SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998 Commission file number 1-5313
POTLATCH CORPORATION
(Exact name of registrant as specified in its charter)
A Delaware Corporation 82-0156045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 West Riverside Ave., Suite 1100
Spokane, Washington 99201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (509) 835-1500
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[X] No[ ]
The number of shares of common stock outstanding as of September 30, 1998:
29,008,812 shares of Common Stock, par value $1 per share.
<PAGE>
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Index to Form 10-Q
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Statements of Earnings for the quarter and nine
months ended September 30, 1998 and 1997 2
Condensed Balance Sheets at September 30, 1998
and December 31, 1997 3
Condensed Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 4
Notes to Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBIT INDEX 13
1
<PAGE>
PART I
Item 1. Financial Statements
<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Statements of Earnings
Unaudited (Dollars in thousands - except per-share amounts)
- ------------------------------------------------------------------------------
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $404,625 $395,447 $1,207,641 $1,189,115
Costs and expenses:
Depreciation, amortization and
cost of fee timber harvested 39,203 38,991 112,411 113,866
Materials, labor and other
operating expenses 301,987 299,184 916,857 923,399
Selling, general and
administrative expenses 31,450 27,229 91,525 78,630
- ------------------------------------------------------------------------------
372,640 365,404 1,120,793 1,115,895
- ------------------------------------------------------------------------------
Earnings from operations 31,985 30,043 86,848 73,220
Interest expense (12,801) (11,154) (37,148) (33,944)
Interest and dividend income 886 98 2,656 271
Other income (expense), net (154) 2,716 552 7,151
- ------------------------------------------------------------------------------
Earnings before taxes
on income 19,916 21,703 52,908 46,698
Provision for taxes on
income (Note 2) 7,369 7,596 19,576 16,344
- ------------------------------------------------------------------------------
Net earnings $ 12,547 $ 14,107 $ 33,332 $ 30,354
==============================================================================
Net earnings per
common share (Note 3):
Basic $ .43 $ .49 $1.15 $1.05
Diluted .43 .48 1.15 1.04
Dividends per common share
(annual rate) 1.74 1.70 1.74 1.70
Average shares outstanding
(in thousands):
Basic 29,009 28,935 29,006 28,909
Diluted 29,026 29,028 29,032 28,959
- ------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
<PAGE>
<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Condensed Balance Sheets
1998 amounts unaudited (Dollars in thousands -
except per-share amounts)
- -----------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 13,185 $ 9,026
Short-term investments 8,803 6,516
Receivables, net 186,254 179,159
Inventories (Note 4) 172,710 182,303
Prepaid expenses 25,770 26,773
- -----------------------------------------------------------------------------
Total current assets 406,722 403,777
Land, other than timberlands 9,073 9,093
Plant and equipment, at cost less
accumulated depreciation 1,490,116 1,493,417
Timber, timberlands and related
logging facilities 339,342 342,503
Other assets 114,943 116,346
- -----------------------------------------------------------------------------
$2,360,196 $2,365,136
=============================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 43,699 $ 95,550
Current installments on long-term debt 10,021 22
Accounts payable and accrued liabilities 238,692 201,984
- -----------------------------------------------------------------------------
Total current liabilities 292,412 297,556
Long-term debt 712,100 722,080
Other long-term obligations 160,944 155,336
Deferred taxes 244,765 236,934
Put options 10,844 1,638
Stockholders' equity 939,131 951,592
- -----------------------------------------------------------------------------
$2,360,196 $2,365,136
=============================================================================
Stockholders' equity per common share $32.37 $32.82
Working capital $114,310 $106,221
Current ratio 1.4:1 1.4:1
- -----------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE>
<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Condensed Statements of Cash Flows
Unaudited (Dollars in thousands)
- ----------------------------------------------------------------------------
<CAPTION>
Nine Months Ended
September 30
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operations
Net earnings $ 33,332 $ 30,354
Adjustments to reconcile net earnings
to cash provided by operations:
Depreciation, amortization and cost of
fee timber harvested 112,411 113,866
Deferred taxes 7,831 8,172
Working capital changes 49,177 24,291
Other, net (1,315) (5,027)
- ----------------------------------------------------------------------------
Net cash provided by operations 201,436 171,656
- ----------------------------------------------------------------------------
Cash Flows From Financing
Change in bank overdrafts (8,968) (1,389)
Increase (decrease) in notes payable (51,851) 24,301
Repayment of long-term debt 19 (31,335)
Issuance of treasury stock 323 1,956
Dividends (37,852) (36,850)
- ----------------------------------------------------------------------------
Net cash used for financing (98,329) (43,317)
- ----------------------------------------------------------------------------
Cash Flows From Investing
Decrease in short-term investments - 3,125
Additions to investments (11,261) (11,398)
Reductions in investments 9,452 8,175
Funding of qualified pension plans (1,816) (5,037)
Additions to plant and properties (99,579) (124,406)
Disposition of plant and properties 2,027 2,611
Other, net 2,229 (3,047)
- ----------------------------------------------------------------------------
Net cash used for investing (98,948) (129,977)
- ----------------------------------------------------------------------------
Increase (decrease) in cash 4,159 (1,638)
Balance at beginning of period 9,026 7,740
- ----------------------------------------------------------------------------
Balance at end of period $ 13,185 $ 6,102
============================================================================
<FN>
Net interest payments (net of amounts capitalized) for the nine months ended
September 30, 1998 and 1997 were $27.8 million and $24.2 million, respectively.
Net income tax payments for the nine months ended September 30, 1998 and 1997
were $2.4 million and $5.5 million, respectively.
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE>
Potlatch Corporation and Consolidated Subsidiaries
Notes to Financial Statements
(Dollars in thousands)
- -----------------------------------------------------------------------------
NOTE 1. GENERAL - The accompanying condensed balance sheets at September 30,
1998 and December 31, 1997, and the statements of earnings for the quarter
and nine months ended September 30, 1998 and 1997, and the condensed
statements of cash flows for the nine months ended September 30, 1998 and
1997, have been prepared in conformity with generally accepted accounting
principles. The management of Potlatch Corporation (the "company") believes
that all adjustments necessary for a fair statement of the results of such
interim periods have been included. All adjustments were of a normal
recurring nature; there were no material nonrecurring adjustments.
NOTE 2. INCOME TAXES - The provision for taxes on income has been computed
by applying an estimated annual effective tax rate. This rate was 37 percent
for the quarter and nine months ended September 30, 1998. The rate was 35
percent for the quarter and nine months ended September 30, 1997.
NOTE 3. EARNINGS PER COMMON SHARE - Earnings per common share are computed
by dividing net earnings by the weighted average number of common shares
outstanding in accordance with FASB Statement No. 128, "Earnings Per Share."
The following table reconciles the number of common shares used in the
basic and diluted earnings per share calculations:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
(In thousands) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic average common shares
outstanding 29,009 28,935 29,006 28,909
Incremental shares due to:
Common stock options 7 93 26 50
Put options 10 - - -
------ ------ ------ ------
Diluted average common shares
outstanding 29,026 29,028 29,032 28,959
====== ====== ====== ======
Stock options to purchase shares of common stock of 1,236,975 and 943,250
for the quarter and nine months ended September 30, 1998, respectively, and
640,900 for the nine months ended September 30, 1997, were not included in
the above computations because the exercise prices of stock options were
greater than the average market price of common shares.
5
<PAGE>
Note 4. INVENTORIES - Inventories at the balance sheet dates consist of:
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
<S> <C> <C>
Raw materials $ 95,345 $ 93,625
Work in process 7,363 5,989
Finished goods 70,002 82,689
-------- --------
$172,710 $182,303
======== ========
</TABLE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Funding
Net cash provided by operations for the first nine months of 1998, as
presented in the Condensed Statements of Cash Flows on page 4, totaled $201.4
million, compared with $171.7 million for the same period in 1997.
The company's ratio of long-term debt to stockholders' equity was .76 to
1 at September 30, 1998, unchanged from December 31, 1997. The
reclassification of $10.0 million of medium-term notes from long-term to
current due to their maturity within one year, was offset by a net decline in
stockholders' equity of $12.5 million.
Working capital of $114.3 million at September 30, 1998, increased $8.1
million from December 31, 1997. Changes in working capital items causing the
favorable comparison consisted of a decrease in notes payable of $51.9
million and increases in cash, short-term investments and accounts receivable
of $4.2 million, $2.3 million and $7.1 million, respectively. These changes
more than offset a decrease in inventories of $9.6 million and increases in
current installments on long-term debt of $10.0 million and accounts payable
and accrued liabilities of $36.7 million.
Capital expenditures totaled $99.6 million for the first nine months of
1998. Of this amount, the company spent $20.3 million in the wood products
segment, which included expenditures for pollution control equipment at the
Cook and Bemidji, Minnesota, oriented strand board plants and for the plant
expansion at Cook. The company spent $54.2 million in the printing papers
segment, most of which were for the continued modernization and expansion of
the company's pulp mill in Cloquet, Minnesota. Spending in the other pulp-
based products segment totaled $24.4 million. A portion of this total
related to the replacement of washers, the caustic plant upgrade and a new
green liquor clarifier at the Lewiston, Idaho, pulp mill, and the continued
development of the hybrid poplar tree farm in Boardman, Oregon.
6
<PAGE>
<TABLE>
Results of Operations
A summary of period-to-period changes in items included in the statements
of earnings is presented on page 10 of this Form 10-Q.
- ------------------------------------------------------------------------------
Segment Information (Dollars in thousands)
- ------------------------------------------------------------------------------
<CAPTION>
Third Quarter Nine Months
1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales
Wood products
Oriented strand board $ 55,774 $ 27,048 $ 129,684 $ 74,903
Lumber 57,554 63,430 175,940 192,200
Plywood 13,462 17,139 39,435 50,904
Particleboard 3,664 3,294 10,841 9,725
Other 16,417 17,701 39,250 46,343
- ------------------------------------------------------------------------------
146,871 128,612 395,150 374,075
- ------------------------------------------------------------------------------
Printing papers 97,985 108,731 313,458 325,637
- ------------------------------------------------------------------------------
Other pulp-based products
Pulp 2,749 1,594 8,427 9,787
Paperboard 98,326 96,665 313,204 309,945
Tissue 58,694 59,845 177,402 169,671
- ------------------------------------------------------------------------------
159,769 158,104 499,033 489,403
- ------------------------------------------------------------------------------
Total net sales $404,625 $395,447 $1,207,641 $1,189,115
==============================================================================
Operating Income
Wood products $ 32,720 $ 15,301 $ 60,243 $ 35,133
Printing papers (1,702) 10,951 7,771 30,803
Other pulp-based products 11,483 15,110 48,283 38,108
- ------------------------------------------------------------------------------
42,501 41,362 116,297 104,044
Corporate (22,585) (19,659) (63,389) (57,346)
- ------------------------------------------------------------------------------
Earnings before taxes
on income $ 19,916 $ 21,703 $ 52,908 $ 46,698
==============================================================================
</TABLE>
Unfavorable markets for the company's lumber and pulp-based products
offset improved market conditions for oriented strand board and resulted in
slightly lower earnings for the third quarter of 1998. Third quarter 1998
net earnings were $12.5 million or $.43 per diluted common share. Net
earnings in the third quarter of 1997 were $14.1 million or $.48 per diluted
common share. Net sales were $404.6 million for the quarter, compared with
$395.4 million in the third quarter of 1997.
Net earnings for the first nine months of 1998 were $33.3 million, or
$1.15 per diluted common share. Net earnings for the first nine months of
1997 were $30.4 million, or $1.04 per diluted common share. Net sales for
the first nine months of 1998 were $1.21 billion, versus $1.19 billion in
1997.
The wood products segment reported operating income of $32.7 million for
the third quarter of 1998, substantially higher than the $15.3 million earned
a year ago. The group benefited from significantly higher net sales
realizations and increased shipments for oriented strand board, which more
than offset weaker markets for the company's lumber products. Net sales
realizations for oriented strand board improved approximately 90 percent over
the same period last year. However, oriented strand board net sales
realizations declined dramatically in the last three weeks of the quarter.
Those realizations have continued to decline since the quarter's end.
7
<PAGE>
The printing papers segment reported an operating loss of $1.7 million
for the quarter, compared with earnings of $11.0 million in 1997's third
quarter. Lower net sales realizations and shipments, combined with higher
production costs, negatively affected earnings.
The other pulp-based products segment reported third quarter 1998
operating income of $11.5 million, down from $15.1 million earned a year ago.
Pulp and paperboard markets continued to be very competitive, causing net
sales realizations to decline. However, production improvements at the
Lewiston, Idaho, pulp and paperboard mill helped to reduce costs and
partially offset the unfavorable comparison. Results for consumer tissue
products improved slightly due to lower pulp costs, which more than offset
lower net sales realizations and a decline in shipments.
Year 2000
The company is conducting a comprehensive review of all computer programs
and systems used for various purposes within the company to identify
potential problems from the Year 2000 issue. A Year 2000 steering team has
been formed to coordinate the review of programs and systems, evaluate the
findings and implement the changes necessary to become Year 2000 compliant.
The company has retained outside consultants to assist in this effort and
believes it has allocated adequate resources to the issue. It expects to
complete the review and any necessary changes on a timely basis.
The review has been divided into two categories: business systems and
manufacturing systems. The business systems have been undergoing
modifications to address the Year 2000 issue over the last few years.
Routine changes, modifications and new software purchases have all been made
with Year 2000 compliance in mind. As a result, the company anticipates that
its business systems will be substantially Year 2000 compliant by
December 31, 1998.
The company has completed an inventory of its manufacturing systems
(including both embedded technology and information technology), which it
will use to identify systems that are not Year 2000 compliant. Assessment
and remediation of critical manufacturing systems are underway. Remediation
of all manufacturing systems is currently expected to be complete by June 30,
1999, with testing to be completed by the end of the third quarter of 1999.
The costs incurred to date to conduct the manufacturing systems inventory
and other Year 2000 conversion work have not been material to the company's
results of operations and are expensed as incurred, except for expenditures
relating to system replacements or upgrades occurring in the normal course of
business that are capitalized under company guidelines. The company is
unable to estimate the exact amount of future expenditures to become Year
2000 compliant, but currently anticipates a total cost for the project to be
less than $5 million, exclusive of normal replacements and upgrades. These
expenditures are immaterial and will be funded primarily from internally
generated sources.
The company is in the process of making inquiries of its significant
suppliers, including its energy and other utility service providers and
transportation vendors, to evaluate their Year 2000 readiness. While the
company has no control over the readiness of its suppliers, failure by them
or the company to be substantially Year 2000 compliant could have a material
adverse effect on the company's operations and financial results. Although
8
<PAGE>
management believes it unlikely to occur, a plausible worst case scenario
would be one in which a critical system of the company or a supplier failed,
causing a temporary halt or slowdown at one or more of the company's
manufacturing operations.
The company will develop a contingency plan by mid-1999, after it has
progressed further in its Year 2000 remediation phase and testing procedures.
Based upon the success of these efforts and knowledge acquired as to the
readiness of significant third parties, the contingency plan will address any
unresolved issues.
This report contains, in addition to historical information, certain
forward-looking statements, including without limitation, statements
regarding Year 2000 issues. These forward-looking statements are based on
management's best estimates and assumptions regarding future events, and are
therefore subject to known and unknown risks and uncertainties and are not
guarantees of future performance. The company's actual results of operations
could differ materially from those expressed or implied by forward-looking
statements. Factors that could cause or contribute to such differences
include, but are not limited to, changes in the United States and
international economies; changes in worldwide demand for the company's
products; changes in worldwide production and production capacity in the
forest products industry; competitive pricing pressures for the company's
products; impact of Year 2000 issues; and changes in raw material, energy and
other costs.
9
<PAGE>
<TABLE>
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Changes in Statements of Earnings
(Dollars in thousands)
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Net sales $404,625 $395,447 2% $1,207,641 $1,189,115 2%
Costs and expenses:
Depreciation, amortization and
cost of fee timber harvested 39,203 38,991 1% 112,411 113,866 (1%)
Materials, labor and other
operating expenses 301,987 299,184 1% 916,857 923,399 (1%)
Selling, general and
administrative expenses 31,450 27,229 16% 91,525 78,630 16%
Earnings from operations 31,985 30,043 6% 86,848 73,220 19%
Interest expense (12,801) (11,154) 15% (37,148) (33,944) 9%
Interest and dividend income 886 98 804% 2,656 271 880%
Other income (expense), net (154) 2,716 * 552 7,151 (92%)
Provision for taxes on income 7,369 7,596 (3%) 19,576 16,344 20%
Net earnings 12,547 14,107 (11%) 33,332 30,354 10%
*Not a meaningful figure.
</TABLE>
10
<PAGE>
PART II
ITEM 6. Exhibits and Reports on 8-K
Exhibits
The exhibit index is located on page 13 of this Form 10-Q.
Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended September
30, 1998.
11
<PAGE>
SIGNATURES
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.
POTLATCH CORPORATION
(Registrant)
By /S/ S. T. Powell
------------------------------
S. T. Powell
Senior Vice President, Finance
and Chief Financial Officer
(Duly Authorized; Principal
Financial Officer)
By /S/ T. L. Carter
------------------------------
T. L. Carter
Controller
(Duly Authorized; Principal
Accounting Officer)
Date: November 4, 1998
12
<PAGE>
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Exhibit Index
Exhibit
PART II
(4) Registrant undertakes to file with the Securities and
Exchange Commission, upon request, any instrument with
respect to long-term debt
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,185
<SECURITIES> 150
<RECEIVABLES> 151,945
<ALLOWANCES> 2,087
<INVENTORY> 172,710
<CURRENT-ASSETS> 406,722
<PP&E> 3,212,734
<DEPRECIATION> 1,374,203
<TOTAL-ASSETS> 2,360,196
<CURRENT-LIABILITIES> 292,412
<BONDS> 712,100
<COMMON> 32,722
0
0
<OTHER-SE> 906,409
<TOTAL-LIABILITY-AND-EQUITY> 2,360,196
<SALES> 1,207,641
<TOTAL-REVENUES> 1,207,641
<CGS> 1,029,268
<TOTAL-COSTS> 1,029,268
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,148
<INCOME-PRETAX> 52,908
<INCOME-TAX> 19,576
<INCOME-CONTINUING> 33,332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,332
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,102
<SECURITIES> 200
<RECEIVABLES> 146,759
<ALLOWANCES> 2,541
<INVENTORY> 168,835
<CURRENT-ASSETS> 381,208
<PP&E> 3,114,484
<DEPRECIATION> 1,268,255
<TOTAL-ASSETS> 2,293,147
<CURRENT-LIABILITIES> 278,796
<BONDS> 672,067
<COMMON> 32,722
0
0
<OTHER-SE> 920,465
<TOTAL-LIABILITY-AND-EQUITY> 2,293,147
<SALES> 1,189,115
<TOTAL-REVENUES> 1,189,115
<CGS> 1,037,265
<TOTAL-COSTS> 1,037,265
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,944
<INCOME-PRETAX> 46,698
<INCOME-TAX> 16,344
<INCOME-CONTINUING> 30,354
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,354
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.04
</TABLE>
