerging markets
3
|
|
|
12
|
|
|
|
26,391
|
|
|
|
26,403
|
|
Fixed income securities
4
|
|
|
138,897
|
|
|
|
—
|
|
|
|
138,897
|
|
Alternatives
5
|
|
|
—
|
|
|
|
43,287
|
|
|
|
43,287
|
|
Total
|
|
$
|
167,163
|
|
|
$
|
122,512
|
|
|
$
|
289,675
|
|
1
|
Level 1 assets are managed investments in U.S. small/mid-cap equities that track the Russell 2500 Growth index or Russell 2500 Value index. Level 2 assets are collective investments, which are invested in U.S. large-cap equities that track the S&P 500.
|
2
|
Level 2 assets are collective investments in equity funds of developed markets outside of the United States and Canada that track the MSCI EAFE Value index or MSCI EAFE Growth index.
|
3
|
Level 1 assets are mutual funds which are invested in the common stock of companies located (or with primary operations) in emerging markets that track the MSCI Emerging Markets index. Level 2 assets are collective investments in the common stock of companies located (or with primary operations) in emerging markets that track the MSCI Emerging Markets index.
|
4
|
Level 1 assets are mutual funds and investments in a diversified portfolio of fixed income instruments of varying maturities representing corporates, sovereign debt, U.S. treasuries and municipals that track the Barclay's Long-term Credit index.
|
5
|
Level 2 assets are collective investments in inflation-indexed bonds, securities of real estate companies, commodity index-linked notes, fixed income securities, foreign currencies, securities of natural resource companies, master limited partnerships, publicly listed infrastructure companies, floating-rate debt, securities of global agriculture companies and securities of global timber companies.
|
PLAN ACTIVITY
Pre-tax components of net periodic cost (benefit) recognized in our
Consolidated Statements of Income
were as follows:
|
|
Pension Plans
|
|
|
OPEB
|
|
(Dollars in thousands)
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
Service cost
|
|
$
|
6,753
|
|
|
$
|
6,508
|
|
|
$
|
6,159
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
$
|
22
|
|
Interest cost
|
|
|
16,096
|
|
|
|
17,020
|
|
|
|
17,012
|
|
|
|
1,262
|
|
|
|
1,421
|
|
|
|
1,456
|
|
Expected return on plan assets
|
|
|
(18,406
|
)
|
|
|
(18,999
|
)
|
|
|
(20,804
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
|
|
288
|
|
|
|
518
|
|
|
|
605
|
|
|
|
(8,877
|
)
|
|
|
(8,877
|
)
|
|
|
(9,312
|
)
|
Amortization of actuarial loss
|
|
|
14,484
|
|
|
|
16,339
|
|
|
|
17,937
|
|
|
|
1,537
|
|
|
|
1,717
|
|
|
|
2,047
|
|
Net periodic cost (benefit)
|
|
$
|
19,215
|
|
|
$
|
21,386
|
|
|
$
|
20,909
|
|
|
$
|
(6,064
|
)
|
|
$
|
(5,725
|
)
|
|
$
|
(5,787
|
)
|
62
Other amounts recognized in our
Consolidated Statements of Comprehensive Income
were as follows:
|
|
Pension Plans
|
|
|
OPEB
|
|
(Dollars in thousands)
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
Net amount at beginning of year
|
|
$
|
120,627
|
|
|
$
|
128,244
|
|
|
$
|
134,261
|
|
|
$
|
(9,182
|
)
|
|
$
|
(13,741
|
)
|
|
$
|
(15,869
|
)
|
Amounts arising during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
|
(14,874
|
)
|
|
|
4,370
|
|
|
|
8,680
|
|
|
|
(471
|
)
|
|
|
313
|
|
|
|
(3,777
|
)
|
Taxes
|
|
|
3,869
|
|
|
|
(1,704
|
)
|
|
|
(3,386
|
)
|
|
|
121
|
|
|
|
(122
|
)
|
|
|
1,473
|
|
Net amount arising during the period
|
|
|
(11,005
|
)
|
|
|
2,666
|
|
|
|
5,294
|
|
|
|
(350
|
)
|
|
|
191
|
|
|
|
(2,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service (cost) credit
|
|
|
(288
|
)
|
|
|
(518
|
)
|
|
|
(605
|
)
|
|
|
8,877
|
|
|
|
8,877
|
|
|
|
9,312
|
|
Amortization of actuarial loss
|
|
|
(14,484
|
)
|
|
|
(16,339
|
)
|
|
|
(17,937
|
)
|
|
|
(1,537
|
)
|
|
|
(1,717
|
)
|
|
|
(2,047
|
)
|
Taxes
|
|
|
5,761
|
|
|
|
6,574
|
|
|
|
7,231
|
|
|
|
(2,863
|
)
|
|
|
(2,792
|
)
|
|
|
(2,833
|
)
|
Net reclassifications during the period
|
|
|
(9,011
|
)
|
|
|
(10,283
|
)
|
|
|
(11,311
|
)
|
|
|
4,477
|
|
|
|
4,368
|
|
|
|
4,432
|
|
Net amount at end of year
|
|
$
|
100,611
|
|
|
$
|
120,627
|
|
|
$
|
128,244
|
|
|
$
|
(5,055
|
)
|
|
$
|
(9,182
|
)
|
|
$
|
(13,741
|
)
|
Amounts recognized in accumulated other comprehensive loss on our
Consolidated Balance Sheets
, net of tax, consist of:
|
|
Pension Plans
|
|
|
OPEB
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Net loss
|
|
$
|
100,070
|
|
|
$
|
120,006
|
|
|
$
|
10,165
|
|
|
$
|
8,778
|
|
Prior service cost (credit)
|
|
|
541
|
|
|
|
621
|
|
|
|
(15,220
|
)
|
|
|
(17,960
|
)
|
Net amount recognized
|
|
$
|
100,611
|
|
|
$
|
120,627
|
|
|
$
|
(5,055
|
)
|
|
$
|
(9,182
|
)
|
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next year are $16.6 million and $0.2 million, respectively. The estimated net loss and prior service credit for OPEB obligations that will be amortized from accumulated other comprehensive loss into net periodic benefit over the next year are $1.4 million and $8.9 million, respectively.
EXPECTED FUNDING AND BENEFIT PAYMENTS
We are required to make contributions of $10.1 million to our qualified pension plans in 2018. Our non-qualified pension plan and other postretirement employee benefit plans are unfunded and benefit payments are paid from our general assets. We estimate that we will make non-qualified pension plan and other postretirement employee benefit payments of $5.3 million in 2018, which are included below.
Estimated future benefit payments, which reflect expected future service are as follows for the years indicated:
(Dollars in thousands)
|
|
Pension Plans
|
|
|
OPEB
|
|
2018
|
|
$
|
28,536
|
|
|
$
|
3,704
|
|
2019
|
|
$
|
28,264
|
|
|
$
|
3,454
|
|
2020
|
|
$
|
27,951
|
|
|
$
|
3,231
|
|
2021
|
|
$
|
27,588
|
|
|
$
|
2,944
|
|
2022
|
|
$
|
27,255
|
|
|
$
|
2,760
|
|
2022–2026
|
|
$
|
128,115
|
|
|
$
|
10,557
|
|
ACTUARIAL ASSUMPTIONS
The weighted average assumptions used to determine the benefit obligation as of December 31 were:
|
|
Pension Plans
|
|
|
OPEB
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
Discount rate
|
|
|
3.85
|
%
|
|
|
4.40
|
%
|
|
|
4.65
|
%
|
|
|
3.65
|
%
|
|
|
4.10
|
%
|
|
|
4.25
|
%
|
Rate of salaried compensation increase
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
63
The weighted average assumptions used to determine the net periodic cost (benefit) for the years ended December 3
1 were:
|
|
Pension Plans
|
|
|
OPEB
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
Discount rate
|
|
|
4.40
|
%
|
|
|
4.65
|
%
|
|
|
4.25
|
%
|
|
|
4.10
|
%
|
|
|
4.25
|
%
|
|
|
3.90
|
%
|
Expected return on plan assets
|
|
|
6.50
|
%
|
|
|
6.50
|
%
|
|
|
6.75
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Rate of salaried compensation increase
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The discount rate used in the determination of pension and other postretirement employee benefit obligations was calculated using hypothetical bond portfolios to match the expected benefit payments under each of our pension plans and other postretirement employee benefit obligations based on bonds available at each year-end with a rating of "AA" or better. The portfolios were well-diversified over corporate industrial, corporate financial, municipal, federal and foreign government issuers.
The expected return on plan assets assumption is based upon an analysis of historical long-term returns for various investment categories, as measured by appropriate indices. These indices are weighted based upon the extent to which plan assets are invested in the particular categories in arriving at our determination of a composite expected return. The expected rate of return assumption that will be used to determine net periodic cost for 2018 is 6.25%.
A decrease in the discount rate or the rate of expected return on plan assets, all other assumptions remaining the same, would increase net periodic cost. A 25 basis point decrease in the pension discount rate would increase net periodic cost by approximately $0.7 million in 2018 and increase the projected benefit obligation by approximately $10.3 million as of December 31, 2018. A 25 basis point decrease in the assumption for the expected return on plan assets would increase net periodic cost by approximately $0.7 million in 2018. The actual rates of return on plan assets may, and do, vary significantly from the assumption used. A 25 basis point decrease in the OPEB discount rate would be de minimis to the annual net periodic cost.
The assumed health care cost trend rate used to calculate other postretirement employee benefit obligations as of December 31, 2017 was 8.38% for a certain group of participants under age 65 in our hourly plan and our Arkansas participants covered by a collective bargaining agreement, grading ratably to an assumption of 4.50% in 2038. The actual rates of health care cost increases may vary significantly from the assumption used because of unanticipated changes in health care costs.
A one percentage point change in the health care cost trend rates would have the following effects on our December 31, 2017
Consolidated Financial Statements
:
(Dollars in thousands)
|
|
1% Increase
|
|
|
1% Decrease
|
|
Effect on total service cost plus interest cost
|
|
$
|
28
|
|
|
$
|
(24
|
)
|
Effect on accumulated postretirement benefit obligation
|
|
$
|
443
|
|
|
$
|
(373
|
)
|
NOTE 13. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables detail the changes in our accumulated other comprehensive loss (AOCL) on our
Condensed Consolidated Balance Sheets
for the years ended December 31, 2017 and 2016, net of tax.
(Dollars in thousands)
|
|
Gains and losses on cash flow hedge
|
|
|
Pension Plans
|
|
|
OPEB
|
|
|
Total
|
|
Balance at January 1, 2017
|
|
$
|
(701
|
)
|
|
$
|
120,627
|
|
|
$
|
(9,182
|
)
|
|
$
|
110,744
|
|
Amounts arising during the period
|
|
|
145
|
|
|
|
(11,005
|
)
|
|
|
(350
|
)
|
|
|
(11,210
|
)
|
Amounts reclassified from AOCL
|
|
|
(149
|
)
|
|
|
(9,011
|
)
|
|
|
4,477
|
|
|
|
(4,683
|
)
|
Net change
|
|
|
(4
|
)
|
|
|
(20,016
|
)
|
|
|
4,127
|
|
|
|
(15,893
|
)
|
Balance at December 31, 2017
|
|
$
|
(705
|
)
|
|
$
|
100,611
|
|
|
$
|
(5,055
|
)
|
|
$
|
94,851
|
|
64
(Dollars in thousands)
|
|
Gains and losses on cash flow hedge
|
|
|
Pension Plans
|
|
|
OPEB
|
|
|
Total
|
|
Balance at January 1, 2016
|
|
$
|
—
|
|
|
$
|
128,244
|
|
|
$
|
(13,741
|
)
|
|
$
|
114,503
|
|
Amounts arising during the period
|
|
|
(916
|
)
|
|
|
2,666
|
|
|
|
191
|
|
|
|
1,941
|
|
Amounts reclassified from AOCL
|
|
|
215
|
|
|
|
(10,283
|
)
|
|
|
4,368
|
|
|
|
(5,700
|
)
|
Net change
|
|
|
(701
|
)
|
|
|
(7,617
|
)
|
|
|
4,559
|
|
|
|
(3,759
|
)
|
Balance at December 31, 2016
|
|
$
|
(701
|
)
|
|
$
|
120,627
|
|
|
$
|
(9,182
|
)
|
|
$
|
110,744
|
|
Amounts in parenthesis indicate credits.
See
Note 10: Derivative Instruments
and
Note 12: Pension and Other Postretirement Employee Benefits
for additional information.
NOTE 14.
EQUITY-BASED COMPENSATION PLANS
As of December 31, 2017, we had two stock incentive plans under which performance stock awards (PSAs), restricted stock units (RSUs) and deferred compensation stock equivalent units were outstanding. All of these plans have received shareholder approval. We were originally authorized to issue up to 1.6 million shares and 1.0 million shares under our 2005 Stock Incentive Plan and 2014 Stock Incentive Plan, respectively. At December 31, 2017, approximately 0.4 million shares were authorized for future awards. We issue new shares of common stock to settle PSAs, RSUs and deferred compensation stock equivalent units. We estimate forfeitures each period.
The following table details our compensation expense and the related income tax benefit as of December 31:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Employee equity-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance stock awards
|
|
$
|
3,582
|
|
|
$
|
3,437
|
|
|
$
|
3,877
|
|
Restricted stock units
|
|
|
1,140
|
|
|
|
953
|
|
|
|
881
|
|
Total employee equity-based compensation expense
|
|
$
|
4,722
|
|
|
$
|
4,390
|
|
|
$
|
4,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation stock equivalent units expense
|
|
$
|
657
|
|
|
$
|
732
|
|
|
$
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax benefit recognized for shared-based payment awards
|
|
$
|
379
|
|
|
$
|
317
|
|
|
$
|
319
|
|
PERFORMANCE STOCK 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.
A Monte Carlo simulation method is used to estimate the stock prices of Potlatch and the selected peer companies at the end of the three-year performance period. The expected volatility of each company’s stock price and covariance of returns among the peer companies are key assumptions within the Monte Carlo simulation. Historical volatility over a term similar to the performance period is considered a reasonable proxy for forecasted volatility. Likewise, because the returns of Potlatch and the peer group companies are correlated, the covariance, a measure of how two variables tend to move together, is calculated over a historical term similar to the performance period and applied in the simulations. The simulations use the stock prices of Potlatch and the peer group of companies as of the award date as a starting point. Multiple simulations are generated, resulting in share
65
prices and total shareholder return values for Potlatch and the peer group of companies. For each simulation, the total shareholder return of Potlatch is ran
ked against that of the peer group of companies. The future value of the performance share unit is calculated based on a multiplier for the percentile ranking and then discounted to present value. The discount rate is the risk-free rate as of the award dat
e for a term consistent with the performance period. Awards are also credited with dividend equivalents at the end of the performance period, and as a result, award values are not adjusted for dividends.
The following table presents the key inputs used in calculating the fair value of the PSAs in 2017, 2016 and 2015, and the resulting fair values:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Stock price as of valuation date
|
|
$
|
43.60
|
|
|
$
|
25.92
|
|
|
$
|
40.00
|
|
Risk-free rate
|
|
|
1.61
|
%
|
|
|
0.88
|
%
|
|
|
1.07
|
%
|
Expected volatility
|
|
|
24.22
|
%
|
|
|
23.82
|
%
|
|
|
21.09
|
%
|
Expected dividends
|
|
|
3.44
|
%
|
|
|
5.79
|
%
|
|
|
3.75
|
%
|
Expected term (years)
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
3.00
|
|
Fair value of a performance share
|
|
$
|
53.85
|
|
|
$
|
30.02
|
|
|
$
|
36.71
|
|
The following table summarizes outstanding PSAs as of December 31, 2017, 2016 and 2015, and the changes during those years:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
(Dollars in thousands, except per share amounts)
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested shares outstanding at January 1
|
|
|
203,788
|
|
|
$
|
32.59
|
|
|
|
161,049
|
|
|
$
|
41.26
|
|
|
|
160,233
|
|
|
$
|
53.86
|
|
Granted
|
|
|
78,033
|
|
|
$
|
53.85
|
|
|
|
125,469
|
|
|
$
|
30.02
|
|
|
|
78,974
|
|
|
$
|
36.71
|
|
Vested
|
|
|
(78,129
|
)
|
|
$
|
36.71
|
|
|
|
(82,730
|
)
|
|
$
|
45.57
|
|
|
|
(77,078
|
)
|
|
$
|
62.78
|
|
Forfeited
|
|
|
(3,061
|
)
|
|
$
|
34.68
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(1,080
|
)
|
|
$
|
41.29
|
|
Unvested shares outstanding at December 31
|
|
|
200,631
|
|
|
$
|
39.19
|
|
|
|
203,788
|
|
|
$
|
32.59
|
|
|
|
161,049
|
|
|
$
|
41.26
|
|
Total grant date fair value of share awards
vested during the year
|
|
$
|
2,868
|
|
|
|
|
|
|
$
|
3,770
|
|
|
|
|
|
|
$
|
4,839
|
|
|
|
|
|
Aggregate intrinsic value of unvested share
awards at December 31
|
|
$
|
10,011
|
|
|
|
|
|
|
$
|
8,488
|
|
|
|
|
|
|
$
|
4,697
|
|
|
|
|
|
As of December 31, 2017, there was $4.0 million of unrecognized compensation cost related to unvested PSAs, which is expected to be recognized over a weighted average period of 1.4 years.
RESTRICTED STOCK UNITS
Our 2005 Stock Incentive Plan and 2014 Stock Incentive Plan also allow for awards to be issued in the form of RSU grants. During 2017, 2016 and 2015, certain officers and other employees of the company were granted RSU awards that will 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.
66
The following table summarizes outstanding RSU awards as of December 31, 201
7
, 201
6
and 201
5
, and the changes during those years:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
(Dollars in thousands, except per share amounts)
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested shares outstanding at January 1
|
|
|
71,420
|
|
|
$
|
31.61
|
|
|
|
44,531
|
|
|
$
|
40.95
|
|
|
|
32,455
|
|
|
$
|
42.24
|
|
Granted
|
|
|
26,507
|
|
|
$
|
43.64
|
|
|
|
43,320
|
|
|
$
|
26.08
|
|
|
|
27,820
|
|
|
$
|
39.99
|
|
Vested
|
|
|
(29,039
|
)
|
|
$
|
39.65
|
|
|
|
(16,431
|
)
|
|
$
|
39.92
|
|
|
|
(15,385
|
)
|
|
$
|
44.50
|
|
Forfeited
|
|
|
(1,017
|
)
|
|
$
|
31.63
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(359
|
)
|
|
$
|
40.27
|
|
Unvested shares outstanding at December 31
|
|
|
67,871
|
|
|
$
|
32.87
|
|
|
|
71,420
|
|
|
$
|
31.61
|
|
|
|
44,531
|
|
|
$
|
40.95
|
|
Total grant date fair value of RSU awards
vested during the year
|
|
$
|
1,151
|
|
|
|
|
|
|
$
|
656
|
|
|
|
|
|
|
$
|
289
|
|
|
|
|
|
Aggregate intrinsic value of unvested RSU
awards at December 31
|
|
$
|
3,387
|
|
|
|
|
|
|
$
|
2,975
|
|
|
|
|
|
|
$
|
1,347
|
|
|
|
|
|
As of December 31, 2017, there was $1.1 million of total unrecognized compensation cost related to outstanding RSU awards, which is expected to be recognized over a weighted average period of 1.4 years.
DEFERRED COMPENSATION STOCK EQUIVALENT UNITS
A long-term incentive award is granted annually to our directors, and payable upon a director's separation from service. Directors may also elect to defer their annual retainers, payable in the form of stock. All stock unit equivalent accounts are credited with dividend equivalents. As of December 31, 2017, there were 141,938 shares outstanding that will be distributed in the future to directors as common stock.
Issuance of restricted stock units awarded to certain officers and employees may also be deferred. All stock unit equivalent accounts are credited with dividend equivalents. As of December 31, 2017, there were 74,067 RSUs which had vested, but issuance of the related stock had been deferred.
NOTE 15. INCOME TAXES
As a REIT, we generally are not subject to federal and state corporate income taxes on income from investments in real estate that we distribute to our shareholders. We are required to pay federal and state corporate income taxes on income from our non-real estate investments which are held in taxable REIT subsidiaries (TRS). These activities are principally comprised of our wood products manufacturing operations and certain real estate investments held for sale.
As of January 1, 2016, we are no longer subject to corporate income taxes on built-in gains, the excess of fair market value over tax basis, on sales of real property held at the time of our REIT conversion.
On December 22, 2017, H.R. 1, Tax Cuts and Jobs Act (the Act) was enacted and included broad tax reforms. Under the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21% effective January 1, 2018, which required a remeasurement of our deferred tax assets and liabilities as of the date of enactment. Accordingly, net deferred tax assets, including the related valuation allowance, were reduced by $10.7 million and the change was recorded as an increase to the 2017 tax provision.
Income tax expense consists of the following for the years ended December 31:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
$
|
16,657
|
|
|
$
|
(6,178
|
)
|
|
$
|
128
|
|
Deferred
|
|
|
14,325
|
|
|
|
2,143
|
|
|
|
1,097
|
|
Net operating loss carryforwards
|
|
|
1,039
|
|
|
|
(290
|
)
|
|
|
(6,793
|
)
|
Income tax provision (benefit)
|
|
$
|
32,021
|
|
|
$
|
(4,325
|
)
|
|
$
|
(5,568
|
)
|
67
Income tax expense differs from the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes due to the following for the years ended December 31:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
U.S. federal statutory income tax
|
|
$
|
41,466
|
|
|
$
|
2,314
|
|
|
$
|
9,151
|
|
REIT income not subject to federal income tax
|
|
|
(20,651
|
)
|
|
|
(7,199
|
)
|
|
|
(14,110
|
)
|
U.S. tax rate change on deferred tax assets and liabilities
|
|
|
10,528
|
|
|
|
—
|
|
|
|
—
|
|
Intercompany profit-in-inventory elimination adjustment
|
|
|
—
|
|
|
|
1,465
|
|
|
|
—
|
|
Change in valuation allowance
|
|
|
140
|
|
|
|
162
|
|
|
|
488
|
|
State income taxes, net of federal income tax
|
|
|
2,608
|
|
|
|
(740
|
)
|
|
|
(838
|
)
|
Domestic production activities deduction
|
|
|
(1,511
|
)
|
|
|
(2
|
)
|
|
|
—
|
|
Permanent book-tax differences
|
|
|
(252
|
)
|
|
|
(218
|
)
|
|
|
(70
|
)
|
Research and development credits
|
|
|
(294
|
)
|
|
|
(689
|
)
|
|
|
—
|
|
All other items
|
|
|
(13
|
)
|
|
|
582
|
|
|
|
(189
|
)
|
Income tax provision (benefit)
|
|
$
|
32,021
|
|
|
$
|
(4,325
|
)
|
|
$
|
(5,568
|
)
|
Effective tax rate
|
|
|
27.0
|
%
|
|
|
(65.4
|
%)
|
|
|
(21.3
|
%)
|
The tax effects of significant temporary differences creating deferred tax assets and liabilities at December 31 were:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Pensions
|
|
$
|
19,439
|
|
|
$
|
37,423
|
|
Other postretirement employee benefits
|
|
|
7,891
|
|
|
|
13,002
|
|
Net operating loss carryforwards
|
|
|
54
|
|
|
|
983
|
|
Inventories
|
|
|
353
|
|
|
|
443
|
|
Tax credits
|
|
|
2,443
|
|
|
|
2,207
|
|
Nondeductible accruals
|
|
|
2,566
|
|
|
|
2,067
|
|
Incentive compensation
|
|
|
1,131
|
|
|
|
1,643
|
|
Employee benefits
|
|
|
1,037
|
|
|
|
1,444
|
|
Other
|
|
|
88
|
|
|
|
120
|
|
Total deferred tax assets
|
|
|
35,002
|
|
|
|
59,332
|
|
Valuation allowance
|
|
|
(790
|
)
|
|
|
(650
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
34,212
|
|
|
|
58,682
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Timber and timberlands, net
|
|
|
(1,432
|
)
|
|
|
(2,165
|
)
|
Property, plant and equipment, net
|
|
|
(12,683
|
)
|
|
|
(14,018
|
)
|
Other
|
|
|
(301
|
)
|
|
|
(448
|
)
|
Total deferred tax liabilities
|
|
|
(14,416
|
)
|
|
|
(16,631
|
)
|
Deferred tax assets, net
|
|
$
|
19,796
|
|
|
$
|
42,051
|
|
As of December 31, 2017, we had no federal net operating loss carryforwards; state net operating loss and capital loss carryforwards were $1.2 million that expire from 2021 through 2030; and Idaho Investment Tax Credits were $3.1 million that expire from 2019 through 2031. We use the flow-through method of accounting for investment tax credits.
With the exception of the valuation allowance discussed below, we believe it is more likely than not that we will have sufficient future taxable income to realize our deferred tax assets.
68
Due to the impact of
the change in federal rate under the Act
, t
he valuation allowance on
our deferred tax assets increased during 201
7
by $0.
1
million, and was $0.
8
million as of December 31, 201
7
. The valuation allowance is related to certain Idaho Investment Tax Credit carryforwards we expect will expire prior to realization. During 201
6
, t
he valuation allowance increased from
$0.5
to $0.
7
million due to the actual use and expected future use of certain Idaho Investment Tax Credits.
The following table summarizes the tax years subject to examination by major taxing jurisdictions:
Jurisdiction
|
|
Years
|
Federal
|
|
2013 — 2017
|
Arkansas
|
|
2014 — 2017
|
Michigan
|
|
2013 — 2017
|
Minnesota
|
|
2013 — 2017
|
Idaho
|
|
2014 — 2017
|
As of December 31, 2017, we had $0.6 million of unrecognized tax benefits which, if recognized, would impact the effective tax rate. There was $0.9 unrecognized tax benefits at December 31, 2016 and no unrecognized tax benefits at December 31, 2015. We currently believe there is a reasonable possibility that the amounts of unrecognized tax benefits will significantly decrease in the next 12 months based on the closing of certain ongoing state tax examinations.
A reconciliation of the beginning and ending unrecognized tax benefits is as follows:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Balance at January 1
|
|
$
|
850
|
|
|
$
|
—
|
|
Additions for tax positions of prior years
|
|
|
8
|
|
|
|
850
|
|
Reduction for tax positions of prior years
|
|
|
(294
|
)
|
|
|
—
|
|
Balance at December 31
|
|
$
|
564
|
|
|
$
|
850
|
|
We reflect accrued interest related to tax obligations, as well as penalties, in our provision for income taxes. For the years ended December 31, 2017, 2016 and 2015, we recognized insignificant amounts related to interest and penalties in our tax provision. At December 31, 2017 and 2016, we had insignificant amounts of accrued interest related to tax obligations and no accrued interest receivable with respect to open tax refunds.
NOTE 16.
COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We have operating leases primarily for office space, machinery and equipment expiring at various dates through 2033. We expect that most leases will be renewed or replaced in the normal course of business as they expire.
As of December 31, 2017, the future minimum rental payments required under our operating leases are as follows:
(Dollars in thousands)
|
|
|
|
|
2018
|
|
$
|
4,570
|
|
2019
|
|
|
3,518
|
|
2020
|
|
|
2,662
|
|
2021
|
|
|
1,771
|
|
2022
|
|
|
874
|
|
2023 and thereafter
|
|
|
992
|
|
Total
|
|
$
|
14,387
|
|
Operating lease expense was $4.5 million, $4.2 million and $4.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
69
LEGAL MATTERS
In January 2007, the Environmental Protection Agency (EPA) notified us that we are a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Clean Water Act for cleanup of a site known as Avery Landing in northern Idaho. At the time we owned a portion of the land at the Avery Landing site, which we acquired in 1980 from the Milwaukee Railroad. The land we owned at the site and adjacent properties were contaminated with petroleum as a result of the Milwaukee Railroad's operations at the site prior to 1980. On July 5, 2011, the EPA issued an Action Memorandum for the Avery Landing site selecting contaminant extraction and off-site disposal as the remedial alternative. On May 23, 2012, we signed a consent order with the EPA pursuant to which we agreed to provide $1.75 million in funding for EPA cleanup on a portion of our property (including the adjacent riverbank owned by the Idaho Department of Lands). The EPA cleanup was completed in October 2012. On April 4, 2013, the EPA issued a unilateral administrative order requiring us to remediate the portion of the Avery Landing site that we owned. Our remediation was completed in October 2013. On September 25, 2015, the EPA sent us a letter asserting that the EPA and the Department of Transportation (the current owner of a portion of the adjacent property remediated by the EPA) (DOT) had incurred $9.8 million in unreimbursed response costs associated with the site and that we were liable for such costs.
We have executed six tolling agreements with the EPA and DOT suspending the statute of limitations on the claim until March 31, 2018 in order to facilitate negotiations of a final settlement and release. We accrued $0.2 million for this matter in the first quarter of 2016, an additional $0.8 million in the second quarter of 2016 and an additional $5.0 million in the third quarter of 2017.
On February 9, 2018, we executed a Consent Decree with the United States, acting on behalf of the Environmental Protection Agency and Department of Transportation, settling the United States’ claims against us for $6 million. On February 12, 2018 the United States filed a lawsuit against us in the United States District Court for the District of Idaho and lodged the Consent Decree with the Court. The United States will publish a Notice of Lodging of the Consent Decree in the Federal Register and after the expiration of a required 30-day public comment period, will advise the Court whether the Consent Decree may be entered. If the Consent Decree is not approved by the Court following the 30-day public comment period, we reserve all defenses to liability and the right to pursue all potentially responsible parties.
NOTE 17.
SEGMENT INFORMATION
Our businesses are organized into three reportable operating segments: Resource, Wood Products and Real Estate. Management activities include planting and harvesting trees and building and maintaining roads. The Resource segment also generates revenues from non-timber resources such as hunting leases, recreation permits and leases, mineral rights leases, biomass production and carbon sequestration. The Wood Products segment manufactures and markets lumber and plywood. The business of our Real Estate segment consists primarily of the sale of land holdings deemed non-strategic or identified as having higher and better use alternatives. The Real Estate segment engages in limited real estate subdivision activities through Potlatch TRS.
The reporting segments follow the same accounting policies used for our
Consolidated Financial Statements
, as described in the summary of significant accounting policies, with the exception of the valuation of inventories. All segment inventories are reported using the average cost method, and the LIFO reserve is recorded at the corporate level. Management evaluates a segment’s performance based upon profit or loss from operations before income taxes. Intersegment revenues are recorded based on prevailing market prices.
70
The following table presents business segment infor
mation for each of the past three years. Corporate information is included to reconcile segment data to the
Consolidated Financial Statements
.
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Resource
|
|
$
|
278,199
|
|
|
$
|
256,163
|
|
|
$
|
263,875
|
|
Wood Products
|
|
|
441,157
|
|
|
|
367,426
|
|
|
|
336,214
|
|
Real Estate
|
|
|
30,655
|
|
|
|
32,604
|
|
|
|
28,989
|
|
|
|
|
750,011
|
|
|
|
656,193
|
|
|
|
629,078
|
|
Intersegment Resource revenues
1
|
|
|
(71,416
|
)
|
|
|
(57,094
|
)
|
|
|
(53,742
|
)
|
Total consolidated revenues
|
|
$
|
678,595
|
|
|
$
|
599,099
|
|
|
$
|
575,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Resource
|
|
$
|
106,105
|
|
|
$
|
81,918
|
|
|
$
|
76,350
|
|
Wood Products
|
|
|
72,166
|
|
|
|
24,587
|
|
|
|
(5,235
|
)
|
Real Estate
2
|
|
|
18,576
|
|
|
|
(29,495
|
)
|
|
|
16,849
|
|
Eliminations and adjustments
|
|
|
(2,705
|
)
|
|
|
(3,001
|
)
|
|
|
3,283
|
|
|
|
|
194,142
|
|
|
|
74,009
|
|
|
|
91,247
|
|
Corporate
|
|
|
(48,619
|
)
|
|
|
(38,455
|
)
|
|
|
(32,340
|
)
|
Operating income
|
|
|
145,523
|
|
|
|
35,554
|
|
|
|
58,907
|
|
Interest expense, net
|
|
|
(27,049
|
)
|
|
|
(28,941
|
)
|
|
|
(32,761
|
)
|
Income before income taxes
|
|
$
|
118,474
|
|
|
$
|
6,613
|
|
|
$
|
26,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Resource
|
|
$
|
20,476
|
|
|
$
|
24,090
|
|
|
$
|
28,807
|
|
Wood Products
|
|
|
7,347
|
|
|
|
7,357
|
|
|
|
6,810
|
|
Real Estate
|
|
|
2
|
|
|
|
4
|
|
|
|
56
|
|
|
|
|
27,825
|
|
|
|
31,451
|
|
|
|
35,673
|
|
Corporate
|
|
|
607
|
|
|
|
760
|
|
|
|
951
|
|
Bond discount and deferred loan fees
|
|
|
1,480
|
|
|
|
1,979
|
|
|
|
1,481
|
|
Total depreciation, depletion and amortization
|
|
$
|
29,912
|
|
|
$
|
34,190
|
|
|
$
|
38,105
|
|
Basis of real estate sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
$
|
7,114
|
|
|
$
|
8,518
|
|
|
$
|
7,394
|
|
Elimination and adjustments
|
|
|
(287
|
)
|
|
|
(507
|
)
|
|
|
(382
|
)
|
Total basis of real estate sold
|
|
$
|
6,827
|
|
|
$
|
8,011
|
|
|
$
|
7,012
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Resource and Real Estate
3
|
|
$
|
670,240
|
|
|
$
|
662,852
|
|
|
$
|
837,630
|
|
Wood Products
|
|
|
154,479
|
|
|
|
150,855
|
|
|
|
131,103
|
|
|
|
|
824,719
|
|
|
|
813,707
|
|
|
|
968,733
|
|
Corporate
|
|
|
128,360
|
|
|
|
113,974
|
|
|
|
47,879
|
|
Total consolidated assets
|
|
$
|
953,079
|
|
|
$
|
927,681
|
|
|
$
|
1,016,612
|
|
Capital Expenditures:
4
|
|
|
|
|
|
|
|
|
|
|
|
|
Resource
|
|
$
|
15,120
|
|
|
$
|
13,311
|
|
|
$
|
13,497
|
|
Wood Products
|
|
|
10,723
|
|
|
|
5,491
|
|
|
|
18,482
|
|
Real Estate
|
|
|
87
|
|
|
|
111
|
|
|
|
184
|
|
|
|
|
25,930
|
|
|
|
18,913
|
|
|
|
32,163
|
|
Corporate
|
|
|
2,132
|
|
|
|
375
|
|
|
|
569
|
|
Total capital expenditures
|
|
$
|
28,062
|
|
|
$
|
19,288
|
|
|
$
|
32,732
|
|
1
|
Intersegment revenues are based on prevailing market prices of logs sold by our Resource segment to the Wood Products segment.
|
2
|
In the second quarter of 2016, we sold approximately 172,000 acres of timberlands located in central Idaho for $114 million at a loss of $48.5 million before taxes.
|
3
|
Assets are shown on a combined basis for the Resource and Real Estate segments, as we do not report assets separately to management for these segments.
|
4
|
Excludes the acquisition of timber and timberlands.
|
71
All of our wood products facilities and all other assets are located within the continental United States. Geographic information regarding our revenues is as follows:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
676,956
|
|
|
$
|
597,899
|
|
|
$
|
573,398
|
|
Canada
|
|
|
481
|
|
|
|
173
|
|
|
|
851
|
|
Mexico
|
|
|
1,158
|
|
|
|
1,027
|
|
|
|
919
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
168
|
|
Total consolidated revenues
|
|
$
|
678,595
|
|
|
$
|
599,099
|
|
|
$
|
575,336
|
|
One customer within our Resource segment accounted for slightly more than 10% of our total consolidated revenues in the years ended December 31, 2017, 2016 and 2015.
NOTE 18. FINANCIAL RESULTS BY QUARTER (UNAUDITED)
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
(Dollars in thousands, except per share amounts)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
149,681
|
|
|
$
|
127,896
|
|
|
$
|
163,229
|
|
|
$
|
141,495
|
|
|
$
|
190,441
|
|
|
$
|
174,027
|
|
|
$
|
175,244
|
|
|
$
|
155,681
|
|
Operating income (loss)
|
|
$
|
23,909
|
|
|
$
|
5,072
|
|
|
$
|
40,773
|
|
|
$
|
(34,228
|
)
|
|
$
|
43,793
|
|
|
$
|
38,994
|
|
|
$
|
37,048
|
|
|
$
|
25,716
|
|
Net income (loss)
|
|
$
|
16,921
|
|
|
$
|
157
|
|
|
$
|
24,244
|
|
|
$
|
(31,238
|
)
|
|
$
|
33,700
|
|
|
$
|
27,646
|
|
|
$
|
11,588
|
|
|
$
|
14,373
|
|
Net income (loss) per share
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.41
|
|
|
$
|
—
|
|
|
$
|
0.59
|
|
|
$
|
(0.77
|
)
|
|
$
|
0.83
|
|
|
$
|
0.68
|
|
|
$
|
0.28
|
|
|
$
|
0.35
|
|
Diluted
|
|
$
|
0.41
|
|
|
$
|
—
|
|
|
$
|
0.59
|
|
|
$
|
(0.77
|
)
|
|
$
|
0.82
|
|
|
$
|
0.68
|
|
|
$
|
0.28
|
|
|
$
|
0.35
|
|
1
|
Per share amounts are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share amounts may not equal the total computed for the year.
|
Our Quarterly Reports on Form 10-Q, as filed with the Securities and Exchange Commission, include the quarterly results for the first nine months of each respective year. During the fourth quarter of 2017, we incurred $3.4 million in merger-related costs associated with the pending merger with Deltic. See
Note 2: Pending Merger with Deltic
for additional information.
72