10-Q 1 q101.txt FIRST QUARTER 2001 FORM 10-Q 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, 2001 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, 2001: 28,296,434 shares of Common Stock, par value $1 per share. 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, 2001 and 2000 2 Condensed Balance Sheets at March 31, 2001 and December 31, 2000 3 Condensed Statements of Cash Flows for the three months ended March 31, 2001 and 2000 4 Notes to Financial Statements 5 - 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 - 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 EXHIBIT INDEX 16 1 PART I Item 1. Financial Statements Potlatch Corporation and Consolidated Subsidiaries Statements of Earnings Unaudited (Dollars in thousands - except per-share amounts) ----------------------------------------------------------------------------
Three Months Ended March 31 2001 2000 ---------------------------------------------------------------------------- Net sales $444,047 $474,556 ---------------------------------------------------------------------------- Costs and expenses: Depreciation, amortization and cost of fee timber harvested 40,872 40,837 Materials, labor and other operating expenses 405,531 382,359 Selling, general and administrative expenses 28,666 33,140 Restructuring charge (Note 4) 4,217 - ---------------------------------------------------------------------------- 479,286 456,336 ---------------------------------------------------------------------------- Earnings (loss) from operations (35,239) 18,220 Interest expense (16,734) (14,051) Other income (expense), net 485 (175) ---------------------------------------------------------------------------- Earnings (loss) before taxes on income (51,488) 3,994 Provision for taxes on income (Note 2) (20,080) 1,558 ---------------------------------------------------------------------------- Net earnings (loss) $(31,408) $ 2,436 ============================================================================ Net earnings (loss) per common share (Note 3): Basic $(1.11) $ .08 Diluted (1.11) .08 Dividends per common share (annual rate) 1.74 1.74 Average shares outstanding (in thousands): Basic 28,330 28,779 Diluted 28,330 28,814 ---------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
2 Potlatch Corporation and Consolidated Subsidiaries Condensed Balance Sheets 2001 amounts unaudited (Dollars in thousands - except per-share amounts) ---------------------------------------------------------------------------
March 31, December 31, 2001 2000 --------------------------------------------------------------------------- Assets Current assets: Cash $ 1,970 $ 11,652 Short-term investments 9 9 Receivables, net 213,377 187,819 Inventories (Note 5) 219,935 223,206 Prepaid expenses 83,199 61,153 --------------------------------------------------------------------------- Total current assets 518,490 483,839 Land, other than timberlands 9,044 9,044 Plant and equipment, at cost less accumulated depreciation 1,551,442 1,637,374 Timber, timberlands and related logging facilities 389,844 333,249 Other assets 81,854 78,939 --------------------------------------------------------------------------- $2,550,674 $2,542,445 =========================================================================== Liabilities and Stockholders' Equity Current liabilities: Notes payable $ 239,970 $ 188,943 Current installments on long-term debt 100,306 325 Accounts payable and accrued liabilities 248,080 249,831 --------------------------------------------------------------------------- Total current liabilities 588,356 439,099 Long-term debt 701,568 801,549 Other long-term obligations 185,059 184,147 Deferred taxes 297,861 293,961 Put options 8,334 10,453 Stockholders' equity 769,496 813,236 --------------------------------------------------------------------------- $2,550,674 $2,542,445 =========================================================================== Stockholders' equity per common share $27.19 $28.69 Working capital $(69,866) $44,740 Current ratio .9:1 1.1:1 --------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
3 Potlatch Corporation and Consolidated Subsidiaries Condensed Statements of Cash Flows Unaudited (Dollars in thousands) ---------------------------------------------------------------------------
Three Months Ended March 31 2001 2000 --------------------------------------------------------------------------- Cash Flows From Operations Net earnings (loss) $(31,408) $ 2,436 Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operations: Depreciation, amortization and cost of fee timber harvested 40,872 40,837 Deferred taxes 3,900 1,091 Working capital changes (42,243) (6,855) Other, net 113 (337) --------------------------------------------------------------------------- Net cash provided by (used for) operations (28,766) 37,172 --------------------------------------------------------------------------- Cash Flows From Investing Additions to investments (1,149) (921) Reductions in investments 466 281 Additions to plant and properties (13,294) (34,062) --------------------------------------------------------------------------- Net cash used for investing (13,977) (34,702) --------------------------------------------------------------------------- Cash Flows From Financing Change in book overdrafts (3,841) 2,156 Increase in notes payable 51,027 33,703 Repayment of long-term debt - (9,999) Issuance of treasury stock - 404 Purchase of treasury stock (2,120) (13,011) Dividends (12,332) (12,567) Other, net 327 (5,407) --------------------------------------------------------------------------- Net cash provided by (used for) financing 33,061 (4,721) --------------------------------------------------------------------------- Decrease in cash (9,682) (2,251) Balance at beginning of period 11,652 11,531 --------------------------------------------------------------------------- Balance at end of period $ 1,970 $ 9,280 =========================================================================== Net interest payments (net of amounts capitalized) for the three months ended March 31, 2001 and 2000 were $9.3 million and $6.6 million, respectively. Net income tax payments (refunds) for the three months ended March 31, 2001 and 2000 were $0 million and $(0.2) million, respectively. The accompanying notes are an integral part of these financial statements.
4 Potlatch Corporation and Consolidated Subsidiaries Notes to Financial Statements (Dollars in thousands) --------------------------------------------------------------------------- NOTE 1. GENERAL - The accompanying condensed balance sheets at March 31, 2001, and December 31, 2000, and the statements of earnings and the condensed statements of cash flows for the three months ended March 31, 2001, and 2000, 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 39 percent for the quarters ended March 31, 2001 and 2000. 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 2001 2000 ---- ---- Basic average common shares outstanding 28,329,767 28,779,449 Incremental shares due to common stock options - 34,140 ---------- ---------- Diluted average common shares outstanding 28,329,767 28,813,589 ========== ========== Incremental shares due to common stock options of 778 and put options of 59,201 were not included in the diluted average common shares outstanding total for March 31, 2001 due to their antidilutive effect as a result of the company's net loss for the period. Stock options to purchase shares of common stock of 2,035,425 and 1,940,225 at March 31, 2001, and 2000, respectively, were not included in the above computations because the stock options' exercise prices were greater than the average market price of common shares. NOTE 4. RESTRUCTURING CHARGES - In March 2001 the company recorded a $4.2 million charge associated with a workforce reduction plan at its pulp, paperboard and consumer products operations in Idaho. The plan permanently reduced the workforce by 124 hourly positions. During 2000 the company also recorded charges related to a company-wide reduction and reorganization in its salaried workforce and for the permanent closure of a plywood plant. The following table summarizes the components of the accrued liabilities for all of these charges and the cash and noncash amounts applied against them as of March 31, 2001: 5
Accrued Compensation Ancillary Site Asset (Dollars in thousands) and Employee Benefits Maintenance Valuation Total ------------------------------------------------------------------------------------------------ Hourly workforce reduction charge $ 4,217 $ - $ - $ 4,217 Cash payments - - - - Noncash allocations (2,864) - - (2,864) ------------------------------------------------------------------------------------------------ 1,353 - - 1,353 ------------------------------------------------------------------------------------------------ Salaried workforce reduction charge 27,909 - - 27,909 Cash payments (16,872) - - (16,872) Noncash allocations (2,009) - - (2,009) ------------------------------------------------------------------------------------------------ 9,028 - - 9,028 ------------------------------------------------------------------------------------------------ Mill closure charge 7,825 3,837 6,840 18,502 Cash payments (4,065) (795) - (4,860) Noncash allocations (3,852) - - (3,852) ------------------------------------------------------------------------------------------------ (92) 3,042 6,840 9,790 ------------------------------------------------------------------------------------------------ $ 10,289 $3,042 $6,840 $ 20,171 ================================================================================================
NOTE 5. INVENTORIES - Inventories at the balance sheet dates consist of: March 31, 2001 December 31, 2000 -------------- ----------------- Raw materials $105,806 $105,022 Work in process 5,788 3,849 Finished goods 108,341 114,335 -------- -------- $219,935 $223,206 ======== ======== ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Funding Net cash used for operations for the first three months of 2001, as presented in the Condensed Statements of Cash Flows on page 4, totaled $28.8 million, compared with cash provided by operations of $37.2 million for the same period in 2000. The unfavorable comparison was largely due to a decrease in earnings before taxes of $55.5 million in the first quarter of 2001 compared to the same period in 2000. Net cash used for investing was $14.0 million for 2001's first quarter, a decrease of $20.7 million compared to the first quarter of 2000. The change was due to a planned reduction in capital spending from 2000 levels. Capital expenditures totaled $13.3 million for the first three months of 2001. Of this amount, the company spent $5.6 million in the wood products segment, the majority of which were for the completion of the modernization and expansion project at the Cook, Minnesota, oriented strand board mill. Total spending in the resource segment for the quarter equaled $3.1 million, mainly for reforestation and activities at the Boardman, Oregon, hybrid poplar plantation. The company spent $1.2 million in the printing papers segment and $3.4 million in the pulp and paper segment, largely for environmental, safety and general replacement projects. 6 Net cash provided by financing totaled $33.1 million in the first quarter of 2001, compared to cash used for financing activities of $4.7 million in the first quarter of 2000. The company borrowed $17.3 million more under its credit lines in the current quarter than in the same period last year and also reduced its purchases of treasury stock by $10.9 million. Additionally, the company repaid $10.0 million of long-term debt in the first quarter of 2000. The company's ratio of long-term debt to stockholders' equity was .91 to 1 at March 31, 2001, compared to .99 to 1 at December 31, 2000. Long-term debt declined $100.0 million during the quarter due to the reclassification to current of debt which matures in March 2002. Stockholders' equity decreased $43.7 million due to a net loss of $31.4 million and dividend payments of $12.3 million. In the first quarter of 2001, the company funded its operating losses and other cash requirements primarily through borrowings under its bank credit agreements. At March 31, 2001, the company's bank credit agreements permitted the borrowing of up to $350 million (later increased to $400 million), of which $100 million may be used for long-term debt. At March 31, 2001, the company had $173.0 million outstanding under the short-term portion of the bank lines. The remainder of the credit lines was used to back the commercial paper issued by the company. Commercial paper outstanding at March 31, 2001 totaled $167.0 million, of which $67.0 million was classified as short- term debt and $100.0 million was classified as long-term debt. During April 2001, all commercial paper became due and was replaced by borrowings under the bank credit lines. During March 2001, the company determined that it might be in violation of its quarterly interest coverage ratio test in its bank credit agreements for the quarter ended March 31, and it obtained a waiver of the covenant for that quarter. The covenant requires, in effect, that for any four fiscal quarters, the net earnings of the company plus income tax expense, depreciation and depletion exceed the interest expense of the company by a ratio of at least three to one. The company had a 3.0 interest coverage ratio at March 31, 2001, which was in compliance with the covenant. The company is currently in the process of negotiating a new bank credit facility to replace the existing bank credit agreements. The company expects that the new facility will contain financial maintenance covenants (to be negotiated with the lenders), be secured by certain assets, and become effective upon the sale of $200-$300 million of long-term debt securities in a separate financing with institutional investors. The company expects that the new credit facility will be in place by June 30, 2001, although there can be no assurance that it will be in place by that time or that it will contain terms (including pricing terms) that are favorable to the company. If a new credit facility is not in place by June 30, 2001, the company may need to obtain an additional waiver of the quarterly interest coverage ratio test under its existing bank credit agreements. During the quarter, Standard & Poors, Moody's and Fitch completed a review of their ratings on the company's outstanding long-term debt. As a result of the review, Standard & Poors and Fitch adjusted their ratings from BBB+ to BBB and Moody's adjusted its rating from Baa1 to 7 Baa3. As of April 3, 2001, Standard & Poors placed the company on a negative credit watch. The changes in its debt ratings are expected to increase the company's borrowing costs in future financings but are not expected to significantly adversely affect its access to capital markets. The company had negative working capital of $69.9 million at March 31, 2001, a decrease of $114.6 million from December 31, 2000. The decrease was largely due to the reclassification from long-term to current of $100.0 million of 6.25 percent debentures maturing in March 2002. Also negatively affecting working capital was an increase of $51.0 million in notes payable and a decrease in cash of $9.7 million. Partially offsetting these amounts were increases of $25.6 million in receivables and $22.0 million in prepaid expenses. 8 Results of Operations A summary of period-to-period changes in items included in the statements of earnings is presented on page 13 of this Form 10-Q. Net sales figures for 2000 have been restated due to the reclassification of freight costs. Segment Information (Dollars in thousands) ---------------------------------------------------------------------------
Three Months Ended March 31 2001 2000 --------------------------------------------------------------------------- Segment Sales Resource $ 91,287 $ 88,558 Wood products Oriented strand board 32,326 61,844 Lumber 58,039 69,883 Plywood 10,726 18,359 Particleboard 3,889 5,541 Other 5,754 6,868 --------------------------------------------------------------------------- 110,734 162,495 --------------------------------------------------------------------------- Printing papers Printing papers 110,786 117,033 Pulp 17,604 9,620 --------------------------------------------------------------------------- 128,390 126,653 --------------------------------------------------------------------------- Pulp and paper Paperboard 116,640 108,990 Tissue 83,127 65,415 Pulp 2,830 5,745 --------------------------------------------------------------------------- 202,597 180,150 --------------------------------------------------------------------------- 533,008 557,856 Elimination of intersegment sales (88,961) (83,300) --------------------------------------------------------------------------- Total consolidated net sales $444,047 $474,556 =========================================================================== Intersegment sales or transfers Resource $ 84,335 $ 79,357 Wood products 4,023 3,681 Printing papers 594 247 Pulp and paper 9 15 --------------------------------------------------------------------------- Total $ 88,961 $ 83,300 =========================================================================== Operating Income (Loss) Resource $ 7,863 $ 12,783 Wood products (20,718) 15,728 Printing papers (2,172) (4,134) Pulp and paper (15,095) 3,344 Eliminations and adjustments 2,334 (1,339) --------------------------------------------------------------------------- (27,788) 26,382 Corporate (23,700) (22,388) --------------------------------------------------------------------------- Consolidated earnings (loss) before taxes on income $(51,488) $ 3,994 ===========================================================================
9 The company reported a loss for the first quarter of 2001, largely due to continuing high energy costs and poor market conditions for most of its products. The results for the quarter include an after-tax charge of $2.6 million, or $.09 per diluted common share, related to a workforce reduction plan at the company's pulp, paperboard and consumer products operations in Idaho. For the first quarter of 2001 the company incurred a net loss of $28.8 million, or $1.02 per diluted common share, before the workforce reduction charge. Including the charge, the loss was $31.4 million or $1.11 per diluted common share. Net earnings for the first quarter of 2000 were $2.4 million, or $.08 per diluted common share. Net sales for the first quarter of 2001 were $444.0 million, compared to $474.6 million recorded a year ago. The resource segment reported earnings of $7.9 million for the first quarter, compared to the $12.8 million earned in the first quarter of 2000. The unfavorable comparison to the prior year was primarily due to lower log production in Idaho and Arkansas combined with lower net sales realizations for log sales in Idaho. The wood products segment reported an operating loss of $20.7 million for the first quarter of 2001, versus earnings of $15.7 million recorded in 2000's first quarter. Net sales realizations for all of the company's wood products were considerably lower than first quarter 2000 levels, especially for oriented strand board, which were down over 40 percent. Oriented strand board shipments declined during the first quarter of 2001, largely due to the temporary shutdown of the Cook, Minnesota, mill to complete a modernization and expansion project. The Cook mill has been operating well since its startup in late January. Lower plywood shipments in the first quarter of 2001 reflect the permanent closure of the Jaype, Idaho, mill in the fall of 2000. During the first quarter markets for lumber and panel products continued to reflect the effects of foreign imports. The printing papers segment reported a first quarter 2001 operating loss of $2.2 million, a slight improvement over the $4.1 million loss in the first quarter of 2000. Increased production at the pulp mill in Cloquet, Minnesota, helped to reduce costs and led to significantly increased pulp shipments compared to the first quarter of 2000. Those benefits were partially offset by lower net sales realizations for printing papers and pulp and higher energy costs. Markets for the company's printing papers remained soft for the first quarter. The pulp and paper segment reported an operating loss for 2001's first quarter of $15.1 million, compared to earnings of $3.3 million in 2000's first quarter. High energy costs, particularly in the northwest, severely affected the segment's financial performance. The company is actively working to mitigate these costs through conservation initiatives and enhancement of its internal electrical generation capabilities. Results were also adversely affected by lower net sales realizations for paperboard and pulp and a decline in pulp shipments. Consumer tissue product shipments and net sales realizations showed modest increases for the quarter compared to the first quarter of 2000. Markets for the segment's products were soft 10 during the quarter, with the exception of consumer tissue products, which were stable for the period. The company's operating results reflect the general cyclical pattern of the forest products industry. All of the company's pulp-based products other than tissue products are influenced by international trade. In addition, the company's wood products are subject to competition from manufacturers in North and South America. Historical prices for the company's products have been volatile, and the company, like other participants in this industry, has limited direct influence over the timing and extent of price changes for its products. Product pricing is significantly affected by the relationship between industry supply and demand. Product supply is influenced primarily by fluctuations in available manufacturing capacity. Demand is affected by the state of the economy in general and a variety of other factors. The demand for the company's lumber resources and wood products is affected by the level of new residential construction activity and, to a lesser extent, home repair and remodeling activity, which are subject to fluctuations due to changes in economic conditions, interest rates, population growth, weather conditions and other factors. The demand for most of the company's printing papers and pulp and paper products is primarily affected by the state of the global economy, in general, and, in particular, the economies in North America and Asia. A prolonged and severe weakness in the markets for most of the company's principal products could seriously harm its results of operations and financial condition and could affect its ability to satisfy working capital requirements and its obligations under various debt instruments. The markets for the company's products are highly competitive, with a number of major companies competing in each market. Many of the company's competitors have significantly greater financial resources than the company. In addition, some of the company's competitors are currently lower-cost producers in some of the businesses in which the company operates, particularly in the company's pulp-based businesses. Because the company's competitors are located worldwide, variations in exchange rates between the United States dollar and other currencies, particularly the Euro, significantly affect the company's relative competitive position as compared to many of its competitors. Although the company generates a substantial portion of the energy required to operate its mills, the cost of natural gas and electricity purchased from outside suppliers increased significantly during late 2000 and these high costs continued during the first quarter of 2001. The company's facilities in Idaho have been most adversely affected as a result of relatively greater price increases in the Northwestern United States. The company has taken steps to increase its energy production and reduce its energy needs, which has substantially reduced its energy costs since the beginning of the year. Other This report contains, in addition to historical information, certain forward-looking statements. These forward-looking statements are based on management's best estimates and assumptions regarding future events, 11 and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. The company's actual results could differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, operating difficulties; changes in the United States and international economies; changes in worldwide demand for the company's products; changes in worldwide production and production capacity in the forest products industry; competitive pricing pressures for the company's products; and changes in raw material, energy and other costs. 12 POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES Changes in Statements of Earnings (Dollars in thousands)
Three Months Ended March 31 ----------------------------------- Increase 2001 2000 (Decrease) ---- ---- -------- Net sales $444,047 $474,556 (6%) Costs and expenses: Depreciation, amortization and cost of fee timber harvested 40,872 40,837 -% Materials, labor and other operating expenses 405,531 382,359 6% Selling, general and administrative expenses 28,666 33,140 (14%) Restructuring charge 4,217 - * Earnings (loss) from operations (35,239) 18,220 (293%) Interest expense (16,734) (14,051) 19% Other income (expense), net 485 (175) 377% Provision for taxes on income (20,080) 1,558 (1,389%) Net earnings (loss) (31,408) 2,436 (1,389%) *Not a meaningful figure.
13 PART II ITEM 6. Exhibits and Reports on Form 8-K Exhibits The exhibit index is located on page 16 of this Form 10-Q. Reports on Form 8-K No reports on Form 8-K were filed for the three months ended March 31, 2001. 14 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/ G. L. Zuehlke ------------------------------ G. L. Zuehlke Vice President, Finance, Chief Financial Officer and Treasurer (Duly Authorized; Principal Financial Officer) By /S/ T. L. Carter ------------------------------ T. L. Carter Controller (Duly Authorized; Principal Accounting Officer) Date: May 9, 2001 15 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. 16