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 March 31, 1999 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 March 31, 1999:
28,937,632 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 three
months ended March 31, 1999 and 1998 2
Condensed Balance Sheets at March 31, 1999
and December 31, 1998 3
Condensed Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 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 1. Legal Proceedings 11
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>
Three Months Ended
March 31
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Net sales $416,418 $402,534
- ----------------------------------------------------------------------------
Costs and expenses:
Depreciation, amortization and
cost of fee timber harvested 37,427 36,673
Materials, labor and other
operating expenses 328,831 307,884
Selling, general and
administrative expenses 29,097 30,328
- ----------------------------------------------------------------------------
395,355 374,885
- ----------------------------------------------------------------------------
Earnings from operations 21,063 27,649
Interest expense (12,344) (12,212)
Other income (expense), net (7,710)* 1,604
- ----------------------------------------------------------------------------
Earnings before taxes on income 1,009 17,041
Provision for taxes on income (Note 2) 384 6,305
- ----------------------------------------------------------------------------
Net earnings $ 625 $ 10,736
============================================================================
Net earnings per common share (Note 3):
Basic $ .02 $ .37
Diluted .02 .37
Dividends per common share (annual rate) 1.74 1.74
Average shares outstanding (in thousands):
Basic 28,925 29,002
Diluted 28,932 29,043
- ----------------------------------------------------------------------------
<FN>
*Includes a $7.5 million nonrecurring charge ($4.6 million after-tax) for
expenses related to the termination of efforts to form a timber real estate
investment trust with Anderson-Tully Company.
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
<PAGE>
<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Condensed Balance Sheets
1999 amounts unaudited (Dollars in thousands -
except per-share amounts)
- ----------------------------------------------------------------------------
<CAPTION>
March 31, December 31,
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 10,195 $ 11,650
Short-term investments 351 6,422
Receivables, net 251,525 162,268
Inventories (Note 4) 180,574 200,257
Prepaid expenses 27,816 27,258
- ----------------------------------------------------------------------------
Total current assets 470,461 407,855
Land, other than timberlands 9,073 9,073
Plant and equipment, at cost less
accumulated depreciation 1,532,658 1,504,522
Timber, timberlands and related
logging facilities 339,160 338,617
Other assets 61,556 117,239
- ----------------------------------------------------------------------------
$2,412,908 $2,377,306
============================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 126,797 $ 74,939
Current installments on long-term debt 10,022 10,021
Accounts payable and accrued liabilities 229,446 225,339
- ----------------------------------------------------------------------------
Total current liabilities 366,265 310,299
Long-term debt 702,047 712,113
Other long-term obligations 164,255 163,453
Deferred taxes 253,883 253,691
Put options 6,844 6,844
Stockholders' equity 919,614 930,906
- ----------------------------------------------------------------------------
$2,412,908 $2,377,306
============================================================================
Stockholders' equity per common share $31.78 $32.19
Working capital $104,196 $97,556
Current ratio 1.3:1 1.3:1
- ----------------------------------------------------------------------------
<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>
Three Months Ended
March 31
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operations
Net earnings $ 625 $ 10,736
Adjustments to reconcile net earnings
to cash provided by operations:
Depreciation, amortization and cost of
fee timber harvested 37,427 36,673
Deferred taxes 192 2,522
Working capital changes (5,400) 36,023
Other, net (37) (369)
- ----------------------------------------------------------------------------
Net cash provided by operations 32,807 85,585
- ----------------------------------------------------------------------------
Cash Flows From Financing
Change in book overdrafts (10,625) (9,899)
Increase (decrease) in notes payable 51,858 (27,250)
Proceeds from long-term debt 99,935 -
Repayment of long-term debt (110,000) (3)
Issuance of treasury stock 443 248
Dividends (12,580) (12,614)
- ----------------------------------------------------------------------------
Net cash provided by (used for) financing 19,031 (49,518)
- ----------------------------------------------------------------------------
Cash Flows From Investing
Decrease in short-term investments - (2,100)
Additions to investments (1,714) (2,135)
Reductions in investments 8,106 2,913
Additions to plant and properties (59,659) (30,712)
Other, net (26) (3,913)
- ----------------------------------------------------------------------------
Net cash used for investing (53,293) (35,947)
- ----------------------------------------------------------------------------
Increase (decrease) in cash (1,455) 120
Balance at beginning of period 11,650 9,026
- ----------------------------------------------------------------------------
Balance at end of period $ 10,195 $ 9,146
============================================================================
<FN>
Net interest payments (net of amounts capitalized) for the three months ended
March 31, 1999 and 1998 were $2.9 million and $2.7 million, respectively. Net
income tax payments (refunds) for the three months ended March 31, 1999 and
1998 were $(1.4) million and $(2.1) 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 March 31,
1999, and December 31, 1998, and the statements of earnings and the condensed
statements of cash flows for the three months ended March 31, 1999, and 1998,
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 38 percent
for the quarter ended March 31, 1999, and 37 percent for the quarter ended
March 31, 1998.
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:
Three Months Ended
March 31
1999 1998
Basic average common shares outstanding 28,925,352 29,001,754
Incremental shares due to common stock options 7,114 40,983
---------- ----------
Diluted average common shares outstanding 28,932,466 29,042,737
========== ==========
Stock options to purchase shares of common stock of 1,834,700 and 781,575
at March 31, 1999, and 1998, respectively, were not included in the above
computations because the stock options' exercise price was greater than the
average market price of common shares.
5
<PAGE>
Note 4. INVENTORIES - Inventories at the balance sheet dates consist of:
March 31, 1999 December 31, 1998
Raw materials $ 80,838 $ 88,591
Work in process 7,483 9,385
Finished goods 92,253 102,281
-------- --------
$180,574 $200,257
======== ========
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 three months of 1999, as
presented in the Condensed Statements of Cash Flows on page 4, totaled
$32.8 million, compared with $85.6 million for the same period in 1998.
Higher earnings in 1998 and a $36.0 million change in the components of
working capital during the first quarter of 1998 were largely responsible for
the difference in the quarter-to-quarter comparison.
The company's ratio of long-term debt to stockholders' equity was .76 to
1 at March 31, 1999, unchanged from December 31, 1998. During the quarter
the company issued $100.0 million of long-term debt, the proceeds of which
were used to repay a like amount of commercial paper which had been
classified as long-term debt. Also during the quarter, $10.0 million of
medium-term notes were reclassified from long-term to current due to their
maturity within a year. Stockholders' equity decreased largely due to the
payment of dividends in excess of earnings.
Working capital of $104.2 million at March 31, 1999, increased $6.6
million from December 31, 1998. Receivables increased $89.3 million compared
to December 31, 1998. The largest portion of this increase resulted from the
reclassification from long-term to current of a $50.0 million note receivable
from Anderson-Tully Company. This amount was partially offset by declines in
short-term investments of $6.1 million and inventories of $19.7 million. In
addition, notes payable increased $51.9 million during the quarter.
Capital expenditures totaled $59.7 million for the first three months of
1999. Of this amount, the company spent $9.4 million in the wood products
segment, which included expenditures for the modernization and expansion at
the Cook, Minnesota, oriented strand board plant and the continued
development of the hybrid poplar tree farm in Boardman, Oregon. The company
spent $45.0 million in the printing papers segment. The majority of these
expenditures were for the continued modernization and expansion of the
company's pulp mill in Cloquet, Minnesota. Spending in the pulp and paper
segment totaled $5.1 million. Numerous small projects are underway which are
designed to increase efficiency and productivity.
6
<PAGE>
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.
<TABLE>
Segment Information (Dollars in thousands)
- ----------------------------------------------------------------------------
<CAPTION>
Three Months Ended
March 31
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Segment Sales
Wood products
Oriented strand board $ 44,494 $ 33,358
Lumber 64,335 58,758
Plywood 16,471 12,794
Particleboard 3,763 3,335
Logs, chips, etc. 30,865 31,405
- ----------------------------------------------------------------------------
159,928 139,650
- ----------------------------------------------------------------------------
Printing papers 108,424 112,263
- ----------------------------------------------------------------------------
Pulp and paper
Pulp 6,056 2,398
Paperboard 95,577 107,205
Tissue 63,853 60,955
- ----------------------------------------------------------------------------
165,486 170,558
- ----------------------------------------------------------------------------
433,838 422,471
Elimination of intersegment sales (17,420) (19,937)
- ----------------------------------------------------------------------------
Total consolidated net sales $416,418 $402,534
============================================================================
Intersegment sales or transfers
Wood products $ 17,397 $ 19,879
Printing papers - -
Pulp and paper 23 58
- ----------------------------------------------------------------------------
Total $ 17,420 $ 19,937
============================================================================
Operating Income
Wood products $ 22,425 $ 13,535
Printing papers 174 8,654
Pulp and paper 5,094 15,581
- ----------------------------------------------------------------------------
27,693 37,770
Corporate (26,684) (20,729)
- ----------------------------------------------------------------------------
Consolidated earnings before taxes on income $ 1,009 $ 17,041
============================================================================
</TABLE>
Continued poor market conditions for most of the company's pulp-based
products were largely responsible for lower earnings for the first quarter of
1999. The company benefited from improved markets for its panel products,
which helped to partially offset the unfavorable results. The first quarter
results also include a nonrecurring after-tax charge of $4.6 million for
expenses related to the termination of efforts to form a timber real estate
investment trust (REIT) with Anderson-Tully Company (ATCO). On March 31,
1999, the company and ATCO announced the mutual termination of their February
7
<PAGE>
1998 agreement to combine the company's Arkansas timberlands and ATCO's
timberlands into a timber REIT. Related agreements were also terminated for
the company's purchase of certain logging, lumber and veneer operations from
ATCO.
Net earnings for the first quarter of 1999 were $5.2 million, or $.18 per
diluted common share, before the nonrecurring charge. Including the charge,
first quarter earnings were $.6 million, or $.02 per diluted common share.
First quarter 1998 net earnings were $10.7 million, or $.37 per diluted
common share. Net sales for the first quarter of 1999 were $416.4 million,
slightly higher than the $402.5 million recorded a year ago.
The wood products segment reported operating income of $22.4 million for
the first quarter of 1999, compared to $13.5 million in 1998's first quarter.
Net sales realizations for the company's panel products were higher during
the quarter compared to the first quarter of 1998. The improvement in panel
prices offset lower lumber net sales realizations.
The printing papers segment reported first quarter 1999 operating income
of $.2 million, versus $8.7 million earned in the first quarter of 1998.
Markets for coated papers remained weak, resulting in lower net sales
realizations for the segment compared to 1998's first quarter.
The pulp and paper segment reported operating income for the first
quarter of 1999 of $5.1 million, down substantially from the $15.6 million
earned in 1998's first quarter. Paperboard shipments and net sales
realizations were below first quarter 1998 levels, a consequence of the
depressed market conditions in the industry. Consumer tissue products helped
to partially offset the negative paperboard results with increased shipments
and higher net sales realizations compared to last year's first quarter.
YEAR 2000
The company is continuing its comprehensive review of all its computer
programs and systems to identify and resolve potential Year 2000 problems. A
Year 2000 steering team has been in place since June 1998 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 believes that
its business systems have been substantially Year 2000 compliant since
December 31, 1998. Extensive testing is planned in 1999 to confirm
compliance.
The company has completed an inventory of its manufacturing systems
(including both embedded technology and information technology), which it
8
<PAGE>
used to identify systems that are not Year 2000 compliant. Assessment and
remediation of critical manufacturing systems are underway. All critical
manufacturing systems are currently expected to be substantially Year 2000
compliant by mid-year, 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 for any reporting period in which expenditures have
been made. These costs, including hardware, software, internal personnel and
external consultants, 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. Prior to 1998, the
company did not separately identify internal costs related to Year 2000
conversion work. The total costs incurred in 1998 through the conclusion of
the Year 2000 project are expected to be in the range of $4 million to $6
million, exclusive of normal replacements and upgrades.
The company is in the process of making inquiries of its major customers
and 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 management believes it is unlikely to occur, a plausible worst case
scenario would involve the failure of a critical system of the company or of
a supplier, causing a temporary halt or slowdown at one or more of the
company's manufacturing operations.
The company is developing contingency plans for each of its facilities.
These plans address both internal and external potential failures, as well as
any unresolved issues. The company expects to have the contingency plans
written by August 1999 and activated by the end of the third quarter.
9
<PAGE>
<TABLE>
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Changes in Statements of Earnings
(Dollars in thousands)
<CAPTION>
Three Months Ended March 31
Increase
1999 1998 (Decrease)
<S> <C> <C> <C>
Net sales $416,418 $402,534 3%
Costs and expenses:
Depreciation, amortization and
cost of fee timber harvested 37,427 36,673 2%
Materials, labor and other
operating expenses 328,831 307,884 7%
Selling, general and
administrative expenses 29,097 30,328 (4%)
Earnings from operations 21,063 27,649 (24%)
Interest expense (12,344) (12,212) 1%
Other income (expense), net (7,710) 1,604 *
Provision for taxes on income 384 6,305 (94%)
Net earnings 625 10,736 (94%)
* Not a meaningful figure.
</TABLE>
10
<PAGE>
PART II
ITEM 1. Legal Proceedings
In December 1995, the company filed a complaint against Beloit
Corporation in the District Court of the State of Idaho, Nez Perce County.
The complaint alleged that a pulp washer system supplied by Beloit
Corporation and installed at the company's pulp mill in Lewiston, Idaho,
experienced massive defects and deficiencies and failed to meet contract
performance requirements and criteria. In June 1997, a jury awarded damages
of $95 million to the company. Beloit appealed the case to the Idaho Supreme
Court (the "Court"). On April 2, 1999, the Court vacated the judgement and
remanded the case to the trial court for a new trial. In its ruling, the
Court did not decide the merits of the company's case. On April 23, 1999,
the company filed a Petition for Rehearing with the Court. The company
intends to continue to pursue its claims against Beloit.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
The exhibit index is located on page 13 of this Form 10-Q.
Reports on Form 8-K
A current report on Form 8-K was filed, dated January 28, 1999. Under
Item 5, Other Events, it was reported that the company's Board of Directors
amended the company's By-Laws to change notification requirements for
business to be properly brought before the annual meeting of stockholders.
A current report on Form 8-K was filed, dated March 31, 1999. It was
reported under Item 5, Other Events, that the company and Anderson-Tully
Company had mutually terminated the February 1998 agreement to form a timber
real estate investment trust.
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: May 5, 1999
12
<PAGE>
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Exhibit Index
Exhibit
(4) Registrant undertakes to file with the Securities and
Exchange Commission, upon request, any instrument with
respect to long-term debt
(10)(j)(ii) Amendment No. 2 to Schedule A which sets forth the name of
each director of Potlatch Corporation who has signed an
Indemnification Agreement, the form of which was filed as
Exhibit (10)(j) to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
13
Amendment No. 2
to
Schedule A to Exhibit (10)(j)
April 30, 1999
The following table sets forth the name of each current
director of Potlatch Corporation who has executed the
Indemnification Agreement filed as Exhibit (10)(j):
Name of Director Date Agreement Executed
Richard A. Clarke December 11, 1986
Kenneth T. Derr January 1, 1994
George F. Jewett, Jr. December 11, 1986
Richard B. Madden May 6, 1988
Vivian W. Piasecki December 10, 1992
Toni Rembe December 11, 1986
John M. Richards January 1, 1991
Reuben F. Richards December 11, 1986
Richard M. Rosenberg December 10, 1992
Judith M. Runstad March 9, 1999
Robert G. Schwartz December 11, 1986
L. Pendleton Siegel November 1, 1997
Charles R. Weaver February 20, 1987
Frederick T. Weyerhaeuser December 11, 1986
Dr. William T. Weyerhaeuser February 22, 1990
Exhibit (10)(j)(ii)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,195
<SECURITIES> 150
<RECEIVABLES> 173,115
<ALLOWANCES> 1,733
<INVENTORY> 180,574
<CURRENT-ASSETS> 470,461
<PP&E> 3,314,692
<DEPRECIATION> 1,433,801
<TOTAL-ASSETS> 2,412,908
<CURRENT-LIABILITIES> 366,265
<BONDS> 702,047
<COMMON> 32,722
0
0
<OTHER-SE> 886,892
<TOTAL-LIABILITY-AND-EQUITY> 2,412,908
<SALES> 416,418
<TOTAL-REVENUES> 416,418
<CGS> 366,258
<TOTAL-COSTS> 366,258
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,344
<INCOME-PRETAX> 1,009
<INCOME-TAX> 384
<INCOME-CONTINUING> 625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 625
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
