ITEM 1. Business
General
Potlatch Corporation (the "company"), incorporated in 1903, is an integrated forest products company with substantial timber resources. It is engaged principally in the growing and harvesting of timber and the manufacture and sale of wood products, printing papers and other pulp-based products. Its timberlands and all of its manufacturing facilities are located within the continental United States.
Information relating to the amounts of revenue, operating profit or loss and identifiable assets attributable to each of the company's industry segments for 1992-1994 is included in Note 12 to the financial statements on pages 31-32 of this report.
Fiber Resources
The principal source of raw material used in the company's operations is timber, obtained from its own timberlands and purchased on the open market. The company owns in fee approximately 1.5 million acres of timberland: 497,000 acres in Arkansas, 678,000 acres in Idaho and 345,000 acres in Minnesota. In addition, the company owns and is developing 10,000 acres in Oregon as a hybrid poplar tree farm for pulp fiber. The company plans to acquire an additional 12,000 acres for this purpose in 1995.
The amount of timber harvested in any one year from company-owned lands varies according to the requirements of sound forest management, as well as the supply of timber available for purchase on the open market. By continually improving forestry and silviculture techniques and other forest management practices, the company has been able to increase the volume of wood fiber available from its timberlands and to provide for a continuous supply of wood fiber in the future. In most cases, the cost of timber from company land is substantially less than that of timber obtained on the open market.
The company's fee lands provided approximately 59 percent of its sawlogs and plywood logs in 1994 and an average of 62 percent over the past five years. Including the raw materials used for pulp and oriented strand board, the percentages decline to 35 percent for 1994 and 38 percent for the past five years. Additional logs were obtained principally under cutting contracts from lands owned by federal, state and local governments and from private purchases. Such cutting contracts cover areas of varying size and generally have terms ranging from a few months to several years. The company enters into many such contracts each year. At December 31, 1994, the market value of uncut timber remaining under timber cutting contracts approximated $60.7 million. The company is not unconditionally obligated for that amount on such contracts and uncut timber values are subject to change depending on the market value at time of harvest.
At the present time, timber from the company's own lands, together with outside purchases, is adequate to support manufacturing operations. In recent years the timber supply from federal lands has been increasingly curtailed largely due to environmental pressures that are expected to continue into the foreseeable future. Although this trend has had a favorable effect on
earnings for the company as a whole, it has had an adverse effect on wood costs. The long-term effect of this trend on company earnings cannot be predicted. However, the company has implemented plans to develop additional fiber supplies, primarily hybrid poplar, for the Lewiston, Idaho, pulp mill and by the year 2000 expects to provide approximately 70 percent of chip fiber requirements for this mill from resources it controls, compared with approximately 40 percent currently.
The company assumes substantially all risk of loss from fire and other hazards on the standing timber it owns, as do most owners of timber tracts in the United States.
Wood Products
The company manufactures and markets oriented strand board, plywood, particleboard, lumber and other wood products. These products are sold through the company's sales offices primarily to wholesalers for nationwide distribution.
To produce these solid wood products, the company owns and operates several manufacturing facilities in Arkansas, Idaho and Minnesota. A description of these facilities is included under Item 2
ITEM 2. Properties
The principal manufacturing facilities of the company, together with their respective 1994 capacities and production are as follows:
ITEM 3.
ITEM 3. Legal Proceedings
In June 1994, the company received a Notice of Violation ("NOV") issued by the Idaho Department of Health and Welfare ("IDHW") alleging 41 violations of State of Idaho environmental laws relating to air quality at the company's facilities in Lewiston, Idaho. Many of the alleged violations include continuing violations over a period of time. The IDHW also submitted a list of 14 alleged federal New Source Performance Standard violations. The aggregate penalty proposed by the IDHW for settlement of all of the alleged state and federal violations is approximately $2.7 million. The company believes it has legal and equitable defenses to many of the alleged violations and has held settlement discussions with the IDHW and the United States Environmental Protection Agency ("EPA"). The company will continue to discuss settlement of all outstanding issues.
In August 1993, the company received a NOV from the EPA. The NOV alleged that construction of the company's three oriented strand board plants in Minnesota commenced prior to obtaining proper permits and that particulate emissions from the dryers at one plant exceeded applicable limits. The Minnesota Pollution Control Agency ("MPCA") had previously issued NOVs to the company which set forth the same allegations. In early January 1994, the company entered into an agreement with the MPCA which resolved the alleged violations under its NOVs by agreeing to install additional pollution control equipment at all three plants and pay a civil penalty of $300,000. The agreement did not resolve the EPA allegations. In January 1995, the EPA informed the company that it referred the matter to the United States Department of Justice to commence a civil enforcement action against the company. The company believes that it has legal and equitable defenses to the alleged violations.
The company believes that adequate provision has been made for any amounts which may be paid as a result of the alleged violations described above.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1994.
Executive Officers of the Registrant
Information as of March 1, 1995, and for the past five years concerning the executive officers of the company is as follows:
John M. Richards (age 57), first elected an officer in 1972, has served as Chairman of the Board and Chief Executive Officer since May 1994. Prior to May 1994 he was President and Chief Operating Officer. He was elected a director of the company effective January 1991. He is a member of the Finance Committee of the Board of Directors.
L. Pendleton Siegel (age 52), first elected an officer in 1983, has served as President and Chief Operating Officer since May 1994. From August 1993 to May 1994, he was Executive Vice President, Pulp-Based Operations and Planning. From March 1992 through July 1993, he was Group Vice President, Pulp and Paperboard. Prior to March 1992, he was Group Vice President, Wood Products. In addition, from October 1990 through May 1994, he was also responsible for planning and business development.
Robert V. Hershey (age 62), first elected an officer in 1993, has served as Vice President, Northwest Paper Division since August 1993. From June 1991 through July 1993, he was an appointed officer serving as Vice President, Manufacturing, Northwest Paper Division. Prior to that he served as Vice President, Manufacturing, for the Northwest Paper Division's Cloquet plant.
Richard L. Paulson (age 53), first elected an officer in 1992, has served as Vice President, Consumer Products since January 1993. Prior to that he was an appointed officer serving as Vice President, Manufacturing, for the Northwest Paper Division's Brainerd plant.
George E. Pfautsch (age 59), first elected an officer in 1971, has served as Senior Vice President, Finance since October 1989. From January 1993 through May 1994, he also served as Treasurer.
Charles R. Pottenger (age 55), first elected an officer in 1991, has served as Group Vice President, Pulp and Paperboard since August 1993. From February 1991 through July 1993, he was Vice President, Northwest Paper Division. Prior to February 1991, he was an appointed officer serving as Northwest Paper Division Vice President, Manufacturing.
Thomas J. Smrekar (age 52), first elected an officer in 1992, has served as Group Vice President, Wood Products since March 1992. Prior to March 1992, he was an appointed officer serving as Minnesota Wood Products Division Vice President.
NOTE: The aforementioned officers of the company are elected to hold office until the next annual meeting of the Board of Directors. Each officer holds office until the officer's successor has been duly elected and has qualified or until the earlier of the officer's death, resignation, retirement or removal by the board.
PART II
ITEM 5.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The company's common stock is traded on the New York, Chicago and Pacific Stock Exchanges. Quarterly and yearly price ranges were:
In general, all holders of Potlatch common stock who own shares 48 consecutive calendar months or longer ("long-term holders") are entitled to exercise four votes per share of stock so held, while stockholders who are not long-term holders are entitled to one vote per share. All stockholders are entitled to only one vote per share on matters arising under certain provisions of the company's charter. There were approximately 3,500 common stockholders of record at December 31, 1994.
Quarterly dividend payments per common share for the past two years were:
ITEMS 6, 7 and 8.
The information called for by Items 6, 7 and 8, inclusive, of Part II of this form, is contained in the following sections of this Report at the pages indicated below:
Page Number
ITEM 6
ITEM 6 Selected Financial Data 12
ITEM 7
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 12-16
ITEM 8
ITEM 8 Financial Statements and Supplementary Data 17-35
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding the directors of the company is set forth under the heading "Information with Respect to Nominees for Election and Directors Continuing in Office" on pages 3-5 of the company's definitive proxy statement, dated March 27, 1995, for the 1995 annual meeting of stockholders (the "1995 Proxy Statement"), which information is incorporated herein by reference. Information concerning Executive Officers is included in Part I of this report following Item 4.
ITEM 11.
ITEM 11. Executive Compensation
Information set forth under the heading "Compensation of Directors and the Named Executive Officers" on pages 9-19 of the 1995 Proxy Statement, is incorporated herein by reference.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of management, included under the heading "Stock Ownership of Directors and Executive Officers" on pages 7-8 of the 1995 Proxy Statement, is incorporated herein by reference.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
Information set forth under the heading "Certain Transactions" on page 19 of the 1995 Proxy Statement, is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Exhibits are listed in the Exhibit Index on pages 36-38 of this Form 10-K.
2. Financial statement schedules are listed in the Index to Consolidated Financial Statements and Schedules on page 11 of this Form 10-K.
3. No reports on Form 8-K were filed for the quarter ended December 31, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POTLATCH CORPORATION (Registrant)
Date: March 23, 1995 By John M. Richards ---------------------- John M. Richards Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 23, 1995, by the following persons on behalf of the company in the capacities indicated.
By John M. Richards ----------------------------- John M. Richards RICHARD A. CLARKE* Director and Chairman of Director the Board and Chief KENNETH T. DERR* Executive Officer Director (Principal Executive Officer) ALLEN F. JACOBSON* Director By L. Pendleton Siegel GEORGE F. JEWETT, JR.* ----------------------------- Director L. Pendleton Siegel RICHARD B. MADDEN* President and Chief Director Operating Officer RICHARD M. MORROW* (Principal Operating Officer) Director VIVIAN W. PIASECKI* By George E. Pfautsch Director ----------------------------- TONI REMBE* George E. Pfautsch Director Senior Vice President, REUBEN F. RICHARDS* Finance Director (Principal Financial Officer) RICHARD M. ROSENBERG* Director By Terry L. Carter ROBERT G. SCHWARTZ* ----------------------------- Director Terry L. Carter CHARLES R. WEAVER* Controller Director (Principal Accounting Officer) FREDERICK T. WEYERHAEUSER* Director DR. WILLIAM T. WEYERHAEUSER* Director
*By Sandra T. Powell ------------------ Sandra T. Powell (Attorney-in-fact)
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Page Number
The following documents are filed as part of this Report:
Consolidated Financial Statements:
Selected Financial Data 12
Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 16
Statements of Earnings for the years ended December 31, 1994, 1993 and 1992 17
Balance Sheets at December 31, 1994 and 1993 18
Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 19
Statements of Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992 20
Summary of Principal Accounting Policies 21 - 22
Notes to Financial Statements 23 - 33
Independent Auditors' Report 34
Schedules:
II. Valuation and Qualifying Accounts 35
All other schedules are omitted because they are not required, not applicable or the required information is given in the consolidated financial statements.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity
Liquidity of a company can be measured by several factors. Of major importance are: Capability of generating earnings and cash flow Maintenance of a sound financial structure Access to capital markets Maintenance of adequate working capital
In 1994, the company's net cash provided by operations, excluding working capital changes, as presented in the Statements of Cash Flows on page 19, totaled $197.9 million, compared with $170.7 million in 1993 and $166.2 million in 1992.
The ratio of long-term debt to stockholders' equity was .69 to 1 at December 31, 1994, compared with .77 to 1 at December 31, 1993, and .66 to 1 at December 31, 1992. The improvement in 1994 was largely due to a reduction in outstanding commercial paper classified as long-term debt from $75.0 million at December 31, 1993, to $20.0 million at December 31, 1994. Total commercial paper outstanding at December 31, 1994, was $33.0 million. Also affecting the ratio was the reclassification of $15.0 million of the company's medium-term notes from long-term to current due to the debt maturing within one year.
At December 31, 1994, the company had credit lines totaling $150.0 million for general corporate purposes. Of that amount, $50.0 million was in short- term lines and $100.0 million was in a revolving credit and term loan agreement. At December 31, 1994, there were no borrowings by the company under any credit lines; however, the company uses the credit lines to back its issuance of commercial paper. At December 31, 1994, a portion of the revolving credit was being used to back outstanding commercial paper.
One of the company's stated objectives is to maintain a sound financial structure. The company's long-term debt to equity ratio of .69 to 1 at December 31, 1994, is somewhat above the range of its targeted financial structure. The company believes that the combination of its internal cash flow and projected levels of dividends and capital spending in 1995 will permit it to return to its targeted range within the next year.
The company also believes that debt ratings within investment grade categories are important for long-term access to capital markets. At the end of 1994, the company's senior long-term debt was rated A- by Standard & Poors and Duff and Phelps, and Baa1 by Moody's. With the company's ability to generate cash flow and its access to capital markets, the company believes it is capable of funding capital expenditures, working capital and other liquidity needs for the foreseeable future.
At December 31, 1994, working capital was $142.7 million, compared with $129.1 million at December 31, 1993, and $153.5 million at December 31, 1992. The improvement for 1994 was largely due to increases of $26.4 million in short-term investments and $18.8 million in receivables, which were partially offset by increases of $12.9 million in notes payable, $11.8 million in current installments on long-term debt and $5.9 million in accounts payable and accrued liabilities.
Capital Resources and Funding
Capital expenditures totaled $104.4 million in 1994, compared with $201.7 million in 1993 and $179.5 million in 1992.
In 1994, the company spent $37.9 million in the wood products segment. Significant projects included the completion of the new sawmill in Warren, Arkansas, installation of a new log processing center at the Lewiston, Idaho, sawmill and installation of required pollution control equipment at the Grand Rapids, Minnesota, oriented strand board plant. The Warren sawmill, which is progressing steadily to its designed capabilities, will improve lumber quality and the yield from the available log supply while making more efficient use of manpower. The new log processing center in Lewiston will reduce manufacturing costs as well as increase production and improve yield.
Capital spending in the printing papers segment totaled $25.2 million, where the first phase of the modernization and expansion of the Cloquet, Minnesota, pulp mill continued during 1994. Also included were expenditures for the rebuild of a paper machine at the Brainerd, Minnesota, facility.
Spending in the other pulp-based products segment totaled $40.8 million, including two major projects in the Consumer Products Division where an older tissue machine was rebuilt in Lewiston and the warehouse at the North Las Vegas, Nevada, tissue converting facility was expanded. These two projects improve the division's competitive position by improving product quality and service. Other pulp-based products spending also included the continuing development of acreage near Boardman, Oregon, to grow hybrid poplar trees for pulp fiber to be used at the Lewiston pulp mill.
Authorized but unexpended appropriations totaled $332.5 million at December 31, 1994. Of that amount, $225.1 million is budgeted to be expended in 1995. Such expenditures will include the continuing modernization and expansion of the Cloquet pulp mill; the continued rebuild of a paper machine in Brainerd; the continued development of the hybrid poplar tree farm in Boardman; the upgrade of the green stacker, planer and kiln at the Prescott, Arkansas, sawmill; and installation of pollution control equipment at the Minnesota oriented strand board plants. As in 1994, the 1995 capital program will be funded primarily from internally generated sources.
Historically, the company has spent less on capital expenditures than the annual amount budgeted. In 1994, the company spent $63.8 million less than the $168.2 million budgeted. Spending on projects may be delayed due to acquisition of environmental permits, acquisition of equipment, engineering, weather and other factors. It is likely that the company will again spend less than the budgeted amount in 1995.
In December 1994, the company announced a stock repurchase program which authorizes the company to purchase up to 1 million shares of its common stock over several years. Under the program, the company can purchase shares of common stock from time to time through open market and privately negotiated transactions at prices deemed appropriate by management. The purchases of such shares are planned to be accomplished while also maintaining the company's targeted financial structure.
Environment
The company is subject to extensive federal and state environmental control regulations at its operating facilities. The company endeavors to comply with all environmental regulations and monitors its activities on a regular basis for such compliance. Compliance with environmental regulations requires capital expenditures as well as additional operating costs. Capital expenditures specifically designated for environmental compliance totaled approximately $17.0 million during 1994 and are budgeted to be $25.0 million in 1995. In addition, the company made expenditures for pollution control facilities as part of major mill modernizations and expansions currently under way.
In late 1993, the Environmental Protection Agency published proposed regulations applicable to the pulp and paper industry. This extensive set of regulations is designed to address both air and water emissions. As proposed, the regulations would require modifications to process equipment and procedures. Based on an examination of the capital costs of the proposals, the company estimates that compliance would require capital expenditures in the broad range of $200.0 million. Of this amount, approximately $100.0 million is already included in the planned expansion and modernization project
under way at the Cloquet, Minnesota, pulp mill, which is expected to cost in excess of $500.0 million. The company does not expect that such compliance costs would have a material adverse effect on its competitive position.
Results of Operations Comparison of 1994 with 1993
Potlatch consolidated net sales of $1.47 billion increased 7 percent from 1993's $1.37 billion. Earnings were $49.0 million, compared with $38.3 million before the one-time effects of accounting changes for 1993. Earnings per common share for 1994 were $1.68, which included a $.21 per share first quarter charge for early retirement programs. Earnings per share for 1993 were $1.31 before the one-time effects of accounting changes.
Market improvements in most of the company's pulp-based businesses, along with continued favorable market conditions for wood products, resulted in higher earnings for 1994. The operating difficulties experienced by the Lewiston, Idaho, pulp and paperboard mill in 1993 were reduced in 1994, but some problems continue with the pulp mill washers. Although no reduction of current operating levels is anticipated, the company is planning to replace these washers.
The wood products segment reported earnings of $160.3 million, approximately equal to the $160.2 million earned in 1993. Higher net sales realizations for the company's lumber and panel products were offset by startup costs of the new sawmill in Warren, Arkansas, and costs associated with the installation of new log processing equipment at the Lewiston, Idaho, sawmill. Late in the year the company sold two small manufacturing operations: a split-cedar mill in Idaho and a hardwood flooring plant in Arkansas.
At the present time, timber from the company's own lands, together with outside purchases, is adequate to support manufacturing operations. In recent years the timber supply from federal lands has been increasingly curtailed largely due to environmental pressures that are expected to continue into the foreseeable future. Although this trend has had a favorable effect on earnings for the company as a whole, it has had an adverse effect on wood costs. The long-term effect of this trend on company earnings cannot be predicted. However, the company has implemented plans to develop additional fiber supplies for the Lewiston, Idaho, pulp mill and by the year 2000 expects to provide approximately 70 percent of chip fiber requirements for this mill from resources it controls, compared with approximately 40 percent currently.
Earnings for the printing papers segment were $40.2 million, a substantial improvement over 1993's $15.8 million. Higher shipments and net sales realizations, resulting from a strengthening marketplace, along with production improvements at the segment's facilities, were largely responsible for the increase. An improved product mix also contributed to the positive results.
The other pulp-based products segment, which includes the Pulp and Paperboard Group and the Consumer Products Division, reported a loss of $53.5 million versus a loss of $40.9 million for 1993. The 1994 results include a first quarter charge for early retirement programs of $10.0 million. The company anticipates annual savings of $10.0 million as a result of the
programs. Higher paperboard shipments for the Pulp and Paperboard Group were partially offset by lower paperboard net sales realizations and costs associated with operating problems during the year. Sales of market pulp had been curtailed since late 1993. However, market conditions improved considerably from the beginning of 1994 and resulted in the resumption of market pulp sales during the second quarter. The Consumer Products Division increased product shipments 10 percent in 1994, but higher pulp costs and a very competitive tissue market resulted in a loss for the year.
Comparison of 1993 with 1992
Potlatch consolidated net sales of $1.37 billion in 1993 increased slightly over 1992's $1.33 billion. Earnings per common share before accounting changes were $1.31 in 1993 compared with $2.71 for 1992. Including a one- time, after-tax net charge of $31.7 million related to new accounting requirements for postretirement benefits and income taxes, the company earned $6.6 million or $.22 per common share in 1993. The results for 1992 include a nonrecurring, net after-tax gain of $14.7 million or $.51 per common share from the sale of the company's packaging operations and a charge related to a litigation settlement.
Despite very favorable market conditions for wood products, earnings continued to be adversely affected by weak market conditions throughout 1993 for the company's pulp-based products. Operating difficulties at the Lewiston, Idaho, pulp and paperboard mill also negatively affected earnings.
Earnings for the wood products segment were $160.2 million, an increase of 61 percent over 1992's $99.8 million. Substantially higher net sales realizations for most of the company's wood products were the primary reason for the improved results. Timber supply constraints in the Pacific Northwest continued to have a significant positive influence on product pricing in 1993, as they did in 1992.
In 1993 the printing papers segment reported earnings of $15.8 million, down from the $27.3 million earned in 1992. The poor market conditions for printing papers of the past few years continued in 1993. Shipments increased modestly during the year, but realizations were lower than in 1992.
The other pulp-based products segment, which includes the Pulp and Paperboard Group and the Consumer Products Division, reported a loss of $40.9 million for 1993, compared with earnings of $33.3 million in 1992. Lower paperboard shipments and sales realizations as a result of very depressed market conditions combined with higher wood costs in Idaho were largely responsible for the decline. Operating difficulties and extended shutdowns at both of the company's pulp and paperboard mills in Lewiston, Idaho, and Cypress Bend, Arkansas, during 1993 also contributed to the disappointing results. The Consumer Products Division also incurred a loss for the year due to very competitive markets and higher operating costs associated with the startup of the new tissue machine in Lewiston and the new converting facility in North Las Vegas, Nevada.
Income Taxes
The company's effective tax rates for 1994, 1993 and 1992 were 35.5 percent, 41.0 percent and 36.7 percent, respectively.
Potlatch Corporation and Consolidated Subsidiaries Summary of Principal Accounting Policies
Consolidation
The financial statements include the accounts of Potlatch Corporation and its subsidiaries after elimination of significant intercompany transactions and accounts. There are no significant unconsolidated subsidiaries.
Inventories
Inventories are stated at the lower of cost or market. The last-in, first- out method is used to determine cost of most wood products. The average cost method is used to determine cost of all other inventories.
Earnings Per Common Share
Earnings per common share are computed on the weighted average number of common shares outstanding each year. Outstanding stock options are common stock equivalents but are excluded from earnings per common share computations due to immateriality. The weighted average number of common shares used in earnings per common share computations for 1994, 1993 and 1992 were 29,217,261, 29,183,871 and 29,110,179, respectively.
Properties
Property, plant and equipment are valued at cost less accumulated depreciation. Depreciation of buildings, equipment and other depreciable assets is determined by using the straight-line method on estimated useful lives. Estimated useful lives of plant and equipment range from 2 to 40 years.
Timber, timberlands and related logging facilities are valued at cost net of the cost of fee timber harvested and depreciation or amortization. Logging roads and related facilities are amortized over their useful lives or as related timber is removed. Cost of fee timber harvested is determined annually based on the estimated volumes of recoverable timber and related cost.
Major improvements and replacements of property are capitalized. Maintenance, repairs, and minor improvements and replacements are expensed. Amounts expensed in 1994, 1993 and 1992 were $167.7 million, $166.6 million and $155.1 million, respectively. Upon retirement or other disposition of property, applicable cost and accumulated depreciation or amortization are removed from the accounts. Any gains or losses are included in earnings.
Income Taxes
The provision for taxes on income is based on earnings reported in the financial statements. Deferred income taxes are provided on the temporary differences between reported earnings and taxable income using current tax laws and rates.
Preoperating and Startup Costs
Preoperating costs are expensed as incurred except for charges relating to major new facilities. Deferred preoperating costs are amortized over a 60- month period. Startup costs are expensed as incurred.
Potlatch Corporation and Consolidated Subsidiaries Notes to Financial Statements
If the last-in, first-out inventory had been priced at lower of current average cost or market, the values would have been approximately $32.3 million higher at December 31, 1994, and $27.8 million higher at December 31, 1993. In 1994 and 1993, reductions in quantities of LIFO inventories valued at lower costs prevailing in prior years had the effect of increasing earnings, net of income taxes, by approximately $1.6 million ($.06 per common share) and $2.4 million ($.08 per common share), respectively.
Depreciation charged against income amounted to $119.6 million in 1994 ($108.4 million in 1993 and $95.8 million in 1992).
Authorized but unexpended appropriations totaled $332.5 million at December 31, 1994. Of that amount, $225.1 million is budgeted to be expended in 1995.
Timber, timberlands and related logging facilities are stated at cost less cost of fee timber harvested and amortization. Cost of fee timber harvested amounted to $15.1 million in 1994 ($12.0 million in 1993 and $9.1 million in 1992). Amortization of logging roads and related facilities amounted to $1.1 million in 1994 ($.7 million in 1993 and 1992).
Note 4. Taxes on Income
Effective January 1, 1993, the company adopted the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The statement requires the liability method for recording differences in financial and taxable income. The company recorded the cumulative effect of the accounting change in the first quarter of 1993, which increased income by $43.8 million or $1.50 per share. Prior years' financial statements were not restated.
Significant components of the provision for taxes on income:
The provision for taxes on income differs from the amount computed by applying the statutory federal income tax rate (35 percent in 1994 and 1993 and 34 percent in 1992) to earnings before taxes on income and cumulative effect of accounting changes due to the following:
Principal current and noncurrent deferred tax assets and liabilities at December 31:
Noncurrent deferred tax assets at December 31, 1994 and 1993, are net of valuation allowances of $8.9 million and $8.1 million, respectively. Based on the company's history of operating earnings and its expectations for the future, management has determined that operating income will more likely than not be sufficient to recognize fully all other deferred tax assets.
In the third quarter of 1993, the company adjusted its current and deferred income tax balances to reflect an increase in the statutory federal tax rate from 34 percent to 35 percent retroactive to January 1, 1993. The provision for taxes on income for 1993 includes $3.2 million of expense for the effect of the tax increase on beginning of the year deferred tax balances.
The company's federal income tax returns have been examined and settlements have been reached for all years through 1988, except a petition which has been filed with the U.S. Tax Court regarding the deductibility of certain expenses on the company's 1985 federal income tax return. Assessments made for the years 1989 and 1990 are presently being negotiated at the appellate level. The company believes that adequate provision has been made for possible assessments of additional taxes.
The commercial paper is backed by the company's revolving credit agreement, which enables it to refinance these short-term borrowings to a long-term basis should the company choose to do so. Because of this capability and the likelihood of $20.0 million of the commercial paper being outstanding for more than a year, that amount has been classified as long-term debt. The balance of commercial paper outstanding at December 31, 1994, is classified as current notes payable in the Balance Sheets. The weighted average interest rate payable is 6.302 percent.
The interest rate payable on the 9.125 percent credit sensitive debentures is subject to adjustment if certain changes in the debt rating of the debentures occur. No such change in the interest rate payable has occurred.
Certain credit agreements have restrictive covenants. At December 31, 1994, the company was in compliance with such covenants.
Payments due on long-term debt during each of the five years subsequent to December 31, 1994:
The above installments do not include any payments on commercial paper outstanding.
At December 31, 1994, the company had credit lines totaling $150.0 million for general corporate purposes. Of that amount, $50.0 million was in short- term lines and $100.0 million was in a revolving credit and term loan agreement. The short-term credit lines are LIBOR based and permit the company to borrow at any time through May 31, 1995. The revolving credit and term loan agreement dated September 1, 1994, contains a 364-day commitment period, is renewable annually and includes a two-year term loan option. At December 31, 1994, there were no borrowings by the company under any credit lines.
Note 8. Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
CASH AND SHORT-TERM INVESTMENTS
For short-term investments, the carrying amount approximates fair value. Short-term investments include bank certificates of deposit, repurchase agreements, money market preferreds and various other investment grade securities which can be readily purchased or sold using established markets. Short-term investments at December 31, 1994, include $45.3 million for the company's investment in corporate owned life insurance (COLI). COLI does not qualify as a financial instrument and therefore is not included in the fair values stated below.
CURRENT NOTES PAYABLE
The fair value of the company's current notes payable, which consists of commercial paper, is estimated based upon the quoted market prices for the same or similar issues.
LONG-TERM DEBT
The fair value of the company's long-term debt is estimated based upon the quoted market prices for the same or similar debt issues. The amount of long- term debt for which there is no quoted market price is immaterial and the carrying amount approximates fair value.
Estimated fair values of the company's financial instruments:
Note 9. Retirement, Incentive and Savings Plans
Substantially all employees and directors of the company are covered by noncontributory defined benefit pension plans. These include both company- sponsored and multi-employer plans. Total pension expense was $4.5 million in 1994, $6.3 million in 1993 and $7.3 million in 1992. The 1994 pension expense presented above excludes $4.6 million for early retirement programs which is included in Other income and expense in the Statements of Earnings.
The salaried plan provides benefits based on the participants' final average pay and years of service. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The directors' plan provides a benefit equal to the retainer in effect at the time the participant ceases to be a director if the director has completed five years of service as a nonemployee director. Benefits are paid for the lesser of 10 years or the number of years of service as a nonemployee director.
Pension cost for company-sponsored plans:
Funded status and related balance sheet amounts for company-sponsored pension plans at December 31:
The projected benefit obligation for the company's unfunded, nonqualified plans at December 31, 1994 and 1993, was $16.2 million and $15.2 million, respectively. These amounts are included in the total for Plans Where Accumulated Benefits Exceed Assets.
As of December 31, 1994, $20.3 million of minimum pension liabilities for underfunded plans was included in other long-term liabilities, with corresponding intangible assets of $14.8 million and a charge of $3.4 million to retained earnings, which is net of deferred taxes of $2.1 million. As of December 31, 1993, minimum pension liabilities totaled $.7 million, with corresponding intangible assets of the same amount.
The projected benefit obligation at December 31, 1994, 1993 and 1992, was determined using an assumed discount rate of 8.25 percent, 7.75 percent and 8.5 percent, respectively, and an assumed long-term rate of salaried
compensation increase of 5 percent, 5 percent and 6 percent, respectively. The assumed rate of return on plan assets was 9.5 percent for 1994, 9.5 percent for 1993 and 9 percent for 1992. The actual return on plan assets has averaged approximately 12 percent over the past 17 years.
Funding of company-sponsored plans is based on accepted actuarial methods in accordance with applicable governmental regulations and is determined separately from the net periodic cost presented above.
Hourly employees at two of the company's manufacturing facilities participate in a multi-employer defined benefit pension plan, the Paper Industry Union-Management Pension Fund. Company contributions were $2.6 million for 1994, $2.7 million for 1993 and $2.6 million for 1992 and equaled the amounts charged to pension expense.
Key management employees participate in a management performance award plan under which awards are based on certain minimum and standard performance criteria established each year. All company employees are eligible to participate in 401(k) savings plans.
Note 10. Postretirement Benefits Other Than Pensions
Effective January 1, 1993, the company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The statement requires accrual basis recognition of the projected future cost of providing postretirement benefits. The company elected immediate recognition of the transition obligation, which amounted to $118.0 million ($75.5 million after income tax benefits or $2.59 per share). The obligation, which is presented in Other long-term obligations in the Balance Sheets, was partially offset by $31.2 million of plan assets.
The company provides many of its retired employees with health care and life insurance benefits. Benefits are provided under company-sponsored defined benefit retiree health care and life insurance plans which cover most salaried and certain hourly employees. Employees become eligible for these benefits as they retire from active employment. Most of the retiree health care plans require retiree contributions and contain other cost sharing features such as deductibles and coinsurance. The retiree life insurance plans are primarily noncontributory. The retiree health care plans are partially funded. The retiree life insurance plans are unfunded.
Net periodic postretirement benefit cost:
The 1994 postretirement benefit cost presented above excludes $1.9 million for early retirement programs which is included in Other income and expense in the Statements of Earnings. Postretirement benefit cost on a pay-as-you-go basis totaled $5.7 million for 1992 and has not been restated.
Funded status and related balance sheet amounts for postretirement health care and life insurance plans at December 31:
The discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1994 and 1993, was 8.25 percent and 7.75 percent, respectively. The expected long-term rate of return on plan assets for 1994 and 1993 was 9.5 percent.
The health care cost trend rate assumption used in determining the accumulated postretirement benefit obligation at December 31, 1994 and 1993, is based on an initial rate of 10 percent, decreasing incrementally to 5 percent over an 8-year period and remaining at that level thereafter. This assumption has a significant effect on the amounts reported. For example, a 1 percent increase in the health care cost trend rates would have increased the accumulated postretirement benefit obligation at December 31, 1994, to $176.7 million and increased the net periodic cost for 1994 to $15.9 million from the $13.3 million actually recorded.
Funding of postretirement health care plans is based on accepted actuarial methods in accordance with applicable governmental regulations and is determined separately from the net periodic cost presented above.
Effective January 1, 1993, the company adopted Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits. The statement requires accrual basis recognition of postemployment benefits provided to former or inactive employees after employment but before retirement. The effect of implementing the new standard was not material.
Note 11. Stock Options
Under the company's stock option plans, options for shares of the company's common stock have been issued to certain key personnel. Options are granted at market value and may include a stock appreciation right. Options may also be issued in the form of restricted stock and other share-based awards, none of which were outstanding at December 31, 1994. Options are fully exercisable after two years and expire not later than 10 years from the date of grant.
Information with respect to the company's stock options:
Note 12. Segment Information
Potlatch Corporation is an integrated forest products company with substantial timber resources. It is engaged principally in the growing and harvesting of timber and the manufacture and sale of wood products, printing papers and other pulp-based products. Its timberlands and all of its manufacturing facilities are located within the United States.
Following is a tabulation of business segment information for each of the past three years:
INDEPENDENT AUDITORS' REPORT
The Board of Directors:
We have audited the accompanying balance sheets of Potlatch Corporation and consolidated subsidiaries as of December 31, 1994 and 1993 and the related statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994. In connection with our audits of the financial statements, we also have audited the financial statement schedule on page 35. These financial statements and financial statement schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of Potlatch Corporation and consolidated subsidiaries at December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth herein.
As discussed in the notes to the financial statements, in 1993 the company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits."
KPMG Peat Marwick LLP
Portland, Oregon
January 25, 1995
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Exhibit Index
Exhibit
*(3)(a) Restated Certificate of Incorporation, restated and filed with the state of Delaware on May 1, 1987, filed as Exhibit (3)(a) to the Annual Report on Form 10-K for the fiscal year ended December 31, 1992 ("1992 Form 10-K").
*(3)(c) By-laws, as amended through May 20, 1993, filed as Exhibit (3)(c) to the Annual Report on Form 10-K for the fiscal year ended December 31, 1993 ("1993 Form 10-K").
(4) See Exhibits (3)(a) and (3)(c). Registrant also undertakes to file with the Securities and Exchange Commission, upon request, any instrument with respect to long-term debt.
(4)(a) Form of Indenture, dated as of April 1, 1986.
(4)(b) Form of Debenture for the $100 Million Principal Amount of 9-5/8% Sinking Fund Debentures due April 15, 2016.
(4)(c) Form of Debenture for the $100 Million Principal Amount of 9-1/8% Credit Sensitive Debentures due December 1, 2009.
(4)(d) Officers' Certificate, dated December 6, 1989.
*(4)(e) Form of Indenture, dated as of November 27, 1990, filed as Exhibit (4)(e) to the Annual Report on Form 10-K for the fiscal year ended December 31, 1990 ("1990 Form 10- K").
*(4)(f) Officers' Certificate, dated January 24, 1991, filed as Exhibit (4)(f) to the 1990 Form 10-K.
*(4)(g) Officers' Certificate, dated December 12, 1991, filed as Exhibit (4)(g) to the Annual Report on Form 10-K for the fiscal year ended December 31, 1991 ("1991 Form 10-K").
*(10)(a) Potlatch Corporation Management Performance Award Plan, as amended effective January 1, 1986, filed as Exhibit (10)(a) to the 1990 Form 10-K.
(10)(a)(i) Amendment, dated May 5, 1989, to the Plan described in Exhibit (10)(a).
*Incorporated by reference.
*(10)(b) Potlatch Corporation Severance Program for Executive Employees, as amended and restated as of February 24, 1989, filed as Exhibit (10)(b)(iv) to the 1993 Form 10-K.
*(10)(c) Letter agreement, dated May 21, 1979, between Potlatch Corporation and George F. Jewett, Jr., regarding consulting services, filed as Exhibit (10)(c) to the 1990 Form 10-K.
*(10)(c)(i) Amendment, dated February 19, 1986, to agreement described in Exhibit (10)(c), filed as Exhibit (10)(c)(i) to the 1990 Form 10-K.
*(10)(d) Potlatch Corporation Salaried Employees' Supplemental Benefit Plan (As Amended and Restated Effective January 1, 1988), filed as Exhibit (10)(d)(i) to the 1993 Form 10-K.
*(10)(d)(i) Amendment, effective as of December 31, 1992, to Plan described in Exhibit (10)(d), filed as Exhibit (10)(d)(ii) to the 1992 Form 10-K.
*(10)(f) Supplemental Retirement Benefit and Life Insurance Agreement, dated February 19, 1988, together with Amendment to Agreement thereto, dated as of January 1, 1992, between Potlatch Corporation and Richard B. Madden, filed as Exhibit (10)(f)(iii) to the 1992 Form 10-K.
(10)(f)(i) Description of facilities use by Richard B. Madden.
*(10)(g) Potlatch Corporation 1983 Stock Option Plan (effective September 24, 1983), together with amendments thereto, dated December 14, 1984, February 24, 1989 and February 22, 1990, filed as Exhibit (10)(r) to the 1993 Form 10-K.
(10)(g)(i) Form of Stock Option Agreement for the Potlatch Corporation 1983 Stock Option Plan together with the Addendum thereto as used for options granted on December 14, 1989.
(10)(g)(ii) Form of Amendment to Stock Option Agreement together with the Addendum thereto to add stock appreciation rights to stock option agreements issued under the Potlatch Corporation 1983 Stock Option Plan.
*(10)(g)(iii) Form of Stock Option Agreement for the Potlatch Corporation 1983 Stock Option Plan together with the Addendum thereto as used for options granted in each December of 1990-1992, filed as Exhibit (10)(s)(v) to the 1990 Form 10-K.
(10)(h) Potlatch Corporation Deferred Compensation Plan for Directors, as amended and restated as of May 1991.
*Incorporated by reference.
(10)(i) Potlatch Corporation Directors' Retirement Plan, effective October 1, 1989.
*(10)(j) Compensation of Directors, dated May 20, 1993, filed as Exhibit (10)(w)(vi) to the 1993 Form 10-K.
*(10)(k) Form of Indemnification Agreement with each director of Potlatch Corporation, dated as of the dates set forth on Schedule A and Amendments 1, 2, 3 and 4 to Schedule A, filed as Exhibit (10)(x) to the 1991 Form 10-K.
*(10)(k)(i) Amendment No. 5 to Schedule A to Exhibit (10)(k), filed as Exhibit (10)(x)(i) to the 1992 Form 10-K.
*(10)(k)(ii) Amendment No. 6 to Schedule A to Exhibit (10)(k), filed as Exhibit (10)(x)(ii) to the 1993 Form 10-K.
*(10)(l) Form of Indemnification Agreement with certain officers of Potlatch Corporation identified on Schedule A and Amendments 1, 2, and 3 to Schedule A, filed as Exhibit (10)(y) to the 1991 Form 10-K.
*(10)(l)(i) Amendment No. 4 to Schedule A to Exhibit (10)(l), filed as Exhibit (10)(y) to the 1992 Form 10-K.
*(10)(l)(ii) Amendment No. 5 to Schedule A to Exhibit (10)(l), filed as Exhibit (10)(y)(ii) to the 1993 Form 10-K.
*(10)(m) Potlatch Corporation 1989 Stock Incentive Plan adopted December 8, 1988, and as amended and restated February 24, 1989, filed as Exhibit (10)(z) to the 1993 Form 10-K.
(10)(m)(i) Form of Stock Option Agreement for the Potlatch Corporation 1989 Stock Incentive Plan together with the Addendum thereto as used for options granted on December 14, 1989.
*(10)(m)(ii) Form of Stock Option Agreement for the Potlatch Corporation 1989 Stock Incentive Plan together with the Addendum thereto as used for options granted in each December of 1990-1994, filed as Exhibit (10)(z)(ii) to the 1990 Form 10-K.
*(10)(n) Form of Amendments to Stock Options and Stock Incentive Plans, dated March 30, 1990, filed as Exhibit (10)(aa) to the 1990 Form 10-K.
(22) Potlatch Corporation Subsidiaries.
(23) Consent of Independent Auditors.
(24) Powers of Attorney.
*Incorporated by reference.