EX-99.1 2 a5261646ex991.txt EXHIBIT 99.1 Exhibit 99.1 Potlatch Reports Third Quarter Results SPOKANE, Wash.--(BUSINESS WIRE)--Oct. 31, 2006--Potlatch Corporation (NYSE:PCH), a real estate investment trust (REIT), today reported net earnings of $24.2 million, or $.62 per diluted common share, for the third quarter of 2006, compared to second quarter net earnings of $8.0 million, or $.21 per diluted common share, and net earnings of $11.1 million for the third quarter of 2005. Results for the third quarter of 2006 included a net tax benefit of $9.2 million, or $.23 per diluted common share, primarily related to an agreement reached with the Internal Revenue Service regarding tax issues pertaining to open tax years. Excluding the net tax benefit, third quarter 2006 net income was $15.0 million, or $.39 per diluted common share. Compared to the second quarter, results for the third quarter of 2006 reflected continued improvement in our pulp and paperboard business and higher results for the Resource segment, which were partially offset by lower results for the Wood Products segment. Third quarter 2006 results were better than the third quarter of 2005 due primarily to improved results for the Pulp and Paperboard and Consumer Products segments. Net revenues for the third quarter of 2006 were $398.1 million, compared with $414.6 million and $405.5 million recorded in the second quarter of 2006 and third quarter of 2005, respectively. Net earnings for the first nine months of 2006 totaled $95.0 million, or $2.65 per diluted common share, compared to net earnings of $23.0 million, or $.79 per diluted common share, for the first nine months of 2005. Results for the first nine months of 2006 included a net tax benefit of $60.4 million, or $1.68 per diluted common share, related primarily to the company's January 1, 2006, conversion to a REIT. Cash provided by operating activities for the nine months ended September 30, 2006, was $137.9 million, compared to $43.9 million for the same period in 2005. During the third quarter of 2006, the company paid $19.0 million in distributions and made an $18.1 million voluntary contribution to its qualified pension plans. Resource The Resource segment reported operating income of $19.3 million for the third quarter of 2006, compared with $9.8 million in the second quarter and $20.0 million earned in the third quarter of 2005. Compared to the second quarter, the higher operating income for the third quarter of 2006 was due primarily to seasonal increases in Idaho fee harvest levels, which were partially offset by lower selling prices for logs in Idaho and Arkansas. The slightly lower earnings for the third quarter of 2006 compared to the same period in 2005 were due primarily to decreased harvest of fee timber and lower selling prices for logs in Arkansas, combined with a loss at the company's Boardman, Oregon, hybrid poplar operation. The Boardman operation was in a development stage in the third quarter of 2005, and most of the expenses were capitalized in that quarter. Following the start of harvesting operations in late 2005, most operating costs are now expensed. Increased fee harvest and higher selling prices for logs in Idaho partially offset the unfavorable comparison. Land Sales and Development The Land Sales and Development segment, which is a new segment beginning in 2006, reported operating income of $0.8 million for the third quarter of 2006, compared with operating income of $1.5 million in the second quarter and $6.0 million for 2005's third quarter. The lower results for the third quarter of 2006 as compared to the second quarter were due to the sale of a conservation easement in Minnesota during the second quarter. The year over year quarterly results were lower for 2006 due to larger strategic sales that occurred in 2005. Most of our land sales activity is on hold pending the completion of an on-going assessment of our land for alternative values and identification of suitable property for tax deferred exchanges. Wood Products The Wood Products segment recorded an operating loss of $5.2 million for the third quarter of 2006, compared with income of $3.5 million and $5.9 million in the second quarter of 2006 and the third quarter of 2005, respectively. "Markets for our lumber products deteriorated significantly, especially for our southern lumber products," noted Michael J. Covey, Potlatch president and chief executive officer. "Sales prices for our southern yellow pine lumber products were down 13% from the second quarter of 2006 and 21% from the third quarter of 2005, while log prices were relatively flat, thus eroding margins during the third quarter," Covey added. Due to the poor lumber markets in the South, the company's two Arkansas lumber mills took temporary downtime during the third quarter, and additional downtime is being taken at these lumber mills in the fourth quarter. Pulp and Paperboard For the third quarter of 2006, the Pulp and Paperboard segment reported operating income of $14.3 million, versus $3.9 million in the second quarter and $0.4 million for the third quarter of 2005. "Markets for our pulp and paperboard products continued to strengthen during the third quarter," Covey said. "Average sales prices for both pulp and paperboard were higher in the third quarter of 2006 compared to the second quarter of 2006 and third quarter of 2005, with selling prices for paperboard increasing 3% and 6%, respectively, versus the two comparable periods," Covey noted. Higher costs for wood fiber in Idaho and maintenance partially offset the favorable comparisons to the second quarter of 2006 and third quarter of 2005. Consumer Products The Consumer Products segment reported operating income of $6.2 million for the third quarter of 2006, compared with operating income of $7.0 million and $2.4 million reported for the second quarter of 2006 and third quarter of 2005, respectively. Compared to the second quarter, the lower earnings for the third quarter of 2006 were primarily due to higher pulp costs and 5% fewer shipments. Record shipments were recorded in the second quarter of 2006, due primarily to the sale of additional consumer tissue products and parent rolls in order to balance our inventories. The improved results for the third quarter of 2006 compared to the same quarter in 2005 were largely due to increased shipments and higher net selling prices, partially offset by higher pulp, freight and packaging costs. The higher net selling prices were due to a combination of price increases and sheet count reductions. Other Items Excluding the net tax benefit of $9.2 million primarily related to the agreement reached with the Internal Revenue Service regarding tax issues pertaining to open tax years, the company recorded an income tax benefit of $4.6 million for the third quarter of 2006, compared with income tax provisions of $1.3 million and $6.6 million for the second quarter of 2006 and third quarter of 2005, respectively. The income tax benefit was due to a pre-tax loss for the company's taxable REIT subsidiary, which includes all of the manufacturing businesses. During the third quarter of 2006, we redeemed the remaining $5.5 million balance of our 10% Senior Subordinated Notes. Premium-related and deferred debt issuance costs associated with the redemption were more than offset by interest rate swap income associated with the notes. The U.S. and Canada reached a negotiated settlement to the softwood lumber trade dispute during the third quarter. As a result of the settlement, Potlatch expects to receive an estimated $40 million payment within six months of the effective date of October 13, 2006. The company anticipates receiving 50% or more of the payment in the fourth quarter of 2006. Outlook Pulp, paperboard and consumer tissue markets are expected to remain strong for the remainder of 2006, with some additional strengthening of paperboard markets likely. These improvements are expected to be partially offset by continued overall poor markets for lumber and higher wood fiber costs, especially for our Idaho pulp and paperboard operation, due to very high chip prices resulting at least partly from sawmill curtailments in the West. We expect that it may take several months for the capacity in North America to adjust to housing starts at current levels. Although we have not seen significant erosion of log prices in our operating areas, it is possible that weak markets will cause log prices to decline in the future. About Potlatch Potlatch is a REIT with 1.5 million acres of forestland in Arkansas, Idaho, Minnesota and Oregon. Through a taxable REIT subsidiary, the company also operates 13 manufacturing facilities that produce lumber and panel products and bleached pulp products, including paperboard and tissue products. A conference call will be held today, October 31, at 8 a.m. Pacific time (11 a.m. Eastern). Those interested can access the conference call by dialing 1-866-314-9013 for U.S./Canada and 1-617-213-8053 for calls outside the U.S./Canada. Participants will be asked to provide passcode number 38999387. The conference call may also be accessed through the Potlatch Corporation website at www.potlatchcorp.com. For those unable to participate in the live call, an archived recording will be available through the Potlatch Corporation website for approximately one year following the conference call. A telephone replay of the conference call will be available until November 7, 2006, by calling 1-888-286-8010 for U.S./Canada, or 1-617-801-6888 for calls outside the U.S./Canada, and entering passcode number 96459995. Forward-Looking Statements This press release contains certain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995 as amended, including without limitation, statements regarding the amount and timing of expected payments under the U.S./Canada softwood lumber trade dispute settlement, direction of markets, and future costs and prices. These forward-looking statements are based on current expectations, estimates, assumptions and projections that are subject to change, and actual results may differ materially from the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, changes in the United States and international economies; changes in exchange rates between the U.S. dollar and other currencies; changes in the level of construction activity; changes in worldwide demand for our products; changes in worldwide production and production capacity in the forest products industry; competitive pricing pressures for our products; unanticipated manufacturing disruptions; changes in general and industry-specific environmental laws and regulations; unforeseen environmental liabilities or expenditures; weather conditions; changes in raw material, energy, and other costs; implementation or revision of governmental policies and regulations affecting import and export controls or taxes; the ability to satisfy complex rules in order to remain qualified as a REIT; changes in tax laws that could reduce the benefits associated with REIT status; unanticipated actions by the Canadian government or other Canadian interests with respect to the softwood lumber trade dispute settlement and other risks and uncertainties described from time to time in the company's public filings with the Securities and Exchange Commission. The company does not undertake to update any forward-looking statements. Potlatch Corporation and Consolidated Subsidiaries Statements of Operations Unaudited (Dollars in thousands - except per-share amounts) Three Months Ended Nine Months Ended ------------------------------ ----------------------- Sept. 30, June 30, Sept. 30, September 30, 2006 2006 2005 2006 2005 ---------------------------------------------------------------------- Revenues $398,108 $414,623 $405,540 $1,215,212 $1,110,923 ---------------------------------------------------------------------- Costs and expenses: Depreciation, depletion and amortization 22,989 22,314 21,729 67,995 60,404 Materials, labor and other operating expenses 334,625 353,917 340,359 1,028,248 932,169 Selling, general and administrative expenses 23,206 22,093 18,999 68,946 61,284 ---------------------------------------------------------------------- 380,820 398,324 381,087 1,165,189 1,053,857 ---------------------------------------------------------------------- Earnings from operations 17,288 16,299 24,453 50,023 57,066 Interest expense (7,229) (7,323) (7,236) (21,911) (21,722) Debt retirement costs 53 - - 53 - Interest income 355 295 514 1,452 1,827 ---------------------------------------------------------------------- Earnings before taxes 10,467 9,271 17,731 29,617 37,171 Provision (benefit) for taxes (13,765) 1,273 6,641 (65,386) 14,125 ---------------------------------------------------------------------- Net earnings $ 24,232 $ 7,998 $ 11,090 $ 95,003 $ 23,046 ====================================================================== Net earnings per common share: (a) Basic $ .63 $ .21 $ .38 $ 2.66 $ .79 Diluted .62 .21 .38 2.65 .79 Average shares outstanding (in thousands): Basic 38,724 38,681 29,179 35,688 29,055 Diluted 38,858 38,819 29,401 35,870 29,238 ---------------------------------------------------------------------- Certain 2005 amounts have been reclassified to conform to the 2006 presentation. (a) On March 31, 2006, the Company paid a special earnings and profit distribution, consisting of approximately 9.1 million shares of common stock and $89 million in cash, in association with the REIT conversion. Reflected below are pro forma results giving effect to the common stock distribution for diluted earnings per common share for all periods presented, as if the common stock distribution had occurred at the beginning of each period: Three Months Ended Nine Months Ended ---------------------------- ----------------- Sept. 30, June 30, Sept. 30, September 30, 2006 2006 2005 2006 2005 ----------------------------------------------- Diluted earnings per common share As reported $ .62 $ .21 $ .38 $ 2.65 $ .79 Pro forma $ .62 $ .21 $ .29 $ 2.45 $ .60 Potlatch Corporation and Consolidated Subsidiaries Condensed Balance Sheets Unaudited (Dollars in thousands - except per-share amounts) September 30, December 31, 2006 2005 ---------------------------------------------------------------------- Assets Current assets: Cash and short-term investments $ 16,752 $ 63,833 Receivables, net 117,191 114,641 Inventories 160,192 209,696 Prepaid expenses 17,077 15,006 ---------------------------------------------------------------------- Total current assets 311,212 403,176 Land other than timberlands 8,556 8,507 Plant and equipment, at cost less accumulated depreciation 566,261 589,161 Timber, timberlands and related logging facilities 393,781 400,595 Other assets 253,664 227,358 ---------------------------------------------------------------------- $1,533,474 $1,628,797 ====================================================================== Liabilities and Stockholders' Equity Current liabilities: Current installments on long-term debt $ 3,157 $ 2,357 Accounts payable and accrued liabilities 163,856 144,943 ---------------------------------------------------------------------- Total current liabilities 167,013 147,300 Long-term debt 324,464 333,097 Other long-term obligations 252,392 245,867 Deferred taxes 124,610 197,385 Stockholders' equity 664,995 705,148 ---------------------------------------------------------------------- $1,533,474 $1,628,797 ====================================================================== Stockholders' equity per common share $ 17.16 $ 24.01 Working capital $ 144,199 $ 255,876 Current ratio 1.9:1 2.7:1 ---------------------------------------------------------------------- Certain 2005 amounts have been reclassified to conform to the 2006 presentation. Potlatch Corporation and Consolidated Subsidiaries Condensed Statements of Cash Flows Unaudited (Dollars in thousands) Nine Months Ended September 30, 2006 2005 ---------------------------------------------------------------------- Cash Flows From Operations Net earnings $95,003 $23,046 Adjustments to reconcile net earnings to net operating cash flows: Depreciation, depletion and amortization 67,995 60,404 Deferred taxes (72,775) - Cost of permit timber harvested 3,229 3,747 Equity-based compensation expense 2,970 1,628 Employee benefit plans (981) (2,907) Working capital changes 60,569 (42,040) Funding of qualified pension plans (18,092) - ---------------------------------------------------------------------- Net cash provided by operating activities 137,918 43,878 ---------------------------------------------------------------------- Cash Flows From Investing Decrease in short-term investments 48,263 60,917 Additions to plant and properties (37,243) (91,162) Other, net (4,514) (6,430) ---------------------------------------------------------------------- Net cash provided by (used for) investing activities 6,506 (36,675) ---------------------------------------------------------------------- Cash Flows From Financing Change in book overdrafts 3,228 837 Issuance of common stock 6,261 - Repayment of long-term debt (7,833) (1,078) Issuance of treasury stock 513 10,880 Purchase of treasury stock - (1,868) Distributions to common stockholders (146,112) (13,103) Income tax benefit resulting from the exercise of employee stock options 1,233 - Other, net (532) 491 ---------------------------------------------------------------------- Net cash used for financing activities (143,242) (3,841) ---------------------------------------------------------------------- Increase in cash 1,182 3,362 Cash at beginning of period 6,133 8,646 ---------------------------------------------------------------------- Cash at end of period $7,315 $12,008 ====================================================================== Certain 2005 amounts have been reclassified to conform to the 2006 presentation. Highlights Unaudited (Dollars in thousands - except per-share amounts) Three Months Ended Nine Months Ended ---------------------------- ----------------- Sept. 30, June 30, Sept. 30, Sept. 30, 2006 2006 2005 2006 2005 ---------------------------------------------------------------------- Distributions per common share (1) (annual rate) $ 1.96 $ 1.96 $ .60 $ 1.96 $ .60 ====================================================================== (1) Distributions for 2006 reflect the annualized rate, after adjustment for a special earnings and profit distribution of $15.15 per common share paid in the first quarter. Segment Information (Dollars in thousands) Three Months Ended Nine Months Ended ------------------------------ ----------------------- Sept. 30, June 30, Sept. 30, September 30, 2006 2006 2005 2006 2005 ---------------------------------------------------------------------- Revenues Resource $ 84,710 $ 68,787 $ 90,794 $ 218,689 $ 209,195 ---------------------------------------------------------------------- Land sales and development 1,139 2,031 6,938 3,810 9,502 ---------------------------------------------------------------------- Wood products Lumber 89,703 107,671 103,795 302,771 289,602 Plywood 12,657 15,368 12,943 42,452 40,197 Particleboard 5,928 5,012 4,036 15,138 13,286 Other 9,209 9,773 10,183 30,053 26,925 ---------------------------------------------------------------------- Total wood products revenues 117,497 137,824 130,957 390,414 370,010 ---------------------------------------------------------------------- Pulp and paperboard Paperboard 131,080 132,130 133,178 395,743 372,682 Pulp 23,004 15,317 18,099 53,811 45,317 Other 302 294 206 915 681 ---------------------------------------------------------------------- Total pulp and paperboard revenues 154,386 147,741 151,483 450,469 418,680 ---------------------------------------------------------------------- Consumer products 113,232 117,142 95,541 329,909 281,203 ---------------------------------------------------------------------- 470,964 473,525 475,713 1,393,291 1,288,590 Intersegment revenues (72,856) (58,902) (70,173) (178,079) (177,667) ---------------------------------------------------------------------- Total revenues $398,108 $414,623 $405,540 $1,215,212 $1,110,923 ====================================================================== Operating income (loss) Resource $ 19,262 $ 9,764 $ 19,957 $ 43,408 $ 42,954 Land sales and development 788 1,491 6,043 2,768 7,496 Wood products (5,161) 3,481 5,943 5,581 28,212 Pulp and paperboard 14,302 3,913 402 16,560 2,695 Consumer products 6,186 6,984 2,379 20,059 3,230 Eliminations (6,578) 1,049 (1,506) (4,859) 625 ---------------------------------------------------------------------- 28,799 26,682 33,218 83,517 85,212 Corporate (18,332) (17,411) (15,487) (53,900) (48,041) ---------------------------------------------------------------------- Earnings before taxes $ 10,467 $ 9,271 $ 17,731 $ 29,617 $ 37,171 ====================================================================== Certain 2005 amounts have been reclassified to conform to the 2006 presentation. CONTACT: Potlatch Corporation Mark J. Benson, 509-835-1513 (Media) Douglas D. Spedden, 509-835-1549 (Investors)