FINANCIAL
INFORMATION
Dollars in thousands (except per-share amounts)
2017
2016
2015
Revenues
Net income
Total assets
Long-term debt (including current portion)
Total stockholders’ equity
$ 678,595
$ 599,099
$
575,336
86,453
10,938
31,714
953,079
573,319
200,542
927,681
583,988
156,274
1,016,612
603,881
203,736
Capital expenditures, excluding timber and timberland acquisitions:
Property, plant and equipment
Timberlands reforestation and roads
Total capital expenditures
12,855
15,207
28,062
5,866
13,422
19,288
18,987
13,745
32,732
Net income per share:
Basic
Diluted
Dividends per share
$
$
2.12
2.10
1.525
$
0.27
0.27
1.50
0.78
0.77
1.50
Weighted-average shares outstanding (in thousands):
Basic
Diluted
40,824
41,227
40,798
41,033
40,842
40,988
Potlatch is a Real Estate Investment Trust (REIT) with approximately 1.4 million acres of timberland in Alabama,
Arkansas, Idaho, Minnesota and Mississippi. Potlatch, a certified forest practices leader, is committed to providing
superior returns to stockholders through long-term stewardship of its forest resources. The company also conducts
a land sales and development business and operates wood products manufacturing facilities through its taxable REIT
subsidiary. More information about Potlatch can be found on the company’s website at www.potlatchcorp.com.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One) (cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2017
(cid:4) 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
POTLATCH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
601 West 1st Ave., Suite 1600
Spokane, Washington
(Address of principal executive offices)
82-0156045
(IRS Employer Identification No.)
99201
(Zip Code)
Registrant’s telephone number, including area code: (509) 835-1500
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
Common Stock
($1 par value)
NAME OF EACH EXCHANGE ON WHICH
REGISTERED
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:3) Yes (cid:4) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act (cid:4) Yes (cid:3) No
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. (cid:3)Yes (cid:4) 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). (cid:3) Yes (cid:4) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer (cid:3) Accelerated filer (cid:4) Non-accelerated filer (Do not check if a smaller reporting company) (cid:4) Smaller reporting
company (cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). (cid:4) Yes (cid:3) No
The aggregate market value of the common stock held by non-affiliates of the registrant at June 30, 2017, was approximately $1,855.9 million,
based on the closing price of $45.70.
As of January 31, 2018, 40,611,991 shares of the registrant's common stock, par value $1 per share, were outstanding.
Portions of the definitive proxy statement for the 2018 annual meeting of stockholders expected to be filed with the Commission on or about
March 30, 2018 are incorporated by reference in Part III hereof.
DOCUMENTS INCORPORATED BY REFERENCE
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Table of Contents
BUSINESS
PART I
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4. MINE SAFETY DISCLOSURES
PROPERTIES
LEGAL PROCEEDINGS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
PAGE
NUMBER
4
11
23
23
23
23
24
27
28
41
42
43
44
45
46
47
48
73
73
73
76
77
77
77
77
78
82
EXPLANATORY NOTE
For purposes of this report, any references to "the company,” “us,” “we” and “our” include Potlatch Corporation
and its consolidated subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains, in addition to historical information, certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, including without limitation, statements regarding:
•
•
•
•
•
•
•
•
•
•
•
•
•
timber inventory;
lumber demand and pricing in North America in 2018;
increased North American housing starts and repair and remodel activity;
expected improvements in U.S. economic growth due to the 2017 Tax Cuts and Jobs Act;
decreased Asian demand for North American lumber;
excess log supply in the South;
the expected positive effect on timber prices of increased lumber demand and higher lumber prices;
expected sawlog prices in 2018;
expected 2018 timber harvest of approximately 4.1 million tons;
expected sale of 35% of timber volume under log supply agreements in 2018;
expected sales of 45,000 acres of higher and better use (HBU) property, 95,000 acres of rural real estate
property and 50,000 acres of non-strategic timberland over the next decade or more;
funding of our dividends in 2018;
compliance with REIT tax rules;
• Forest Stewardship Council® (FSC®) and Sustainable Forest Initiative® (SFI®) certification of our
timberlands;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
expectations regarding premium prices for FSC®-certified logs and FSC®-certified lumber;
realization of deferred tax assets;
expected closing of the merger of Potlatch and Deltic;
expected issuance of Potlatch stock in connection with the closing of the merger with Deltic;
expected merger costs;
proposed impact of the merger on Potlatch’s financial results;
estimated distribution of Deltic’s accumulated earnings and profits;
integration of Deltic’s operations;
expected capital expenditures in the first quarter of 2018;
expectations regarding funding of our pension plans in 2018 and over the next 7 years;
estimated non-qualified pension plan payments in 2018;
estimated future benefit payments;
estimated future payments under operating leases;
estimated long-term rate of return on pension assets and discount rate;
estimated future debt payments;
expectations regarding the effect of ASU No. 2014-9, ASU No. 2016-02, ASU No. 2016-09 and ASU No.
2016-13; and
1
•
expected liquidity in 2018 to fund our operations, regular stockholder dividends, capital expenditures and
debt service obligations and related matters.
Words such as “anticipate,” “expect,” “will,” “intend,” “plan,” “target,” “project,” “believe,” “seek,” “schedule,”
“estimate,” “could,” “can,” “may” and similar expressions are intended to identify such forward-looking statements.
These forward-looking statements reflect our current views regarding future events based on estimates and
assumptions and are therefore subject to known and unknown risks and uncertainties and are not guarantees of
future performance.
Our actual results of operations could differ materially from our historical results or those expressed or implied by
forward-looking statements contained in this report. Important factors that could cause or contribute to such
differences include, but are not limited to, the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
changes in timber growth rates;
changes in silviculture;
timber cruising variables;
changes in state forest acts or best management practices;
changes in timber harvest levels on our lands;
changes in timber prices;
changes in timberland values;
changes in policy regarding governmental timber sales;
changes in the United States and international economies;
changes in interest rates and discount rates;
changes in exchange rates;
changes in requirements for FSC® or SFI® certification;
changes in the level of residential and commercial construction and remodeling activity;
changes in tariffs, quotas and trade agreements involving wood products;
changes in demand for our products;
changes in 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 and other costs;
collectability of amounts owed by customers;
changes in federal and state tax laws;
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;
the company’s ability to consummate the merger with Deltic or satisfy the conditions to the completion of
the transaction, including the receipt of stockholder approvals;
the company’s ability to meet expectations regarding the timing, completion and accounting and tax
treatments of the merger transaction;
2
•
•
•
•
•
•
•
•
the possibility that any of the anticipated benefits of the proposed merger will not be realized or will not be
realized within the expected time period;
the risk that integration of Deltic’s operations with those of Potlatch will be materially delayed or will be
more costly or difficult than expected;
the failure of the proposed merger to close for any other reason;
the effect of the announcement of the merger on customer relationships and operating results (including
without limitation, difficulties in maintaining relationships with employees or customers);
dilution caused by Potlatch’s issuance of additional shares of its common stock in connection with the
merger;
the possibility that the merger may be more expensive to complete than anticipated, including as a result
of unexpected factors or events;
the diversion of management’s time on transaction related issues; and
the estimation of Deltic’s accumulated earnings and profits is preliminary and may change with further due
diligence.
For a discussion of some of the factors that may affect our business, results and prospects, see Part 1 - Item 1A.
Risk Factors.
Forward-looking statements contained in this report present our views only as of the date of this report. Except as
required under applicable law, we do not intend to issue updates concerning any future revisions of our views to
reflect events or circumstances occurring after the date of this report.
3
Part I
ITEM 1. BUSINESS
General
Potlatch Corporation, formerly known as Potlatch Holdings, Inc., was incorporated in Delaware in September
2005 to facilitate a restructuring to qualify for treatment as a REIT for federal income tax purposes. It is the
successor to the business of the original Potlatch Corporation, which was incorporated in Maine in 1903.
We are focused on the ownership of timberland, which we view as a unique and attractive asset due to the renewable
nature of timber resources and timber’s long-term history of price appreciation in excess of inflation. Our primary
objectives include using our timberland investments to generate income and maximizing the long-term value of our
assets. We pursue these objectives by adhering to the following strategies:
• Managing our timberlands to improve their long-term sustainable yield. We manage our timberlands in a
manner designed to optimize the balance among timber growth, prudent environmental management and
current cash flow, in order to achieve increasing levels of sustainable yield over the long-term. We may
choose to harvest timber at levels above or below our current estimate of sustainability for short periods of
time, for the purpose of improving the long-term productivity of certain timber stands or in response to
market conditions. In addition, we focus on optimizing timber returns by continually improving productivity
and yields through advanced silvicultural practices that take into account soil, climate and biological
considerations.
• Pursuing attractive acquisitions. We actively pursue timberland acquisitions that meet our financial and
strategic criteria. The critical elements of our acquisition strategy generally include acquiring properties
that complement our existing land base, are cash flow accretive and have attractive timber or higher and
better use (HBU) values.
• Maximizing the value of our timberland real estate. A portion of our acreage is more valuable for
recreational purposes or to other timberland or real estate investors. We continually assess the potential
uses of our lands and manage them proactively for the highest value. We have identified approximately
14% of our timberlands as having values that are potentially greater than timberland values.
• Practicing sound environmental stewardship. We pursue a program of environmental stewardship and
active involvement in federal, state and local policymaking to maximize our assets’ long-term value. We
manage our timberlands in a manner consistent with the principles set forth by SFI® or FSC®.
Our businesses are organized into three operating segments:
• Resource: Our Resource segment manages our timberlands to optimize revenue producing opportunities
while adhering to our strict stewardship standards. Management activities include planting and harvesting
trees and building and maintaining roads. The Resource segment also generates revenues from activities
such as hunting leases, recreation permits and leases, mineral rights leases, biomass production and
carbon sequestration.
• Wood Products: Our Wood Products segment manufactures and sells lumber, plywood and residual
products.
• Real Estate: Our Real Estate segment consists primarily of sales of real property deemed non-strategic or
identified as having higher and better use alternatives. The Real Estate segment engages in real estate
sales and limited subdivision activity through Potlatch’s taxable REIT subsidiaries (Potlatch TRS).
Additional information regarding each of our operating segments is included in this section, as well as in
Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 17: Segment
Information in the Notes to Consolidated Financial Statements.
4
Effective January 1, 2006, we restructured our operations to qualify for treatment as a REIT. As a REIT, we
generally are not subject to federal and state corporate income taxes on our income from investments in real
estate that we distribute to our stockholders, including the income derived from the sale of standing timber. As of
January 1, 2016, we are no longer subject to corporate taxes on certain built-in gains, the excess of fair market
value over tax basis, on sales of real property held by the REIT at the time of our conversion. We are required to
pay federal corporate income taxes on income from our non-real estate investments, principally the operations of
Potlatch TRS.
Pending Merger with Deltic
On October 22, 2017, Potlatch and Deltic Timber Corporation (Deltic) entered into an Agreement and Plan of
Merger (Merger Agreement) pursuant to which Deltic will merge with and into a wholly-owned subsidiary of
Potlatch (Merger Sub). Deltic owns approximately 530,000 acres of timberland, operates two sawmills and a
medium density fiberboard plant and is engaged in real estate development primarily in Arkansas.
The combined company will be named PotlatchDeltic Corporation. Under the terms of the Merger Agreement,
Deltic shareholders will receive 1.80 shares of Potlatch common stock for each share of Deltic common stock at
the closing date. We have estimated the total consideration expected to be issued to Deltic shareholders in the
merger to be approximately 22 million shares of our common stock based on the 1.80 exchange ratio and the
number of Deltic shares outstanding. Because the market value of our common stock will continue to fluctuate
and the number of shares to be issued with respect to Deltic stock awards will not be determinable until the
closing of the transaction, the total value of the consideration exchanged will not be determinable until the closing
date.
During 2018, subsequent to the completion of the transaction, as part of the REIT conversion process, Deltic’s
earnings and profits, estimated to be $250 million, will be distributed to shareholders of the combined company
through a dividend consisting of 80% stock and 20% cash. The closing of the merger is subject to approval by the
shareholders of Deltic and Potlatch and other conditions specified in the Merger Agreement. The respective
shareholder meetings are scheduled for February 20, 2018, as published in the joint proxy statement/prospectus
dated January 18, 2018. If approved by the shareholders at their respective meetings, the merger is expected to
close the same day.
Available Information
We make our periodic and current reports that we file with, or furnish to, the Securities and Exchange
Commission (SEC) available on or through our website, www.potlatchcorp.com (under “Investor Resources –
Financial Information”), at no charge as soon as reasonably practicable after we electronically file the information
with, or furnish it to, the SEC. Information on our website is not part of this report. In addition, the reports and
materials that we file with the SEC are available at the SEC’s website (www.sec.gov) and at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington DC 20549. Interested parties may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Business Segments
Resource Segment
Industry Background. The demand for timber depends primarily upon the markets for wood related products,
including lumber, panel products, paper and other pulp-based products. The end uses for timber vary widely,
depending on species, size and quality. Historically, timber demand has experienced cyclical fluctuations,
although sometimes at different times and rates for products or geographic regions. The demand for sawlogs,
lumber and other manufactured wood products is significantly dependent upon the level of new residential
construction and remodeling activity, which, in turn, is affected by general economic and demographic factors,
including population growth, new household formations, interest rates for home mortgages and construction loans
and credit availability. Increases in residential construction and remodeling activities are generally followed by
higher lumber prices, which are usually followed by higher log prices. The demand for pulpwood is dependent on
the paper and pulp-based manufacturing industries. Both pulpwood and sawlogs are affected by domestic and
international economic conditions, global population growth and other demographic factors, industry capacity and
5
the value of the U.S. dollar in relation to foreign currencies. Locally, timber demand also fluctuates due to the
expansion or closure of individual wood products and pulp-based manufacturing facilities.
Timber supplies can fluctuate depending upon factors such as changes in weather conditions and harvest
strategies, as well as occasionally high timber salvage efforts due to storm damage, unusual pest infestations
such as the mountain pine beetle, or fires. Local timber supplies also change in response to prevailing timber
prices. Rising timber prices often lead to increased harvesting on private timberlands, including lands not
previously made available for commercial timber operations. The supply of timber generally is adequate to meet
demand, although this could tighten in the event of higher demand due to increased U.S. housing starts,
increased log and lumber exports and the impacts from a natural disaster, such as fire, hurricane, earthquake,
insect infestation, drought, disease, ice storms, windstorms, flooding or other factors.
Timberland Sale. On April 21, 2016, we sold approximately 172,000 acres of timberlands located in central Idaho
for $114 million. We purchased the property in 2007 and 2008 for the purpose of growing and harvesting timber
and selling rural recreational parcels. The sale freed up capital without having to wait for the rural recreational real
estate market in central Idaho to recover. Historical earnings generated by the property were positive, but not
material.
Ownership. The Resource segment manages approximately 1.4 million acres of timberlands including
approximately 19,000 acres under long-term leases. We are the largest private landowner in Idaho. The following
table provides additional information about our timberlands.
(Acres in thousands)
Region
State
Northern region Idaho
Variety of commercially viable softwood species,
such as grand fir, Douglas fir and inland red cedar
Description
Acres
Minnesota Primarily pine, aspen and hardwoods
Total Northern region
Southern regio
n
Alabama
Primarily southern yellow pine and hardwoods
Arkansas
Mississippi
Primarily southern yellow pine and hardwoods
Primarily southern yellow pine and hardwoods
Total Southern region
Total
629
144
773
94
410
97
601
1,374
Operation. The primary business of the Resource segment is the management of our timberlands to optimize the
value of all possible revenue producing opportunities while adhering to our strict stewardship standards.
Management activities include planting and harvesting trees and building and maintaining roads. The segment
also generates revenue from non-timber resources such as from hunting leases, recreation permits and leases,
mineral rights leases, biomass production and carbon sequestration.
We strive to maximize cash flow while managing our timberlands sustainably over the long-term. From time to
time, we may choose, within the parameters of our environmental commitments, to harvest timber at levels above
or below our estimate of sustainability for short periods in order to take advantage of strong demand or to adjust
to weak demand. To maximize our timberlands' long-term value, we manage them intensively, based upon timber
species and local growing conditions. Our harvest plans take into account changing market conditions, are
designed to contribute to the growth of the remaining timber and reflect our policy of environmental stewardship.
We reforest our acreage in a timely fashion to enhance its long-term value. We employ silvicultural techniques to
improve timber growth rates, including vegetation control, fertilization and thinning. In deciding whether to
implement any silvicultural practice, we analyze the associated costs and long-term benefits, with the goal of
achieving an attractive return over time.
Inventory. At the end of 2017, our estimated standing merchantable timber inventory was 64 million tons,
including 35 million tons in the North and 29 million tons in the South. At the end of 2016, our estimated standing
merchantable timber inventory was 62 million tons.
The aggregate estimated volume of current standing merchantable timber inventory is updated annually to reflect
increases due to reclassification of young growth to merchantable timber when the young growth meets defined
6
diameter specifications, the annual growth rates of merchantable timber and the acquisition of additional
merchantable timber and to reflect decreases due to timber harvests and land sales. This estimate is derived
using methods consistent with industry practice and is based on statistical methods and field sampling. The
estimated inventory volume includes timber in environmentally sensitive areas where the timberlands are
managed in a manner consistent with best management practices, state forest practice acts and the SFI® or FSC®
forest management standards.
Timber volumes are estimated from cruises of the timber tracts, which are generally completed on a five to ten
year cycle. Since the individual cruises collect field data at different times for specific sites, the growth model
projects standing inventory from the cruise date to a common reporting date. Annual growth rates for the
merchantable inventory have historically been in the range of 2% to 5% in the North and 6% to 9% in the South.
Harvest. Our short-term and long-term harvest plans are critical factors in our long-term management process.
Each year, we prepare a harvest plan designating the timber tracts and volumes to be harvested during that
particular year. Each harvest plan reflects our analysis of the age, size and species distribution of our timber, as
well as our expectations about harvest methods, growth rates, the volume of each species to be harvested,
anticipated acquisitions and dispositions, thinning operations, regulatory constraints and other relevant
information. Among other things, the optimal harvest cycles, or rotations, for timber vary by location and species
and tend to change over time as a result of silvicultural advances, changes in the markets for different sizes and
ages of timber and other factors. Since harvest plans are based on projections of weather, timber growth rates,
regulatory constraints and other assumptions, many of which are beyond our control, there can be no assurance
that we will be able to harvest the volumes projected or the specific timber stands designated in our harvest plans.
Detailed harvest information by region and product is presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations. The following table presents a summary of our total 2017 timber
harvest by region.
(Tons in thousands)
Northern region
Southern region
Total
Sawlogs
Timber Harvested
Pulpwood Stumpage
Total
1,712
933
2,645
146
1,169
1,315
12
41
53
1,870
2,143
4,013
Based on our current projections, which are based on constant timberland holdings (without including additional
timberlands from the pending merger with Deltic) and that take into consideration such factors as market
conditions, the ages of our timber stands and recent timberland sales and acquisitions, we expect to harvest
approximately 4.1 million tons in 2018.
The Resource segment sells a portion of its logs at market prices to our wood products manufacturing facilities.
Intersegment sales to our wood products manufacturing facilities in 2017 were 26% of our total Resource
segment revenues. The segment also sells sawlogs and pulpwood to a variety of forest products companies
located near our timberlands. The segment’s customers range in size from small operators to multinational
corporations. Idaho Forest Group, LLC operates five sawmills in Idaho and represented slightly more than 10% of
our consolidated revenues in 2017, 2016 and 2015. The segment competes with owners of timberlands that
operate in areas near our timberlands, ranging from private owners of small tracts of land to some of the largest
timberland companies in the United States. The segment competes principally on the basis of distance to market,
price, log quality and customer service.
In 2017, approximately 35% of our harvest volumes were sold under log supply agreements. We expect
approximately the same amount to be sold under log supply agreements in 2018. In general, our log supply
agreements require a specified volume of timber to be delivered to defined customer facilities at prices that are
adjusted periodically to reflect market conditions. Prices in our Northern region contracts are adjusted periodically
by species to prevailing market prices for logs, lumber, wood chips and other residuals. Prices in our Southern
region contracts are adjusted every three months based on prevailing market prices for logs. Currently, our log
supply agreements are in place for one to five years.
Other. Our timberlands include a wide diversity of softwood and hardwood species and are certified to either the
SFI® or FSC® standards. We adhere to principles that include commitments to sustainable forestry, responsible
practices, forest health and productivity and protection of special sites. We are generally able to realize price
premiums for pulpwood from our FSC®-certified lands.
7
Our operations are subject to numerous federal, state and local laws and regulations, including those relating to
the environment, endangered species, our forestry activities and health and safety. Due to the significance of
regulation to our business, we integrate wildlife, habitat and watershed management into our resource
management practices. We also take an active approach to regulatory developments by participating in standard-
setting where possible. We work cooperatively with regulators to create voluntary conservation plans that address
environmental concerns while preserving our ability to operate our timberlands efficiently. Despite our active
participation in governmental policymaking and regulatory standard-setting, there can be no assurance that
endangered species, environmental and other laws will not restrict our operations or impose significant costs,
damages, penalties or liabilities on us. In particular, we anticipate that endangered species and environmental
laws will generally become increasingly stringent.
The volume and value of timber that can be harvested from our lands may be affected by natural disasters such
as fire, insect infestation, disease, ice storms, hurricanes, wind storms, floods and other weather conditions and
causes. We assume substantially all risk of loss to the standing timber we own from fire and other hazards,
consistent with industry practice in the United States, because insuring for such losses is not practicable.
Wood Products Segment
Our Wood Products segment manufactures and sells lumber, plywood and residual products at five mills located
in Arkansas, Idaho, Michigan and Minnesota. The segment’s products are largely commodity products, which are
sold through our sales department to end users, retailers or wholesalers for nationwide distribution primarily for
use in home building, repair and remodeling, industrial products and other construction activity.
A description of our wood products manufacturing facilities, which are all owned by us, together with their
respective 2017 capacities and actual production, are as follows:
Sawmills:
Warren, Arkansas
St. Maries, Idaho
Gwinn, Michigan
Bemidji, Minnesota
Plywood Mill:
St. Maries, Idaho
Annual Capacity1,2
Production2
220 MMBF
185 MMBF
185 MMBF
140 MMBF
207 MMBF
195 MMBF
186 MMBF
147 MMBF
150 MMSF
162 MMSF
1
Capacity represents the proven annual production capabilities of the facility under normal operating conditions and
producing a normal product mix. Normal operating conditions are based on the configuration, efficiency and the number of
shifts worked at each individual facility. In general, the definition includes two shifts per day for five days (two 40-hour
shifts) per week at each facility, which is consistent with industry-wide recognized measures. Production can exceed
capacity due to efficiency gains and overtime.
2 MMBF stands for million board feet; MMSF stands for million square feet, 3/8 inch panel thickness basis.
We are a top 10 lumber manufacturer in the United States. We believe that competitiveness in this industry is
largely based on individual mill efficiency and on the availability of competitively priced raw materials on a facility-
by-facility basis, rather than the number of mills operated. This is due to the fact that it is generally not economical
to transfer logs between or among facilities, which might permit a greater degree of specialization and operating
efficiencies. Instead, each facility must utilize the raw materials that are available to it in a relatively limited
geographic area. For these reasons, we believe we are able to compete effectively with companies that have a
larger number of mills. We compete based on product quality, customer service and price.
The principal raw material used is logs, which are obtained from our Resource segment or purchased on the open
market. We generally do not maintain long-term supply contracts for a significant volume of logs. During 2017,
2016 and 2015, 39%, 34% and 33% of our log purchases, respectively, were provided by our Resource segment.
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Real Estate Segment
The activities of our Real Estate segment consist primarily of the sale of non-core timberlands in the categories of
HBU, rural recreational real estate and non-strategic properties.
• HBU properties have characteristics that provide primarily home site or other development potential as a
result of superior location or other attractive amenities. These properties tend to have a much higher value
than timberlands.
• Rural recreational real estate properties also have a higher value than timberlands, but do not have the
same developmental potential as HBU properties. For example, these properties may be appropriate for
hunting, conservation or secondary rural housing.
• Non-strategic properties are typically on the fringe of our ownership areas and are more valuable to
another timberland owner.
The Real Estate segment engages in real estate sales and limited subdivision activities through Potlatch TRS.
From time to time, we also take advantage of opportunities to sell timberland where we believe pricing to be
particularly attractive, to match a sale with a purchase of more desirable property while deferring taxes in a like-
kind exchange (LKE) transaction, or to meet various other financial or strategic objectives. Sales of conservation
properties and conservation easements on our properties are also included in this segment. Results for the
segment depend on the demand for our non-core timberlands, the types of properties sold, the basis of these
properties and the timing of closings of property sales. Although large sales of non-strategic properties can cause
results that are not comparable or predictable between periods, we have maintained a relatively consistent level
of rural real estate and HBU sales.
A main focus of this segment is to continually assess the highest value and best use of our lands. We conduct
periodic stratification assessments on our lands and as new lands are acquired. The following tools are used in
assessing our lands:
•
•
•
on-the-ground analysis and verification of modeling assumptions;
electronic analysis, using geographic information systems; and
certain measured and ranked attributes, such as timber potential, recreational opportunities, accessibility,
special features and population and demographic trends.
We have identified approximately 190,000 acres of non-core timberland real estate. This includes approximately
45,000 acres of HBU property, 50,000 acres of non-strategic timberland and 95,000 acres of rural recreational
real estate property. Sales of these lands are expected to occur over a decade or more.
Seasonality
Log and pulpwood sales volumes in our Resource segment are typically lower in the first half of each year as
winter rains in the Southern region and spring thaw in the Northern region limit timber harvesting operations due
to softened roadbeds and wet logging conditions that restrict access to logging sites. The third quarter is typically
our Resource segment's strongest production quarter. Real Estate dispositions and acquisitions can be adversely
affected when access to any properties to be sold or considered for acquisition are limited due to adverse weather
conditions. Demand for our manufactured wood products typically decreases in the winter months when
construction activity is slower, while demand typically increases during the spring, summer and fall when
construction activity is generally higher.
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Geographic Areas
All of our timberlands, wood products manufacturing facilities and other real estate assets are located within the
continental United States. In 2017, 2016 and 2015, less than 1% of our Wood Products' segment revenues were
derived from sales of manufactured wood products outside of the United States, primarily to Canada and Mexico.
The remainder of our revenues were from domestic sales.
Environmental Regulation
Our operations are subject to federal and state laws and regulations, including those relating to our emissions,
wastewater discharges, solid and hazardous waste management, site remediation, endangered species and our
forestry activities. We are also subject to the requirements of the Federal Occupational Safety and Health Act and
comparable state statutes relating to the health and safety of our employees. We maintain environmental and
safety compliance programs and conduct regular internal and independent third-party audits of our facilities and
timberlands to monitor compliance with these laws and regulations. Compliance with environmental regulations is
a significant factor in our business and requires capital expenditures as well as additional operating costs.
Due to the significance of regulation to our business, we integrate wildlife, habitat and watershed management
into our resource management practices. We also take an active approach to regulatory developments by
participating in standard-setting where possible. We work cooperatively with regulators to create voluntary
conservation plans that address environmental concerns while preserving our ability to operate our timberlands
efficiently.
Enactment of new environmental laws or regulations, or changes in existing laws or regulations, particularly
relating to air and water quality, or their enforcement, may require significant expenditures by us or may adversely
affect our timberland management, harvesting activities and manufacturing operations.
Similarly, a number of species indigenous to our timberlands have been listed as threatened or endangered or
have been proposed for one or the other status under the Endangered Species Act. As a result, our activities in or
adjacent to the habitat of these species may be subject to restrictions on the harvesting of timber, reforestation
activities and the construction and use of roads.
We expect legislative and regulatory developments in the area of climate change to address carbon dioxide
emissions and renewable energy and fuel standards. It is unclear as of this date how any such developments will
affect our business.
We believe that our manufacturing facilities and timberland operations are currently in substantial compliance with
applicable environmental laws and regulations. We cannot be certain, however, that situations that give rise to
material environmental liabilities will not be discovered.
At this time, we believe that federal and state laws and regulations related to the protection of endangered
species and air and water quality will not have a material adverse effect on our financial position, results of
operations or liquidity. We anticipate, however, increasingly strict laws and regulations relating to the
environment, natural resources and forestry operations, as well as increased social concern over environmental
issues, may result in additional restrictions on us, leading to increased costs, additional capital expenditures and
reduced operating flexibility.
Information regarding potentially material environmental proceedings is included in Note 16: Commitments and
Contingencies in the Notes to Consolidated Financial Statements contained in this report and incorporated herein
by reference.
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Employees
As of December 31, 2017, we had 963 employees. The workforce consisted of 229 salaried, 702 hourly and
32 temporary or part-time employees. As of December 31, 2017, 18% of the workforce was covered under a
collective bargaining agreement, which expires in 2020.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a significant degree of risk. Our business, financial condition, results of
operations or liquidity could be materially adversely affected by any of the following risks and, as a result, the trading
price of our common stock could decline. The risks described below are not the only ones we face. Additional risks
not presently known to us or that we currently deem immaterial may also impair our business, financial condition,
results of operations or liquidity. In addition to the risk factors discussed below, investors should carefully consider
the risks and uncertainties presented in Part 1 - Item 1. Business.
Business and Operating Risks
Our cash dividends are not guaranteed and may fluctuate, which could adversely affect our stock price.
Under the REIT rules, to remain qualified as a REIT, a REIT must distribute, within a certain period after the end
of each year, 90% of its ordinary taxable income for such year. Our REIT income, however, consists primarily of
net capital gains resulting from payments received under timber cutting contracts with Potlatch TRS and third
parties, rather than ordinary taxable income. Therefore, unlike most REITs, we are not required to distribute
material amounts of cash to remain qualified as a REIT. If, after giving effect to our dividends, we have not
distributed an amount equal to 100% of our REIT taxable income, then we would be required to pay tax on the
undistributed portion of such taxable income at regular corporate tax rates and our stockholders would be
required to include their proportionate share of any undistributed capital gain in income and would receive a credit
or refund for their share of the tax paid by us.
Our board of directors, in its sole discretion, determines the actual amount of dividends to be made to
stockholders based on consideration of a number of factors, including, but not limited to, our results of operations,
cash flow and capital requirements, economic conditions in our industry and in the markets for our products, tax
considerations, borrowing capacity, debt covenant restrictions, timber prices, harvest levels on our timberlands,
market demand for timberlands, including timberland properties we have identified as potentially having a higher
and better use and future acquisitions and dispositions. For a description of debt covenants that could limit our
ability to pay dividends to stockholders in the future, see Liquidity and Capital Resources in Management’s
Discussion and Analysis of Financial Condition and Results of Operations. Consequently, the level of future
dividends to our stockholders may fluctuate and any reduction in the dividend rate may adversely affect our stock
price.
The cyclical nature of our business could adversely affect our results of operations.
The financial performance of our operations is affected by the cyclical nature of our business. The markets for
timber, manufactured wood products and real estate are influenced by a variety of factors beyond our control. The
demand for our timber and manufactured wood products is affected by the level of new residential construction,
home repair and remodeling and commercial and industrial building activity, which are subject to fluctuations due
to changes in economic conditions, interest rates, credit availability, population growth, weather conditions and
other factors. The demand for logs is also affected by the demand for wood chips in the pulp and paper markets.
The supply of timber and logs has historically increased during favorable pricing environments, which then causes
downward pressure on prices. Historical prices for our manufactured wood products have been volatile and we
have limited direct influence over the timing and extent of price changes for our manufactured wood products. The
demand for real estate can be affected by changes in factors such as interest rates, credit availability and
economic conditions, as well as by the impact of federal, state and local land use and environmental protection
laws.
All of our timberlands are located in Alabama, Arkansas, Idaho, Minnesota and Mississippi. As a result, we may
be susceptible to adverse economic and other developments in these regions, including industry slowdowns,
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business layoffs or downsizing, relocations of businesses, changes in demographics, increases in real estate and
other taxes and increased regulation, any of which could have a material adverse effect on us.
Our operating results and cash flows will be materially affected by supply and demand for timber.
A variety of factors affect prices for timber, including factors affecting demand, such as changes in economic
conditions, the level of domestic new construction and remodeling activity, foreign demand, interest rates, credit
availability, population growth, weather conditions and pest infestation, as well as changes in timber supply and
other factors. All of these factors can vary by region, timber type (sawlogs or pulpwood logs) and species.
Timber prices are affected by changes in demand on a local, national or international level. The closure of a mill in
the regions where we own timber can have a material adverse effect on demand and therefore pricing. As the
demand for paper nationwide continues to decline, closures of pulp mills have adversely affected the demand for
pulpwood and wood chips in certain of the regions in which we operate. Also, demand in other parts of the world
may affect timber prices in the markets in which we compete. For example, although we do not sell into the Asian
markets, Asian demand has affected supply in North American markets. A recent decrease in Asian demand has
had a negative impact on lumber and timber prices in the North American markets.
Timber prices are also affected by changes in timber availability at the local, national and international level. Our
timberland ownership is currently concentrated in Alabama, Arkansas, Idaho, Minnesota and Mississippi. In
Alabama, Arkansas, Minnesota and Mississippi, most timberlands are privately owned. Historically, increases in
timber prices have often resulted in substantial increases in harvesting on private timberlands, including lands not
previously made available for commercial timber operations, causing a short-term increase in supply that has
tended to moderate price increases. Decreases in timber prices have often resulted in lower harvest levels,
causing short-term decreases in supply that have tended to moderate price decreases. In the South, timber
growth rates have exceeded harvests during the past decade, which have led to an oversupply of timber in the
region, which in turn has reduced prices. In Idaho, where a greater proportion of timberland is government-owned,
any substantial increase in timber harvesting from government-owned land could significantly reduce timber
prices, which would harm our results of operations. For more than 20 years, environmental concerns and other
factors have limited timber sales by federal agencies, which historically had been major suppliers of timber to the
U.S. forest products industry, particularly in the West. Any reversal of policy that substantially increases timber
sales from government-owned land could have a material adverse effect on our results of operations and cash
flows.
On a local level, timber supplies can fluctuate depending upon factors such as changes in weather conditions and
harvest strategies of local timberland owners, as well as occasionally high timber salvage efforts due to events
such as unusual pest infestations or fires.
Our wood products are commodities that are widely available from other producers.
Because commodity products have few distinguishing properties from producer to producer, competition for these
products is based primarily on price, which is determined by supply relative to demand and competition from
substitute products. Prices for our products are affected by many factors outside of our control and we have no
influence over the timing and extent of price changes, which often are volatile. Our profitability with respect to
these products depends, in part, on managing our costs, particularly raw material and energy costs, which
represent significant components of our operating costs and can fluctuate based upon factors beyond our control.
The wood products industry is highly competitive.
The markets for our wood products are highly competitive and companies that have substantially greater financial
resources than we do compete with us in each of our lines of business. Our wood products are subject to
competition from wood products manufacturers in the United States and Canada. After years of trade disputes
over Canadian softwood lumber imports, the United States and Canada signed a Softwood Lumber Agreement in
2006, which expired in October 2015. The agreement established a system of tiered taxes and volume restrictions
relating to Canadian lumber imports to the United States. Following expiration of the softwood lumber agreement,
imports of Canadian lumber to the United States at lower prices increased, depressing U.S. lumber prices. On
November 25, 2016, the U.S. lumber industry filed a petition seeking countervailing (CVD) and anti-dumping (AD)
duties on Canadian lumber imports with the U.S. Department of Commerce. Final rulings on injury and CVD and
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AD duties went into effect on December 28, 2017. The combined CVD and AD duty to be paid by most Canadian
exporters was established at 20.23%. The Canadians have commenced proceedings with the NAFTA appeals
panel and the World Trade Organization appealing the imposition of the duties. In addition, the governments of
the United States and Canada continue to state publicly their intention to reach a negotiated settlement of these
trade cases. Even if an agreement is successfully negotiated, there can be no assurance that it will at all times, or
at any time, effectively create a fair trade environment. Additional information regarding the expiration of the
Softwood Lumber Agreement is included in Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
In addition, our wood products manufacturing facilities are relatively capital intensive, which leads to high fixed
costs and generally results in continued production as long as prices are sufficient to cover variable costs. These
conditions have contributed to substantial price competition, particularly during periods of reduced demand. Some
of our wood products competitors may currently be lower-cost producers than we are, or may benefit from weak
currencies relative to the U.S. dollar and accordingly these competitors may be less adversely affected than we
are by price decreases. Wood products also are subject to significant competition from a variety of substitute
products, including non-wood and engineered wood products. To the extent there is a significant increase in
competitive pressure from substitute products or other domestic or foreign suppliers, our business could be
adversely affected.
Changes in demand for our real estate and delays in the timing of real estate transactions may affect our
revenues and operating results.
A number of factors, including availability of credit, a slowing of residential real estate development, population
shifts and changes in demographics could reduce the demand for our real estate and negatively affect our results
of operations. Changes in investor interest in purchasing timberlands could reduce our ability to execute sales of
non-core timberlands and could also negatively affect our results of operations. In addition, changes in the
interpretation or enforcement of current laws, or the enactment of new laws, regarding the use and development
of real estate, or changes in the political composition of federal, state and local governmental bodies could lead to
new or greater costs, delays and liabilities that could materially adversely affect our real estate business,
profitability or financial condition.
There are inherent uncertainties in the timing of real estate transactions that could adversely affect our operating
results in any particular quarter. The timing of real estate sales is a function of many factors, including the general
state of the economy, demand in local real estate markets, the number of properties listed for sale, the seasonal
nature of sales, the plans of adjacent landowners and our expectations of future price appreciation. Delays in the
completion of transactions or the termination of potential transactions may be beyond our control. These events
could adversely affect our operating results.
We may be unable to harvest timber or we may elect to reduce harvest levels due to market, weather and
regulatory conditions, either of which could adversely affect our results of operations and cash flows.
Our timber harvest levels and sales may be limited due to weather conditions, timber growth cycles, restrictions
on access, availability of contract loggers and regulatory requirements associated with the protection of wildlife
and water resources, as well as by other factors, including damage by fire, pest infestation, disease and natural
disasters such as ice storms, wind storms, tornadoes, hurricanes and floods. Changes in global climate conditions
could intensify one or more of these factors. Although damage from such natural causes usually is localized,
affecting only a limited percentage of our timber, there can be no assurance that any damage affecting our
timberlands will be limited. We typically experience seasonally lower harvest activity during the winter and early
spring due to weather conditions. Severe weather conditions and other natural disasters can also reduce the
productivity of timberlands and disrupt the harvesting and delivery of logs. Our financial results and cash flows are
dependent to a significant extent on our continued ability to harvest timber at adequate levels.
On a short-term basis, we may adjust our timber harvest levels in response to market conditions. Longer term, our
timber harvest levels will be affected by acquisitions of additional timberlands, sales of existing timberlands and
shifts in harvest from one region to another. In addition to timberland acquisitions and sales, future timber harvest
levels may be affected by changes in estimates of long-term sustainable yield because of silvicultural advances,
natural disasters, fires, pests, insects and other hazards, regulatory constraints and other factors beyond our
control.
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We do not insure against losses of standing timber from fire or any other causes.
The volume and value of timber that can be harvested from our lands may be affected by natural disasters such
as fire, pest infestation, disease, ice storms, wind storms, tornadoes, hurricanes, floods and other weather
conditions and causes beyond our control. As is typical in the forest industry, we assume substantially all risk of
loss to the standing timber we own from fire and other hazards because insuring for such losses is not
practicable. Consequently, a reduction in our timber inventory could adversely affect our financial results and cash
flows.
In addition, the geographic concentration of our property makes us more susceptible to adverse impacts from a
single natural disaster such as fire, hurricane, earthquake, insect infestation, drought, disease, ice storms,
windstorms, tornadoes, flooding and other factors that could negatively impact our timber production.
A material disruption at one of our manufacturing facilities could prevent us from meeting customer
demand, reduce our sales or negatively affect our results of operations and financial condition.
Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease
operations unexpectedly due to a number of events, including unscheduled maintenance outages, prolonged
power failures, equipment failures, raw material shortages, cyber-attacks, labor difficulties, disruptions in the
transportation infrastructure, such as roads, bridges, railroad tracks and tunnels, fire, ice storms, floods,
windstorms, tornadoes, hurricanes or other catastrophes, terrorism or threats of terrorism, governmental
regulations and other operational problems.
Any such downtime or facility damage could prevent us from meeting customer demand for our products and/or
require us to make unplanned capital expenditures. If one of these machines or facilities were to incur significant
downtime, our ability to meet our production targets and satisfy customer requirements could be impaired,
resulting in lower sales and income.
Our businesses are affected by logger and transportation availability and costs.
Our business depends on the availability of logging contractors and providers of transportation of wood products
and is materially affected by the cost and availability of these service providers. Therefore, increases in the cost of
fuel could negatively impact our financial results by increasing the cost associated with logging activities and
transportation services and could also result in an overall reduction in the availability of these services. Truck
driver shortages could negatively impact our financial results by reducing the volume of delivered wood products.
We may be unsuccessful in carrying out our acquisition strategy.
We have pursued, and may continue to pursue, acquisitions of strategic timberland properties and other forest
products assets. We compete with buyers that have substantially greater financial resources than we have for
acquisition opportunities. We intend to finance acquisitions through cash from operations, borrowings under our
credit facility, proceeds from equity or debt offerings, proceeds from asset dispositions or any combination
thereof. In addition, it is uncertain whether any acquisitions we make will perform in accordance with our
expectations. The failure to identify and complete acquisitions of suitable properties could adversely affect our
operating results and cash flows.
Our businesses are subject to extensive environmental laws and regulations.
Our operations are subject to a variety of federal, state and local laws and regulations regarding protection of the
environment, including those relating to the protection of timberlands, endangered species, timber harvesting
practices, recreation and aesthetics, protection and restoration of natural resources, air and water quality and
remedial standards for contaminated soil, sediments and groundwater. Failure to comply with these requirements
can result in significant fines or penalties, as well as liabilities for remediation of contaminated sites, natural
resource damages or alleged personal injury or property damage claims.
Laws, regulations and related judicial decisions and administrative interpretations affecting our business are
subject to change and new laws and regulations that may affect our business are frequently enacted. These
changes may adversely affect our ability to harvest and sell timber and operate our manufacturing facilities and
may adversely affect the ability of others to develop property we intend to sell for higher and better use purposes.
Over time, the complexity and stringency of these laws and regulations have increased markedly and the
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enforcement of these laws and regulations has intensified. We believe that these laws and regulations will
continue to become more restrictive and over time could adversely affect our operating results. Regulatory
restrictions on future harvesting activities may be significant. Federal, state and local laws and regulations, which
are intended to protect threatened and endangered species, as well as waterways and wetlands, limit and may
prevent timber harvesting, road building and other activities on our timberlands. For example, the Clean Water Act
and comparable state laws, regulations and best management practices programs protect water quality. As a
result, our resource management activities adjacent to rivers and streams, as well as the point source discharges
from our manufacturing facilities, are subject to strict regulation and there can be no assurance that our forest
management and manufacturing activities will not be subject to increased regulation under the Clean Water Act in
the future.
Similarly, the threatened and endangered species restrictions apply to activities that would adversely impact a
protected species or significantly degrade its habitat. A number of species on our timberlands have been, and in
the future may be, protected under these laws. If current or future regulations or their enforcement become more
restrictive, the amount of our timberlands subject to harvest restrictions could increase.
We anticipate that increasingly strict laws and regulations relating to the environment, natural resources and
forestry operations, as well as increased social concern over environmental issues, may result in additional
restrictions on us, leading to increased costs, additional capital expenditures and reduced operating flexibility.
Our manufacturing operations are subject to stringent environmental laws, regulations and permits covering air
emissions, wastewater discharge, water usage and waste handling and disposal that govern how we operate our
facilities. These laws, regulations and permits, now and in the future, may restrict our current production and limit
our ability to increase production and impose significant costs on our operations with respect to environmental
compliance. Overall, it is expected that environmental compliance costs will likely increase over time as
environmental requirements become more stringent and as the expectations of the communities in which we
operate become more demanding.
Certain environmental laws, including the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 (CERCLA) impose strict, and under certain circumstances joint and several, liability on responsible
parties, including current and former owners and operators of contaminated sites, for costs of investigation and
remediation of contamination. They also impose liability for related damages to natural resources. We have in the
past been identified by the Environmental Protection Agency (EPA) as a potentially responsible party under
CERCLA at various locations and we are currently identified as a potentially responsible party in connection with
one of our properties. Additional information regarding this matter is included in Note 16: Commitments and
Contingencies in the Notes to Consolidated Financial Statements included in this report and that information is
incorporated herein by reference. It is possible that other facilities we own or operate, or formerly owned or
operated, or timberlands we now own or acquire, could also become subject to liabilities under these laws. The
cost of investigation and remediation of contaminated properties could increase operating costs and adversely
affect our financial results. Although we believe we have appropriate amounts accrued for the investigation and
remediation of known matters, there can be no assurance that actual expenditures will not exceed our
expectations and that amounts accrued will not be increased or that other unknown liabilities will not be
discovered in the future.
Environmental groups and interested individuals may intervene in the regulatory processes in the locations where
we own timberlands and operate our wood products mills. Delays or restrictions on our operations due to the
intervention of environmental groups or interested individuals could adversely affect our operating results. In
addition to intervention in regulatory proceedings, interested parties may file or threaten to file lawsuits that seek
to prevent us from obtaining permits, harvesting timber under contract with federal or state agencies,
implementing capital improvements or pursuing operating plans or require us to obtain permits before pursuing
operating plans. Any lawsuit, or even a threatened lawsuit, could delay harvesting on our timberlands or impact
our ability to operate or invest in our wood products mills.
Our defined benefit pension plans are currently underfunded.
We have qualified defined benefit pension plans that cover the majority of our employees. The determination of
pension plan expense and the requirements for funding our pension plans are based on a number of actuarial
assumptions. Two critical assumptions are the expected rate of return on plan assets and the discount rate
applied to pension plan obligations. Pension plan assets primarily consist of equity and fixed income investments;
therefore, fluctuations in actual equity market returns and changes in long-term interest rates may result in
15
increased pension costs in future periods. Changes in assumptions regarding discount rates and expected rates
of return on plan assets could also increase future pension costs. Changes in any of these factors may
significantly impact future contribution requirements. For additional information regarding this matter see Note 12:
Savings Plans, Pension Plans and Other Postretirement Employee Benefits in the Notes to Consolidated
Financial Statements and Liquidity and Capital Resources and Critical Accounting Policies and Estimates
included in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We depend on external sources of capital for future growth.
Our ability to finance growth is dependent to a significant degree on external sources of capital. Our ability to
access such capital on favorable terms could be hampered by a number of factors, many of which are outside of
our control, including a decline in general market conditions, decreased market liquidity, a downgrade to our
public debt rating, increases in interest rates, an unfavorable market perception of our growth potential, a
decrease in our current or estimated future earnings or a decrease in the market price of our common stock. In
addition, our ability to access additional capital may also be limited by the terms of our existing indebtedness,
which, among other things, restricts our incurrence of debt and the payment of dividends. For additional details,
see Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results
of Operations. Any of these factors, individually or in combination, could prevent us from being able to obtain the
capital we require on terms that are acceptable to us and the failure to obtain necessary capital could materially
adversely affect our future growth.
A strike or other work stoppage, or our inability to renew collective bargaining agreements on favorable
terms, could adversely affect our financial results.
As of December 31, 2017, approximately 18% of our workforce was covered by a collective bargaining
agreement, which expires in 2020. If our unionized workers were to engage in a strike or other work stoppage, or
other non-unionized operations were to become unionized, we could experience a significant disruption of
operations at our facilities or higher ongoing labor costs. A strike or other work stoppage in the facilities of any of
our major customers or suppliers could also have similar effects on us.
A security failure of our information technology infrastructure could impact our ability to operate our
businesses effectively, adversely affect our reported financial results, impact our reputation and expose
us to potential liability or litigation.
We use information systems to carry out our operational activities and maintain our business records. Some
systems are internally managed, and some are maintained by third-party service providers. We and our service
providers employ what we believe are adequate security measures. Our ability to conduct business could be
materially and adversely affected if these systems or resources are compromised, damaged or fail. This could be
a result of a cyber incident, natural disaster, hardware or software corruption, failure or error, service provider
error or failure, intentional or unintentional personnel actions or other disruption.
In the ordinary course of our business, we collect and store small amounts of sensitive data, including personally
identifiable information. If this data is compromised, destroyed or inappropriately disclosed, it could have a
material adverse effect, including damage to our reputation, loss of customers, significant expenses to address
and resolve the issues, or litigation or other proceedings by affected individuals, business partners and/or
regulators.
16
Risks Related to Our Indebtedness
Our indebtedness could materially adversely affect our ability to generate sufficient cash to pay
dividends to stockholders and fulfill our debt obligations, our ability to react to changes in our business
and our ability to incur additional indebtedness to fund future needs.
Our debt requires interest and principal payments. As of December 31, 2017, we had long-term debt of
$576.5 million, including $14.3 million due in the first quarter of 2018. Subject to the limits contained in our debt
instruments, we may be able to incur additional debt from time to time to finance working capital, capital
expenditures, investments or acquisitions or for other purposes. If we do so, the risks related to our indebtedness
could intensify.
Our indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due,
the principal of, interest on or other amounts due in respect of our indebtedness or to pay dividends to our
stockholders. Our indebtedness, combined with our other financial obligations and contractual commitments,
could have important consequences for stockholders. For example, it could:
• make it more difficult for us to satisfy our obligations with respect to our indebtedness and any failure to
comply with the obligations under any of our debt instruments, including restrictive covenants, could result
in an event of default under the agreements governing such indebtedness;
•
•
•
•
require us to dedicate a substantial portion of our cash flow from operations to payments on our
indebtedness, thereby reducing funds available for dividends to stockholders, working capital, capital
expenditures, acquisitions and other purposes;
increase our vulnerability to adverse economic and industry conditions, which could place us at a
competitive disadvantage compared with our competitors that have relatively less indebtedness;
limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we
operate; and
limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for dividends to
stockholders, working capital, capital expenditures, acquisitions and other corporate purposes.
Changes in credit ratings issued by nationally recognized statistical rating organizations could adversely
affect our cost of financing and have an adverse effect on the market price of our securities.
Credit rating agencies rate our debt securities on factors that include our operating results, actions that we take, their
view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by
the rating agencies can include maintaining, upgrading or downgrading the current rating or placing us on a watch
list for possible future downgrading. Downgrading the credit rating of our debt securities or placing us on a watch list
for possible future downgrading could limit our access to the credit markets, increase our cost of financing and have
an adverse effect on the market price of our securities. For additional detail on our credit ratings see Liquidity and
Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
REIT and Tax-Related Risks
If we fail to remain qualified as a REIT, income from our timberlands will be subject to taxation at regular
corporate rates and we will have reduced cash available for dividends to our stockholders.
Qualification as a REIT involves the application of highly technical and complex provisions of the Internal
Revenue Code to our operations, including satisfaction of certain asset, income, organizational, dividend,
stockholder ownership and other requirements, on an ongoing basis. Given the highly complex nature of the rules
governing REITs, the ongoing importance of factual determinations and the possibility of future changes in our
circumstances, no assurance can be given that we will remain qualified as a REIT.
17
In addition, the rules dealing with federal income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Department of the Treasury (Treasury). Changes to the tax laws
affecting REITs or taxable REIT subsidiaries, which may have retroactive application, could adversely affect our
stockholders or us. We cannot predict how changes in the tax laws might affect our stockholders or us. Accordingly,
we cannot provide assurance that new legislation, Treasury regulations, administrative interpretations or court
decisions will not significantly affect our ability to remain qualified as a REIT, the federal income tax consequences
of such qualification, the determination of the amount of REIT taxable income or the amount of tax paid by the TRS.
If in any taxable year we fail to remain qualified as a REIT:
• we would not be allowed a deduction for dividends to stockholders in computing our taxable income; and
• we would be subject to federal income tax on our taxable income at regular corporate rates, including any
applicable alternative minimum tax.
Any such corporate tax liability could be substantial and would reduce the amount of cash available for dividends
to our stockholders, which in turn could have an adverse impact on the value of our common stock. In addition,
we would be disqualified from treatment as a REIT for the four taxable years following the year during which the
qualification was lost, unless we are entitled to relief under certain statutory provisions. As a result, net income
and the cash available for dividends to our stockholders could be reduced for at least five years, which would
have an adverse impact on the value of our common stock.
Certain of our business activities are potentially subject to a prohibited transactions tax on 100% of our
net income derived from such activities, which would reduce our cash flow and impair our ability to pay
dividends.
REITs are generally intended to be passive entities and can thus only engage in those activities permitted by the
Internal Revenue Code, which for us generally include owning and managing a timberland portfolio, growing
timber and selling standing timber.
Accordingly, the manufacture and sale of wood products, certain types of timberland sales and the harvest and
sale of logs are conducted through Potlatch TRS because such activities generate non-qualifying REIT income
and could constitute “prohibited transactions” if such activities were engaged in directly by the REIT. In general,
prohibited transactions are defined by the Internal Revenue Code to be sales or other dispositions of property
held primarily for sale to customers in the ordinary course of a trade or business.
By conducting our business in this manner, we believe we will satisfy the REIT requirements of the Internal
Revenue Code and thus avoid the 100% tax that could be imposed if a REIT were to conduct a prohibited
transaction. We may not always be successful, however, in limiting such activities to Potlatch TRS. Therefore, we
could be subject to the 100% prohibited transactions tax if such instances were to occur, which would adversely
affect our cash flow and impair our ability to pay quarterly dividends.
Our REIT structure may limit our ability to invest in our non-REIT qualifying operations.
Our use of Potlatch TRS enables us to continue to engage in non-REIT qualifying business activities consisting
primarily of our manufacturing facilities, assets used for the harvesting of timber and the sale of logs and selected
land parcels that we expect to be sold or developed for higher and better use purposes. However, under the
Internal Revenue Code, no more than 20% of the value of the assets of a REIT may be represented by securities
of our taxable REIT subsidiaries. This may limit our ability to make investments in our wood products
manufacturing operations or in other non-REIT qualifying operations.
18
Our ability to pay dividends and service our indebtedness using cash generated through our taxable REIT
subsidiary may be limited.
The rules with which we must comply to maintain our status as a REIT limit our ability to use dividends from
Potlatch TRS for the payment of stockholder dividends and to service our indebtedness. In particular, at least
75% of our gross income for each taxable year as a REIT must be derived from sales of our standing timber and
other types of real estate income. No more than 25% of our gross income may consist of dividends from Potlatch
TRS and other non-qualifying types of income. This requirement may limit our ability to receive dividends from
Potlatch TRS and may impact our ability to pay dividends to stockholders and service the REIT's indebtedness
using cash from Potlatch TRS.
We may not be able to realize our deferred tax assets.
We may not have sufficient future taxable income to realize all our deferred tax assets. The ultimate realization of
deferred tax assets depends on the generation of future taxable income during the periods in which our temporary
differences are deductible as governed by the Internal Revenue Code. On December 22, 2017, the H.R. 1, Tax
Cut and Jobs Act was enacted that decreased the top corporate tax rate from 35% to 21%. As a result, the value
of our deferred tax assets was reduced by $10.7 million. The amount of our deferred tax assets could be reduced
in the near term if future taxable income does not materialize or management is unable to implement one or more
strategies that it has identified to generate taxable income. See Note 15: Income Taxes in the Notes to
Consolidated Financial Statements contained in this report for additional information about our deferred tax
assets.
Risks Related to Ownership of Our Common Stock
The price of our common stock may be volatile.
The market price of our common stock may be influenced by many factors, some of which are beyond our control,
including those described above under Business and Operating Risks and the following: actual or anticipated
fluctuations in our operating results or our competitors’ operating results, announcements by us or our
competitors of capacity changes, acquisitions or strategic investments, our growth rate and our competitors’
growth rates, the financial markets, interest rates and general economic conditions, changes in stock market
analyst recommendations regarding us, our competitors or the forest products industry generally, or lack of
analyst coverage of our common stock, failure to pay cash dividends or the amount of cash dividends paid, sales
of our common stock by our executive officers, directors and significant stockholders or sales of substantial
amounts of common stock, changes in accounting principles and changes in tax laws and regulations.
Certain provisions of our certificate of incorporation and bylaws and of Delaware law may make it difficult
for stockholders to change the composition of our board of directors and may discourage hostile
takeover attempts that some of our stockholders may consider to be beneficial.
Certain provisions of our certificate of incorporation and bylaws and of Delaware law may have the effect of
delaying or preventing changes in control if our board of directors determines that such changes in control are not
in the best interest of us and our stockholders. The provisions in our certificate of incorporation and bylaws
include, among other things, the following:
•
•
•
•
•
•
a classified board of directors with three-year staggered terms;
the ability of our board of directors to issue shares of preferred stock and to determine the price and other
terms, including preferences and voting rights, of those shares without stockholder approval;
stockholder action can only be taken at a special or regular meeting and not by written consent and
stockholders cannot call a special meeting except upon the written request of stockholders entitled to cast
not less than a majority of all of the votes entitled to be cast at the meeting;
advance notice procedures for nominating candidates to our board of directors or presenting matters at
stockholder meetings;
removal of directors only for cause;
allowing only our board of directors to fill vacancies on our board of directors;
19
•
•
•
in order to facilitate the preservation of our status as a REIT under the Internal Revenue Code, a
prohibition on any single stockholder, or any group of affiliated stockholders, from beneficially owning
more than 9.8% of our outstanding common or preferred stock, unless our board waives or modifies this
ownership limitation;
unless approved by the vote of at least 80% of our outstanding shares, we may not engage in business
combinations, including mergers, dispositions of assets, certain issuances of shares of stock and other
specified transactions, with a person owning or controlling, directly or indirectly, 5% or more of the voting
power of our outstanding common stock; and
supermajority voting requirements to amend our bylaws and certain provisions of our certificate of
incorporation.
While these provisions have the effect of encouraging persons seeking to acquire control of our company to
negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction
that stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts
to remove and replace incumbent directors. We are also subject to Delaware laws that could have similar effects.
One of these laws prohibits us from engaging in a business combination with a significant stockholder unless
specific conditions are met.
Risks Related to Our Merger with Deltic
Our merger with Deltic may not be completed on the terms currently contemplated, or at all.
The Company, Merger Sub and Deltic entered into the Merger Agreement pursuant to which Deltic will merge with
and into Merger Sub, with Merger Sub continuing as the surviving corporation. If the merger is not completed, our
businesses may be adversely affected and we may be subject to various risks without realizing any of the benefits
of having the merger completed, including the following:
• We may be required, under certain circumstances, to pay a termination fee of $66 million;
• We may experience negative reactions from the financial markets or from our customers, suppliers or
employees; and
• We may be subject to litigation related to any failure to complete the merger or to enforcement
proceedings commenced against us to perform our obligations under the Merger Agreement.
Any delay in completing the merger, which is subject to a number of conditions, some of which are
outside of our control, may reduce or eliminate the expected benefits from the transaction.
The merger is subject to required stockholder approvals, which may prevent, delay or otherwise materially
adversely affect its completion. The requirements for obtaining the required stockholder approvals could delay the
completion of the merger for a significant period of time or prevent it from occurring. In addition, several putative
class action lawsuits relating to the merger have been filed and additional lawsuits may be filed, which could delay
completion of the merger. We intend to vigorously defend the litigation but we cannot predict the outcome. Any
delay in completing the merger could cause us not to realize some or all of the synergies and other benefits that
we expect to achieve if the merger is successfully completed within its expected time frame. The Merger
Agreement contains certain restrictions on the conduct of our business. If the merger is delayed, these restrictions
could adversely affect our ability to execute business strategies or pursue attractive business opportunities. In
addition, a delay could cause our management to focus on completion of the merger instead of on other
opportunities that could be beneficial to the company.
The merger will involve substantial costs.
We have incurred and expect to continue to incur substantial costs and expenses relating directly to the merger
including fees and expenses payable to financial advisors, other professional fees and expenses, insurance
premium costs, HSR filing fees, SEC filing fees, printing and mailing costs and other transaction-related costs,
fees and expenses. We also will incur transaction fees and costs related to formulating and implementing
integration plans, including facilities and systems consolidation costs, employment-related costs and costs related
to the special distribution. There are a large number of systems that must be integrated, including management
20
information, purchasing, accounting and finance, sales, billing, payroll and benefits, fixed asset and lease
administration systems and regulatory compliance. Expenses related to this integration are by their nature difficult
to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to
achieve from the realization of economies of scale and cost savings and synergies related to the integration of the
businesses. These integration expenses likely will result in significant charges against earnings following the
completion of the merger, but the amount and timing of such charges are uncertain.
We may be unable to integrate successfully the businesses of Potlatch and Deltic and realize the
anticipated benefits of the merger.
The merger involves the combination of two independently operated public companies. The merger will require
management to devote significant attention and resources to integrating business practices and operations. The
combined company may fail to realize some or all of the anticipated benefits of the merger if the integration
process takes longer than expected or is more costly than expected. Potential difficulties the combined company
may encounter in the integration process include the following:
•
•
•
•
•
•
•
the inability to successfully combine the businesses of Potlatch and Deltic in a manner that permits the
combined company to achieve the cost savings and synergies anticipated to result from the merger, which
would result in the anticipated benefits of the merger not being realized partly or wholly in the time frame
currently anticipated or at all;
lost sales and customers as a result of certain customers of either of the two companies deciding not to do
business with the combined company;
complexities associated with managing the combined businesses;
integrating personnel from the two companies;
creation of uniform standards, controls, procedures, policies and information systems;
potential unknown liabilities and unforeseen increased expenses or delays associated with the merger;
and
performance shortfalls at one or both of the two companies as a result of the diversion of management’s
attention caused by completing the merger and integrating the companies’ operations.
Uncertainties associated with the merger may cause a loss of management personnel and other key
employees of Potlatch or Deltic which could adversely affect the future business and operations of the
combined company following the merger.
Potlatch and Deltic are dependent on the experience and industry knowledge of their officers and other key
employees to execute their business plans and conduct operations. The combined company’s success after the
merger will depend in part upon its ability to retain key management personnel and other key employees of
Potlatch and Deltic. Current and prospective employees of Potlatch and Deltic may experience uncertainty about
their future roles with the combined company following the merger, which may materially adversely affect the
ability of each of Potlatch and Deltic to attract and retain key personnel during the pendency of the merger.
Accordingly, no assurance can be given that the combined company will be able to retain key management
personnel and other key employees of Potlatch and Deltic.
Uncertainty due to the pendency of the merger could adversely affect the business and operations of
Potlatch or Deltic.
In connection with the pendency of the merger, some customers, suppliers or other entities with whom Potlatch or
Deltic have a business relationship may delay or defer decisions, which could negatively impact revenues,
earnings and cash flows of Potlatch or Deltic, as well as the market price of shares of Potlatch common stock
regardless of whether the merger is completed. In addition, customers or suppliers may cease doing business
with Potlatch, Deltic or the combined company in anticipation of or following the merger or may change the terms
and conditions upon which they are willing to continue to do business. In addition, current or prospective
competitors of Potlatch, Deltic or the combined company may seek to take advantage of potential uncertainty or
disruption resulting from the merger to interfere with relationships with customers, suppliers or employees.
21
Potlatch’s future results will suffer if the combined company does not effectively manage its expanded
operations following the merger.
Following the merger, the size of the business of the combined company will increase significantly beyond the
current size of either Potlatch’s or Deltic’s current businesses. In addition, the combined company may continue
to expand its operations through additional acquisitions or other strategic transactions. Potlatch’s future success
depends, in part, upon its ability to manage its expanded business, which may pose substantial challenges for
management, including challenges related to the management and monitoring of new operations and associated
increased costs and complexity. There can be no assurances that the combined company will be successful or
that it will realize the expected economies of scale, synergies and other benefits currently anticipated from the
merger or anticipated from any additional acquisitions or strategic transactions.
The market price of shares of Potlatch common stock may decline in the future as a result of the merger.
The market price of shares of Potlatch common stock may decline in the future as a result of the merger for a
number of reasons, including the unsuccessful integration of Potlatch and Deltic or the failure of Potlatch to
achieve the perceived benefits of the merger, including financial results, as rapidly as or to the extent anticipated
by financial or industry analysts.
The merger may not be accretive and may cause dilution to Potlatch’s cash available for distribution per
share, which may negatively affect the market price of shares of Potlatch common stock.
The merger is expected to deliver accretion to Potlatch’s cash available for distribution per share in the first full
year after the merger, including cost synergies and excluding integration and restructuring activities. This
expectation is based on preliminary estimates which may materially change, including the currently expected
timing of the merger. Potlatch could also encounter additional transaction-related costs or other factors such as a
delay in the closing of the merger or the failure to realize all of the benefits anticipated in the merger. Any of these
factors could cause dilution to Potlatch’s cash available for distribution per share or decrease or delay the
expected accretive effect of the merger and cause a decrease in the market price of shares of Potlatch common
stock.
The combined company may incur adverse tax consequences as a result of Deltic’s status as a non-REIT
“C corporation” for U.S. federal income tax purposes.
Because Deltic is not a REIT for U.S. federal income tax purposes, Potlatch and its stockholders will face the
following adverse tax consequences as a result of the merger:
• Potlatch will generally inherit any corporate income tax liabilities of Deltic, including penalties and interest;
• Potlatch will be subject to regular corporate-level tax on the built-in gain in each asset of Deltic existing at
the time of the merger if Potlatch were to dispose of a Deltic asset during the five-year period following the
merger; and
• Potlatch will be required to pay one or more special distributions to eliminate any earnings and profits
accumulated by Deltic, which distributions will be taxable and are expected in substantial part to be paid in
Potlatch stock and thus may cause a stockholder receiving such distributions to incur a tax liability that
exceeds the cash received by such stockholder.
As a result of these factors, Deltic’s status as a non-REIT “C corporation” could reduce Potlatch’s cash available
for distribution to stockholders or impair its ability after the merger to expand its business and raise capital, could
materially adversely affect the value of shares of Potlatch’s common stock, and could have other adverse effects
for Potlatch and its stockholders.
22
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Information on our locations and facilities is included in Part I - Item 1. Business under each of the respective
segment headers.
ITEM 3. LEGAL PROCEEDINGS
Other than the environmental proceedings described in Note 16: Commitments and Contingencies in the Notes to
Consolidated Financial Statements, which is incorporated herein by reference, we believe there is no pending or
threatened litigation that could have a material adverse effect on our financial position, results of operations or
liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
23
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on The Nasdaq Global Select Market (NASDAQ). The quarterly high and low sales
price per share of our common stock and the quarterly cash dividend payments per share for 2017 and 2016 were
as follows:
2017
2016
Quarter
1st
2nd
3rd
4th
Low
High
Cash
Dividends
Cash
Dividends
$ 46.00 $ 39.05 $ 0.375 $ 32.00 $ 24.01 $ 0.375
$ 48.85 $ 43.15 $ 0.375 $ 35.94 $ 31.06 $ 0.375
$ 51.40 $ 43.85 $ 0.375 $ 39.91 $ 33.01 $ 0.375
0.40 $ 44.00 $ 36.35 $ 0.375
$ 56.35 $ 47.80 $
High
Low
There were approximately 984 stockholders of record at January 31, 2018.
Our board of directors, in its sole discretion, determines the actual amount of dividends to be paid to stockholders
based on consideration of a number of factors, including, but not limited to, our results of operations, cash flow
and capital requirements, economic conditions in our industry and in the markets for our products, timber prices,
harvest levels on our timberlands, market demand for timberlands, including timberland properties we have
identified as potentially having a higher and better use, future acquisitions and dispositions, tax considerations,
borrowing capacity and debt covenant restrictions. Consequently, the level of dividends paid to our stockholders
may fluctuate and any reduction in the dividend rate may adversely affect our stock price.
Reference is made to the discussion in Liquidity and Capital Resources in Management’s Discussion and
Analysis of Financial Condition and Results of Operations of (i) the covenants in our credit facility and term loan
and the indenture governing our senior notes with which we must comply in order to make cash dividends and
(ii) the REIT tax rules, which under certain circumstances may restrict our ability to receive dividends from
Potlatch TRS, our taxable REIT subsidiary.
ISSUER PURCHASES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 26, 2016, our board of directors authorized management to repurchase up to $60 million of common
stock over a period of 24 months (the Repurchase Plan).
Common Share Purchases
April (4/28/16 - 4/30/16)
May (5/1/16 - 5/31/16)
June (6/1/16 - 6/30/16)
July (7/1/16 - 7/31/16)
August (8/1/16 - 8/31/16)
September (9/1/16 - 9/30/16)
October (10/1/16 - 10/31/16)
November (11/1/16 - 11/30/16)
December (12/1/16 - 12/31/16)
Total Shares Purchased
Total Number
of Shares
Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased
as Part of a
Publicly
Announced Plan
Maximum Dollar Value
of Shares that May Yet
Be Purchased Under
the Plan
94,625 $
75,000 $
— $
— $
— $
— $
— $
— $
— $
169,625 $
35.46
34.61
—
—
—
—
—
—
—
35.08
94,625 $
75,000 $
— $
— $
— $
— $
— $
— $
— $
169,625
56,644,779
54,048,978
54,048,978
54,048,978
54,048,978
54,048,978
54,048,978
54,048,978
54,048,978
No repurchase transactions occurred in 2017. We repurchased 169,625 shares of common stock for $6.0 million
(including transaction costs) in 2016. Transaction costs are not counted against authorized funds under the
Repurchase Plan. All purchases were made in open-market transactions.
24
We record share purchases upon trade date, as opposed to the settlement date when cash is disbursed. We
record a liability to account for repurchases that have not been settled. There were no unsettled repurchases as
of December 31, 2017 and 2016.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about securities authorized for issuance under our equity compensation
plans as of December 31, 2017:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security
holders
Total
Number of securitie
s
to be issued upon
exercise of
outstanding options,
warrants and rights1
(a)
Number of securitie
s
remaining available
for future issuance
under equity
compensation plans
(excluding
securities reflected
in column (a))
(c)
Weighted-average
exercise price of
outstanding options,
warrants and rights2
(b)
814,668 $
—
814,668 $
—
—
—
373,968
—
373,968
1
2
The number of performance shares issued, as a percentage of the amount subject to the performance share award, could
range from 0% to 200%. The number of performance shares to be issued is based on 181% of vested and unvested
shares, which was 504,753. Also included are 93,910 RSUs and 216,005 deferred compensation stock equivalent units.
Performance shares and RSUs do not have exercise prices and are therefore not included in the weighted-average
exercise price calculation.
25
Company Stock Price Performance
The following graph and table show a five year comparison of cumulative total stockholder returns for our
company, the NAREIT Equity Index, the Standard & Poor’s 500 Composite Index and a group of five companies
that we refer to as our Peer Group for the period ended December 31, 2017. The total stockholder return
assumes $100 invested at December 31, 2012, with quarterly reinvestment of all dividends.
$220
$210
$200
$190
$180
$170
$160
$150
$140
$130
$120
$110
$100
$90
$80
1 2 / 3 1 / 1 2
1 2 / 3 1 / 1 3
1 2 / 3 1 / 1 4
1 2 / 3 1 / 1 5
1 2 / 3 1 / 1 6
1 2 / 3 1 / 1 7
Potlatch Corporation
NAREIT Equity Index
S&P 500 Index
2017 Peer Group
Potlatch Corporation
NAREIT Equity Index
S&P 500 Composite
2017 Peer Group1
2013
2014
At December 31,
2015
2016
2017
$
$
$
$
110 $
102 $
132 $
106 $
114 $
133 $
151 $
117 $
86 $
138 $
153 $
104 $
123 $
149 $
171 $
115 $
152
157
208
137
1
Our peer group companies are Deltic Timber Corp., Rayonier Inc., St. Joe Co., Universal Forest Products Inc. and
Weyerhaeuser Co. Returns are weighted based on market capitalizations as of the beginning of each year.
The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of
Regulation S-K and is not being filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as
amended and is not to be incorporated by reference into any of our filings, whether made before or after the date
hereof, regardless of any general incorporation in such filing.
26
ITEM 6. SELECTED FINANCIAL DATA
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
(Dollars in thousands - except per share amounts)
Revenues
Net income1
2016
2017
2015
$ 678,595 $ 599,099 $ 575,336 $ 606,950 $ 570,289
89,910 $ 70,581
$ 86,453 $ 10,938 $
31,714 $
2014
2013
Total assets1,2
Long-term debt (including current portion)1,2
Total stockholders’ equity
$ 953,079 $ 927,681 $1,016,612 $1,031,746 $ 677,202
$ 573,319 $ 583,988 $ 603,881 $ 625,668 $ 316,764
$ 200,542 $ 156,274 $ 203,736 $ 225,066 $ 204,148
Capital expenditures:3
Property, plant and equipment
Timberlands reforestation and roads
Total capital expenditures
Net income per share:
Basic
Diluted
Dividends per share
Weighted-average shares outstanding
(in thousands):
Basic
Diluted
$ 12,855 $
15,207
5,866 $
13,422
$ 28,062 $ 19,288 $
18,987 $
13,745
32,732 $
13,261 $ 10,280
12,313
10,971
24,232 $ 22,593
$
$
$
2.12 $
2.10 $
1.525 $
0.27 $
0.27 $
1.50 $
0.78 $
0.77 $
1.50 $
2.21 $
2.20 $
1.425 $
1.74
1.73
1.28
40,824
41,227
40,798
41,033
40,842
40,988
40,749
40,894
40,503
40,709
1
2
3
In the second quarter of 2016, we sold approximately 172,000 acres of timberlands located in central Idaho for
$114 million at a loss of $48.5 million before taxes and repaid $42.6 million of revenue bonds.
In December 2014, we acquired approximately 201,000 acres of timberland in Alabama and Mississippi for a total
purchase price of $384 million, which was funded with $310 million of new term loans and cash on hand.
Excludes the acquisition of timber and timberlands.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The following discussion and analysis should be read in conjunction with Part I - Item 1. Business and Item 8.
Financial Statements and Supplementary Data.
Our business is organized into three reporting segments: Resource, Wood Products and Real Estate. Sales
between segments are recorded as intersegment revenues based on prevailing market prices. Approximately
one-fourth of the Resource segment’s sales have been to Wood Products. Our other segments generally do not
generate intersegment revenues.
In the discussion of our consolidated results of operations, our revenues are reported after elimination of
intersegment revenues. In the business segment discussions, each segment’s revenues are presented before
elimination of intersegment revenues.
The operating results of our Resource, Wood Products and Real Estate business segments have been and will
continue to be influenced by a variety of factors, including the cyclical nature of the forest products industry,
changes in timber prices and in harvest levels from our timberlands, competition, timberland valuations, demand
for our non-strategic timberland for higher and better use purposes, lumber prices, the efficiency and level of
capacity utilization of our wood products manufacturing operations, changes in our principal expenses such as log
costs, asset dispositions or acquisitions and other factors. See Part I - Item 1A. Risk Factors for additional
information.
Overview
Summary of 2017
With over half of our total revenues indexed to lumber, increased lumber sale prices contributed to strong results
for 2017. We also benefited from higher cedar prices and a greater mix of cedar. Our lumber mills continued to
have improved lumber recovery and better grade yield. Production increased almost 50 MMBF to set a new
company record. The Real Estate segment continued to sell non-core timberlands at margins in excess of 60%.
Higher lumber prices for 2017 were affected by several factors, including:
• Restricted production in Canada due to forest fires;
• Hurricanes in the South affecting logistics;
• Uncertainty in the Canadian softwood lumber case (final duties went into effect on December 28, 2017);
• Strong U.S. markets for home repair and remodel and commercial and industrial buildings; and
• A continued rise in U.S. housing starts.
In 2018, we expect continued strength in lumber prices resulting from the following factors:
• A continued increase in U.S. housing starts and a strong U.S. home improvement market, including
rebuild and repairs from 2017’s hurricanes and wildfires; and
• Expected U.S. economic growth resulting from the December 22, 2017 Tax Cuts and Jobs Act, including
strengthening employment and higher disposable incomes.
Summary of 2016
During 2016, all three of our business segments contributed to our positive results. The Resource segment
achieved planned harvest volumes despite challenging weather conditions. The capital projects completed in
2015 at each of our lumber mills resulted in improved lumber recovery, better grade yield and increased
production. The Real Estate segment sold approximately 172,000 acres of non-strategic timberlands located in
central Idaho for $114 million and closed three large conservation sales during the year.
28
Summary of 2015
During 2015, the Resource and Wood Products segment results were affected by lower lumber prices resulting
from excess supply in the United States. Lumber demand decreased in early 2015 due to adverse weather in the
eastern part of the United States, which slowed housing starts, while a mild winter in the western part of the
United States did not limit timber harvesting, which provided for strong log and lumber production volumes. A
decrease in lumber exported by Canada to China, coupled with a weak Canadian dollar relative to the U.S. dollar,
resulted in higher Canadian lumber sales into the United States.
In addition, during 2015, we completed large capital projects at each of our lumber mills. These capital projects
resulted in lower production volumes in 2015 due to down time taken during installation.
Softwood Lumber Agreement
After years of trade disputes over Canadian softwood lumber imports, the United States and Canada signed a
Softwood Lumber Agreement in 2006, which expired in October 2015. The agreement established a system of
tiered taxes and volume restrictions relating to Canadian lumber imports to the United States. Following expiration
of the softwood lumber agreement, imports of Canadian lumber to the United States at lower prices increased,
depressing U.S. lumber prices. On November 25, 2016, the U.S. lumber industry filed a petition seeking
countervailing (CVD) and anti-dumping (AD) duties on Canadian lumber imports with the U.S. Department of
Commerce. Final rulings on injury and CVD and AD duties went into effect on December 28, 2017. The combined
CVD and AD duty to be paid by most Canadian exporters was established at 20.23%. The Canadians have
commenced proceedings with the NAFTA appeals panel and the World Trade Organization appealing the
imposition of the duties. In addition, the governments of the United States and Canada continue to state publicly
their intention to reach a negotiated settlement of these trade cases.
Pending merger with Deltic
On October 22, 2017, Potlatch, Merger Sub and Deltic entered into a Merger Agreement pursuant to which Deltic
will merge with and into Merger Sub. Information regarding the pending merger with Deltic is included in Part I -
Item 1. Business - General. The merger is expected to close on February 20, 2018.
CONSOLIDATED RESULTS
The following table sets forth year-over-year changes in items included in our Consolidated Statements of
Income. Our Business Segment Results provide a more detailed discussion of our segments.
(Dollars in thousands)
Revenues
Costs and expenses:
Cost of goods sold
Selling, general and administrative expenses
Environmental charges for Avery Landing
Deltic merger-related costs
Gain on lumber price swap
Loss on sale of central Idaho timber and
timberlands
Operating income
Interest expense, net
Income before income taxes
Income tax (provision) benefit
Net income
*
Percentage change not meaningful.
2017
vs.
2016
13%
2%
7%
*
*
*
*
(5%)
*
(7%)
*
*
*
2016
vs.
2015
4%
(2%)
11%
*
*
*
*
9%
(40%)
(12%)
(75%)
(22%)
(66%)
2017
2016
$ 678,595 $ 599,099 $ 575,336
2015
470,365 462,304 470,037
46,392
—
—
—
51,697
1,022
—
—
55,408
4,978
3,409
(1,088)
—
48,522
—
533,072 563,545 516,429
58,907
145,523
(32,761)
(27,049)
26,146
118,474
5,568
(32,021)
$ 86,453 $ 10,938 $ 31,714
35,554
(28,941)
6,613
4,325
29
Revenues
2017 compared with 2016
Revenues increased $79.5 million, or 13%, due to 21% higher lumber sale prices and a 7% increase in lumber
shipments, partially offset by a 5% decrease in harvest volumes. We sold 5,536 less acres, resulting in a 6%
reduction in Real Estate revenue.
2016 compared with 2015
Revenues increased $23.8 million, or 4%, due to a 10% increase in lumber shipments, a 2% increase in
lumber sales prices and 7,155 more acres sold. These increases were partially offset by a decrease in harvest
volumes due to the sale of central Idaho timberlands.
Cost of goods sold
2017 compared with 2016
Cost of goods sold increased 2% due to higher fiber and manufacturing costs due to increased manufacturing
volumes, partially offset by a decrease in the average land basis of real estate sold due to geographic mix.
2016 compared with 2015
Cost of goods sold decreased 2% due to lower log and haul and depletion on reduced harvest volumes,
partially offset by an increase in the average land basis of real estate sold due to geographic mix.
Selling, general and administrative expenses
2017 compared with 2016
The increase of $3.7 million in selling, general and administrative expenses included higher annual cash
incentive expense due to strong results and higher worker’s compensation expense, partially offset by lower
pension expense resulting from updated mortality tables. Approximately 70% of selling, general and
administrative expenses are considered Corporate, and not allocated to the segments.
2016 compared with 2015
The increase in selling, general and administrative expenses was a combination of annual cash incentive
expense, which was absent in 2015, and higher pension expense resulting from lower discount rates as
compared with the prior year.
Other
Environmental charges for Avery Landing
During 2017, we accrued $5.0 million related to Avery Landing, compared with $1.0 million in 2016. See
Note 16: Commitments and Contingencies for a more detailed discussion of Avery Landing.
Deltic merger-related costs
During 2017, we incurred costs directly attributable to the pending merger with Deltic include investment
banking, legal, accounting, filing and appraisal fees, as well as other costs related to the pending merger.
Gain on lumber price swap
In April 2017, we entered into a lumber price swap to fix the price on a total of 36 million board feet of southern
yellow pine with an effective date of July 1, 2017 and a termination date of December 31, 2017. Under the
contract, beginning in July, cash settlements on 6 MMBF occurred monthly. We recognized $1.1 million in
cash settlements on this swap over its term.
See Note 10: Derivative Instruments for a more detailed discussion of the lumber price swap.
Income taxes
Income taxes are typically due to income or loss from Potlatch TRS. The TRS had income before tax of
$59.5 million for 2017 and a loss before income tax of $14.0 million and $14.2 million for 2016 and 2015,
respectively.
30
On December 22, 2017, the H.R. 1, Tax Cuts and Jobs Act was enacted that decreased the U.S. corporate tax
rate from 35% to 21%, repealed the domestic production deduction and altered taxation of executive
compensation and employer provided benefits, as well as other changes. The TRS remeasured deferred tax
assets and liabilities at the reduced tax rate, resulting in a $10.7 million charge to the provision.
BUSINESS SEGMENT RESULTS
Resource Segment
(Dollars in thousands)
Revenues1
Cost of goods sold:
For the Years Ended December 31,
2015
2016
2017
$ 278,199 $ 256,163 $ 263,875
2017
vs.
2016
9%
Logging and hauling
Depreciation, depletion and amortization
Other
Selling, general and administrative expenses2
Operating income
117,827
20,476
27,121
165,424
6,670
$ 106,105 $
117,583
24,090
26,086
167,759
6,486
81,918 $
126,085 —
28,583
26,289
180,957
6,568
76,350
(15%)
4%
(1%)
3%
30%
2016
vs.
2015
(3%)
(7%)
(16%)
(1%)
(7%)
(1%)
7%
Harvest Volumes (in tons)
Northern region
Sawlog
Pulpwood
Stumpage
Total
Southern region
Sawlog
Pulpwood
Stumpage
Total
1,711,588 1,809,288 1,992,965
194,902
23,574
1,870,117 2,022,294 2,211,441
146,402
12,127
194,414
18,592
853,377
933,228
736,333
1,168,225 1,115,647 1,127,561
321,172
2,142,604 2,213,225 2,185,066
244,201
41,151
(5%)
(25%)
(35%)
(8%)
(9%)
—
(21%)
(9%)
9%
5%
(83%)
(3%)
16%
(1%)
(24%)
1%
Total harvest volume
4,012,721 4,235,519 4,396,507
(5%)
(4%)
Sales Price/Unit ($ per ton)
Northern region3
Sawlog
Pulpwood
Stumpage
Southern region3
Sawlog
Pulpwood
Stumpage
$
$
$
$
$
$
111 $
38 $
13 $
44 $
30 $
14 $
90 $
42 $
13 $
44 $
32 $
26 $
87
42
23%
(10%)
9 —
3%
—
44%
43 —
33
19
(6%)
(46%)
2%
(3%)
37%
1
2
3
Prior to elimination of intersegment fiber revenues of $71.4 million, $57.1 million and $53.7 million in 2017, 2016 and
2015, respectively.
A portion of depreciation expense is included in selling, general and administrative expenses.
Sawlog and pulpwood sale prices are on a delivered basis, which include contracted logging and hauling costs charged to
the customer. Stumpage sales provide our customers the right to harvest standing timber. As such, the customer
contracts the logging and hauling and bears such costs.
31
Revenues
2017 compared with 2016
Resource segment revenues increased 9% due to strong sawlog prices in the Northern region, partially offset
by lower harvest volumes in both regions.
Northern region sawlog prices increased 23% due to indexed lumber prices, higher cedar pricing and a greater
mix of cedar. The decrease in 2017 Northern region sawlog volumes was primarily the result of the sale of
central Idaho timberlands in the second quarter of 2016. Northern region pulpwood sales were down 25% due
to trucking shortages.
Scheduled harvest volumes of sawlogs and pulpwood in the Southern region increased 9% and 5%,
respectively. A higher mix of hardwood sawlogs offset lower prices for pine sawlogs. Pulpwood prices
decreased 6% due to high pulp mill inventories. Stumpage prices fluctuated based on the mix of pulpwood
and sawlog volume.
2016 compared with 2015
Revenues decreased 3% due to a 4% reduction in harvest volumes that resulted from the sale of central Idaho
timberlands in the second quarter of 2016. Central Idaho represented 5% of harvest volumes in 2015.
Excluding central Idaho, the Northern region’s harvest volumes were relatively flat, consistent with planned
harvest volumes. Higher Northern region sawlog prices were the result of a 10% increase in cedar prices and
an increase in cedar mix.
Harvest volumes in our Southern region were also relatively flat, with a shift to a higher proportion of delivered
sawlog sales and fewer stumpage sales. Sawlog prices increased due to a slight lift in hardwood prices.
Pulpwood prices declined for both hardwood and pine due to full pulp mill inventories.
Cost of Goods Sold
2017 compared with 2016
Logging and hauling expense was flat due to higher delivered harvest volumes in the Southern region offset by
lower harvest volumes in the Northern region. Stumpage sales do not include logging and hauling. A 15%
decrease in depreciation, depletion and amortization expense was the result of a 5% decrease in harvest
volumes and lower harvest volumes on leased acres. Leased acres are primarily located in Alabama and the
related timber has a higher cost basis.
2016 compared with 2015
The decrease in harvest volumes resulted in lower logging, hauling and depletion expense. Lower diesel
prices resulted in slightly lower hauling rates.
32
Wood Products Segment
(Dollars in thousands)
Revenues
Cost of goods sold1:
Fiber costs
Freight, logging and hauling
Manufacturing costs
Finished goods inventory change
Selling, general and administrative expenses
Gain on lumber price swap
Operating income (loss)
Lumber shipments (MBF)2
Lumber sales prices ($ per MBF)2
For the Years Ended December 31,
2015
2016
2017
$ 441,157 $ 367,426 $ 336,214
(1,159)
50,929
48,410
182,090 165,585 163,985
42,661
132,486 127,086 127,998
1,548
364,346 337,427 336,192
5,257
—
(5,235)
5,412
—
$ 72,166 $ 24,587 $
5,733
(1,088)
(3,654)
736,667 688,229 626,630
346
$
352 $
425 $
2017
vs.
2016
20%
2016
vs.
2015
9%
10%
5%
4%
*
8%
6%
*
*
1%
13%
(1%)
*
—
3%
*
*
7%
21%
10%
2%
1
Prior to elimination of intersegment fiber costs of $71.4 million, $57.1 million and $53.7 million in 2017, 2016 and 2015,
respectively.
2 MBF stands for thousand board feet.
*
Percentage change not meaningful.
Revenues
2017 compared with 2016
Revenues increased $73.7 million due to higher lumber sales realization and a 7% increase in lumber
shipments.
2016 compared with 2015
Revenues increased $31.2 million due to higher lumber shipments and slightly improved lumber sales prices.
Lumber shipments in 2015 were impacted by mill down time for the completion of capital projects and
downtime taken at certain mills near year end to balance supply and demand. The increase in lumber prices
included the impact of a higher percentage of premium grade lumber resulting from the 2015 capital projects.
Cost of Goods Sold
2017 compared with 2016
Cost of goods sold increased due to the following factors:
• Fiber costs increased 10% due to elevated production volumes and higher per unit log costs, particularly
in Idaho where sawlog prices are indexed to lumber prices.
• Freight costs increased as a result of higher lumber shipments.
• Manufacturing costs, such as wages, repairs and maintenance, increased 4% due to higher production
volumes.
• Finished goods inventory fluctuates based on a combination of production volume, fiber costs,
manufacturing costs and shipments.
2016 compared with 2015
Cost of goods sold fluctuated due to the following factors:
• Fiber costs increased $1.6 million, or 1%. Increased use of fiber due to higher production volume was
substantially offset by lower per unit log costs in most of our mills, as well as increased lumber recovery.
• Freight costs increased as a result of residual hauling costs that were previously the responsibility of the
customer. These costs were $5.2 million and were billed to the customer and included in revenue. Higher
lumber shipments also increased freight costs.
33
• Manufacturing costs declined 1% in 2016. The increased cost associated with higher production volume in
2016 was more than offset by lower maintenance expense. We also had 11 days of downtime at our St.
Maries, Idaho sawmill in the first quarter of 2016 due to log shortages resulting from an unseasonably
warm winter that caused unfavorable hauling conditions.
• Finished goods inventory fluctuates based on a combination of production volume, fiber costs,
manufacturing costs and shipments.
Real Estate Segment
(Dollars in thousands)
Revenues
Cost of goods sold:
Basis of real estate sold
Other
Selling, general and administrative expenses
Loss on sale of central Idaho timber and
timberlands
Operating income (loss)
*
Percentage change not meaningful
Higher and better use (HBU)
Rural real estate
Non-strategic timberland
Central Idaho timberland
Total
For the Years Ended December 31,
2015
2016
2017
$ 30,655 $ 32,604 $ 28,989
7,114
2,182
9,296
2,783
8,518
2,490
11,008
2,569
7,394
2,519
9,913
2,227
—
$ 18,576 $ (29,495) $ 16,849
48,522
—
2017
vs.
2016
(6%)
(16%)
(12%)
(16%)
8%
*
*
2016
vs.
2015
12%
15%
(1%)
11%
15%
*
*
2017
2016
2015
Average
Average
Price/Acre
Price/Acre
Acres
Sold
Acres
Sold
Acres
Average
Sold
Price/Acre
6,440 $ 2,505
5,267 $ 2,338 4,599 $ 3,340
9,993 $ 1,394 12,911 $ 1,246 9,036 $ 1,329
900
17,007 $ 1,803 22,543 $ 1,446 15,388 $ 1,881
665
—
756 15,388 $ 1,881
— 171,598 $
17,007 $ 1,803 194,141 $
963 1,753 $
574 $ 1,033
4,365 $
— $
— $
2017 compared with 2016
During 2017, we sold 17,007 acres, which included a large conservation sale in Alabama. In 2016, we sold
22,543 acres, which also included a large conservation sale in Alabama, in addition to the sale of central Idaho
timberlands. The average price per acre fluctuates based on both the geographic area of the real estate and
the product mix.
In the second quarter of 2016, we sold approximately 172,000 acres of timberlands located in central Idaho for
$114 million, resulting in a loss of $48.5 million before tax. We purchased the property in 2007 and 2008 for
the purpose of growing and harvesting timber and selling rural recreational parcels. The sale freed up capital
without having to wait for the rural recreation real estate market in central Idaho to recover.
2016 compared with 2015
Excluding the sale of central Idaho, we sold 7,155 more acres in 2016, compared with 2015, at a lower
weighted average sales price. The average sales price per acre was higher in 2015 largely due to the sale of
two commercial real estate sites included in HBU, as well as geographic mix.
34
Liquidity and Capital Resources
Overview
Higher lumber prices contributed to higher revenues and net income resulting in an increase in cash and cash
equivalents of $37.9 million for the year ended December 31, 2017. We also increased the quarterly dividend
from $0.375 per share to $0.40 per share beginning in the fourth quarter of 2017. Investing activities in 2017
included capital projects at our lumber mills and the acquisition of timber and timberlands.
Cash Flows from Operating Activities
2017 compared with 2016
Net cash provided by operating activities was $162.7 million in 2017, compared with $102.1 million in 2016.
The increase of $60.6 million was primarily the result of the following:
• Cash received from customers increased $86.8 million, primarily due to higher lumber sale prices and
increased lumber shipments in 2017 over 2016. A more detailed discussion of revenues is included in
Business Segment Results.
• Cash paid for interest decreased $1.9 million due to reductions in long-term debt.
The following partially offset the increases in 2017:
•
Income tax payments were $15.8 million in 2017, compared with tax refunds of $8.1 million in 2016. As a
result of the loss on sale of central Idaho timberlands in the second quarter of 2016, we received a
$5.5 million tax refund. In addition, during 2016 we received $2.1 million from estimated tax payments
made in 2015 and $0.5 million from the carryback of certain tax credits.
• Cash contributions to our qualified pension plans were $4.0 million higher in 2017.
2016 compared with 2015
Net cash provided by operating activities was $102.1 million in 2016, compared with $74.0 million in 2015.
The increase of $28.1 million was primarily the result of the following:
• Cash received from customers increased $23.9 million, primarily due to increased lumber shipments and
more acres sold by our Real Estate segment in 2016 over 2015, excluding the central Idaho timber and
timberland sale. A more detailed discussion of revenues is included in Business Segment Results.
• Net cash inflows related to income taxes were $8.1 million in 2016, compared with outflows of $1.6 million
in 2015. As a result of the loss on sale of central Idaho timberlands in the second quarter of 2016, we
received a $5.5 million tax refund. In addition, during 2016 we received $2.1 million from estimated tax
payments made in 2015 and $0.5 million from the carryback of certain tax credits.
• Cash paid for interest decreased $1.6 million due to reductions in long-term debt.
The following partially offset the increases in 2016:
• Cash paid to employees and suppliers increased $5.8 million primarily due to costs for freight, logging and
hauling attributable to the 10% increase in lumber shipments.
• Cash contributions to our qualified pension plans were $1.3 million in 2016. We did not make a qualified
pension plan contribution in 2015.
Net Cash Flows from Investing Activities
Net cash used in investing activities was $50.0 million in 2017, compared with net cash provided by investing
activities of $93.4 million in 2016 and $33.6 million used by investing activities in 2015.
•
•
In 2017, we used $28.1 million for capital expenditures and $22.0 million for the acquisition of timber and
timberlands.
In 2016, the net proceeds from the sale of central Idaho timber and timberlands were $111.5 million,
partially offset by $19.3 million used for capital expenditures.
35
•
In 2015, we used $32.7 million for capital expenditures and $10.2 million for the acquisition of timber and
timberlands, partially offset by $7.0 million provided by short-term investments. During 2015, we
completed large capital projects at each of our lumber mills.
Net Cash Flows from Financing Activities
Net cash used in financing activities was $74.8 million in 2017, $120.8 million in 2016 and $56.5 million in 2015.
• Net cash used in financing activities in 2017 was primarily attributable to $11.0 million in long-term debt
repayments and $61.9 million of dividends to stockholders.
• Net cash used in financing activities in 2016 was primarily attributable to the $42.6 million repayment of
Minnesota revenue bonds, $60.8 million of dividends to stockholders and $6.0 million in the repurchase of
common stock. We refinanced debt of $93.2 million at attractive interest rates.
•
In 2015, we paid dividends to stockholders, which totaled $61.0 million and repaid $22.5 million of
debentures. This was partially offset by $30.0 million provided by our revolving line of credit.
Future Cash Requirements
Due to the pending merger with Deltic, in December 2017, our Board of Directors approved a partial-year budget.
We anticipate we will spend $9 million for capital expenditures through the first quarter of 2018. Our capital
spending will primarily be related to reforestation expenditures, logging road construction and general
replacement and improvement projects in our wood products manufacturing facilities. A full-year post-merger
budget is expected to be approved by our Board of Directors in mid-February 2018.
We expect to close the merger with Deltic on February 20, 2018 and issue approximately 22 million shares of our
common stock. To complete the conversion of Deltic to a REIT, we will also pay a special dividend in the fourth
quarter, estimated to be $250 million consisting of $50 million in cash and the remainder in stock. During 2018,
we expect to pay approximately $30 million in non-recurring costs directly attributable to the merger, including
investment banking, legal, accounting, filing and appraisal fees, as well as termination costs related to duplicate
executive and non-executive employees.
In the first quarter of 2018, we repaid $14.3 million in maturing medium-term notes.
Minimum required contributions to defined benefit plans were temporarily reduced for plan years 2013 through
approximately 2021 as a result of the Bipartisan Budget Act of 2015 (BBA 2015), which extended the Highway
and Transportation Funding Act (HAFTA) of 2014 and Moving Ahead for Progress in the 21st Century Act (MAP-
21). For us, this pension relief reduced required contributions to zero through the 2016 plan year. Declining
pension plan interest rates have reduced the effectiveness of the relief. In 2018, without considering the post-
merger impact of Deltic, we expect to make minimum funding contribution to our qualified pension plans totaling
$10.1 million. From 2019 to 2025, we expect to make minimum funding contributions totaling $41 million, with no
additional minimum funding contributions required subsequent to 2025. As a result of 2017’s actual return on plan
assets, expected minimum funding requirements decreased from previous estimates.
We expect to fund a majority of our 2018 annual cash dividends using the cash flows from our REIT-qualifying
timberland operations and from cash and cash equivalents on hand. While maintaining compliance with the limits
imposed by our REIT status, we may also utilize cash dividends from Potlatch TRS to fund our cash dividends. In
particular, at least 75% of our gross income for each taxable year as a REIT must be derived from sales of our
standing timber and other types of real estate income. No more than 25% of our gross income may consist of
dividends from Potlatch TRS and other non-qualifying types of income. This requirement may limit our ability to
receive dividends from Potlatch TRS and may impact our ability to fund dividends to stockholders using cash
flows from Potlatch TRS.
Sources of Financing
Credit Agreement
On August 12, 2014, we entered into an amended and restated credit agreement with an expiration date of
February 12, 2020. This credit agreement provided for a revolving line of credit with an initial aggregate principal
amount not to exceed $250 million, which may be increased by up to an additional $250 million, subject to certain
36
conditions and agreement of the lenders. It also included a sublimit of $40 million for the issuance of standby
letters of credit and a sublimit of $15 million for swing line loans. Usage under either or both subfacilities reduces
availability under the revolving line of credit. At December 31, 2017, there were no borrowings outstanding under
the revolving line of credit and approximately $0.9 million of the letter of credit subfacility was being used to
support outstanding standby letters of credit. Available borrowing capacity as of December 31, 2017 was
$249.1 million.
On February 14, 2018, we entered into a second amended and restated credit agreement (the Amended Credit
Agreement) with an expiration date of April 14, 2023. The Amended Credit 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 consistent
with the 2014 amended and restated credit agreement. The interest coverage ratio and leverage ratio financial
covenants are unchanged. The limitation on timberland acre sales was eliminated.
Upon closing of the merger with Deltic, we intend to repay their outstanding borrowings under their revolving
credit agreement of approximately $100 million utilizing this Amended Credit Agreement, with the intention of
refinancing such borrowings utilizing our term loan agreement. We also intend to assume approximately $29.7
million of Deltic obligations under a letter of credit agreement relating to Union County, Arkansas Industrial
Development Revenue Bonds and $100 million of Deltic term loans.
We may also utilize borrowings under the Amended Credit Agreement to, among other things, refinance existing
indebtedness and provide funding for working capital requirements, capital projects, acquisitions and other
general corporate expenditures.
The Amended Credit Agreement contains certain covenants that limit our ability and that of our subsidiaries to
create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, repurchase or redeem
capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with
affiliates or change the nature of our business. The Amended Credit Agreement also contains financial
maintenance covenants including the maintenance of a minimum interest coverage ratio and a maximum
leverage ratio. We will be permitted to pay dividends to our stockholders under the terms of the Amended Credit
Agreement so long as we expect to remain in compliance with the financial maintenance covenants.
Term Loans
In December 2014, we entered into an amended and restated term loan agreement. The amended term loan
agreement provided additional term loan facilities of $310 million to fund the acquisition of timberlands in Alabama
and Mississippi. In February 2016, an additional tranche was added to refinance $27.5 million of long-term debt
that matured in December 2015 and February 2016. A $6.0 million tranche matured and was repaid in December
2017. The amended term loan agreement totaling $343.5 million contains covenants similar to the 2014 amended
and restated credit agreement.
Senior Notes
In 2009, we sold $150 million aggregate principal amount of 7.5% senior notes. The terms of these notes limit our
ability and the ability of any subsidiary guarantors, to borrow money, pay dividends, redeem or repurchase capital
stock, enter into sale and leaseback transactions and create liens. Dividends and the repurchase of our capital
stock, are permitted as follows:
• We may use 100% of our Funds Available for Distribution (FAD), for the period January 1, 2010 through
the end of the quarter preceding the payment date, less cumulative restricted payments previously made
from FAD during that period, to make restricted payments. Our cumulative FAD less our dividends paid
was $237.4 million as of December 31, 2017.
•
•
If our cumulative FAD, less cumulative restricted payments previously made from FAD, is insufficient to
cover a restricted payment, then we are permitted to make payments from a basket amount, which was
approximately $90.1 million as of December 31, 2017.
If our cumulative FAD less our aggregate restricted payments made from FAD is insufficient to cover a
restricted payment and we have depleted the basket, we may still make a restricted payment, so long as,
after giving effect to the payment, our ratio of indebtedness to earnings before interest, taxes,
depreciation, depletion, amortization and basis of real estate sold, or EBITDDA, from continuing
operations for the preceding four full fiscal quarters does not exceed 4.25 to 1.00.
37
FAD, as defined in the indenture governing the senior notes, is earnings from continuing operations, plus
depreciation, depletion and amortization, plus basis of real estate sold and minus capital expenditures. For
purposes of this definition, capital expenditures exclude all expenditures relating to direct or indirect timberland
purchases in excess of $5 million.
Financial Covenants
The table below sets forth the financial covenants in the 2014 amended and restated credit agreement and term
loan agreement and our status with respect to these covenants as of December 31, 2017:
Interest Coverage Ratio
Leverage Ratio
Allowable acres that may be sold1
Covenant Requirement
3.00 to 1.00
≥
40%
≤
480,000
Actual At
December 31, 201
7
6.86
23%
1
Acres sold under the credit and term loan agreements were 233,358 and 16,059, respectively, as of December 31, 2017.
The term loan agreement allows for an exclusion of up to 250,000 acres sold in the fiscal years ending December 31,
2016 and December 31, 2017. The Amended Credit Agreement eliminates the limitation on timberland acre sales.
The Interest Coverage Ratio is EBITDDA, which is defined as net income adjusted for interest expense, income
taxes, depreciation, depletion and amortization, the basis of real estate sold and non-cash equity compensation
expense, divided by interest expense for the same period.
The Leverage Ratio is our Total Funded Indebtedness divided by our Total Asset Value. Our Total Funded
Indebtedness consists of our long-term debt, including any current portion of long-term debt, revolving line of
credit borrowings, plus the total amount outstanding under the letter of credit subfacility. Our Total Asset Value,
per the 2014 amended and restated credit agreement and term loan agreement, is defined as the value of our
timberlands, the book basis of our wood products manufacturing facilities, cash and cash equivalents and the
cash value of our company-owned life insurance (COLI). The book basis of our Wood Products manufacturing
facilities and the cash value of our COLI are each limited to 5% of Total Asset Value.
The definition of our Total Asset Value under the Amended Credit Agreement has been revised to increase the
limit on the book basis of our Wood Products manufacturing facilities from 5% to 10%. In addition, Total Asset
Value now includes the book basis of Construction In Progress (limited to 10% of Total Asset Value) and a Pro
Rata Share of Investment Affiliates (limited to 15% of Total Asset Value). Construction in Progress means, as of
any date, (a) the construction of a new operating facility or (b) an expansion with greater than $10 million of
capital expenditures to an existing facility. Investment Affiliate means any person in which any member of the
Consolidated Parties, directly or indirectly, has an ownership interest, whose financial results are not consolidated
into our financial statements. The inclusion of cash and cash equivalents and the limitation on the cash value of
our COLI remain the same.
Tax Reform
As a REIT, we generally are not subject to federal and state corporate income taxes on income from investments
in real estate that we distribute to our shareholders. We are required to pay federal and state corporate income
taxes on income from our non-real estate investments which are held in taxable REIT subsidiaries (TRS). These
activities are principally comprised of our wood products manufacturing operations and certain real estate
investments held for sale. As discussed in Business Results, the Tax Cuts and Jobs Act decreased the U.S.
corporate tax rate from 35% to 21%. Had the new tax rules been in place during 2017, our income tax expense
would have been $5.4 million lower.
38
Dividends to Shareholders
The following table summarizes the historical tax characteristics of dividends to shareholders for the years ended
December 31:
(Amounts per share)
Capital gain dividends
Non-taxable return of capital
Total dividends
2017
2016
2015
$
$
1.525 $
—
1.525 $
1.50 $
—
1.50 $
1.28
0.22
1.50
In October 2017, concurrent with the announcement of the Deltic merger, our Board of Directors declared a
dividend of $0.40 per share for the fourth quarter of 2017, which was a 7% increase relative to the prior quarterly
dividend of $0.375 per share.
Credit Ratings
Two major debt rating agencies routinely evaluate our debt and our cost of borrowing can increase or decrease
depending on our credit rating. In October 2017, Moody’s changed the outlook of our debt rating of 'Ba1' from
Stable to Rating Under Review for Upgrade, following our announcement of the Deltic merger. Also in October,
Standard & Poors updated their outlook related to our BB+ rating on our debt from Stable to Positive.
Off-Balance Sheet Arrangements
We had no off-balance sheet financing agreements or guarantees as defined by Item 303 of Regulation S-K as of
December 31, 2017 and December 31, 2016 that we believe are reasonably likely to have a current or future
effect on our financial condition, results of operations or cash flows.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2017:
(Dollars in thousands)
Long-term debt1
Interest on long-term debt2
Operating leases3
Purchase obligations4
Other long-term liabilities5
Total
Payments Due by Period
Total
Within
1 Year
2-3 Years 4-5 Years
More Than
5 Years
$ 576,485 $ 14,250 $ 236,000 $ 83,000 $ 243,235
15,023
992
—
1,121
$ 724,523 $ 71,233 $ 280,515 $ 112,404 $ 260,371
93,533
14,387
21,893
18,225
20,425
2,645
5,652
682
24,247
4,570
12,426
15,740
33,838
6,180
3,815
682
1
2
3
4
5
See Note 9: Debt in the Notes to Consolidated Financial Statements.
Amounts presented for interest payments assume that all long-term debt outstanding as of December 31, 2017 will remain
outstanding until maturity and interest rates on variable rate debt in effect as of December 31, 2017 will remain in effect
until maturity. Estimated cash flows related to interest rate swaps are also included in this category.
See Note 16: Commitments and Contingencies in the Notes to Consolidated Financial Statements.
Purchase obligations primarily include open purchase orders for goods or services that are legally binding on us and that
specify fixed or minimum quantities to be purchased. Purchase obligations exclude arrangements that we can cancel
without penalty. We have not included the termination fee that would be payable by Potlatch in the event Potlatch
terminates the Merger Agreement, as disclosed in Note 2: Pending Merger with Deltic in the Notes to Consolidated
Financial Statements.
Other long-term liabilities consist of certain employee-related obligations. We estimate that we will make qualified and
non-qualified pension plan and other postretirement employee benefit plan payments of $15.4 million in 2018. Due to the
uncertainty of payment timing and amounts, we have not included estimated payments for pension and post retirement
funding beyond 2018, Idaho cost share roads, deferred compensation and unrecognized tax benefits.
Critical Accounting Policies and Estimates
Our accompanying Consolidated Financial Statements have been prepared in conformity with generally accepted
accounting principles in the United States, which require management to make estimates that affect the amounts
39
of revenues, expenses, assets and liabilities reported. The following are critical accounting policies and estimates,
which are both very important to the portrayal of our financial condition and results of operations and which
require some of management’s most difficult, subjective and complex judgments. The accounting for these
matters involves forming estimates based on current facts, circumstances and assumptions which, in
management’s judgment, could change in a manner that would materially affect management’s future estimates
with respect to such matters and, accordingly, could cause our future reported financial condition and results of
operations to differ materially from financial results reported based on management’s current estimates.
Timber and timberlands. We record depletion expense as timber is harvested by applying depletion rates to the
volume of timber harvested. We establish depletion rates annually by dividing the cost of merchantable timber by
estimated merchantable timber volume. Our estimate of merchantable timber volume does not include anticipated
future growth. The estimated merchantable timber volume is updated at least annually to reflect increases due to
the reclassification of pre-production timber to merchantable timber when it meets defined diameter specifications,
the acquisition of additional merchantable timber, decreases due to timber harvests and land sales and changes
resulting from other factors, such as environmental or casualty losses. Our estimates of merchantable timber
volume are subject to judgments that could significantly affect volume estimates and the use of different
assumptions for volume estimates could have a significant effect upon amounts reported in our Consolidated
Financial Statements. A decrease in the estimated merchantable timber volume, all other assumptions remaining
the same, would increase depletion expense. A 5% decrease in the estimated merchantable timber for all
depletion pools would increase 2017 depletion expense by approximately $1 million. For a further discussion of
our accounting policies for timber and timberlands, see Note 1: Summary of Significant Accounting Policies in our
Notes to Consolidated Financial Statements.
Contingent liabilities. We are subject to lawsuits, investigations and other claims related to environmental,
product and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to
these matters, as well as potential ranges of probable losses. We record contingent liabilities when it becomes
probable that we will have to make payments and the amount of loss can be reasonably estimated. Assessing
probability and estimating losses requires analysis of multiple factors, including historical experience, judgments
about the potential actions of third-party claimants and courts and recommendations of legal counsel. In addition
to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable
possibility that an ultimate loss may occur.
Recorded contingent liabilities are based on the best information available and actual losses in any future period
are inherently uncertain. If estimated probable future losses or actual losses exceed our recorded liability for such
claims, we would record additional charges. These exposures and proceedings can be significant, and the
ultimate negative outcomes could be material to our financial position, operating results or cash flow in any given
quarter or year. See Note 16: Commitments and Contingencies in the Notes to Consolidated Financial
Statements for more information.
Pension and postretirement employee benefits. The determination of net periodic pension and postretirement
benefit expense, funded status and the requirements for funding our pension plans are based on a number of
actuarial assumptions that require judgment. Different assumptions would change the net periodic pension and
postretirement benefit expense and the funded status of the benefit plans. For a discussion of our accounting
policies, assumptions and sensitivity of such assumptions, see Note 12: Savings Plans, Pension Plans and Other
Postretirement Employee Benefits in the Notes to Consolidated Financial Statements.
PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
See new accounting pronouncements in Note 1: Summary of Significant Accounting Policies in the Notes to
Consolidated Financial Statements.
40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk exposure on financial instruments includes interest rate risk on our bank credit facility, term loans
and interest rate swap agreements. All market risk sensitive instruments were entered into for purposes other
than trading purposes. We do not attempt to hedge our exposure to interest rate risk for our cash equivalents.
The interest rates applied to borrowings under our credit facility adjust often and therefore react quickly to any
movement in the general trend of market interest rates. We do not attempt to mitigate the effects of short-term
interest rate fluctuations on our credit facility borrowings through the use of derivative financial instruments. There
were no borrowings under our credit facility at December 31, 2017.
We are exposed to interest rate risk through our variable rate debt instruments. At December 31, 2017, we had
four separate interest rate swaps with notional amounts totaling $41.8 million. We have three fair value interest
rate swaps, which convert interest payments with fixed rates of 8.88% and 8.89% to a variable rate of 3-month
LIBOR plus a spread of 6.17%. Our fair value swaps terminate at various dates in the first quarter of 2018. We
have one cash flow hedge, which converts a variable rate debt instrument of 2.15% plus 3-month LIBOR to a
fixed rate of 3.88% and terminates in February 2026. See Note 10: Derivative Instruments in the Notes to
Consolidated Financial Statements for additional information.
Quantitative Information about Market Risks
The following table summarizes our outstanding debt, interest rate swaps and average interest rates as of
December 31, 2017:
(Dollars in thousands)
Variable rate debt:
Principal due
$
Average interest rate
Fixed rate debt:
Principal due
Average interest rate
Interest rate swaps:
Fixed to variable
Average pay rate
Average receive
rate
Variable to fixed
$
Average pay rate
Average receive
rate
2018
Expected Maturity Date
2019
2020
2021
2022
Thereafter
Total
Fair Value
—
$ 40,000
$ 40,000
$ 40,000
3.75%
4.08%
$
4.13%
—
$
27,500
$ 147,500
$147,501
4.55%
4.09%
$14,250
$150,000
8.88%
7.50%
$ 6,000
$
3.70%
—
$ 43,000
$ 215,735
$ 428,985
$440,978
4.60%
4.04%
5.46%
$14,250
$
8.46%
—
$
—
$
—
$
—
$
—
$ 14,250
$
8.46%
13
8.88%
$
—
—
$
—
$
—
$
—
$
27,500
$ 27,500
1,156
8.88%
$
1.73%
1.73%
2.40%
2.40%
A hypothetical increase or decrease of 50 and 100 basis points (BPS) related to our interest rate swap
agreements would have the following effects on fair value:
(Dollars in thousands)
Maturing in:
2018
2026
Total
Notional Amoun
t
Current
+50 BPS +100 BPS -50 BPS -100 BPS
Interest Rate Swap Agreements - Fair Value1
$
$
24 $
14,250 $
27,500
3,009
41,750 $ 1,191 $ 2,132 $ 3,033 $
24 $
2,108
24 $
1,167
24 $
185
209 $
24
(842)
(818)
1
Fair value for this table is calculated on a termination value basis. Accrued interest is included and a credit value
adjustment, which is used for GAAP purposes, is excluded.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Potlatch Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Potlatch Corporation and subsidiaries (the
Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive
income, cash flows, and stockholders’ equity for each of the years in the three-year period ended December 31,
2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 16, 2018 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
We have served as the Company’s auditor since 1952.
/s/ KPMG LLP
Seattle, Washington
February 16, 2018
42
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Revenues
Costs and expenses:
Cost of goods sold
Selling, general and administrative expenses
Environmental charges for Avery Landing
Deltic merger-related costs
Gain on lumber price swap
Loss on sale of central Idaho timber and timberlands
Operating income
Interest expense, net
Income before income taxes
Income tax (provision) benefit
Net income
Net income per share:
Basic
Diluted
Dividends per share
Weighted-average shares outstanding (in thousands)
Basic
Diluted
$
$
$
$
$
For the Years Ended December 31,
2016
599,099 $
2017
678,595 $
2015
575,336
470,365
55,408
4,978
3,409
(1,088)
—
533,072
145,523
(27,049)
118,474
(32,021)
86,453 $
462,304
51,697
1,022
—
—
48,522
563,545
35,554
(28,941)
6,613
4,325
10,938 $
470,037
46,392
—
—
—
—
516,429
58,907
(32,761)
26,146
5,568
31,714
2.12 $
2.10 $
1.525 $
0.27 $
0.27 $
1.50 $
0.78
0.77
1.50
40,824
41,227
40,798
41,033
40,842
40,988
The accompanying notes are an integral part of these consolidated financial statements.
43
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
For the Years Ended December 31,
2016
2015
2017
Net income
Other comprehensive income, net of tax:
Pension and other postretirement employee benefits:
$
86,453 $
10,938 $
31,714
Net gain (loss) arising during the period, net of tax expense
(benefit) of $3,990, $(1,826) and $(1,913)
Amortization of actuarial loss included in net periodic cost,
net of tax expense of $6,248, $7,042 and $7,794
Amortization of prior service credit included in net periodic
cost, net of tax benefit of $(3,350), $(3,260) and $(3,396)
Cash flow hedge, net of tax of $3, $448, and $-
Other comprehensive income, net of tax
Comprehensive income
$
11,355
(2,857)
(2,990)
9,773
11,014
12,190
(5,239)
4
15,893
102,346 $
(5,099)
701
3,759
14,697 $
(5,311)
—
3,889
35,603
The accompanying notes are an integral part of these consolidated financial statements.
44
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
$
Customer receivables, net of allowance for doubtful accounts of $260 and $510
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Timber and timberlands, net
Deferred tax assets, net
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable and accrued liabilities
Current portion of pension and other postretirement employee benefits
Total current liabilities
Long-term debt
Pension and other postretirement employee benefits
Other long-term obligations
Total liabilities
Commitments and contingencies
Stockholders’ equity:
$
$
At December 31,
2017
2016
120,457 $
11,240
50,132
11,478
193,307
77,229
654,476
19,796
8,271
953,079 $
82,584
14,842
52,622
13,597
163,645
72,820
641,856
42,051
7,309
927,681
14,263 $
55,201
5,334
74,798
559,056
103,524
15,159
752,537
11,032
43,710
5,839
60,581
572,956
123,284
14,586
771,407
Preferred stock, authorized 4,000,000 shares, no shares issued
Common stock, $1 par value, authorized 100,000,000 shares, issued
40,611,991 and 40,519,351 shares
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders' equity
—
—
40,612
359,144
(104,363)
(94,851)
200,542
953,079 $
40,519
355,274
(128,775)
(110,744)
156,274
927,681
$
The accompanying notes are an integral part of these consolidated financial statements.
45
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
For the Years Ended December 31,
2016
2015
2017
$
86,453 $
10,938 $
31,714
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation, depletion and amortization
Basis of real estate sold
Change in deferred taxes
Pension and other postretirement employee benefits
Equity-based compensation expense
Loss on sale of central Idaho timber and timberlands
Other, net
Change in:
Receivables
Inventories
Other assets
Accounts payable and accrued liabilities
Other liabilities
Funding of qualified pension plans
Net cash from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Change in short-term investments
Transfer from company owned life insurance (COLI)
Transfer to COLI
Purchase of property, plant and equipment
Timberlands reforestation and roads
Acquisition of timber and timberlands
Net proceeds from sale of central Idaho timber and timberlands
Other, net
Net cash from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to common stockholders
Repurchase of common stock
Revolving line of credit (repayment) borrowings
Repayment of long-term debt
Proceeds from issuance of long-term debt
Other, net
Net cash from financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest, net of amounts capitalized
Income taxes, net
$
$
$
29,912
6,827
15,364
13,151
4,722
—
(1,872)
3,602
2,490
(15)
11,591
(4,291)
(5,275)
162,659
—
1,278
(1,324)
(12,855)
(15,207)
(22,043)
—
131
(50,020)
(61,931)
—
—
(11,000)
—
(1,835)
(74,766)
37,873
82,584
120,457 $
34,190
8,011
1,853
15,661
4,390
48,522
(1,198)
(3,712)
(17,460)
(473)
7,232
(4,537)
(1,300)
102,117
—
6,384
(3,967)
(5,866)
(13,422)
(1,244)
111,460
6
93,351
(60,842)
(5,956)
(30,000)
(113,335)
93,235
(3,911)
(120,809)
74,659
7,925
82,584 $
38,105
7,012
(5,696)
15,122
4,758
—
(2,046)
(3,864)
(3,672)
898
267
(8,584)
—
74,014
6,995
1,492
—
(18,987)
(13,745)
(10,230)
—
886
(33,589)
(61,017)
—
30,000
(22,500)
—
(3,000)
(56,517)
(16,092)
24,017
7,925
26,125 $
15,845 $
28,051 $
(8,081) $
29,676
1,576
The accompanying notes are an integral part of these consolidated financial statements.
46
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands, except per share amounts)
Common Stock
Balance, December 31, 2014
Performance shares and restricted stock
units
Net income
Director deferred stock awards
Pension plans and OPEB obligations
Transfer of assets from REIT to subsidiary
Common dividends, $1.50 per share
Balance, December 31, 2015
Performance shares and restricted stock
units
Net income
Director deferred stock awards
Pension plans and OPEB obligations
Repurchase of common stock
Cash flow hedge
Common dividends, $1.50 per share
Balance, December 31, 2016
Performance shares and restricted stock
units
Net income
Director deferred stock awards
Pension plans and OPEB obligations
Cash flow hedge
Common dividends, $1.525 per share
Balance, December 31, 2017
Shares
Amount
40,605,179 $40,605 $
Additional Paid
-
in Capital
Accumulated
Deficit
Accumulated Othe
r
Comprehensive
Loss
Total Stockholders
'
Equity
346,441 $
(43,588) $
(118,392) $
225,066
76
75,534
—
—
—
—
—
—
—
—
—
—
40,680,713 $40,681 $
8
8,263
—
—
—
—
—
—
(170)
(169,625)
—
—
—
—
40,519,351 $40,519 $
93
92,640
—
—
—
—
—
—
—
—
—
—
40,611,991 $40,612 $
3,406
—
701
—
(7)
—
350,541 $
(92)
31,714
—
—
—
(61,017)
(72,983) $
4,065
—
668
—
—
—
—
(102)
10,938
—
—
(5,786)
—
(60,842)
355,274 $ (128,775) $
3,452
—
418
—
—
—
(110)
86,453
—
—
—
(61,931)
359,144 $ (104,363) $
—
—
—
3,889
—
—
(114,503) $
—
—
—
3,058
—
701
—
(110,744) $
—
—
—
15,889
4
—
(94,851) $
3,390
31,714
701
3,889
(7)
(61,017)
203,736
3,971
10,938
668
3,058
(5,956)
701
(60,842)
156,274
3,435
86,453
418
15,889
4
(61,931)
200,542
The accompanying notes are an integral part of these consolidated financial statements.
47
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
We are primarily engaged in activities associated with timberland management, including the sale of timber, the
management of approximately 1.4 million acres of timberlands and the purchase and sale of timberlands. We are
also engaged in the manufacture and sale of wood products. Our timberlands and all of our wood products
facilities are located within the continental United States. The primary market for our products is the United
States. We converted to a Real Estate Investment Trust (REIT) effective January 1, 2006.
CONSOLIDATION
The Consolidated Financial Statements include the accounts of Potlatch Corporation and its subsidiaries after the
elimination of intercompany transactions and accounts. There are no unconsolidated subsidiaries.
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America, which we refer to in this report as U.S. GAAP, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and assumptions.
Significant estimates include timber volumes, pension and postretirement obligation assumptions, contingent
liabilities and the fair value of derivative instruments. These significant estimates are described in further detail
below.
CASH AND CASH EQUIVALENTS
Cash equivalents are investments that are highly liquid with maturities of three months or less when purchased.
INVENTORIES
For most of our operations, the last-in, first-out method is used to determine the cost of logs, lumber and plywood.
The average cost method is used to determine the cost of all other inventories. Inventories are stated at the lower
of cost or net realizable value. Expenses associated with idle capacity or other curtailments of production are
reflected in cost of goods sold in the periods incurred.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are valued at cost less accumulated depreciation. Depreciation of buildings,
equipment and other depreciable assets is determined using the straight-line method of depreciation.
Major improvements and replacements of property are capitalized. Maintenance, repairs and minor improvements
and replacements are expensed. Upon retirement or other disposition of property, applicable cost and
accumulated depreciation are removed from the accounts. Any gains or losses are included in earnings.
TIMBER AND TIMBERLANDS
Timber and timberlands are valued at cost less accumulated depletion and amortization. We capitalize costs
related to stand establishment, which include the preparation of the land for planting, seeds or seedlings and tree
planting costs, which include third-party labor costs, materials and other contract services. Upon completion of
48
planting activities and field inspection to confirm the planting operation was successful, a plantation will be
considered “established.”
Subsequent expenditures to maintain the integrity or enhance the growth of an established plantation or stand are
expensed. Post-establishment expenses include vegetation control, fertilization, thinning operations and the
replanting of seedlings lost through mortality. Forest management costs are considered current operating
expenses and include property taxes and insurance, silviculture costs incurred subsequent to stand
establishment, cruising (physical inventory), property maintenance, salaries, supplies, travel, record-keeping, fire
protection and other normal recurring administrative personnel costs.
Timberland acquisitions are capitalized based on the relative appraised values of timberland, merchantable
sawlogs, merchantable pulpwood, pre-production timber (young growth that is not yet merchantable timber),
logging roads and other land improvements.
The estimated volume of current standing merchantable timber inventory, which is a component of calculating our
depletion rates, is updated at least annually to reflect increases due to the reclassification of pre-production timber
to merchantable timber when it meets defined diameter specifications, the annual growth of merchantable timber
and the acquisition of additional merchantable timber, decreases due to timber harvests and land sales and
changes resulting from other factors, such as environmental or casualty losses. Timber volumes are estimated
from cruises of the timber tracts, which are completed on our timberlands on approximately a five to ten year
cycle.
Depletion represents the amount charged to expense as timber is harvested. Rates at which timber is depleted
are calculated annually for each of our depletion pools by dividing the beginning of year balance of the
merchantable timber accounts by the forest inventory volume, after inventory updates.
The base cost of logging roads, such as clearing, grading and ditching, is not amortized and remains a capitalized
item until disposition. Other portions of the initial logging road cost, such as bridges, culverts and gravel surfacing
are amortized over their useful lives, which range from 5 to 20 years. Costs associated with temporary logging
road spurs, which are typically used for one harvest season, are expensed as incurred.
REAL ESTATE SALES
Sales of non-core timberland are considered to be part of our normal operations. We therefore classify revenue
and costs associated with real estate sold in revenues and cost of goods sold, respectively, in our Consolidated
Statements of Income. Cash generated from real estate sales is included as an operating activity in our
Consolidated Statements of Cash Flows.
Sales of large parcels of property, such as our sale of central Idaho timberlands in 2016, which do not represent
our core operations and are of such a size as to not be indicative of our ongoing operations, are presented as a
net gain or loss in our Consolidated Statements of Income. Cash generated from these sales is included as an
investing activity in our Consolidated Statements of Cash Flows.
LONG-LIVED ASSETS
Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, as measured by its undiscounted estimated future cash
flows. We use our operational budgets to estimate future cash flows. The estimates are adjusted periodically to
reflect changing business conditions. Impaired assets are written down to fair value. Assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell.
We recognize a liability and an asset equal to the fair value of our legal obligations to perform asset retirement
activities if the amount can be reasonably estimated. We review these obligations annually and do not expect
them to have a material effect on our financial position, results of operations or cash flows.
49
INCOME TAXES
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and their respective tax bases, operating loss
carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are measured pursuant to tax laws
using rates expected to apply to taxable income in the years in which the temporary differences are expected to
be recovered or settled. We recognize the effect of a change in income tax rates on deferred tax assets and
liabilities in the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income in
the period that includes the enactment date of the rate change. We record a valuation allowance to reduce the
carrying amounts of deferred tax assets if it is more likely than not that such deferred tax assets will not be
realized.
REVENUE RECOGNITION
We recognize revenue from the sale of timber when risk of loss transfers to the buyer and the quantity sold is
determinable. These sales usually take the form of delivered logs, pay-as-cut stumpage contracts, lump sum
stumpage contracts or timber deeds. On delivered log sales, revenue includes amounts billed for logging and
hauling and is recognized at the point the logs are delivered and scaled. Revenue is recognized on timber deeds
and lump sum stumpage contracts generally upon closing or when the contracts are effective, which is the point
at which the buyer assumes risk of loss associated with the standing timber.
We recognize revenue from the sale of manufactured wood products and residual by-products when there is
persuasive evidence of a sales agreement, the price to the customer is fixed and determinable, collection is
reasonably assured and title and the risk of loss passes to the customer. Shipping terms generally indicate when
title and the risk of loss have passed. Revenue is recognized at shipment when shipping terms are FOB (free on
board) shipping point. For sales where shipping terms are FOB destination, revenue is recognized when the
goods are received by the customer.
We receive cash consideration in full and recognize revenue at closing on substantially all of our real estate sales.
While sales taxes are not typical, in the event sales taxes are collected, revenue is recognized net of any sales
tax and sales taxes are recorded as a current liability and remitted to the appropriate governmental entities.
Costs for shipping and handling are included in cost of goods sold in our Consolidated Statements of Income.
EQUITY-BASED COMPENSATION
Equity-based awards are measured at fair value on the dates they are granted or modified. These measurements
establish the cost of the equity-based awards for accounting purposes. The cost of the equity-based award is then
recognized in the Consolidated Statements of Income over each employee’s required service period. See Note
14: Equity-Based Compensation Plans for more information about our equity-based compensation.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which changes several aspects of
the accounting for share-based payment award transactions, including accounting for income taxes, diluted
shares outstanding, classification of excess tax benefits on the statement of cash flows, forfeitures and minimum
statutory tax withholding requirements. We prospectively adopted the provisions of this ASU on January 1, 2017,
which include recording the tax effects related to share-based payments through the income statement. As a Real
Estate Investment Trust (REIT), we are generally not subject to federal and state corporate income taxes, except
through our taxable REIT subsidiaries. Therefore, the adoption of this guidance was not material to our
consolidated financial statements. We will continue to estimate forfeitures each period. We consider many factors
when estimating expected forfeitures, including types of awards, employee class and historical experience.
In May 2014, the FASB issued 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
50
services. ASU 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. Subsequent ASUs have been issued that provide clarity,
technical corrections and improvements to ASU No. 2014-09. 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. ASU No. 2014-09 is effective for us on January 1, 2018. For most
of our sales, which consist of logs, manufactured wood products, residual by-products and real estate, we have
identified no change to the timing or amount of revenue recognized because our contracts are legally enforceable,
the transaction price is fixed and performance obligations are satisfied at a point in time, typically with control
transferring to the buyer when risk of loss and title pass. For our other sales, which include stumpage contracts,
timber deeds, land use permits and royalties, we have also identified no change to the timing or amount of
revenue recognized. We will have minor refinements to our controls over financial reporting as a result of this
ASU. Our expanded disclosures will disaggregate revenues along the lines of the sales categories mentioned
above. The guidance permits a retrospective application of the new standard with certain practical expedients
(contracts completed within the same annual reporting period need not be restated and other allowances for
contracts with variable consideration) or retrospective application with a cumulative effect adjustment to the
beginning balance of retained earnings. Upon adoption of this ASU on January 1, 2018, if there is a difference in
the amount of revenue recorded for any of the prior reporting periods presented, we will record a cumulative
adjustment to retained earnings in the first quarter of 2018. The adoption of this guidance is not expected to have
a significant effect on our consolidated financial statements.
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. This ASU is effective for us on January 1, 2018. The amendments in this update
require retrospective presentation in the income statement. Changes to the capitalized portion of both service cost
and the other components of net benefit cost within inventory will be applied prospectively. In 2017, net periodic
pension and other postretirement employee benefit cost reported within operating income totaled $13.2 million of
which $6.8 million represented service cost.
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. Historically, the income tax consequence of an intra-entity asset transfer was not recognized until the
asset was sold to an outside party. This amendment should be applied on a modified retrospective basis through
a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. There
are no new disclosure requirements. This ASU is effective for us on January 1, 2018. The adoption of this
guidance is not expected to have a significant effect on our consolidated financial statements.
In January 2017, the FASB issued ASU 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. This ASU is effective for us on
January 1, 2018 on a prospective basis.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted
Improvements to Accounting for Hedging Activities, which simplifies and expands the application of hedge
accounting. ASU 2017-12 requires that when a hedge is deemed effective, hedge accounting must be applied to
the entire change in fair value of the hedging instrument eliminating the notion of ineffective portions of the hedge
relationship. The entire change in the fair value of the hedging instrument will be recorded in the same income
statement line item as the hedged item and the ineffective portion will no longer be separately recognized in
earnings. This ASU is effective for us on January 1, 2019, with early application permitted in any interim period.
The presentation and disclosure guidance are required prospectively upon adoption. Our cash flow hedges
currently have no ineffectiveness, but in the event they did, as of the beginning of the fiscal year that we adopt
this ASU, a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness
would be recorded to accumulated other comprehensive income with a corresponding adjustment to the opening
balance of retained earnings.
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
51
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. We expect our right-of-
use asset and lease liability will approximate our current future minimum lease payments required under our
operating leases, which were $14.4 million at December 31, 2017. The ASU is effective for us on January 1,
2019.
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). See Note 15: Income
Taxes for additional information regarding the Act. This ASU is effective for us on January 1, 2019, with early
adoption permitted. We expect to adopt this ASU on January 1, 2018 and elect to reclassify 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. Accordingly, at March 31, 2018, accumulated other
comprehensive loss will increase by approximately $20 million and the change will be recorded as a decrease to
accumulated deficit.
RECLASSIFICATIONS
Prior year environmental charges for Avery Landing within the Consolidated Statements of Income have been
reclassified to conform to the 2017 presentation. There was no change to revenues, cost of goods sold, operating
income or net income.
Prior year receivables not due from customers within the Consolidated Balance Sheets have been reclassified to
other current assets to conform to the 2017 presentation. There was no change to previously reported total
current assets. See Note 7: Other Current Assets for additional information.
Certain 2016 and 2015 amounts within cash flows from operations on the Consolidated Statements of Cash
Flows have been reclassified to conform to the 2017 presentation. There was no change to previously reported
net cash from operating, investing or financing activities.
NOTE 2. PENDING MERGER WITH DELTIC
On October 22, 2017, Potlatch, Portland Merger, LLC (Merger Sub), a wholly-owned subsidiary of Potlatch, and
Deltic Timber Corporation (Deltic) entered into an Agreement and Plan of Merger (Merger Agreement) pursuant to
which Deltic will merge with and into Merger Sub. Following the merger, Potlatch will be renamed PotlatchDeltic
Corporation. Under the terms of the Merger Agreement, Deltic shareholders will receive 1.80 shares of Potlatch
common stock for each share of Deltic common stock at the closing date. Deltic owns approximately 530,000
acres of timberland, operates two sawmills and a medium density fiberboard plant and is engaged in real estate
development primarily in Arkansas.
Because the exchange ratio was fixed at the time of the Merger Agreement and the market value of our common
stock will continue to fluctuate, the total value of the consideration exchanged will not be determinable until the
closing date. The number of shares to be issued with respect to Deltic stock awards will not be determinable until
the closing of the transaction.
We estimated that approximately 22 million shares of our common stock will be issued to Deltic shareholders in
the merger based on the 1.80 exchange ratio and the number of shares of Deltic common stock issued and
outstanding as of January 31, 2018.
The Merger Agreement provides that, upon termination of the Merger Agreement by a party under certain
circumstances, such party may be obligated to pay the other party a termination fee equal to $66 million with
respect to the fee payable by Potlatch and $33 million with respect to the fee payable by Deltic.
Subsequent to the completion of the transaction, as part of the REIT conversion process, Deltic’s earnings and
profits are expected to be distributed to shareholders of the combined company through a dividend or special
distribution consisting of 80% stock and 20% cash.
52
The closing of the merger is subject to approval by the shareholders of Deltic and Potlatch and other conditions
specified in the Merger Agreement. The respective shareholder meetings are scheduled for February 20, 2018, as
published in the joint proxy statement/prospectus dated January 18, 2018. If approved by the shareholders, the
merger is expected to close the same day.
NOTE 3. EARNINGS PER SHARE
The following table reconciles the number of shares used in calculating the basic and diluted earnings per share
for the years ended December 31:
(Dollars in thousands, except per share amounts)
Net income
2017
2016
2015
$
86,453 $
10,938 $
31,714
Basic weighted-average shares outstanding
Incremental shares due to:
Performance shares
Restricted stock units
Diluted weighted-average shares outstanding
40,824,420 40,797,806 40,842,126
362,509
40,459
122,334
23,359
41,227,388 41,033,440 40,987,819
200,164
35,470
Basic net income per share
Diluted net income per share
$
$
2.12 $
2.10 $
0.27 $
0.27 $
0.78
0.77
For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the
dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if
later) and assumes the related proceeds were used to repurchase common stock at the average market price
during the period. Related proceeds include future compensation cost associated with the stock award.
At December 31, 2017 and 2016, there were 250 and 503 stock-based awards, respectively, which were
excluded from the calculation of earnings per share because they were anti-dilutive. At December 31, 2015, there
were no anti-dilutive stock-based awards.
On April 26, 2016, we announced that our board of directors had authorized management to repurchase up to
$60 million of common stock over a period of 24 months (the “Repurchase Plan”). We repurchased 169,625
shares of common stock during the second quarter of 2016 at an average price of $35.08 per share. We retire
shares upon repurchase. Any excess repurchase price over par is recorded in accumulated deficit. No shares
were repurchased during 2017 and $54 million remains available on the authorization.
NOTE 4. INVENTORIES
(Dollars in thousands)
Logs
Lumber, plywood and veneer
Materials and supplies
Valued at lower of cost or net realizable value:
Last-in, first-out basis
Average cost basis
Total inventories
2017
2016
$
$
$
$
20,133 $
20,889
9,110
50,132 $
25,127 $
25,005
50,132 $
23,342
20,500
8,780
52,622
29,769
22,853
52,622
If the last-in, first-out inventory had been carried at average cost, the values would have been higher by
approximately $10.9 million, $11.1 million and $10.6 million at December 31, 2017, 2016 and 2015, respectively.
53
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
(Dollars in thousands)
Land
Buildings and improvements
Machinery and equipment
Construction in progress
Less: accumulated depreciation
Total property, plant and equipment, net
Range of useful lives
2017
2016
10-40 years
2-25 years
$
4,707 $
55,734
197,648
1,348
259,437
(182,208)
$
77,229 $
4,712
54,448
190,316
1,437
250,913
(178,093)
72,820
Depreciation charged against operating income totaled $8.1 million, $8.3 million and $8.2 million in 2017, 2016
and 2015, respectively.
Interest expense capitalized was inconsequential in 2017 and 2016, and $0.2 million 2015.
NOTE 6. TIMBER AND TIMBERLANDS
(Dollars in thousands)
Timber and timberlands
Logging roads
Total timber and timberlands, net
2017
2016
$
$
581,648 $
72,828
654,476 $
572,273
69,583
641,856
Depletion from company-owned lands totaled $17.0 million, $20.8 million and $25.3 million in 2017, 2016 and
2015, respectively. Amortization of road costs, such as bridges, culverts and gravel surfacing, totaled $3.2 million,
$3.1 million and $3.1 million in 2017, 2016 and 2015, respectively.
Future payments due under timber cutting contracts as of December 31, 2017 are as follows:
(Dollars in thousands)
2018
2019
2020
2021
2022
Total
NOTE 7. OTHER CURRENT ASSETS
(Dollars in thousands)
Real estate held for sale
Prepaid expenses
Other receivables
Interest rate swaps
Total other current assets
$
$
11,280
2,730
1,085
5,370
281
20,746
2017
2016
$
$
7,721 $
2,862
882
13
11,478 $
9,184
1,939
2,442
32
13,597
NOTE 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
(Dollars in thousands)
Accrued payroll and benefits
Accounts payable
Accrued interest
Avery Landing accrual
Accrued taxes
Other current liabilities
Total accounts payable and accrued liabilities
2017
2016
$
$
18,110 $
9,361
6,385
6,000
5,103
10,242
55,201 $
13,634
8,382
6,237
1,022
4,956
9,479
43,710
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NOTE 9. DEBT
(Dollars in thousands)
Term loans
Senior notes
Revenue bonds
Medium-term notes
Long-term principal
Interest rate swaps
Debt issuance costs
Unamortized discounts
Total long-term debt (includes current portion)
Less current portion of long-term debt
Long-term debt
TERM LOANS
2017
2016
$
$
343,500 $
150,000
65,735
17,250
576,485
(373)
(2,321)
(472)
573,319
(14,263)
559,056 $
349,500
150,000
65,735
22,250
587,485
247
(3,015)
(729)
583,988
(11,032)
572,956
We repaid $6 million of our term loans in 2017. The remaining term loans include eight tranches consisting of the
following:
•
•
•
•
•
one $6 million tranche with a rate of 3.70% maturing in 2020;
three $40 million tranches maturing each year from 2019 through 2021 at variable rates based on three-
month LIBOR plus a spread between 1.65% and 1.90% (term loan variable rates are based on three-
month LIBOR of 1.34%, which is the rate incurred during the fourth quarter of 2017);
two $40 million tranches with rates of 4.29% maturing in 2022 and 4.49% maturing in 2023;
one tranche of $110 million with a rate of 4.64% maturing in 2024; and
one tranche of $27.5 million with a rate of 2.15% plus three-month LIBOR maturing in 2026.
SENIOR NOTES
In 2009, we sold $150 million aggregate principal amount of 7.50% senior notes due in 2019. The terms of these
notes limit our ability, and the ability of any subsidiary guarantors, to borrow money, pay dividends, redeem or
repurchase capital stock, enter into sale and leaseback transactions and create liens.
MEDIUM-TERM NOTES AND REVENUE BONDS
The medium-term notes were originally issued during 1991 and 1992 with fixed rates of 8.75% to 8.89% due 2018
through 2022. Repayment of $5 million of our medium-term notes occurred in 2017.
In 2016, we repaid $42.6 million of revenue bonds. The bonds carried a rate of 5.90% and matured in 2026. In
2016, we also refinanced $65.7 million of revenue bonds at a rate of 2.75%. The original bonds, which carried a
rate of 6.00%, were extinguished and a new debt obligation was simultaneously issued. The principal balance and
maturity date in 2024 remain unchanged.
DEBT ISSUANCE COSTS
Debt issuance costs represent the capitalized direct costs incurred related to the issuance of debt. These costs
are amortized to interest expense over the terms of the respective borrowings.
55
DEBT MATURITIES
Scheduled principal payments due on long-term debt as of December 31, 2017 are as follows:
(Dollars in thousands)
2018
2019
2020
2021
2022
Thereafter
Total
$
$
14,250
190,000
46,000
40,000
43,000
243,235
576,485
Principal repayments on long-term debt occur at maturity. Our debt obligations are of equal priority.
CREDIT AGREEMENT
In 2014, we entered into an amended and restated credit agreement with an expiration date of February 12, 2020.
The credit agreement provides for a revolving line of credit with an initial aggregate principal amount not to
exceed $250 million, which may be increased by up to an additional $250 million. It also includes a sublimit of $40
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. As of December 31, 2017, there
were no borrowings outstanding under the revolving line of credit, and approximately $0.9 million of the letter of
credit subfacility was being used to support several outstanding letters of credit. Available borrowing capacity at
December 31, 2017 was $249.1 million.
Pricing is set according to the type of borrowing. LIBOR Loans are issued at a rate equal to the British Bankers
Association 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 December 31, 2017, 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 $250 million of the
bank credit facility.
On February 14, 2018, we entered into a second amended and restated credit agreement (the Amended Credit
Agreement) with an expiration date of April 14, 2023. The Amended Credit 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 consistent
with the 2014 amended and restated credit agreement. The interest coverage ratio and leverage ratio financial
covenants are unchanged. The limitation on timberland acre sales was eliminated.
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NOTE 10. 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 have three fair value
interest rate swaps with notional amounts totaling $14.3 million associated with our medium-term notes. The fair
value swaps convert interest payments with fixed rates ranging between 8.88% and 8.89% to a variable rate of 3-
month LIBOR plus a spread of 6.17%. Our fair value swaps terminate at various dates in 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 one interest rate swap with a notional amount of $27.5 million associated with $27.5 million of term loan
debt. The cash flow hedge converts a variable rate of 2.15% plus 3-month LIBOR to a fixed rate of 3.88% and
terminates in February 2026. Our cash flow hedge is expected to be highly effective in achieving offsetting cash
flows attributable to the hedged interest rate risk through the term of the hedge. Therefore, changes in the fair
value of the interest rate swap are recorded as a component of other comprehensive income and will be
recognized in earnings when the hedged interest rate affects earnings. Changes in the fair value of the ineffective
portion are recognized immediately in earnings. There has been no impact on earnings due to ineffectiveness to
date. As of December 31, 2017, the amount of net losses expected to be reclassified into earnings in the next
12 months is inconsequential.
Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate
movements, commodity price movements or other identified risks, but do not meet the strict hedge accounting
requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded
directly into income. In April 2017, we entered into a lumber price swap to fix the price on a total of 36 million
board feet (MMBF) of southern yellow pine. The lumber price swap expired on December 31, 2017, resulting in a
realized gain of $1.1 million for the period then ended.
The fair values of our cash flow and fair value derivative instruments on our Consolidated Balance Sheets as of
December 31 are as follows:
(Dollars in thousands)
Derivatives designated in fair value hedging relationships:
Location
Interest rate contracts
Interest rate contracts
Other assets,
current
Other assets,
non-current
$
$
Asset Derivatives
2017
2016
Location
Liability Derivatives
2016
2017
13 $
32
13 $
215
247
Other long-term
obligations
$
$
— $
— $
—
91
91
Derivatives designated in cash flow hedging relationships:
Interest rate contracts
Other assets,
non-current
$
1,156 $
1,148
$
— $
—
57
The following table details the effect of derivatives on our Consolidated Statements of Income:
(Dollars in thousands)
Derivatives designated in fair value hedging relationships:
Interest rate contracts
Location
2017
2016
2015
Realized gain on interest rate contracts1
Interest expense
$
413 $
805 $
1,534
Derivatives designated in cash flow hedging relationships:
Interest rate contracts
Gain (loss) recognized in other comprehensive income, net
of tax (effective portion)
Loss reclassified from accumulated other comprehensive
income (effective portion)1
Derivatives not designated as hedging instruments:
Lumber price contracts
Realized gain on lumber price swap
$
(145) $
916 $
Interest expense
$
(149) $
(215) $
—
—
Gain on lumber
price swap
$
1,088 $
— $
—
1
Realized gains and losses on interest rate contracts consist of net cash received or paid and interest accruals on the
interest rate swaps during the periods. Net cash received or paid is included in the supplemental cash flow information
within interest, net of amounts capitalized in the Consolidated Statements of Cash Flows.
NOTE 11. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of our financial instruments as of December 31 are as follows:
(Dollars in thousands)
Cash and cash equivalents (Level 1)
Derivative assets related to interest rate
swaps (Level 2)
Derivative liabilities related to interest rate
swaps (Level 2)
Long-term debt, including current portion (Level 2):
Term loans
Senior notes
Revenue bonds
Medium-term notes
Total long-term debt1
2017
2016
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$ 120,457 $ 120,457 $
82,584 $
82,584
$
$
1,169 $
1,169 $
1,395 $
1,395
— $
— $
(91) $
(91)
$ (343,500) $ (345,222) $ (349,500) $ (350,909)
(164,250)
(62,205)
(23,926)
$ (576,013) $ (588,479) $ (586,756) $ (601,290)
(149,528)
(65,735)
(17,250)
(149,271)
(65,735)
(22,250)
(161,063)
(63,967)
(18,227)
Company owned life insurance (COLI) (Level 3)
$
1,996 $
1,996 $
70 $
70
1
The carrying amount of long-term debt includes principal and unamortized discounts.
A framework has been established for measuring fair value, which provides a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are
described below.
Level 1 inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in
active markets.
Level 2 inputs to the valuation methodology include:
•
•
quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in inactive markets;
58
•
•
inputs other than quoted prices that are observable for the asset or liability; and
inputs that are derived principally from or corroborated by observable market data by correlation or
other means.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
If the asset or liability has a specified (contractual) term, the Level 2 input must correspond to substantially the full
term of the asset or liability.
The fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is
significant to the fair value measurement. Valuation techniques used need to maximize the use of observable
inputs and minimize the use of unobservable inputs.
• For cash and cash-equivalents, the carrying amount approximates fair value due to the short-term
nature of these financial instruments.
• The fair value of the interest rate swaps was 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.
• The fair value of our long-term debt is estimated based upon the quoted market prices for the same
or 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.
COMPANY OWNED LIFE INSURANCE
We are the beneficiary of insurance policies on the lives of certain current and past officers and employees. We
have recognized the amount that could be realized upon surrender of the insurance policies in other assets in our
Consolidated Balance Sheets. COLI expense and income are included in selling, general and administrative
expenses and interest expense, respectively, in the Consolidated Statements of Income. The net effect of these
amounts on income was not significant for the years ended December 31, 2017, 2016 and 2015. Cash receipts
and disbursements are recorded as investing activities in the Consolidated Statements of Cash Flows.
NOTE 12. SAVINGS PLANS, PENSION PLANS AND OTHER POSTRETIREMENT
EMPLOYEE BENEFITS
SAVINGS PLANS
Substantially all of our employees are eligible to participate in 401(k) savings plans. In 2017, 2016 and 2015, we
made matching 401(k) contributions on behalf of our employees of $2.4 million, $2.1 million and $2.1 million,
respectively.
Certain eligible employees who earn awards under our annual incentive plan are permitted to defer receipt of
those awards. These employees may defer receipt of a minimum of 50% and a maximum of 100% of the award
pursuant to rules established under our Management Deferred Compensation Plan. Eligible employees may also
defer up to 50% of their base salary under the Management Deferred Compensation Plan. At the employee's
election, deferrals may be deemed invested in a company stock unit account, a directed investment account with
certain deemed investments available under the 401(k) Plan or a combination of these investment vehicles. If
company stock units are elected, dividend equivalents are credited to the units.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
On January 1, 2011, we froze our pension plans to any new salaried and hourly non-represented employees hired
after that date.
59
Effective January 1, 2010, we restructured our other postretirement benefit plans (OPEB). The level of health care
subsidy was frozen for retirees so that all future increments in health care costs will be borne by the retirees. In
addition, for retirees under age 65, a high deductible medical plan was created and all other existing health care
plans were terminated. For retirees age 65 or over, the medical plan is divided into two components, with the
company continuing to self-insure prescription drugs and providing a fully-insured medical supplemental plan
through AARP/United Healthcare. Both health care plans require the retiree to contribute amounts in excess of
the company subsidy in order to continue coverage. Finally, vision, dental and life insurance coverage for these
retirees were terminated. The effect of these retiree plan changes was a reduction in the accumulated
postretirement benefit obligation of $76.7 million, which was recognized in Accumulated Other Comprehensive
Loss as of December 31, 2009 and will be amortized through 2019.
We use a December 31 measurement date for our benefit plans and obligations. We recognize the underfunded
status of our defined benefit pension plans and OPEB obligations on our Consolidated Balance Sheets. We
recognize changes in the funded status in the year in which changes occur through accumulated other
comprehensive income and amortize actuarial gains and losses through the Consolidated Statements of Income
as net periodic cost (benefit).
The change in benefit obligation, change in plan assets and funded status for company-sponsored benefit plans
and obligations are as follows:
(Dollars in thousands)
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (loss) gain
Benefits paid
Benefit obligation at end of year
Pension Plans
2017
2016
$ (385,461) $ (382,071) $
(6,508)
(17,020)
(13,997)
34,135
$ (392,371) $ (385,461) $
(6,753)
(16,096)
(15,876)
31,815
OPEB
2017
(33,337) $
(14)
(1,262)
471
3,793
(30,349) $
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions and benefit payments
Benefits paid
Fair value of plan assets at end of year
$ 289,675 $ 292,200 $
28,626
2,984
(34,135)
$ 313,862 $ 289,675 $
49,158
6,844
(31,815)
— $
—
3,794
(3,794)
— $
2016
(35,471)
(14)
(1,421)
(313)
3,882
(33,337)
—
—
3,882
(3,882)
—
Amounts recognized in the consolidated balance sheets:
Current liabilities
$
Noncurrent liabilities
Funded status
$
(1,629) $
(76,880)
(78,509) $
(1,824) $
(93,962)
(95,786) $
(3,705) $
(26,644)
(30,349) $
(4,015)
(29,322)
(33,337)
The accumulated benefit obligation for all defined benefit pension plans is determined using the actuarial present
value of the vested benefits to which the employee is currently entitled and the employee’s expected date of
separation for retirement and was $389.6 million and $379.5 million at December 31, 2017 and 2016,
respectively.
PENSION ASSETS
We utilize formal investment policy guidelines for our company-sponsored pension plan assets. Management’s
responsibility is that the investment policy and guidelines are adhered to and the investment objectives are met.
The general policy states that plan assets will be invested to seek the greatest return consistent with the fiduciary
character of the pension funds and to allow the plans to meet the need for timely pension benefit payments. The
specific investment guidelines stipulate that management will maintain adequate liquidity for meeting expected
benefit payments by reviewing, on a timely basis, contribution and benefit payment levels and appropriately revise
long-term and short-term asset allocations. Management takes reasonable and prudent steps to preserve the
value of pension fund assets and to avoid the risk of large losses. Major steps taken to provide this protection
include the following:
60
• Assets are diversified among various asset classes, such as domestic equities, global equities, fixed
income, convertible securities and liquid reserves. The long-term asset allocation ranges are as follows:
Domestic and international equities
Fixed income securities
Alternatives, which may include equities and fixed income securities
Cash and cash equivalents
24% - 48%
38% - 58%
12% - 18%
0% - 5%
• Periodic reviews of allocations within these ranges are made to determine what adjustments should be
made based on changing economic and market conditions and specific liquidity requirements.
• Assets are managed by professional investment managers and may be invested in separately managed
accounts or commingled funds. Assets are diversified by selecting different investment managers for each
asset class and by limiting assets under each manager to no more than 25% of the total pension fund.
• Assets are not invested in Potlatch stock.
The investment guidelines also provide that the individual investment managers are expected to achieve a
reasonable rate of return over a market cycle. Emphasis will be placed on long-term performance versus short-
term market aberrations. Factors to be considered in determining reasonable rates of return include performance
achieved by a diverse cross section of other investment managers, performance of commonly used benchmarks
(e.g., Russell 2500 Index, Barclays Long Credit Index, Morgan Stanley Capital International Index), actuarial
assumptions for return on plan investments and specific performance guidelines given to individual investment
managers.
The asset allocations of the pension benefit plans’ assets at December 31 by asset category are as follows:
Asset Category
Domestic and international equities
Fixed income securities
Other (includes cash and cash equivalents and alternatives)
Total
Pension Plans
2017
2016
37%
47
16
100%
36%
48
16
100%
The pension assets are stated at fair value. Refer to Note 11: Financial Instruments for a discussion of the
framework used to measure fair value.
Following is a description of the valuation methodologies used for assets measured at fair value:
•
•
•
Level 1 assets include cash and cash equivalents, corporate common and preferred stocks with quoted
market prices on major securities markets, and investments in registered investment company funds for
which market quotations are generally readily available on the primary market or exchange on which they
are traded.
Level 2 assets consist primarily of collective investment trust funds, which are valued at their respective
net asset value (NAV) and fully redeemable in the near-term.
Investments in funds that may not be fully redeemed in the near-term are generally classified in Level 3.
We had no Level 3 investments at December 31, 2017 or 2016.
61
Fair value measurements are as follows:
(Dollars in thousands)
Asset Category
Cash and cash equivalents
Domestic equity securities1
International equity securities2
Emerging markets3
Fixed income securities4
Alternatives5
Total
(Dollars in thousands)
Asset Category
Cash and cash equivalents
Domestic equity securities1
International equity securities2
Emerging markets3
Fixed income securities4
Alternatives5
Total
Level 1
December 31, 2017
Level 2
3,004 $
29,178
—
12
148,833
—
181,027 $
— $
28,382
28,413
29,245
—
46,795
132,835 $
Level 1
December 31, 2016
Level 2
2,845 $
25,409
—
12
138,897
—
167,163 $
— $
26,279
26,555
26,391
—
43,287
122,512 $
$
$
$
$
Total
3,004
57,560
28,413
29,257
148,833
46,795
313,862
Total
2,845
51,688
26,555
26,403
138,897
43,287
289,675
1
2
3
4
5
Level 1 assets are managed investments in U.S. small/mid-cap equities that track the Russell 2500 Growth index or
Russell 2500 Value index. Level 2 assets are collective investments, which are invested in U.S. large-cap equities that
track the S&P 500.
Level 2 assets are collective investments in equity funds of developed markets outside of the United States and Canada
that track the MSCI EAFE Value index or MSCI EAFE Growth index.
Level 1 assets are mutual funds which are invested in the common stock of companies located (or with primary
operations) in emerging markets that track the MSCI Emerging Markets index. Level 2 assets are collective investments in
the common stock of companies located (or with primary operations) in emerging markets that track the MSCI Emerging
Markets index.
Level 1 assets are mutual funds and investments in a diversified portfolio of fixed income instruments of varying maturities
representing corporates, sovereign debt, U.S. treasuries and municipals that track the Barclay's Long-term Credit index.
Level 2 assets are collective investments in inflation-indexed bonds, securities of real estate companies, commodity
index-linked notes, fixed income securities, foreign currencies, securities of natural resource companies, master limited
partnerships, publicly listed infrastructure companies, floating-rate debt, securities of global agriculture companies and
securities of global timber companies.
PLAN ACTIVITY
Pre-tax components of net periodic cost (benefit) recognized in our Consolidated Statements of Income were as
follows:
(Dollars in thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Amortization of actuarial loss
Net periodic cost (benefit)
OPEB
Pension Plans
2017
2016
2015
22
$ 6,753 $ 6,508 $ 6,159 $
1,456
16,096 17,020 17,012
—
(18,406) (18,999) (20,804)
(9,312)
605
2,047
14,484 16,339 17,937
$ 19,215 $ 21,386 $ 20,909 $ (6,064) $ (5,725) $ (5,787)
518
288
2017
14 $
1,262
—
(8,877)
1,537
2016
14 $
1,421
—
(8,877)
1,717
2015
62
Other amounts recognized in our Consolidated Statements of Comprehensive Income were as follows:
(Dollars in thousands)
Net amount at beginning of year
Amounts arising during the period:
Pension Plans
2016
2017
2015
$120,627 $128,244 $134,261 $ (9,182) $(13,741) $(15,869)
2017
2016
2015
OPEB
Net (gain) loss
Taxes
Net amount arising during the period
(14,874)
3,869
(11,005)
4,370
(1,704)
2,666
8,680
(3,386)
5,294
(471)
121
(350)
313
(122)
191
(3,777)
1,473
(2,304)
Amounts reclassified during the period:
Amortization of prior service (cost) credit
Amortization of actuarial loss
Taxes
Net reclassifications during the period
Net amount at end of year
(288)
(518)
(605)
(14,484) (16,339) (17,937)
5,761
7,231
6,574
(9,011) (10,283) (11,311)
9,312
(2,047)
(2,833)
4,432
$100,611 $120,627 $128,244 $ (5,055) $ (9,182) $(13,741)
8,877
(1,537)
(2,863)
4,477
8,877
(1,717)
(2,792)
4,368
Amounts recognized in accumulated other comprehensive loss on our Consolidated Balance Sheets, net of tax,
consist of:
(Dollars in thousands)
Net loss
Prior service cost (credit)
Net amount recognized
Pension Plans
2017
2016
$ 100,070 $ 120,006 $
621
$ 100,611 $ 120,627 $
541
OPEB
2017
10,165 $
(15,220)
(5,055) $
2016
8,778
(17,960)
(9,182)
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from
accumulated other comprehensive loss into net periodic benefit cost over the next year are $16.6 million and
$0.2 million, respectively. The estimated net loss and prior service credit for OPEB obligations that will be
amortized from accumulated other comprehensive loss into net periodic benefit over the next year are $1.4 million
and $8.9 million, respectively.
EXPECTED FUNDING AND BENEFIT PAYMENTS
We are required to make contributions of $10.1 million to our qualified pension plans in 2018. Our non-qualified
pension plan and other postretirement employee benefit plans are unfunded and benefit payments are paid from
our general assets. We estimate that we will make non-qualified pension plan and other postretirement employee
benefit payments of $5.3 million in 2018, which are included below.
Estimated future benefit payments, which reflect expected future service are as follows for the years indicated:
(Dollars in thousands)
2018
2019
2020
2021
2022
2022–2026
ACTUARIAL ASSUMPTIONS
Pension Plans
OPEB
$
$
$
$
$
$
28,536 $
28,264 $
27,951 $
27,588 $
27,255 $
128,115 $
3,704
3,454
3,231
2,944
2,760
10,557
The weighted average assumptions used to determine the benefit obligation as of December 31 were:
Discount rate
Rate of salaried compensation increase
Pension Plans
OPEB
2017
2016
2015
2017
2016
2015
3.85%
3.00%
4.40%
3.00%
4.65%
3.00%
3.65%
—
4.10%
—
4.25%
—
63
The weighted average assumptions used to determine the net periodic cost (benefit) for the years ended
December 31 were:
Discount rate
Expected return on plan assets
Rate of salaried compensation increase
Pension Plans
OPEB
2017
2016
2015
2017
2016
2015
4.40%
6.50%
3.00%
4.65%
6.50%
3.00%
4.25%
6.75%
3.00%
4.10%
—
—
4.25%
—
—
3.90%
—
—
The discount rate used in the determination of pension and other postretirement employee benefit obligations was
calculated using hypothetical bond portfolios to match the expected benefit payments under each of our pension
plans and other postretirement employee benefit obligations based on bonds available at each year-end with a
rating of "AA" or better. The portfolios were well-diversified over corporate industrial, corporate financial,
municipal, federal and foreign government issuers.
The expected return on plan assets assumption is based upon an analysis of historical long-term returns for
various investment categories, as measured by appropriate indices. These indices are weighted based upon the
extent to which plan assets are invested in the particular categories in arriving at our determination of a composite
expected return. The expected rate of return assumption that will be used to determine net periodic cost for 2018
is 6.25%.
A decrease in the discount rate or the rate of expected return on plan assets, all other assumptions remaining the
same, would increase net periodic cost. A 25 basis point decrease in the pension discount rate would increase
net periodic cost by approximately $0.7 million in 2018 and increase the projected benefit obligation by
approximately $10.3 million as of December 31, 2018. A 25 basis point decrease in the assumption for the
expected return on plan assets would increase net periodic cost by approximately $0.7 million in 2018. The actual
rates of return on plan assets may, and do, vary significantly from the assumption used. A 25 basis point
decrease in the OPEB discount rate would be de minimis to the annual net periodic cost.
The assumed health care cost trend rate used to calculate other postretirement employee benefit obligations as of
December 31, 2017 was 8.38% for a certain group of participants under age 65 in our hourly plan and our
Arkansas participants covered by a collective bargaining agreement, grading ratably to an assumption of 4.50% in
2038. The actual rates of health care cost increases may vary significantly from the assumption used because of
unanticipated changes in health care costs.
A one percentage point change in the health care cost trend rates would have the following effects on our
December 31, 2017 Consolidated Financial Statements:
(Dollars in thousands)
Effect on total service cost plus interest cost
Effect on accumulated postretirement benefit obligation
1% Increase
1% Decrease
$
$
28 $
443 $
(24)
(373)
NOTE 13. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables detail the changes in our accumulated other comprehensive loss (AOCL) on our Condensed
Consolidated Balance Sheets for the years ended December 31, 2017 and 2016, net of tax.
(Dollars in thousands)
Balance at January 1, 2017
Amounts arising during the period
Amounts reclassified from AOCL
Net change
Balance at December 31, 2017
Gains and
losses on cash
flow hedge
Pension Plans
OPEB
$
$
(701) $
145
(149)
(4)
(705) $
120,627 $
(11,005)
(9,011)
(20,016)
100,611 $
(9,182) $
(350)
4,477
4,127
(5,055) $
Total
110,744
(11,210)
(4,683)
(15,893)
94,851
64
(Dollars in thousands)
Balance at January 1, 2016
Amounts arising during the period
Amounts reclassified from AOCL
Net change
Balance at December 31, 2016
Amounts in parenthesis indicate credits.
Gains and
losses on cash
flow hedge
Pension Plans
OPEB
$
$
— $
(916)
215
(701)
(701) $
128,244 $
2,666
(10,283)
(7,617)
120,627 $
(13,741) $
191
4,368
4,559
(9,182) $
Total
114,503
1,941
(5,700)
(3,759)
110,744
See Note 10: Derivative Instruments and Note 12: Pension and Other Postretirement Employee Benefits for
additional information.
NOTE 14. EQUITY-BASED COMPENSATION PLANS
As of December 31, 2017, we had two stock incentive plans under which performance stock awards (PSAs),
restricted stock units (RSUs) and deferred compensation stock equivalent units were outstanding. All of these
plans have received shareholder approval. We were originally authorized to issue up to 1.6 million shares and
1.0 million shares under our 2005 Stock Incentive Plan and 2014 Stock Incentive Plan, respectively. At
December 31, 2017, approximately 0.4 million shares were authorized for future awards. We issue new shares of
common stock to settle PSAs, RSUs and deferred compensation stock equivalent units. We estimate forfeitures
each period.
The following table details our compensation expense and the related income tax benefit as of December 31:
(Dollars in thousands)
Employee equity-based compensation expense:
Performance stock awards
Restricted stock units
Total employee equity-based compensation expense
Deferred compensation stock equivalent units expense
2017
2016
2015
$
$
$
3,582 $
1,140
4,722 $
3,437 $
953
4,390 $
657 $
732 $
Total tax benefit recognized for shared-based payment awards
$
379 $
317 $
PERFORMANCE STOCK AWARDS
PSAs granted under the stock incentive plans have a three-year performance period and shares are issued at the
end of the period if the performance measures are met. The performance measures are based on the percentile
ranking of our total shareholder return relative to the total shareholder return performance of both a selected peer
group of companies and a larger group of indexed companies over the three-year performance period. The
number of shares actually issued, as a percentage of the amount subject to the PSA, could range from 0% to
200%. PSAs granted under our stock incentive plans do not have voting rights unless and until shares are issued
upon settlement. If shares are issued at the end of the three-year performance measurement period, the
recipients will receive dividend equivalents in the form of additional shares at the time of payment equal to the
dividends that would have been paid on the shares earned had the recipients owned the shares during the three-
year period. Therefore, the shares are not considered participating securities.
A Monte Carlo simulation method is used to estimate the stock prices of Potlatch and the selected peer
companies at the end of the three-year performance period. The expected volatility of each company’s stock price
and covariance of returns among the peer companies are key assumptions within the Monte Carlo simulation.
Historical volatility over a term similar to the performance period is considered a reasonable proxy for forecasted
volatility. Likewise, because the returns of Potlatch and the peer group companies are correlated, the covariance,
a measure of how two variables tend to move together, is calculated over a historical term similar to the
performance period and applied in the simulations. The simulations use the stock prices of Potlatch and the peer
group of companies as of the award date as a starting point. Multiple simulations are generated, resulting in share
65
3,877
881
4,758
376
319
prices and total shareholder return values for Potlatch and the peer group of companies. For each simulation, the
total shareholder return of Potlatch is ranked against that of the peer group of companies. The future value of the
performance share unit is calculated based on a multiplier for the percentile ranking and then discounted to
present value. The discount rate is the risk-free rate as of the award date for a term consistent with the
performance period. Awards are also credited with dividend equivalents at the end of the performance period, and
as a result, award values are not adjusted for dividends.
The following table presents the key inputs used in calculating the fair value of the PSAs in 2017, 2016 and 2015,
and the resulting fair values:
2017
2016
2015
Stock price as of valuation date
Risk-free rate
Expected volatility
Expected dividends
Expected term (years)
Fair value of a performance share
$
$
43.60
$
1.61%
24.22%
3.44%
3.00
53.85
$
25.92
$
0.88%
23.82%
5.79%
3.00
30.02
$
40.00
1.07%
21.09%
3.75%
3.00
36.71
The following table summarizes outstanding PSAs as of December 31, 2017, 2016 and 2015, and the changes
during those years:
2017
2016
2015
(Dollars in thousands, except per share amounts)
Unvested shares outstanding at January 1
Granted
Vested
Forfeited
Unvested shares outstanding at December 3
1
Total grant date fair value of share awards
vested during the year
Aggregate intrinsic value of unvested share
awards at December 31
Weighted
Average
Grant Date
Fair Value Shares
Weighted
Average
Grant Date
Fair Value Shares
32.59 161,049 $
53.85 125,469 $
36.71 (82,730) $
— $
34.68
41.26 160,233 $
30.02 78,974 $
45.57 (77,078) $
(1,080) $
—
Weighted
Average
Grant Date
Fair Value
53.86
36.71
62.78
41.29
Shares
203,788 $
78,033 $
(78,129) $
(3,061) $
200,631 $
39.19 203,788 $
32.59 161,049 $
41.26
$
2,868
$
3,770
$
4,839
$ 10,011
$
8,488
$
4,697
As of December 31, 2017, there was $4.0 million of unrecognized compensation cost related to unvested PSAs,
which is expected to be recognized over a weighted average period of 1.4 years.
RESTRICTED STOCK UNITS
Our 2005 Stock Incentive Plan and 2014 Stock Incentive Plan also allow for awards to be issued in the form of
RSU grants. During 2017, 2016 and 2015, certain officers and other employees of the company were granted
RSU awards that will accrue dividend equivalents based on dividends paid during the RSU vesting period. The
dividend equivalents will be converted into additional RSUs that will vest in the same manner as the underlying
RSUs to which they relate. Therefore, the shares are not considered participating securities. The terms of the
awards state that the RSUs will vest in a given time period of one to three years, and the terms of certain awards
follow a vesting schedule within the given time period.
66
The following table summarizes outstanding RSU awards as of December 31, 2017, 2016 and 2015, and the
changes during those years:
2017
2016
2015
(Dollars in thousands, except per share amounts)
Unvested shares outstanding at January 1
Granted
Vested
Forfeited
Unvested shares outstanding at December 3
1
Total grant date fair value of RSU awards
vested during the year
Aggregate intrinsic value of unvested RSU
awards at December 31
Weighted
Average
Grant Date
Fair Value Shares
Weighted
Average
Grant Date
Fair Value Shares
31.61 44,531 $
43.64 43,320 $
39.65 (16,431) $
— $
31.63
40.95 32,455 $
26.08 27,820 $
39.92 (15,385) $
(359) $
—
Weighted
Average
Grant Date
Fair Value
42.24
39.99
44.50
40.27
Shares
71,420 $
26,507 $
(29,039) $
(1,017) $
67,871 $
32.87 71,420 $
31.61 44,531 $
40.95
$ 1,151
$
656
$
289
$ 3,387
$ 2,975
$ 1,347
As of December 31, 2017, there was $1.1 million of total unrecognized compensation cost related to outstanding
RSU awards, which is expected to be recognized over a weighted average period of 1.4 years.
DEFERRED COMPENSATION STOCK EQUIVALENT UNITS
A long-term incentive award is granted annually to our directors, and payable upon a director's separation from
service. Directors may also elect to defer their annual retainers, payable in the form of stock. All stock unit
equivalent accounts are credited with dividend equivalents. As of December 31, 2017, there were 141,938 shares
outstanding that will be distributed in the future to directors as common stock.
Issuance of restricted stock units awarded to certain officers and employees may also be deferred. All stock unit
equivalent accounts are credited with dividend equivalents. As of December 31, 2017, there were 74,067 RSUs
which had vested, but issuance of the related stock had been deferred.
NOTE 15. INCOME TAXES
As a REIT, we generally are not subject to federal and state corporate income taxes on income from investments
in real estate that we distribute to our shareholders. We are required to pay federal and state corporate income
taxes on income from our non-real estate investments which are held in taxable REIT subsidiaries (TRS). These
activities are principally comprised of our wood products manufacturing operations and certain real estate
investments held for sale.
As of January 1, 2016, we are no longer subject to corporate income taxes on built-in gains, the excess of fair
market value over tax basis, on sales of real property held at the time of our REIT conversion.
On December 22, 2017, H.R. 1, Tax Cuts and Jobs Act (the Act) was enacted and included broad tax reforms.
Under the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21% effective January 1,
2018, which required a remeasurement of our deferred tax assets and liabilities as of the date of enactment.
Accordingly, net deferred tax assets, including the related valuation allowance, were reduced by $10.7 million and
the change was recorded as an increase to the 2017 tax provision.
Income tax expense consists of the following for the years ended December 31:
(Dollars in thousands)
Current
Deferred
Net operating loss carryforwards
Income tax provision (benefit)
2017
2016
2015
$
$
16,657 $
14,325
1,039
32,021 $
(6,178) $
2,143
(290)
(4,325) $
128
1,097
(6,793)
(5,568)
67
Income tax expense differs from the amount computed by applying the statutory federal income tax rate of 35% to
income before income taxes due to the following for the years ended December 31:
(Dollars in thousands)
U.S. federal statutory income tax
REIT income not subject to federal income tax
U.S. tax rate change on deferred tax assets and liabilities
Intercompany profit-in-inventory elimination adjustment
Change in valuation allowance
State income taxes, net of federal income tax
Domestic production activities deduction
Permanent book-tax differences
Research and development credits
All other items
Income tax provision (benefit)
Effective tax rate
2017
2016
2015
$
$
$
41,466
$
(20,651)
10,528
—
140
2,608
(1,511)
(252)
(294)
(13)
$
27.0%
32,021
2,314
(7,199)
—
1,465
162
(740)
(2)
(218)
(689)
582
(4,325)
$
(65.4%)
9,151
(14,110)
—
—
488
(838)
—
(70)
—
(189)
(5,568)
(21.3%)
The tax effects of significant temporary differences creating deferred tax assets and liabilities at December 31
were:
(Dollars in thousands)
Deferred tax assets:
Pensions
Other postretirement employee benefits
Net operating loss carryforwards
Inventories
Tax credits
Nondeductible accruals
Incentive compensation
Employee benefits
Other
Total deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Timber and timberlands, net
Property, plant and equipment, net
Other
Total deferred tax liabilities
Deferred tax assets, net
2017
2016
$
$
19,439 $
7,891
54
353
2,443
2,566
1,131
1,037
88
35,002
(790)
34,212
(1,432)
(12,683)
(301)
(14,416)
19,796 $
37,423
13,002
983
443
2,207
2,067
1,643
1,444
120
59,332
(650)
58,682
(2,165)
(14,018)
(448)
(16,631)
42,051
As of December 31, 2017, we had no federal net operating loss carryforwards; state net operating loss and capital
loss carryforwards were $1.2 million that expire from 2021 through 2030; and Idaho Investment Tax Credits were
$3.1 million that expire from 2019 through 2031. We use the flow-through method of accounting for investment tax
credits.
With the exception of the valuation allowance discussed below, we believe it is more likely than not that we will
have sufficient future taxable income to realize our deferred tax assets.
68
Due to the impact of the change in federal rate under the Act, the valuation allowance on our deferred tax assets
increased during 2017 by $0.1 million, and was $0.8 million as of December 31, 2017. The valuation allowance is
related to certain Idaho Investment Tax Credit carryforwards we expect will expire prior to realization. During
2016, the valuation allowance increased from $0.5 to $0.7 million due to the actual use and expected future use
of certain Idaho Investment Tax Credits.
The following table summarizes the tax years subject to examination by major taxing jurisdictions:
Jurisdiction
Federal
Arkansas
Michigan
Minnesota
Idaho
Years
2013 — 2017
2014 — 2017
2013 — 2017
2013 — 2017
2014 — 2017
As of December 31, 2017, we had $0.6 million of unrecognized tax benefits which, if recognized, would impact the
effective tax rate. There was $0.9 unrecognized tax benefits at December 31, 2016 and no unrecognized tax
benefits at December 31, 2015. We currently believe there is a reasonable possibility that the amounts of
unrecognized tax benefits will significantly decrease in the next 12 months based on the closing of certain
ongoing state tax examinations.
A reconciliation of the beginning and ending unrecognized tax benefits is as follows:
(Dollars in thousands)
Balance at January 1
Additions for tax positions of prior years
Reduction for tax positions of prior years
Balance at December 31
2017
2016
$
$
$
850
8
(294)
$
564
—
850
—
850
We reflect accrued interest related to tax obligations, as well as penalties, in our provision for income taxes. For
the years ended December 31, 2017, 2016 and 2015, we recognized insignificant amounts related to interest and
penalties in our tax provision. At December 31, 2017 and 2016, we had insignificant amounts of accrued interest
related to tax obligations and no accrued interest receivable with respect to open tax refunds.
NOTE 16. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We have operating leases primarily for office space, machinery and equipment expiring at various dates through
2033. We expect that most leases will be renewed or replaced in the normal course of business as they expire.
As of December 31, 2017, the future minimum rental payments required under our operating leases are as
follows:
(Dollars in thousands)
2018
2019
2020
2021
2022
2023 and thereafter
Total
$
$
4,570
3,518
2,662
1,771
874
992
14,387
Operating lease expense was $4.5 million, $4.2 million and $4.6 million for the years ended December 31, 2017,
2016 and 2015, respectively.
69
LEGAL MATTERS
In January 2007, the Environmental Protection Agency (EPA) notified us that we are a potentially responsible
party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and
the Clean Water Act for cleanup of a site known as Avery Landing in northern Idaho. At the time we owned a
portion of the land at the Avery Landing site, which we acquired in 1980 from the Milwaukee Railroad. The land
we owned at the site and adjacent properties were contaminated with petroleum as a result of the Milwaukee
Railroad's operations at the site prior to 1980. On July 5, 2011, the EPA issued an Action Memorandum for the
Avery Landing site selecting contaminant extraction and off-site disposal as the remedial alternative. On May 23,
2012, we signed a consent order with the EPA pursuant to which we agreed to provide $1.75 million in funding for
EPA cleanup on a portion of our property (including the adjacent riverbank owned by the Idaho Department of
Lands). The EPA cleanup was completed in October 2012. On April 4, 2013, the EPA issued a unilateral
administrative order requiring us to remediate the portion of the Avery Landing site that we owned. Our
remediation was completed in October 2013. On September 25, 2015, the EPA sent us a letter asserting that the
EPA and the Department of Transportation (the current owner of a portion of the adjacent property remediated by
the EPA) (DOT) had incurred $9.8 million in unreimbursed response costs associated with the site and that we
were liable for such costs. We have executed six tolling agreements with the EPA and DOT suspending the
statute of limitations on the claim until March 31, 2018 in order to facilitate negotiations of a final settlement and
release. We accrued $0.2 million for this matter in the first quarter of 2016, an additional $0.8 million in the second
quarter of 2016 and an additional $5.0 million in the third quarter of 2017. On February 9, 2018, we executed a
Consent Decree with the United States, acting on behalf of the Environmental Protection Agency and Department
of Transportation, settling the United States’ claims against us for $6 million. On February 12, 2018 the United
States filed a lawsuit against us in the United States District Court for the District of Idaho and lodged the Consent
Decree with the Court. The United States will publish a Notice of Lodging of the Consent Decree in the Federal
Register and after the expiration of a required 30-day public comment period, will advise the Court whether the
Consent Decree may be entered. If the Consent Decree is not approved by the Court following the 30-day public
comment period, we reserve all defenses to liability and the right to pursue all potentially responsible parties.
NOTE 17. SEGMENT INFORMATION
Our businesses are organized into three reportable operating segments: Resource, Wood Products and Real
Estate. Management activities include planting and harvesting trees and building and maintaining roads. The
Resource segment also generates revenues from non-timber resources such as hunting leases, recreation
permits and leases, mineral rights leases, biomass production and carbon sequestration. The Wood Products
segment manufactures and markets lumber and plywood. The business of our Real Estate segment consists
primarily of the sale of land holdings deemed non-strategic or identified as having higher and better use
alternatives. The Real Estate segment engages in limited real estate subdivision activities through Potlatch TRS.
The reporting segments follow the same accounting policies used for our Consolidated Financial Statements, as
described in the summary of significant accounting policies, with the exception of the valuation of inventories. All
segment inventories are reported using the average cost method, and the LIFO reserve is recorded at the
corporate level. Management evaluates a segment’s performance based upon profit or loss from operations
before income taxes. Intersegment revenues are recorded based on prevailing market prices.
70
The following table presents business segment information for each of the past three years. Corporate information
is included to reconcile segment data to the Consolidated Financial Statements.
(Dollars in thousands)
Revenues:
2017
2016
2015
Resource
Wood Products
Real Estate
Intersegment Resource revenues1
Total consolidated revenues
Income (loss) before income taxes:
Resource
Wood Products
Real Estate2
Eliminations and adjustments
Corporate
Operating income
Interest expense, net
Income before income taxes
Depreciation, depletion and amortization:
Resource
Wood Products
Real Estate
Corporate
Bond discount and deferred loan fees
Total depreciation, depletion and amortization
Basis of real estate sold:
Real Estate
Elimination and adjustments
Total basis of real estate sold
Assets:
Resource and Real Estate3
Wood Products
Corporate
Total consolidated assets
Capital Expenditures:4
Resource
Wood Products
Real Estate
Corporate
Total capital expenditures
$
$
$
$
$
$
$
$
$
$
$
$
278,199 $
441,157
30,655
750,011
(71,416)
678,595 $
256,163 $
367,426
32,604
656,193
(57,094)
599,099 $
263,875
336,214
28,989
629,078
(53,742)
575,336
106,105 $
72,166
18,576
(2,705)
194,142
(48,619)
145,523
(27,049)
118,474 $
20,476 $
7,347
2
27,825
607
1,480
29,912 $
7,114 $
(287)
6,827 $
81,918 $
24,587
(29,495)
(3,001)
74,009
(38,455)
35,554
(28,941)
6,613 $
24,090 $
7,357
4
31,451
760
1,979
34,190 $
8,518 $
(507)
8,011 $
76,350
(5,235)
16,849
3,283
91,247
(32,340)
58,907
(32,761)
26,146
28,807
6,810
56
35,673
951
1,481
38,105
7,394
(382)
7,012
670,240 $
154,479
824,719
128,360
953,079 $
837,630
662,852 $
131,103
150,855
968,733
813,707
113,974
47,879
927,681 $ 1,016,612
15,120 $
10,723
87
25,930
2,132
28,062 $
13,311 $
5,491
111
18,913
375
19,288 $
13,497
18,482
184
32,163
569
32,732
1
2
3
4
Intersegment revenues are based on prevailing market prices of logs sold by our Resource segment to the Wood
Products segment.
In the second quarter of 2016, we sold approximately 172,000 acres of timberlands located in central Idaho for
$114 million at a loss of $48.5 million before taxes.
Assets are shown on a combined basis for the Resource and Real Estate segments, as we do not report assets
separately to management for these segments.
Excludes the acquisition of timber and timberlands.
71
All of our wood products facilities and all other assets are located within the continental United States. Geographic
information regarding our revenues is as follows:
(Dollars in thousands)
United States
Canada
Mexico
Other
Total consolidated revenues
2017
676,956
481
1,158
—
678,595
$
$
2016
597,899
173
1,027
—
599,099
$
$
2015
573,398
851
919
168
575,336
$
$
One customer within our Resource segment accounted for slightly more than 10% of our total consolidated
revenues in the years ended December 31, 2017, 2016 and 2015.
NOTE 18. FINANCIAL RESULTS BY QUARTER (UNAUDITED)
(Dollars in thousands, except per
share amounts)
Revenues
Operating income (loss)
Net income (loss)
Net income (loss) per share1
March 31
June 30
September 30
December 31
Three Months Ended
2017
2016
2017
2016
2017
2016
2017
2016
$149,681 $127,896 $163,229 $141,495 $190,441 $174,027 $175,244 $155,681
5,072 $ 40,773 $ (34,228) $ 43,793 $ 38,994 $ 37,048 $ 25,716
$ 23,909 $
157 $ 24,244 $ (31,238) $ 33,700 $ 27,646 $ 11,588 $ 14,373
$ 16,921 $
Basic
Diluted
$
$
0.41 $
0.41 $
— $
— $
0.59 $
0.59 $
(0.77) $
(0.77) $
0.83 $
0.82 $
0.68 $
0.68 $
0.28 $
0.28 $
0.35
0.35
1
Per share amounts are computed independently for each of the quarters presented. Therefore, the sum of the quarterly
per share amounts may not equal the total computed for the year.
Our Quarterly Reports on Form 10-Q, as filed with the Securities and Exchange Commission, include the
quarterly results for the first nine months of each respective year. During the fourth quarter of 2017, we incurred
$3.4 million in merger-related costs associated with the pending merger with Deltic. See Note 2: Pending Merger
with Deltic for additional information.
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange
Act)), under the supervision and with the participation of management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Exchange Act) as of December 31, 2017. These disclosure controls and
procedures are designed to ensure that information required to be disclosed in our reports that are filed or
submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Our disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that this information is accumulated and communicated to management,
including the principal executive and principal financial officers, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, the CEO and CFO
have concluded that these disclosure controls and procedures were effective as of December 31, 2017.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rule 13a-15(f) under the Exchange Act of 1934.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Our management, with the participation of our CEO and CFO, assessed the effectiveness of our internal control
over financial reporting as of December 31, 2017. In making this assessment, our management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-
Integrated Framework (2013).
Based on our assessment, management believes that, as of December 31, 2017, our internal control over
financial reporting is effective based on those criteria.
Our independent registered public accounting firm has audited the financial statements included in this report and
issued a report which appears on the next page and expresses an unqualified opinion on the effectiveness of our
internal control over financial reporting as of December 31, 2017.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the latest fiscal quarter
that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Potlatch Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Potlatch Corporation and subsidiaries’ (the Company) internal control over financial reporting as
of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016,
the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for
each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the
consolidated financial statements), and our report dated February 16, 2018 expressed an unqualified opinion on
those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on the financial statements.
74
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ KPMG LLP
Seattle, Washington
February 16, 2018
75
Part III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain of the information required by this item is incorporated by reference to the information appearing under
the headings "Board of Directors," "Corporate Governance" and "Security Ownership – Section 16(a) Beneficial
Ownership Reporting Compliance" from our definitive Proxy Statement to be filed with the SEC on or about
March 30, 2018.
Our Corporate Conduct and Ethics Code, which is applicable to all directors, officers and employees, can be
found on our website at www.potlatchcorp.com. We post any amendments to or waivers from our Corporate
Conduct and Ethics Code on our website.
Executive Officers of the Registrant
As of February 16, 2018, information on our executive officers is as follows:
Michael J. Covey (age 60), has served as Chief Executive Officer since February 2006 and served as President
and Chief Executive Officer from 2006 to March 2013. He has been a director of the company since February
2006 and has served as Chairman of the Board of the company since January 2007.
Eric J. Cremers (age 54), has served as President and Chief Operating Officer and a director of the company
since March 2013, as Executive Vice President and Chief Financial Officer from March 2012 to March 2013, and
as Vice President, Finance and Chief Financial Officer from July 2007 to March 2012.
Jerald W. Richards (age 49), has served as Vice President and Chief Financial Officer since September 2013. He
was employed by Weyerhaeuser Company and served as Chief Accounting Officer from October 2010 to August
2013, and corporate segment controller from 2008 to October 2010.
Thomas J. Temple (age 61), has served as Vice President, Wood Products since February 2012 and as Vice
President, Wood Products from January 2009 to February 2012.
Darin Ball (age 52), has served as Vice President of Resource since December 2017 and served as Manager of
Idaho Resource from 2012 to December 2017. He was Director of Budgeting and Business Development of the
company from 2007 to 2012.
William R. DeReu (age 51), has served as Vice President, Real Estate since February 2012 and as Vice
President, Real Estate from May 2006 to February 2012.
Lorrie D. Scott (age 63), has served as Vice President, General Counsel and Corporate Secretary since July
2010. Prior to July 2010, she was employed by Weyerhaeuser Realty Investors, Inc. and served as Senior Vice
President and General Counsel from October 2007 to July 2010.
Stephanie A. Brady (age 50), has served as Controller and Principal Accounting Officer since April 2015. She was
employed by Itron, Inc. and served as North America Controller from January 2012 to March 2015 and Director of
External Reporting from January 2004 to December 2011.
The term of office of the officers of the company expires at the annual meeting of our board and each officer holds
office until the officer’s successor is duly elected and qualified or until the earlier of the officer’s death, resignation,
retirement, removal by the board or as otherwise provided in our bylaws.
76
ITEM 11. EXECUTIVE COMPENSATION
Information set forth under the headings "Report of the Executive Compensation and Personnel Policies
Committee," "Compensation Discussion and Analysis," "Executive Compensation Tables," “CEO Pay Ratio,”
"Compensation of Non-Employee Directors" and "Corporate Governance - Compensation Committee Interlocks
and Insider Participation" in our definitive Proxy Statement to be filed with the SEC on or about March 30, 2018, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding any person or group known by us to be the beneficial owner of more than five percent of
our common stock as well as the security ownership of management set forth under the heading "Security
Ownership" in our definitive Proxy Statement to be filed with the SEC on or about March 30, 2018, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this item regarding certain relationships and related transactions is included under the
heading "Corporate Governance - Transactions with Related Persons" in our definitive Proxy Statement to be filed
with the SEC on or about March 30, 2018, and is incorporated herein by reference.
The information required by this item regarding director independence is included under the headings "Board of
Directors" and "Corporate Governance - Director Independence" in our definitive Proxy Statement to be filed with
the SEC on or about March 30, 2018, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item regarding principal accounting fees and services is included under the
heading "Audit Committee Report - Fees Paid to Independent Registered Public Accounting Firm in 2017 and
2016" in our definitive Proxy Statement to be filed with the SEC on or about March 30, 2018, and is incorporated
herein by reference.
77
Part IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements:
The financial statements required by this item are submitted in Item 8 of this Annual Report on Form 10-K.
(a) (2) Financial Statement Schedule:
Financial Statement Schedules have been omitted because of the absence of conditions under which they are
required or because the required information is included in the Consolidated Financial Statements or the Notes
thereto.
(a) (3) Exhibits:
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
EXHIBIT NUMBER
(2)*
Agreement and Plan of Merger dated October 22, 2017 between Potlatch Corporation, Portland
Merger LLC and Deltic Timber Corporation, filed as Exhibit (2.1) to the Current Report on Form 8-
K filed by the Registrant on October 23, 2017.
DESCRIPTION
(3)(a)*
(3)(b)*
(4)
(4)(a)*
(4)(a)(i)*
(4)(a)(ii)*
(4)(b)*
(4)(b)(i)*
(4)(b)(ii)*
Second Restated Certificate of Incorporation of the Registrant, effective February 3, 2006, filed as
Exhibit 99.2 to the Current Report on Form 8-K filed by the Registrant on February 6, 2006.
Bylaws of the Registrant, as amended through February 18, 2009, filed as Exhibit (3)(b) to the
Current Report on Form 8-K filed by the Registrant on February 20, 2009.
See Exhibits (3)(a) and (3)(b). The Registrant also undertakes to furnish to the SEC, upon
request, any instrument defining the rights of holders of long-term debt.
Indenture, dated as of November 3, 2009, between the Registrant and U.S. Bank National
Association, as trustee, filed as Exhibit 4.1 to the Current Report on Form 8-K filed by the
Registrant on November 9, 2009.
Form of 7 1/2% Senior Notes due 2019 (included as Exhibit A to the Indenture filed as Exhibit
4(a)).
Registration Rights Agreement, dated as of November 3, 2009, between the Registrant and the
parties named therein, filed as Exhibit 4.1 to the Current Report on Form 8-K filed by the
Registrant on November 9, 2009.
Indenture, dated as of November 27, 1990, between Original Potlatch and Deutsche Bank
National Trust Company (successor in interest to Bankers Trust Company of California, National
Association), as trustee, filed as Exhibit (4)(a) to the Original Potlatch Annual Report on Form 10-
K for the fiscal year ended December 31, 2000. (SEC File No. 001-05313)
Officer’s Certificate, dated January 24, 1991, filed as Exhibit (4)(a)(i) to the Original Potlatch
Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (SEC File No. 001-
05313)
Officer’s Certificate, dated December 12, 1991, filed as Exhibit (4)(a)(i) to the Original Potlatch
Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (SEC File No. 001-
05313)
78
EXHIBIT NUMBER
(10)(a)1*
Potlatch Corporation Management Performance Award Plan, as amended effective December 2,
2004, filed as Exhibit (10)(a) to the Annual Report on Form 10-K filed by Original Potlatch for the
fiscal year ended December 31, 2004. (SEC File No. 001-05313)
DESCRIPTION
(10)(a)(i)1*
Amendment to Potlatch Corporation Management Performance Award Plan, filed as Exhibit 10.6
to the Current Report on Form 8-K filed by the Registrant on December 11, 2008.
(10)(b)1*
(10)(c)1*
Potlatch Corporation Severance Program for Executive Employees, amended and restated
effective February 14, 2014, filed as Exhibit (10)(b) to the Annual Report on Form 10-K for the
fiscal year ended December 31, 2013.
Potlatch Corporation Salaried Employees’ Supplemental Benefit Plan, as amended and restated
effective January 1, 1989, and as amended through May 24, 2005, filed as Exhibit (10)(d) to the
Quarterly Report on Form 10-Q filed by Original Potlatch for the quarter ended June 30, 2005.
(10)(c)(i)1*
Amendment, effective as of January 1, 1998, to Plan described in Exhibit (10)(d), filed as Exhibit
(10)(d)(i) to the Annual Report on Form 10-K filed by Original Potlatch for the fiscal year ended
December 31, 2003. (SEC File No. 001-5313)
(10)(c)(ii)1*
Amendment, effective as of December 5, 2008, to Plan described in Exhibit (10)(d), filed as Exhibit
10.5 to the Current Report on Form 8-K filed by the Registrant on December 11, 2008.
(10)(d)1*
(10)(e)(i)1
Potlatch Corporation Deferred Compensation Plan for Directors, as amended through May 24,
2005, filed as Exhibit (10)(g) to the Quarterly Report on Form 10-Q filed by Original Potlatch for
the quarter ended June 30, 2005.
Potlatch Corporation Deferred Compensation Plan II for Directors, as amended and restated
effective May 8, 2014, filed as Exhibit 10.2 to the Current Report on Form 8-K filed by the
Registrant on May 13, 2014, as amended on September 9, 2016.
(10)(e)(ii)1*
First Amendment to the Potlatch Corporation Deferred Compensation Plan for Directors II, filed as
Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on December 7, 2017.
(10)(f)1*
(10)(g)1*
(10)(h)1*
(10)(i)(i)1*
(10)(i)(ii)1*
Potlatch Corporation Benefits Protection Trust Agreement, amended and restated effective
February 14, 2014, filed as Exhibit (10)(h) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 2013.
Summary of Director Compensation, effective as of May 3, 2017, filed as Exhibit 10.1 to the
Current Report on Form 8-K filed by the Registrant on May 4, 2017.
Form of Indemnification Agreement with each director of the Registrant and with each executive
officer of the Registrant, filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the
Registrant on September 23, 2009.
Potlatch Corporation 2005 Stock Incentive Plan, as amended and restated May 19, 2006, filed as
Exhibit (10)(r) to the Quarterly Report on Form 10-Q filed by the Registrant for the quarter ended
June 30, 2006, and as further amended and restated effective September 16, 2006, filed as
Exhibit (10)(e) to the Current Report on Form 8-K filed by the Registrant on September 21, 2006.
Form of Restricted Stock Unit Agreement (2005 Stock Incentive Plan), as amended and restated
May 19, 2006, to be used for restricted stock unit awards to be granted subsequent to May 19,
2006, filed as Exhibit (10)(r)(i) to the Quarterly Report on Form 10-Q filed by the Registrant for the
quarter ended June 30, 2006.
79
EXHIBIT NUMBER
(10)(i)(iii)1*
DESCRIPTION
Form of Performance Share Agreement (2005 Stock Incentive Plan), as amended and restated
May 19, 2006, to be used for performance share awards to be granted subsequent to May 19, 2006,
filed as Exhibit (10)(r)(ii) to the Quarterly Report on Form 10-Q filed by the Registrant for the quarter
ended June 30, 2006, and as further amended on January 17, 2007, filed as Exhibit (10)(r)(ii) to the
Current Report on Form 8-K filed by the Registrant on January 19, 2007.
(10)(j)(i)1*
(10)(j)(ii)1*
Potlatch Corporation 2014 Stock Incentive Plan, filed as Exhibit 10.C to the Quarterly Report on
Form 10-Q filed by the Registrant for the quarter ended June 30, 2014.
Potlatch Corporation Restricted Stock Unit Award Notice and Agreement (Directors) 2014 Long-
Term Incentive Plan, filed as Exhibit 10.2 to the Current Report on Form 8-K filed by the
Registrant on December 7, 2017.
(10)(j)(iii)1*
Form of 2014 Performance Share Award Notice and Agreement filed as Exhibit 10.1 to the
Current Report on Form 8-K filed by the Registrant on May 9, 2014.
(10)(j)(iv)1*
Form of 2014 RSU Award Notice and Award Agreement filed as Exhibit 10.3 to the Current Report
on Form 8-K filed by the Registrant on May 9, 2014.
(10)(j)(v)1*
Form of 2015 Performance Share Award Notice and Agreement filed as Exhibit 10.2 to the
Current Report on Form 8-K filed by the Registrant on February 18, 2015.
(10)(j)(vi)1*
Form of 2015 RSU Award Notice and Agreement filed as Exhibit 10.1 to the Current Report on
Form 8-K filed by the Registrant on February 18, 2015.
(10)(k)(i)1*
(10)(k)(ii)1*
(10)(l)1*
(10)(m)1*
(10)(n)1*
(10)(o)(i)*
Potlatch Corporation Management Performance Award Plan II, as amended through February 20,
2008, filed as Exhibit (10)(r)(iv) to the Current Report on Form 8-K filed by the Registrant on
February 26, 2008.
Amendment to Potlatch Corporation Management Performance Award Plan II, effective June 1,
2008, filed as Exhibit (10)(r)(v) to the Current Report on Form 8-K filed by the Registrant on May
21, 2008.
Potlatch Corporation Salaried Supplemental Benefit Plan II, effective December 5, 2008, and
amended and restated as of February 14, 2014, filed as Exhibit (10)(t) to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2013.
Potlatch Corporation Annual Incentive Plan, amended and restated effective January 1, 2014, filed
as Exhibit (10)(w)(i) to the Annual Report on Form 10-K for the fiscal year ended December 31,
2013.
Potlatch Corporation Management Deferred Compensation Plan, effective June 1, 2008, amended
and restated on February 14, 2014, filed as Exhibit (10)(x) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2013.
Amended and Restated Credit Agreement, dated as of August 12, 2014, among the Registrant and
its wholly-owned subsidiaries, as borrowers, KeyBank National Association, as administrative agent,
swing line lender and L/C issuer, the Guarantors from time to time party thereto and the Lenders
from time to time party thereto, filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the
Registrant on August 14, 2014.
(10)(o)(ii)*
First Amendment to the Amended and Restated Credit Agreement dated January 16, 2015, filed
as Exhibit (10)(c) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.
(10)(o)(iii)*
Second Amendment to the Amended and Restated Credit Agreement dated November 9, 2015,
filed as Exhibit (10)(r) to the Annual Report on Form 10-K for the fiscal year ended December 31,
2015.
80
EXHIBIT NUMBER
(10)(p)(i)*
DESCRIPTION
Amended and Restated Term Loan Agreement, dated as of December 5, 2014, by and among the
Registrant and Potlatch Forest Holdings, Inc., as borrowers, Northwest Farm Credit Services,
PCA as administrative agent, the Guarantors from time to time party thereto and the Lenders from
time to time party thereto, filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the
Registrant on December 9, 2014.
(10)(p)(ii)*
First Amendment to Term Loan Agreement dated as of February 29, 2016, filed as Exhibit 10.1 to
the Current Report on Form 8-K filed by the Registrant on March 3, 2016.
(10)(q)*
(10)(r)*
(12)
(21)
(23)
(24)
(31)
(32)
(101)
Loan Agreement dated August 1, 2016 by and among Nez Perce County, Idaho, Potlatch
Corporation, Potlatch Forest Holdings, Inc., Potlatch Lake States Timberlands, LLC, Potlatch Land
and Lumber, LLC, Minnesota Timberlands, LLC and Potlatch Timberlands, LLC, filed as Exhibit
10.1 to the Current Report on Form 8-K filed by the Registrant on August 19, 2016.
Second Amended and Restated Credit Agreement dated as of February 14, 2018, by and among
the Registrant and its wholly-owned subsidiaries as borrowers, Key Bank National Association as
Administrative agent, swing line lender and L/C issuer, the Guarantors from time to time party
thereto and the Lenders from time to time party thereto, filed as Exhibit 10.1 to the Current Report
on Form 8-K filed by the Registrant on February 15, 2018.
Computation of Ratio of Earnings to Fixed Charges.
Potlatch Corporation Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
Powers of Attorney.
Rule 13a-14(a)/15d-14(a) Certifications.
Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18 U.S.C.
Section 1350.
The following financial information from Potlatch Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2017, filed on February 16, 2018, formatted in XBRL (Extensible
Business Reporting Language): (i) the Consolidated Statements of Income for the years ended
December 31, 2017, 2016 and 2015, (ii) the Consolidated Statements of Comprehensive Income
for the years ended December 31, 2017, 2016 and 2015, (iii) the Consolidated Balance Sheets at
December 31, 2017 and 2016, (iv) the Consolidated Statements of Cash Flows for the years
ended December 31, 2017, 2016 and 2015, (v) the Consolidated Statements of Stockholders’
Equity for the years ended December 31, 2017, 2016 and 2015 and (vi) the Notes to Consolidated
Financial Statements.
*
Incorporated by reference.
1 Management contract or compensatory plan, contract or arrangement.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ MICHAEL J. COVEY
Michael J. Covey
Chairman of the Board and
Chief Executive Officer
Date: February 16, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on
February 16, 2018, by the following persons on behalf of the registrant in the capacities indicated.
BY
BY
/s/ MICHAEL J. COVEY
Director, Chairman of the Board and Chief Executive Officer
Michael J. Covey
(Principal Executive Officer)
/s/ ERIC J. CREMERS
Director, President and Chief Operating Officer
Eric J. Cremers
BY
/s/ JERALD W. RICHARDS
Vice President and Chief Financial Officer
Jerald W. Richards
BY
/s/ STEPHANIE A. BRADY
Controller (Principal Accounting Officer)
Stephanie A. Brady
*
Linda M. Breard
*
William L. Driscoll
*
Charles P. Grenier
*
John S. Moody
*
Lawrence S. Peiros
*
Gregory L. Quesnel
Director
Director
Director
Director
Director
Director
*By
/s/ LORRIE D. SCOTT
Lorrie D. Scott
(Attorney-in-fact)
82
BOARD OF
DIRECTORS
Linda M. Beard
Retired Executive Vice President and Chief Financial Officer
Kaiser Foundation Health Plan of Washington
Seattle, Washington
Director since 2015
Charles P. Grenier
Retired Executive Vice President
Plum Creek Timber Company
Seattle, Washington
Director since 2013
Michael J. Covey
Chairman and Chief Executive Officer
Potlatch Corporation
Director since 2006
Eric J. Cremers
President and Chief Operating Officer
Potlatch Corporation
Director since 2013
William L. Driscoll
Partner
Lincoln Park Partners
Real Estate Management
Tacoma, Washington
Director since 2004
OFFICERS
Darin R. Ball
Vice President, Resource
Mark J. Benson
Vice President, Public Affairs
John S. Moody*
President
Parkside Capital, LLC Fund Management
Houston, Texas
Director since 2006
Lawrence S. Peiros
Retired Executive Vice President and Chief Operating Officer
The Clorox Company
Oakland, California
Director since 2003
Gregory L. Quesnel
Retired President and Chief Executive Officer
CNF, Inc.
Palo Alto, California
Director since 2000
*Independent Lead Director
William R. DeReu
Vice President, Real Estate
Jerald W. Richards
Vice President and Chief Financial Officer
Stephanie A. Brady
Controller and Principal Accounting Officer
Robert L. Schwartz
Vice President, Human Resources
Michael J. Covey
Chairman and Chief Executive Officer
Eric J. Cremers
President and Chief Operating Officer
Lorrie D. Scott
Vice President, General Counsel and Corporate Secretary
Thomas J. Temple
Vice President, Wood Products
CORPORATE
INFORMATION
Executive Offices
601 West First Avenue, Suite 1600
Spokane, Washington 99201-3807
509-835-1500
www.potlatchcorp.com
Transfer Agent and Registrar
Computershare
P.O. Box 505000
Louisville, KY 40233
866-593-2351
www.computershare.com/investor
Stock Listing
Potlatch common stock is traded under the symbol PCH on
NASDAQ.
Distribution Reinvestment
For the convenience of our registered stockholders, dividend
distributions may be reinvested in Potlatch common stock.
For information, contact Computershare at 866-593-2351.
Annual Meeting
The annual meeting of stockholders will be held:
May 7, 2018, at 9 a.m.
Potlatch Corporation
Corporate Offices
601 West First Avenue, Suite 1600
Spokane, Washington 99201
Additional Information
Copies of our filings with the U.S. Securities and Exchange
Commission, our Corporate Governance Guidelines,
Corporate Conduct and Ethics Code, and Charters of the
Committees of the Board of Directors are available, free
of charge, at our Web address, www.potlatchcorp.com,
or upon written request to the Corporate Secretary at our
executive offices.
Forward-Looking Statements
This report contains forward-looking statements that
reflect management’s current views regarding future
events based on estimates and assumptions, and are
therefore subject to known and unknown risks and
uncertainties. For a nonexclusive listing of forward-
looking statements and potential factors affecting
our business, please refer to “Cautionary Statement
Regarding Forward-Looking Information” on Page 1
and “Risk Factors” in Item 1A of our Annual Report
on Form 10-K for the year ended December 31, 2017,
which is included as part of this report. These forward-
looking statements are made as of the date of this
report and, except as required under applicable law, we
do not intend to issue updates concerning any future
revisions of management’s views to reflect events or
circumstances occurring after the date of this report.
SFI�-Certified Paper
Potlatch Corporation’s 2017 Annual Report is printed entirely on SFI-
Certified paper. The Annual Report is printed on Domtar SFI-Certified paper
manufactured using fiber from responsible and legal sources.
FSC
BUREAU VERITAS
Certification