<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>fm10q3rd.txt
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2000 Commission file number 1-5313
POTLATCH CORPORATION
(Exact name of registrant as specified in its charter)
A Delaware Corporation 82-0156045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 West Riverside Ave., Suite 1100
Spokane, Washington 99201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (509) 835-1500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes[X] No[ ]
The number of shares of common stock outstanding as of September 30, 2000:
28,430,834 shares of Common Stock, par value $1 per share.
<PAGE>
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Index to Form 10-Q
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Statements of Earnings for the quarter and nine
months ended September 30, 2000 and 1999 2
Condensed Balance Sheets at September 30, 2000
and December 31, 1999 3
Condensed Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 4
Notes to Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBIT INDEX 13
1
<PAGE>
PART I
Item 1. Financial Statements
<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Statements of Earnings
Unaudited (Dollars in thousands - except per-share amounts)
-------------------------------------------------------------------------------
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $416,845 $446,591 $1,284,268 $1,276,052
-------------------------------------------------------------------------------
Costs and expenses:
Depreciation, amortization and
cost of fee timber harvested 41,543 38,270 121,209 110,843
Materials, labor and other
operating expenses 322,551 327,075 997,700 967,787
Selling, general and
administrative expenses 27,370 34,136 93,642 100,932
Restructuring and
other charges (Note 4) 18,502 - 44,502 -
-------------------------------------------------------------------------------
409,966 399,481 1,257,053 1,179,562
-------------------------------------------------------------------------------
Earnings from operations 6,879 47,110 27,215 96,490
Interest expense (14,959) (10,507) (43,637) (34,846)
Other expense, net* (3,231) (169) (2,997) (9,096)
-------------------------------------------------------------------------------
Earnings (loss) before
taxes on income (11,311) 36,434 (19,419) 52,548
Provision for taxes on
income (Note 2) (4,412) 13,845 (7,574) 19,968
-------------------------------------------------------------------------------
Net earnings (loss) $ (6,899) $ 22,589 $ (11,845) $ 32,580
===============================================================================
Net earnings (loss) per
common share (Note 3):
Basic $(.24) $ .78 $(.41) $1.13
Diluted (.24) .77 (.41) 1.12
Dividends per common share
(annual rate) 1.74 1.74 1.74 1.74
Average shares outstanding
(in thousands):
Basic 28,430 28,950 28,561 28,940
Diluted 28,430 28,991 28,561 28,966
-------------------------------------------------------------------------------
<FN>
Certain 1999 amounts have been reclassified to conform to the 2000 presentation.
* Includes a first quarter 1999 nonrecurring charge of $7.5 million ($4.6
million after tax) for expenses related to the termination of efforts to form
a timber real estate investment trust.
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
<PAGE>
<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Condensed Balance Sheets
2000 amounts unaudited (Dollars in thousands -
except per-share amounts)
--------------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 11,237 $ 11,531
Short-term investments 9 159
Receivables, net 185,698 184,312
Inventories (Note 5) 228,576 196,733
Prepaid expenses 20,336 23,767
--------------------------------------------------------------------------------
Total current assets 445,856 416,502
Land, other than timberlands 9,044 9,073
Plant and equipment, at cost less
accumulated depreciation 1,623,132 1,616,055
Timber, timberlands and related
logging facilities 335,043 335,194
Other assets 79,480 69,676
--------------------------------------------------------------------------------
$2,492,555 $2,446,500
================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 160,440 $ 121,464
Current installments on long-term debt 325 10,323
Accounts payable and accrued liabilities 271,773 232,959
--------------------------------------------------------------------------------
Total current liabilities 432,538 364,746
Long-term debt 751,530 701,798
Other long-term obligations 177,861 172,986
Deferred taxes 269,585 275,644
Put options 14,527 10,287
Stockholders' equity 846,514 921,039
--------------------------------------------------------------------------------
$2,492,555 $2,446,500
================================================================================
Stockholders' equity per common share $29.77 $31.79
Working capital $13,318 $51,756
Current ratio 1.0:1 1.1:1
--------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE>
<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Condensed Statements of Cash Flows
Unaudited (Dollars in thousands)
-------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended
September 30
2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operations
Net earnings (loss) $ (11,845) $ 32,580
Adjustments to reconcile net earnings (loss)
to net cash provided by operations:
Depreciation, amortization and cost of
fee timber harvested 121,209 110,843
Deferred taxes (6,059) 15,974
Working capital changes 7,807 42,801
Other, net (1,600) (244)
-------------------------------------------------------------------------------
Net cash provided by operations 109,512 201,954
-------------------------------------------------------------------------------
Cash Flows From Investing
Decrease in short-term investments 150 -
Additions to investments (3,525) (50,827)
Reductions in investments 918 56,835
Receipt of note receivable - 50,000
Additions to plant and properties (119,040) (205,116)
-------------------------------------------------------------------------------
Net cash used for investing (121,497) (149,108)
-------------------------------------------------------------------------------
Cash Flows From Financing
Change in book overdrafts 1,209 (1,679)
Increase (decrease) in notes payable 38,976 (5,162)
Proceeds from long-term debt 50,000 99,935
Repayment of long-term debt (10,266) (109,967)
Issuance of treasury stock 468 785
Purchase of treasury stock (21,818) -
Dividends (37,328) (37,763)
Other, net (9,550) 545
-------------------------------------------------------------------------------
Net cash provided by (used for) financing 11,691 (53,306)
-------------------------------------------------------------------------------
Decrease in cash (294) (460)
Balance at beginning of period 11,531 11,650
-------------------------------------------------------------------------------
Balance at end of period $ 11,237 $ 11,190
===============================================================================
<FN>
Net interest payments (net of amounts capitalized) for the nine months ended
September 30, 2000 and 1999 were $36.1 million and $25.6 million, respectively.
Net income tax payments (refunds) for the nine months ended September 30, 2000
and 1999 were $.3 million and $(.7) million, respectively.
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE>
Potlatch Corporation and Consolidated Subsidiaries
Notes to Financial Statements
(Dollars in thousands)
--------------------------------------------------------------------------------
NOTE 1. GENERAL - The accompanying condensed balance sheets at September 30,
2000 and December 31, 1999, and the statements of earnings for the quarter
and nine months ended September 30, 2000 and 1999, and the condensed
statements of cash flows for the nine months ended September 30, 2000 and
1999, 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 quarter and nine months ended September 30, 2000. The rate was 38
percent for the quarter and nine months ended September 30, 1999.
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 (in thousands):
Quarter Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
Basic average common shares
outstanding 28,430 28,950 28,561 28,940
Incremental shares due to common
stock options - 41 - 22
Incremental shares due to put
options - - - 4
------ ------ ------ ------
Diluted average common shares
outstanding 28,430 28,991 28,561 28,966
====== ====== ====== ======
For the quarter and nine months ended September 30, 2000, the computation
of diluted common shares would be antidilutive; therefore, the amounts
reported for basic and dilutive common shares are the same. Stock options to
purchase shares of common stock of 1,236,475 for the quarter and nine months
ended September 30, 1999, were not included in the above computations because
the options' exercise prices were greater than the average market price of
common shares.
NOTE 4. RESTRUCTURING AND OTHER CHARGES - In June 2000 the company recorded a
$26.0 million pre-tax charge to cover costs associated with a company-wide
reduction and reorganization in its salaried workforce. In September the
company recorded an $18.5 million pre-tax charge for costs related to the
closure of a plywood plant in Idaho. The after-tax effect of both charges
5
<PAGE>
totaled $27.1 million or $.94 per diluted common share. The charges are
shown as a separate line item in the costs and expenses section in the
Statements of Earnings. A total of 505 salaried and hourly employee
positions have been affected. As of September 30, 2000, $11.6 million had
been recorded against the accrued liabilities associated with the charges.
NOTE 5. INVENTORIES - Inventories at the balance sheet dates consist of:
September 30, 2000 December 31, 1999
Raw materials $102,098 $ 97,666
Work in process 7,340 11,147
Finished goods 119,138 87,920
-------- --------
$228,576 $196,733
======== ========
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Funding
Net cash provided by operations for the first nine months of 2000, as
presented in the Condensed Statements of Cash Flows on page 4, totaled $109.5
million, compared with $202.0 million for the same period in 1999. The
decline was largely due to a decrease in net income of $44.4 million (which
includes $27.1 million of after-tax charges) and a smaller net change in
working capital components compared to the first nine months of 1999.
The company's ratio of long-term debt to stockholders' equity was .89 to
1 at September 30, 2000, compared to .76 to 1 at December 31, 1999. Long-
term debt increased $49.7 million during the first nine months of 2000. The
company's credit lines enable it to classify up to $100.0 million of short-
term borrowings as long-term debt should the company choose to do so.
Because the company intends to utilize this capability, $50.0 million of
commercial paper has been classified as long-term debt. Stockholders' equity
declined $74.5 million for the nine month period, primarily due to dividend
payments of $37.3 million, treasury stock purchases of $21.8 million and a
net loss of $11.8 million.
The company maintains a credit line for general corporate purposes
totaling $250.0 million, of which $100.0 million may be used for long-term
debt and the balance may be used for short-term debt. At September 30, 2000,
$210.4 million was outstanding under the credit line, through a combination
of direct borrowings under the credit line and the issuance of commercial
paper. The company believes that, on a long-term basis, the current credit
line should be adequate to meet its liquidity needs. However, in the short-
term, economic conditions may require it to seek additional borrowing
capabilities.
Working capital of $13.3 million at September 30, 2000, decreased $38.4
million from December 31, 1999. Increases in notes payable of $39.0 million
and in accounts payable and accrued liabilities of $38.8 million were largely
responsible for the unfavorable comparison. Accrued liabilities increased
primarily due to special charges recorded in June and September totaling
$44.5 million before taxes. The negative effect of these items on working
capital was partially offset by increases in inventories of $31.8 million, as
6
<PAGE>
well as a decrease in current installments on long-term debt of $10.0
million.
Capital expenditures totaled $119.0 million for the first nine months of
2000. Of this amount, the company spent $50.2 million in the wood products
segment, which included expenditures for the modernization and expansion of
the oriented strand board plant in Cook, Minnesota. Spending in the resource
segment totaled $16.2 million. The company spent $18.6 million in the
printing papers segment, the majority of which related to the expansion
project at the company's pulp mill in Cloquet, Minnesota. Spending in the
pulp and paper segment totaled $33.5 million for several environmental,
safety and general replacement projects, including a retrofit of the recovery
boiler at the company's pulp mill in Cypress Bend, Arkansas.
Results of Operations
A summary of period-to-period changes in items included in the statements
of earnings is presented on page 10 of this Form 10-Q. Certain 1999 amounts
presented below have been reclassified to reflect changes in segment
reporting.
<TABLE>
Segment Information (Dollars in thousands)
-------------------------------------------------------------------------------
<CAPTION>
Third Quarter Nine Months
2000 1999 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Segment Sales
Resource $ 112,225 $105,867 $ 270,391 $ 246,337
-------------------------------------------------------------------------------
Wood products
Oriented strand board 40,487 68,331 154,479 174,425
Lumber 58,917 69,314 186,998 199,968
Plywood 9,293 18,525 40,471 52,207
Particleboard 4,003 4,510 12,969 12,510
Other 7,424 4,323 21,748 20,856
-------------------------------------------------------------------------------
120,124 165,003 416,665 459,966
-------------------------------------------------------------------------------
Printing papers
Printing papers 105,280 111,869 317,891 324,176
Pulp 15,067 - 34,734 -
-------------------------------------------------------------------------------
120,347 111,869 352,625 324,176
-------------------------------------------------------------------------------
Pulp and paper
Paperboard 97,794 93,953 295,499 276,093
Tissue 65,150 57,899 188,205 180,980
Pulp 6,593 6,941 16,556 19,263
-------------------------------------------------------------------------------
169,537 158,793 500,260 476,336
-------------------------------------------------------------------------------
522,233 541,532 1,539,941 1,506,815
Elimination of intersegment sales (105,388) (94,941) (255,673) (230,763)
-------------------------------------------------------------------------------
Total consolidated net sales $ 416,845 $446,591 $1,284,268 $1,276,052
===============================================================================
Intersegment sales or transfers
Resource $ 101,368 $ 90,975 $ 244,122 $ 218,131
Wood products 3,145 3,958 10,126 12,589
Printing papers 862 - 1,384 -
Pulp and paper 13 8 41 43
-------------------------------------------------------------------------------
Total $ 105,388 $ 94,941 $ 255,673 $ 230,763
===============================================================================
</TABLE>
7
<PAGE>
<TABLE>
Segment Information (continued) (Dollars in thousands)
-------------------------------------------------------------------------------
<CAPTION>
Third Quarter Nine Months
2000 1999 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Income
Resource $ 23,546 $ 23,134 $ 48,286 $ 47,987
Wood products* (29,012) 35,402 645 71,765
Printing papers 8,233 (5,125) 7,810 (7,378)
Pulp and paper 6,915 7,058 16,790 9,935
Eliminations and adjustments (2,209) (3,997) (3,986) 177
-------------------------------------------------------------------------------
7,473 56,472 69,545 122,486
Corporate** (18,784) (20,038) (88,964) (69,938)
-------------------------------------------------------------------------------
Consolidated earnings (loss)
before taxes on income $ (11,311) $ 36,434 $ (19,419) $ 52,548
===============================================================================
<FN>
* Third quarter 2000 includes an $18.5 million charge related to the closure
of a plywood plant in Idaho.
** Includes a $26.0 million restructuring charge for the nine months ended
September 30, 2000.
</TABLE>
Earnings for the third quarter of 2000 were significantly lower compared
to 1999's third quarter. The earnings decline was largely due to rapidly
deteriorating market conditions for the company's wood products during the
quarter, which contrasts sharply with the very favorable conditions during
the same period a year ago. The company also recorded an $18.5 million
charge in September for costs related to the closure of a plywood plant in
Idaho. The after-tax effect of the charge was $11.3 million, or $.39 per
diluted common share. Net earnings for the third quarter of 2000 were $4.4
million, or $.15 per diluted common share, before the charge. Including the
charge, the company posted a net loss of $6.9 million, or $.24 per diluted
common share. Third quarter 1999 net earnings were $22.6 million, or $.77
per diluted common share. Net sales were $416.8 million, compared with
$446.6 million in the third quarter of 1999.
Net earnings for the first nine months of 2000 were $15.3 million, or
$.53 per diluted common share, before restructuring and other charges taken
in the second and third quarters totaling $27.1 million after taxes.
Including the charges, the company had a net loss for the first nine months
of $11.8 million, or $.41 per diluted common share. Net earnings for the
first nine months of 1999 were $32.6 million, or $1.12 per diluted common
share. Net sales for the first nine months of 2000 and 1999 were $1.28
billion.
The resource segment had operating income of $23.5 million for 2000's
third quarter, compared to $23.1 million in the previous year's third
quarter. Increased timber harvest volumes in Arkansas and income from the
sale of timberland in Minnesota offset lower volumes and prices for timber in
Idaho.
The wood products segment reported an operating loss of $29.0 million for
the third quarter of 2000, which includes the charge for the closure of the
Idaho plywood plant. The segment earned $35.4 million in 1999's third
quarter. The industry is operating in a drastically different environment
than a year ago. Interest rate increases in the last twelve months have
slowed construction activity and, combined with increased foreign imports,
have caused net sales realizations to decline substantially for all of the
company's solid wood products. Net sales realizations for oriented strand
board were approximately 40% lower compared to the third quarter of 1999.
8
<PAGE>
The printing papers segment recorded third quarter operating income of
$8.2 million, compared to a loss of $5.1 million reported a year ago. The
improved results are largely due to sales of market pulp, which began this
year as a result of the completion of the pulp mill expansion project in
Cloquet, Minnesota. Demand for printing papers remained soft during the
quarter.
The pulp and paper segment reported third quarter operating income of
$6.9 million, versus $7.1 million for 1999's third quarter. Net sales
realizations for paperboard and tissue were higher compared to last year's
third quarter. However, shipments declined for paperboard, which negatively
affected results. Higher energy costs, namely electricity and natural gas,
also contributed to the slightly unfavorable quarter-to-quarter income
comparison. In addition, results were adversely affected by downtime
resulting from a complete rebuild of the internal components of the recovery
boiler at the company's pulp and paperboard mill in Arkansas. The rebuild,
which commenced on September 7, 2000, was completed on October 23, 2000.
Looking forward to the fourth quarter, the company agrees with the
opinion of industry analysts that general economic conditions, low market
pricing and the strength of the dollar will continue to inhibit earnings.
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, 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.
9
<PAGE>
<TABLE>
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Changes in Statements of Earnings
(Dollars in thousands)
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Net sales $416,845 $446,591 (7%) $1,284,268 $1,276,052 1%
Costs and expenses:
Depreciation, amortization and
cost of fee timber harvested 41,543 38,270 9% 121,209 110,843 9%
Materials, labor and other
operating expenses 322,551 327,075 (1%) 997,700 967,787 3%
Selling, general and
administrative expenses 27,370 34,136 (20%) 93,642 100,932 (7%)
Restructuring and other charges 18,502 - * 44,502 - *
Earnings from operations 6,879 47,110 (85%) 27,215 96,490 (72%)
Interest expense (14,959) (10,507) 42% (43,637) (34,846) 25%
Other expense, net (3,231) (169) 1,812% (2,997) (9,096) (67%)
Provision for taxes on income (4,412) 13,845 (132%) (7,574) 19,968 (138%)
Net earnings (loss) (6,899) 22,589 (131%) (11,845) 32,580 (136%)
<FN>
*Not a meaningful figure.
</TABLE>
10
<PAGE>
PART II
ITEM 1. Legal Proceedings
In February and November 1997, the company received Notices of Violation
("NOVs") from Region 10 of the U.S. Environmental Protection Agency ("EPA").
Both NOVs alleged that the company violated the Prevention of Significant
Deterioration permit requirements and permit requirements of the Idaho State
Implementation Plan by burning tire derived fuel in the company's No. 4 power
boiler in Lewiston, Idaho, in quantities which caused sulfur dioxide
emissions to exceed permitted amounts over a five-year period beginning in
1992. Although the company believes it has defenses to the alleged
violations, it agreed to settle the matter by paying a $500,000 civil
penalty. In September 2000, a Complaint and Stipulation for Dismissal were
filed in the United States District Court for the District of Idaho, Civil
Action No. CIV00-477-S-BLW. On September 8, 2000 the Court issued its Order
dismissing the case with prejudice. The company has paid the stipulated
penalty.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
The exhibit index is located on page 13 of this Form 10-Q.
Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended
September 30, 2000.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POTLATCH CORPORATION
(Registrant)
By /S/ 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: November 2, 2000
12
<PAGE>
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Exhibit Index
Exhibit
PART II
(4) Registrant undertakes to file with the Securities and
Exchange Commission, upon request, any instrument with
respect to long-term debt
13
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</DOCUMENT>