pch-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2018

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from             to

Commission File Number 1-32729

PotlatchDeltic Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

82-0156045

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

601 West First Avenue, Suite 1600

 

Spokane, Washington

99201

(Address of principal executive offices)

(Zip Code)

 

(509) 835-1500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act).    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange act).

Yes      No  

The number of shares of common stock of the registrant outstanding as of May 4, 2018 was 62,755,031.

 

 

 

 


POTLATCHDELTIC CORPORATION AND CONSOLIDATED SUBSIDIARIES

Table of Contents

 

 

 

 

Page
Number

PART I. - FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements (unaudited)

 

 

Consolidated Statements of Income

2

 

Consolidated Statements of Comprehensive Income

3

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

34

ITEM 4.

Controls and Procedures

34

 

 

 

PART II. - OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

35

ITEM 1A.

Risk Factors

35

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

ITEM 6.

Exhibits

36

 

 

 

SIGNATURE

37

 

 

 

 

 


 

Part I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands, except per share amounts)

 

2018

 

 

2017

 

Revenues

 

$

199,897

 

 

$

149,681

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

139,155

 

 

 

112,498

 

Selling, general and administrative expenses

 

 

13,656

 

 

 

11,368

 

Deltic merger-related costs

 

 

19,255

 

 

 

 

 

 

 

172,066

 

 

 

123,866

 

Operating income

 

 

27,831

 

 

 

25,815

 

Interest expense, net

 

 

(5,660

)

 

 

(4,970

)

Non-operating pension and other postretirement benefit costs

 

 

(1,857

)

 

 

(1,906

)

Income before income taxes

 

 

20,314

 

 

 

18,939

 

Income tax

 

 

(5,717

)

 

 

(2,018

)

Net income

 

$

14,597

 

 

$

16,921

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.29

 

 

$

0.41

 

Diluted

 

$

0.29

 

 

$

0.41

 

Dividends per share

 

$

0.40

 

 

$

0.375

 

Weighted-average shares outstanding (in thousands):

 

 

 

 

 

 

 

 

Basic

 

 

50,425

 

 

 

40,778

 

Diluted

 

 

50,786

 

 

 

41,071

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2


 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2018

 

 

2017

 

Net income

 

$

14,597

 

 

$

16,921

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Pension and other postretirement employee benefits:

 

 

 

 

 

 

 

 

Amortization of prior service credit included in net income, net of tax benefit of $(565) and $(837)

 

 

(1,608

)

 

 

(1,310

)

Amortization of actuarial loss included in net income, net of tax expense of $1,172 and $1,659

 

 

3,333

 

 

 

2,595

 

Cash flow hedge, net of tax (benefit) expense of $(32) and $31

 

 

(990

)

 

 

48

 

Other comprehensive income, net of tax

 

 

735

 

 

 

1,333

 

Comprehensive income

 

$

15,332

 

 

$

18,254

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

(Dollars in thousands)

 

March 31, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

102,340

 

 

$

120,457

 

Customer receivables, net

 

 

28,212

 

 

 

11,240

 

Inventories

 

 

62,153

 

 

 

50,132

 

Other current assets

 

 

21,824

 

 

 

11,478

 

Total current assets

 

 

214,529

 

 

 

193,307

 

Property, plant and equipment, net

 

 

343,176

 

 

 

77,229

 

Investment in real estate held for development and sale

 

 

78,454

 

 

 

 

Timber and timberlands, net

 

 

1,704,341

 

 

 

654,476

 

Deferred tax assets, net

 

 

 

 

 

19,796

 

Trade name and customer relationships intangibles

 

 

19,000

 

 

 

 

Other long-term assets

 

 

12,853

 

 

 

8,271

 

Total assets

 

$

2,372,353

 

 

$

953,079

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

75,241

 

 

$

55,201

 

Current portion of long-term debt

 

 

 

 

 

14,263

 

Current portion of pension and other postretirement employee benefits

 

 

6,057

 

 

 

5,334

 

Total current liabilities

 

 

81,298

 

 

 

74,798

 

Long-term debt

 

 

782,974

 

 

 

559,056

 

Pension and other postretirement employee benefits

 

 

131,959

 

 

 

103,524

 

Deferred tax liabilities, net

 

 

22,927

 

 

 

 

Other long-term obligations

 

 

17,753

 

 

 

15,159

 

Total liabilities

 

 

1,036,911

 

 

 

752,537

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $1 par value

 

 

62,755

 

 

 

40,612

 

Additional paid-in capital

 

 

1,480,402

 

 

 

359,144

 

Accumulated deficit

 

 

(90,334

)

 

 

(104,363

)

Accumulated other comprehensive loss

 

 

(117,381

)

 

 

(94,851

)

Total stockholders’ equity

 

 

1,335,442

 

 

 

200,542

 

Total liabilities and stockholders' equity

 

$

2,372,353

 

 

$

953,079

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


 

 

PotlatchDeltic Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

14,597

 

 

$

16,921

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

12,635

 

 

 

6,702

 

Basis of real estate sold

 

 

3,605

 

 

 

4,790

 

Real estate development expenditures

 

 

(608

)

 

 

 

Change in deferred taxes

 

 

(1,058

)

 

 

(351

)

Pension and other postretirement employee benefits

 

 

3,814

 

 

 

3,771

 

Equity-based compensation expense

 

 

3,094

 

 

 

1,157

 

Other, net

 

 

(542

)

 

 

(1,007

)

Funding of qualified pension plans

 

 

(8,098

)

 

 

 

Change in working capital and operating-related activities, net

 

 

7,475

 

 

 

9,966

 

Net cash from operating activities

 

 

34,914

 

 

 

41,949

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(3,632

)

 

 

(3,636

)

Timberlands reforestation and roads

 

 

(2,860

)

 

 

(2,645

)

Other, net

 

 

232

 

 

 

(102

)

Cash and cash equivalents acquired in Deltic merger

 

 

3,419

 

 

 

 

Net cash from investing activities

 

 

(2,841

)

 

 

(6,383

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Dividends to common stockholders

 

 

(25,102

)

 

 

(15,228

)

Proceeds from Potlatch revolving line of credit

 

 

100,000

 

 

 

 

Repayment of Potlatch revolving line of credit

 

 

(100,000

)

 

 

 

Revolving line of credit repayment attributable to Deltic

 

 

(106,000

)

 

 

 

Proceeds from issue of long-term debt

 

 

100,000

 

 

 

 

Repayment of long-term debt

 

 

(14,250

)

 

 

 

Debt issuance costs

 

 

(2,409

)

 

 

 

Other, net

 

 

(2,429

)

 

 

(1,258

)

Net cash from financing activities

 

 

(50,190

)

 

 

(16,486

)

Change in cash and cash equivalents

 

 

(18,117

)

 

 

19,080

 

Cash and cash equivalents at beginning of period

 

 

120,457

 

 

 

82,584

 

Cash and cash equivalents at end of period

 

$

102,340

 

 

$

101,664

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

 

 

 

Interest, net of amounts capitalized

 

$

4,979

 

 

$

3,130

 

Income taxes, net

 

$

(113

)

 

$

148

 

 

 

 

 

 

 

 

 

 

NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Equity issued as consideration for our merger with Deltic

 

$

1,142,775

 

 

$

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


 

Notes to Condensed Consolidated Financial Statements

 

For purposes of this report, any reference to “PotlatchDeltic,” “Potlatch,” “the company,” “we,” “us” and “our” means PotlatchDeltic Corporation and all of its wholly-owned subsidiaries, except where the context indicates otherwise.

We are a leading timberland real estate investment trust (REIT) with operations in seven states where we own nearly 2 million acres of timberland, six sawmills, an industrial grade plywood mill, a medium density fiberboard (MDF) plant and real estate development projects.

NOTE 1. BASIS OF PRESENTATION

Our unaudited condensed consolidated financial statements provide an overall view of our results and financial condition and include the results of Deltic Timber Corporation (Deltic) beginning February 21, 2018, the first full business day following the merger of Deltic into Portland Merger, LLC, a wholly-owned subsidiary of Potlatch (see Note 3: Merger with Deltic). Potlatch was renamed PotlatchDeltic Corporation immediately after consummation of the merger.

Intercompany transactions and accounts have been eliminated in consolidation.

The accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Except as otherwise disclosed in these Notes to Condensed Consolidated Financial Statements, such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. Certain disclosures normally provided in accordance with accounting principles generally accepted in the United States have been omitted. This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on February 16, 2018. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year.

RECLASSIFICATIONS

Components of prior year pension plan and other postretirement benefit plan costs were reclassified to non-operating pension and other postretirement benefit costs to conform to the 2018 presentation. See Note 2: Recent Accounting Pronouncements.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

New Accounting Standards – Recently Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 services. ASU No. 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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, which deferred the effective date of ASU No. 2014-09 by one year. We adopted ASU No. 2014-09 on January 1, 2018 using the cumulative effect method. There was no adjustment to accumulated deficit upon adoption. Adoption of this ASU resulted in expanded disclosures, but did not have a material impact on our condensed consolidated financial statements, processes or internal controls. See Note 5: Revenue Recognition for our expanded disclosures.

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. We adopted this ASU retrospectively on January 1, 2018, have reclassified non-service costs from operating income to non-operating costs. There was no change to income before income taxes. The adjustments made to the Consolidated Statements of Income for the three months ended March 31, 2017 are as follows:

 

 

March 31, 2017

 

(Dollars in thousands)

Previously

Reported

 

 

Effect of

Change

 

 

As

Adjusted

 

Operating income

$

23,909

 

 

 

1,906

 

 

$

25,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6


 

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. We adopted this ASU on January 1, 2018 on a modified retrospective basis through a $1.3 million cumulative-effect adjustment directly to accumulated deficit as of January 1, 2018.

In January 2017, the FASB issued ASU No. 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. We adopted this ASU on January 1, 2018 and accounted for the merger with Deltic as an acquisition of a business.

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). This ASU is effective for us on January 1, 2019, with early adoption permitted. We adopted this ASU on January 1, 2018 and reclassified 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. In future periods, our accounting policy will be to release income tax rate change effects from accumulated other comprehensive loss to accumulated deficit. Accordingly, at March 31, 2018, accumulated other comprehensive loss was increased by $23.3 million, with a corresponding decrease to accumulated deficit. See Note 12: Components of Accumulated Other Comprehensive Loss.

New Accounting Standards – Recently Issued

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 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. While we are continuing to assess and document the effects of this ASU, we expect our right-of use assets and lease liabilities will approximate our current future minimum lease payments required under our operating leases, which were $14.4 million at December 31, 2017. This ASU is effective for us on January 1, 2019.

NOTE 3. MERGER WITH DELTIC

On February 20, 2018 (merger date), Deltic merged into Portland Merger, LLC, a wholly-owned subsidiary of Potlatch. Deltic owned approximately 530,000 acres of timberland, operated two sawmills and a medium density fiberboard plant and was engaged in real estate development primarily in Arkansas. The merger creates a combined company with a diversified timberland base of nearly 2 million acres, including approximately 930,000 acres in Arkansas. It uniquely positions us to expand our integrated model of timberland ownership and lumber manufacturing, provide significant tax savings on Deltic’s timber harvest earnings and increase our exposure to the fast-growing Texas housing market.

Under the merger agreement, each issued and outstanding share of Deltic common stock was exchanged for 1.80 shares of Potlatch common shares, with cash paid in lieu of any fractional shares. Upon consummation of the merger, all outstanding Deltic stock options (which fully vested as of the merger date) and restricted stock units (RSUs) were converted into Potlatch stock options and RSUs, after giving effect to the 1.80 exchange ratio. Because the Deltic stock options are fully vested and relate to services rendered to Deltic prior to the merger, the replacement stock options are also fully vested and their fair value is included in the consideration transferred. A portion of the replacement RSUs relate to services to be performed post-merger and therefore are not included in consideration transferred. See additional details about replacement share-based payment awards in Note 13: Equity-Based Compensation.

7


 

The following table summarizes the total consideration transferred in the merger:

(Dollars in thousands, except share and per share amounts)

 

 

 

Number of shares of Deltic common stock outstanding1

 

12,121,223

 

Number of Deltic performance awards2

 

90,515

 

 

 

12,211,738

 

Exchange ratio3

 

1.80

 

Potlatch shares issued

 

21,981,128

 

Price per Potlatch common share4

$

51.95

 

Aggregate value of Potlatch common shares issued

$

1,141,920

 

Cash paid in lieu of fractional shares

14

 

Fair value of stock options and RSUs5

841

 

Consideration transferred

$

1,142,775

 

1

Number of shares of Deltic common stock issued and outstanding as of February 20, 2018, net of fractional shares.

2

Number of shares of Deltic performance awards for pre-combination services rendered that vested upon closing of the merger.

3

Exchange ratio per the merger agreement.

4

Closing price of Potlatch common shares on February 20, 2018.

5

Fair value of Deltic stock options for pre-combination services rendered that vested upon closing of the merger, as well as RSUs for pre-combination services rendered.

Potlatch and Deltic’s Chief Executive Officer entered into a consulting agreement for a two-year term for $1.85 million. The agreement was terminated in the first quarter of 2018, however, payments are required to be paid through the end of the 24-month term. This agreement was considered a separate transaction from the business combination, therefore $1.85 million was recorded as merger costs in the first quarter of 2018.

We expensed approximately $19.3 million of merger-related costs during the first quarter of 2018. See Note 14: Merger, Integration and other Costs for the components of merger-related costs. These costs are included in Deltic merger-related costs in our Condensed Consolidated Statements of Income.

The amount of revenue and loss before income taxes from acquired Deltic operations included in our Condensed Consolidated Statement of Income from February 21, 2018 to March 31, 2018 are as follows:

(Dollars in thousands)

March 31, 2018

 

Net sales

$

28,806

 

Loss before income taxes

$

(9,002

)

Summarized unaudited pro forma information that presents combined amounts as if this merger occurred at the beginning of 2017 is as follows:

 

Three Months Ended March 31,

 

(Dollars in thousands, except per share amounts)

2018

 

 

2017

 

Net sales

$

238,560

 

 

$

202,896

 

Net earnings attributable to PotlatchDeltic common shareholders

$

32,783

 

 

$

15,464

 

Basic earnings per share attributable to PotlatchDeltic common Shareholders

 

0.49

 

 

 

0.23

 

Diluted earnings per share attributable to PotlatchDeltic common shareholders

 

0.49

 

 

 

0.23

 

Pro forma net earnings attributable to PotlatchDeltic common shareholders excludes $24.7 million non-recurring merger-related costs incurred in the first quarter of 2018 by both companies. This includes $5.4 million of merger-related costs incurred by Deltic prior to the merger. No non-recurring merger-related costs were incurred during the first quarter of 2017. Pro forma basic and diluted earnings per share includes 3.9 million shares, which is the approximate amount of the stock dividend to be issued in connection with the earnings and profits (E&P) distribution. Prior to December 31, 2018, Deltic’s E&P will be distributed to shareholders of the combined company in a special distribution consisting of 80% stock and 20% cash. Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.

PotlatchDeltic has accounted for the merger transaction as the acquirer and has applied the acquisition method of accounting. Under the acquisition method, the assets acquired and liabilities assumed from Deltic were generally recorded as of the date of the merger at their respective estimated fair values.

Our March 31, 2018 Condensed Consolidated Balance Sheet includes the assets and liabilities of Deltic, which have been measured at fair value as of the merger date. The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were generally based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in

8


 

ASC 820, Fair Value Measurements and Disclosures, with the exception of certain long-term debt instruments assumed in the acquisition that can be valued using observable market inputs and are therefore Level 2 measurements. The income approach was primarily used to value acquired timber and timberlands and real estate held for development and sale. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flows are discounted at rates of return that reflect the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. The market approach was primarily used to value long-term debt instruments. The market approach estimates fair value for an asset based on values of recent comparable transactions.

Preliminary estimated fair values of identifiable assets acquired and liabilities assumed as of the merger date are as follows:

(Dollars in thousands)

 

 

 

ASSETS

 

 

 

Cash and cash equivalents

$

3,419

 

Customer receivables, net

 

12,709

 

Inventories

 

17,316

 

Other current assets

 

8,276

 

Real estate held for development and sale

 

79,000

 

Property, plant and equipment

 

265,901

 

Timber and timberlands

 

1,060,000

 

Trade name and customer relationships intangibles

 

19,000

 

Other long-term assets

 

2,010

 

Total assets acquired

 

1,467,631

 

LIABILITIES

 

 

 

Accounts payable and accrued liabilities

 

12,604

 

Current portion of pension and other postretirement employee benefits

 

754

 

Long-term debt

 

229,968

 

Pension and other postretirement employee benefits

 

36,155

 

Deferred tax liabilities, net

 

44,439

 

Other long-term liabilities

 

936

 

Total liabilities assumed

 

324,856

 

Net assets acquired

$

1,142,775

 

 

These estimated fair values are preliminary in nature and subject to adjustments, which could be material. We have not identified any material unrecorded pre-merger contingencies where the related asset, liability or impairment is probable and the amount can be reasonably estimated. We are currently in the process of finalizing our valuations related to the following:

 

Timber and timberlands, including oil and gas leases

 

Property, plant and equipment

 

Real estate held for development and sale

 

Intangible assets, which includes trade names and customer relationships

 

Other contractual rights and obligations

Our valuations will be finalized when certain information arranged to be obtained has been received, our review of that information has been completed and our review of the underlying assumptions within the valuation models has been completed. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation.

9


 

NOTE 4. EARNINGS PER SHARE

The following table reconciles the number of shares used in calculating basic and diluted earnings per share:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands, except per share amounts)

 

2018

 

 

2017

 

Net income

 

$

14,597

 

 

$

16,921

 

 

 

 

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

 

50,424,910

 

 

 

40,777,901

 

Incremental shares due to:

 

 

 

 

 

 

 

 

Performance shares

 

 

328,478

 

 

 

257,021

 

Restricted stock units

 

 

32,796

 

 

 

35,687

 

Diluted weighted-average shares outstanding

 

 

50,786,184

 

 

 

41,070,609

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.29

 

 

$

0.41

 

Diluted net income per share

 

$

0.29

 

 

$

0.41

 

 

We issued 22.0 million shares in connection with the Deltic merger. See Note 3: Merger with Deltic.

For the three months ended March 31, 2018 and 2017, there were 64,217 and 81,440 stock-based awards that were excluded from the calculation of diluted earnings per share because they were anti-dilutive. Anti-dilutive stock-based awards could be dilutive in future periods.

 

NOTE 5. REVENUE RECOGNITION

The majority of our revenues are derived from the sale of delivered logs, manufactured wood products, residual by-products and real estate. We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

Performance Obligations

A performance obligation, as defined in ASC 606, is a promise in a contract to transfer a distinct good or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue at the point in time, or over the period, in which the performance obligation is satisfied.

Performance obligations associated with delivered log and residual sales are typically satisfied when the logs and residuals are delivered to our customers’ mills. Performance obligations associated with the sale of wood products are typically satisfied when the products are shipped (FOB shipping point) or upon delivery to our customer (FOB destination). Shipping and handling costs for all wood product and residual sales are accounted for as cost of goods sold.

ASC Topic 606 requires entities to consider significant financing components of contracts with customers, though allows for the use of a practical expedient when the period between satisfaction of a performance obligation and payment receipt is one year or less. Given the nature of our revenue transactions, we have elected to utilize this practical expedient. Substantially all of our performance obligations are satisfied as of a point in time. We have also elected to use the practical expedient to not disclose unsatisfied or partially satisfied performance obligations as all unsatisfied contracts are expected to be satisfied in less than one year.

Performance obligations associated with real estate sales are generally satisfied at a point in time when all conditions of closing have been met.

Contract Estimates

The transaction price for log and residual sales is determined using contractual rates applied to delivered volumes. The contractual rates are generally based on prevailing market prices and payment is generally due from customers within one month or less of delivery. For log and residual sales subject to long-term supply agreements, the transaction price is variable but is known at the time of delivery. For wood products sales, the transaction price is generally the amount billed to the customer based on the prevailing market price for the products shipped but may be reduced slightly for estimated cash discounts.

There are no significant contract estimates related to the real estate business.

10


 

Contract Balances

In general, a customer receivable is recorded as we ship and/or deliver wood products, logs and residuals. We generally receive payment shortly after products have been received by our customers. Contract asset and liability balances, such as prepayments, are immaterial. For real estate sales, we typically receive the entire consideration in cash at closing.

Major Products

The following table represents our revenues by major product. For additional information regarding our segments, see Note 17: Segment Information.

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

2018

 

 

2017

 

Resource

 

 

 

 

 

 

 

Northern region

 

 

 

 

 

 

 

Sawlogs

$

49,584

 

 

$

32,086

 

Pulpwood

 

1,780

 

 

 

1,954

 

Stumpage

 

79

 

 

 

142

 

Other

 

216

 

 

 

253

 

 

 

51,659

 

 

 

34,435

 

Southern region

 

 

 

 

 

 

 

Sawlogs

 

14,030

 

 

 

8,689

 

Pulpwood

 

8,970

 

 

 

7,642

 

Stumpage

 

391

 

 

 

82

 

Other

 

1,456

 

 

 

920

 

 

 

24,847

 

 

 

17,333

 

Total Resource revenues

$

76,506

 

 

$

51,768

 

 

 

 

 

 

 

 

 

Wood Products

 

 

 

 

 

 

 

Lumber

 

94,993

 

 

 

64,872

 

Panels

 

28,891

 

 

 

17,695

 

Residuals

 

15,931

 

 

 

13,025

 

 

$

139,815

 

 

$

95,592

 

Real Estate

 

 

 

 

 

 

 

Rural real estate

 

8,833

 

 

 

14,504

 

Development real estate

 

1,219

 

 

 

 

Other

 

503

 

 

 

 

 

$

10,555

 

 

$

14,504

 

Total segment revenues

 

226,876

 

 

 

161,864

 

Intersegment Resource revenues1

 

(26,979

)

 

 

(12,183

)

Total consolidated revenues

$

199,897

 

 

$

149,681

 

 

 

 

 

 

 

 

 

1 Intersegment revenues are based on prevailing market prices of logs sold by our Resource segment to the Wood Products segment.

NOTE 6. CERTAIN BALANCE SHEET COMPONENTS

INVENTORIES

 

(Dollars in thousands)

 

March 31, 2018

 

 

December 31, 2017

 

Logs

 

$

16,827

 

 

$

20,133

 

Lumber, panels and veneer

 

 

33,467

 

 

 

20,889

 

Materials and supplies

 

 

11,859

 

 

 

9,110

 

Total inventories

 

$

62,153

 

 

$

50,132

 

11


 

OTHER CURRENT ASSETS

 

(Dollars in thousands)

 

March 31, 2018

 

 

December 31, 2017

 

Rural real estate held for sale

 

$

9,817

 

 

$

7,721

 

Taxes receivable

 

 

6,838

 

 

 

 

Prepaid expenses

 

 

3,197

 

 

 

2,862

 

Other receivables

 

 

1,972

 

 

 

882

 

Interest rate swaps

 

 

 

 

 

13

 

Total other current assets

 

$

21,824

 

 

$

11,478

 

PROPERTY, PLANT AND EQUIPMENT

 

(Dollars in thousands)

 

March 31, 2018

 

 

December 31, 2017

 

Property, plant and equipment

 

$

528,800

 

 

$

259,437

 

Less: accumulated depreciation

 

 

(185,624

)

 

 

(182,208

)

Total property, plant and equipment, net

 

$

343,176

 

 

$

77,229

 

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

(Dollars in thousands)

 

March 31, 2018

 

 

December 31, 2017

 

Accrued payroll and benefits

 

$

13,700

 

 

$

18,110

 

Accounts payable

 

 

14,173

 

 

 

9,361

 

Accrued interest

 

 

9,285

 

 

 

6,385

 

Accrued taxes

 

 

17,818

 

 

 

5,103

 

Avery Landing accrual (see Note 16: Commitments and Contingencies)

 

 

6,000

 

 

 

6,000

 

Other current liabilities

 

 

14,265

 

 

 

10,242

 

Total accounts payable and accrued liabilities

 

$

75,241

 

 

$

55,201

 

 

NOTE 7. TIMBER AND TIMBERLANDS

 

(Dollars in thousands)

 

March 31, 2018

 

 

December 31, 2017

 

Timber and timberlands

 

$

1,627,669

 

 

$

581,648

 

Logging roads

 

 

76,672

 

 

 

72,828

 

Total timber and timberlands, net

 

$

1,704,341

 

 

$

654,476

 

 

NOTE 8. DEBT

MEDIUM-TERM NOTES

We repaid $14.3 million of our medium-term notes in Q1 2018.

REVENUE BONDS

We assumed the obligations relating to the Letter of Credit supporting Deltic’s $29.0 million Union County, Arkansas Taxable Industrial Revenue Bonds 1998 Series due October 1, 2027. Neither the State of Arkansas nor Union County, Arkansas has any liability under the bonds. Contemporaneously with the issuance of the bonds, Deltic’s subsidiary (Del-Tin) and Union County entered into a lease agreement that obligated Del-Tin to make lease payments in an amount necessary to fund the debt service on the bonds. Under the terms of the loan agreement, a standby letter of credit to benefit the holders of the bonds is required. The irrevocable standby letter of credit was amended and re-issued on February 20, 2018, in the amount of $29.7 million, expiring April 13, 2023. These bonds bear interest at a variable rate determined weekly by the remarketing agent. Interest is payable monthly.  

TERM LOANS

On March 22, 2018, we entered into a Second Amended and Restated Term Loan Agreement, which amended the existing term loan agreement dated December 14, 2014. The agreement includes an additional $100 million of new loans and a $100 million loan assumed in connection with the Deltic merger. The interest coverage ratio and leverage ratio financial covenants are unchanged (at least 3.00 to 1.00 and no more than 40%, respectively). The limitation on timberland acre sales was eliminated.

12


 

We repaid the balance of Deltic’s $106 million credit facility borrowing upon closing of the merger. The repayment was funded by a $100 million borrowing under our credit facility and $6 million of available cash. We subsequently refinanced the $100 million credit facility borrowing with the additional $100 million of tranches of term loans under the Second Amended and Restated Term Loan Agreement.

The following summarizes the three term loan tranches added in the first quarter of 2018:

 

one $100 million tranche maturing 2025 with a fixed rate of 4.05% assumed in connection with the merger;

 

one $65 million tranche maturing 2028 at a variable rate based on one-month LIBOR plus 1.95%; and

 

one $35 million tranche maturing 2028 at a variable rate based on one-month LIBOR plus 1.95%.

CREDIT AGREEMENT

On February 14, 2018, we entered into a Second Amended and Restated Credit Agreement with an expiration date of April 13, 2023. The amended 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 set according to the type of borrowing. LIBOR Loans are issued at a rate equal to the 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 March 31, 2018, 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 $380 million of the bank credit facility.

The interest coverage ratio and leverage ratio financial covenants are unchanged (at least 3.00 to 1.00 and no more than 40%, respectively). The limitation on timberland acre sales was eliminated.

NOTE 9. DERIVATIVE INSTRUMENTS

From time to time, we enter into derivative financial instruments to manage certain cash flow and fair value risks.

Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset or liability to a particular risk, such as interest rate risk, are considered fair value hedges. We had three fair value interest rate swaps with notional amounts totaling $14.3 million, which matured during 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 two interest rate swaps to convert variable-rate debt, comprised of 1-month and 3-month LIBOR plus a spread, to fixed-rate debt. Our cash flow hedges are expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the swaps. Therefore, changes in fair value are recorded as a component of other comprehensive income and will be recognized in earnings when the hedged interest rates affect earnings. The amounts paid or received on the swaps will be recognized as adjustments to interest expense. As of March 31, 2018, the amount of net losses expected to be reclassified into earnings in the next 12 months is $0.5 million.

13


 

The following table presents the gross fair values of derivative instruments on our Condensed Consolidated Balance Sheets:

 

 

 

 

Asset Derivatives

 

 

 

 

Liability Derivatives

 

(Dollars in thousands)

 

Location

 

March 31, 2018

 

 

December 31, 2017

 

 

Location

 

March 31, 2018

 

 

December 31, 2017

 

Derivatives designated in fair value hedging relationships:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Other assets, current

 

$

 

 

$

13

 

 

 

 

$

 

 

$

 

Interest rate contracts

 

Other assets,

non-current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

$

13

 

 

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated in cash flow hedging relationships:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Other assets,

non-current

 

$

1,869

 

 

$

1,156

 

 

Other long-term obligations

 

$

1,670

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table details the effect of derivatives on our Consolidated Statements of Income:

 

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

Location

 

2018

 

 

2017

 

Derivatives designated in fair value hedging relationships:

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

Realized gain (loss) on interest rate contracts1

 

Interest expense

 

$

(36

)

 

$

167

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated in cash flow hedging relationships:

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

Loss recognized in other comprehensive income, net of tax (effective portion)

 

 

 

$

(992

)

 

$

(2

)

Loss reclassified from accumulated other comprehensive income (effective portion)1

 

Interest expense

 

$

(2

)

 

$

(50

)

1

Realized gain (loss) on hedging instruments consists of net cash settlements and interest accruals on the fair value interest rate swaps during the periods. Net cash settlements are included in the supplemental cash flow information within interest, net of amounts capitalized in the Condensed Consolidated Statements of Cash Flows.

NOTE 10. FINANCIAL INSTRUMENTS

The following table presents the estimated fair values of our financial instruments:

 

 

March 31, 2018

 

 

December 31, 2017

 

(Dollars in thousands)

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Cash and cash equivalents (Level 1)

 

$

102,340

 

 

$

102,340

 

 

$

120,457

 

 

$

120,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets related to interest rate swaps (Level 2)

 

$

1,869

 

 

$

1,869

 

 

$

1,169

 

 

$

1,169

 

Derivative liabilities related to interest rate swaps (Level 2)

 

$

(1,670

)

 

$

(1,670

)

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including current portion (Level 2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loans

 

$

(543,500

)

 

$

(538,306

)

 

$

(343,500

)

 

$

(345,222

)

Senior notes

 

 

(149,592

)

 

 

(159,375

)

 

 

(149,528

)

 

 

(161,063

)

Revenue bonds

 

 

(94,735

)

 

 

(93,775

)

 

 

(65,735

)

 

 

(63,967

)

Medium-term notes

 

 

(3,000

)

 

 

(3,511

)

 

 

(17,250

)

 

 

(18,227

)

Total long-term debt1

 

$

(790,827

)

 

$

(794,967

)

 

$

(576,013

)

 

$

(588,479

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company owned life insurance asset (COLI) (Level 3)

 

$

2,241

 

 

$

2,241

 

 

$

1,996

 

 

$

1,996

 

1

The carrying amount of long-term debt above excludes unamortized discounts.

For cash and cash equivalents and any revolving line of credit borrowings, the carrying amount approximates fair value due to the short-term nature of these financial instruments.

The fair value of interest rate swaps are 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.

14


 

The fair value of our long-term debt is estimated based upon quoted market prices for similar debt issues or estimated based on average market prices for comparable debt when there is no quoted market price.

The contract value of our COLI, the amount at which it could be redeemed, is used to estimate fair value because market prices are not readily available.

NOTE 11. PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS

The following tables detail the components of net periodic cost (benefit) of our pension plans and other postretirement employee benefits (OPEB):

 

 

Three Months Ended March 31,

 

 

 

Pension

 

 

OPEB

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service cost

 

$

1,913

 

 

$

1,862

 

 

$

44

 

 

$

3

 

Interest cost