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 1991-1993 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: 504,000 acres in Arkansas, 678,000 acres in Idaho and 318,000 acres in Minnesota. In addition, the company is developing 10,000 acres in Oregon as a hybrid poplar tree farm for pulp fiber.
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 use of forestry and silviculture techniques and other forest management practices, the company seeks 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 57 percent of its sawlogs and plywood logs in 1993 and an average of 64 percent over the past five years. Including the raw materials used for pulp and oriented strand board, the percentages decline to 36 percent for 1993 and 39 percent for the past five years. Additional logs were obtained principally under cutting contracts from lands owned by federal, state and local governments and, to a lesser extent, 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, 1993, the market value of uncut timber remaining under timber cutting contracts approximated $95.4 million. The company is not unconditionally obligated for that amount on such contracts and uncut timber values are subject to change depending on the 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. 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 for the Lewiston, Idaho, pulp mill. The company has implemented plans to develop additional fiber supplies, primarily hybrid poplar, for this mill. The long-term effect of this trend on company earnings cannot be predicted.
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 1993 capacities and production are as follows:
ITEM 3.
ITEM 3. Legal Proceedings
Since November 1992, the company has been discussing with representatives of the United States Department of Justice and the Environmental Protection Agency ("EPA") alleged violations of the Clean Air Act in connection with an asbestos removal and demolition project at the company's facility in Lewiston, Idaho. The project, which was completed in early 1990, was performed by an independent contractor and its subcontractor, both of which specialized in asbestos abatement. In late 1993, the two agencies and the company exchanged drafts of a proposed Consent Decree which includes injunctive relief and a civil penalty. The company expects to conclude the discussions and enter into the Consent Decree during 1994. The company believes that the independent contractor retained for the project is responsible for any monetary penalties which may be paid by the company.
In June 1993, the United States EPA, Region 10, requested certain information under section 114 of the Clean Air Act relating to air quality and emission compliance issues at the company's Lewiston, Idaho complex. As a result of the information furnished in late 1993, both the EPA and the Idaho Department of Health and Welfare ("IDHW") informed the company of potential violations of federal and state environmental laws and that any enforcement follow up would be undertaken by the IDHW. The company believes it has legal and equitable defenses to any federal violations. The company has not received sufficient information from the IDHW to be able to determine the specific state violations that may be alleged or the likelihood of their success.
In August 1993, the company received a Notice of Violation ("NOV") from the United States EPA, Region 5, which alleged that the emissions from the dryers at the company's Grand Rapids, Minnesota, oriented strand board plant exceed the applicable emission limits for particulate matter. The allegations contained in the NOV issued by the EPA arise from the same facts and are the same allegations set forth in a NOV previously issued by the Minnesota Pollution Control Agency ("MPCA"). In early January 1994, the company entered into an agreement with the MPCA, requiring the company to: (a) install two electrostatic precipitators at its Grand Rapids plant, to be in operation no later than September 1, 1994; and (b) pay a civil penalty of $300,000.
The company believes that the results of any actions taken in any or all of the above matters will not, in the aggregate, have a material adverse effect on the business or financial condition of the company.
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, 1993.
Executive Officers of the Registrant
Information as of March 1, 1994, and for the past five years concerning the executive officers of the company is as follows:
Richard B. Madden (age 64), elected Chief Executive Officer upon his joining the company in 1971, is Chairman of the Board and Chief Executive Officer. Mr. Madden will retire as Chairman and Chief Executive Officer effective in May 1994, when he reaches the company's mandatory retirement age. He will continue as a member of the Board of Directors. From May 1987 through April 1989, he also served as President. He is a member of the Nominating Committee of the Board of Directors.
John M. Richards (age 56), first elected an officer in 1972, has served as President and Chief Operating Officer since May 1989. At the February 24, 1994, Board of Directors meeting, Mr. Richards was elected to replace Mr. Madden as Chairman of the Board and Chief Executive Officer effective upon Mr. Madden's retirement in May 1994. Prior to May 1989, he was Executive Vice President, Finance and Administration. He was elected a director of the company effective January 1, 1991. He is a member of the Finance Committee of the Board of Directors.
L. Pendleton Siegel (age 51), first elected an officer in 1983, has served as Executive Vice President, Pulp-Based Operations and Planning since August 1, 1993. At the February 24, 1994, Board of Directors meeting, Mr. Siegel was elected to replace Mr. Richards as President and Chief Operating Officer effective in May 1994. From March 1992 through July 1993, he was Group Vice President, Pulp and Paperboard. In addition, since October 1990, he has also been responsible for planning and business development. From October 1989 through February 1992, he was Group Vice President, Wood Products. From May 1989 through September 1989, he was Senior Vice President, Finance and Administration. Prior to that he was Senior Vice President, Finance and Treasurer.
Robert V. Hershey (age 61), was elected an officer in 1993, becoming Vice President, Northwest Paper Division on August 1, 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 52), first elected an officer in 1992, has served as Vice President, Consumer Products since January 1, 1993. From April 1989 through December 1992, he was an appointed officer serving as Vice President, Manufacturing, for the Northwest Paper Division's Brainerd plant. Prior to that he was production manager for the Brainerd plant.
George E. Pfautsch (age 58), first elected an officer in 1971, has served as Senior Vice President, Finance and Treasurer since January 1, 1993. From October 1989 through December 1992, he was Senior Vice President, Finance. Prior to that he was Controller.
Charles R. Pottenger (age 54), first elected an officer in 1991, has served as Group Vice President, Pulp and Paperboard since August 1, 1993. From February 1991 through July 1993, he was Vice President, Northwest Paper Division. Prior to February 1991, he was an appointed officer serving in the following capacities: from September 1989 through January 1991, he was Northwest Paper Division Vice President, Manufacturing; from July 1989 through August 1989, he was Pulp and Paperboard Vice President, Manufacturing; and prior to to that he was Idaho Pulp and Paperboard Division Vice President.
Thomas J. Smrekar (age 51), 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 3,600 common stockholders of record at December 31, 1993.
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 17-37
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no circumstances requiring the company to report a change in accountants in connection with a disagreement on accounting or financial disclosure matters.
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 24, 1994, for the 1994 annual meeting of stockholders (the "1994 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 9-18 of the 1994 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 1994 Proxy Statement, is incorporated herein by reference.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
Information set forth under the headings "Executive Compensation and Personnel Policies Committee Interlocks and Insider Participation" and "Certain Transactions" on pages 17-18 of the 1994 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 38-40 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, 1993.
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, 1994 By Richard B. Madden ----------------- Richard B. Madden 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, 1994, by the following persons on behalf of the company in the capacities indicated.
By Richard B. Madden ------------------------------ Richard B. Madden 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 John M. Richards GEORGE F. JEWETT, JR.* ------------------------------ Director John M. Richards RICHARD M. MORROW* Director, President and Director Chief Operating Officer VIVIAN W. PIASECKI* (Principal Operating Officer) Director TONI REMBE* By George E. Pfautsch Director ------------------------------ REUBEN F. RICHARDS* George E. Pfautsch Director Senior Vice President, RICHARD M. ROSENBERG* Finance and Treasurer Director (Principal Financial Officer) ROBERT G. SCHWARTZ* Director By Terry L. Carter CHARLES R. WEAVER* ------------------------------ Director Terry L. Carter FREDERICK T. WEYERHAEUSER* Controller Director (Principal Accounting Officer) 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, 1993, 1992 and 1991 17
Balance Sheets at December 31, 1993 and 1992 18
Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 19
Statements of Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991 20
Summary of Principal Accounting Policies 21 - 22
Notes to Financial Statements 23 - 33
Independent Auditors' Report 34
Schedules:
V. Property, Plant and Equipment 35
VI. Accumulated Depreciation of Property, Plant and Equipment 36
VIII. Valuation and Qualifying Accounts 37
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 1993, the company's net cash provided by operations, excluding working capital changes, as presented in the Statements of Cash Flows on page 19, totaled $170.7 million, compared with $166.2 million in 1992 and $155.3 million in 1991.
The ratio of long-term debt to stockholders' equity was .77 to 1 at December 31, 1993, compared with .66 to 1 at December 31, 1992, and .62 to 1 at December 31, 1991. The 1993 increase was largely due to a decrease in stockholders'equity as a result of the net effect of accounting changes and the issuance in 1993 of $75.0 million of commercial paper, which was outstanding at December 31, 1993, the proceeds of which are being used for general corporate purposes.
At December 31, 1993, 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 agreement. At December 31, 1993, none of the short-term lines were being utilized, while a portion of the revolving credit was being used to back outstanding commercial paper. Because of the availability of long-term financing and the likelihood of the commercial paper being outstanding for more than a year, these borrowings have been classified as long-term debt.
One of the company's stated objectives is to maintain a sound financial structure. The company's long-term debt to equity ratio of .77 to 1 at December 31, 1993, is above the range of its targeted financial structure. The company plans to make sufficient reductions in capital spending to return to its targeted range within the next two years. The company also believes that debt ratings within investment grade categories are important for long-term access to capital markets. With such access and its ability to generate cash flow, the company believes it is capable of funding capital expenditures, working capital and other liquidity needs for the foreseeable future. At the end of 1993, the company's senior long-term debt was rated A- by Standard & Poors and Duff and Phelps, and Baa1 by Moody's.
At December 31, 1993, working capital was $129.1 million, compared with $153.5 million at December 31, 1992, and $125.2 million at December 31, 1991. The 1993 decrease was attributable to an increase of $14.6 million in accounts payable and accrued liabilities combined with decreases of $11.8 million in cash and $9.1 million in prepaid expenses, which were partially offset by an increase of $6.8 million in short-term investments.
Capital Resources and Funding
Capital expenditures totaled $201.7 million in 1993, compared with $179.5 million in 1992 and $267.0 million in 1991.
Of the 1993 program, $97.6 million was spent in the wood products segment. A significant portion of this amount related to the construction of a new sawmill in Warren, Arkansas, replacing an outdated company sawmill located there. The new sawmill, which began operation in early 1994, will improve lumber quality and increase the yield from the available log supply, and at the same time make more efficient use of manpower. In addition to other timberland purchases totaling $2.9 million, the company purchased approximately 23,850 acres of timberland and a one-half interest in an additional 23,500 acres of timberland located in northern Idaho for $53.6 million. While the purchase was not originally included in the 1993 capital program, it afforded the company an excellent opportunity to expand its land base in Idaho. Capital spending in the printing papers segment was $42.5 million, which included expenditures related to the first phase of the modernization and expansion of the pulp mill in Cloquet, Minnesota. A total of $59.6 million was spent in the other pulp-based products segment. Several of the major projects were in the Consumer Products Division and included the completion of the new tissue converting facility in North Las Vegas, Nevada, and the final expenditures for the new tissue machine in Lewiston, Idaho. Both projects had successful startups during the first half of 1993. The division also began the rebuild of an older tissue machine located in Lewiston. Other pulp-based products segment spending also included the initial 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 $212.1 million at December 31, 1993. Of that amount, $168.2 million is budgeted to be expended in 1994. Of these 1994 expenditures, $63.2 million relates to projects under way at the end of 1993. Such
projects include the completion of the new sawmill in Warren, the continuing modernization and expansion of the Cloquet pulp mill, the continued rebuild of the tissue machine in Lewiston and the continued development of the hybrid poplar tree farm in Boardman. New projects in 1994 will include the rebuild of a paper machine at the company's printing papers manufacturing facility in Brainerd, Minnesota. This project was originally budgeted to begin in 1993 but has been rescheduled to commence in 1994. The 1994 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 1993, the company spent $53.2 million less than the $201.3 million budgeted, excluding the $53.6 million of unbudgeted expenditures related to the timberlands purchase in Idaho. 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 1994.
Results of Operations Comparison of 1993 with 1992
Potlatch consolidated net sales of $1.37 billion increased slightly over 1992's $1.33 billion. Before the effects of accounting changes, earnings were $38.3 million, a decline from $78.9 million in 1992. Earnings per common share before accounting changes were $1.31 compared with $2.71 for 1992. Including a one-time, after-tax charge of $75.5 million related to new accounting require- ments for postretirement benefits other than pensions and a $43.8 million credit for a change in accounting for 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 the year for the company's pulp-based products. Operating difficulties at the Lewiston, Idaho, pulp and paperboard mill also negatively affected earnings. However, the most serious of these problems, which involved the chlorine dioxide plant and washers, are largely resolved.
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 was the primary reason for the improved results. Also contributing to the improvement was the sale of surplus timberland in Idaho and Arkansas, which resulted in a pre-tax gain of $8.6 million. Timber supply constraints in the Pacific Northwest continued to have a significant positive influence on product pricing in 1993, as they did in 1992. This trend is likely to continue into the foreseeable future.
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. 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 for the Lewiston pulp mill. The company has implemented plans to develop additional fiber supplies for this mill. The long-term effect of this trend on company earnings cannot be predicted.
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, as discussed previously, 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 the year also contributed to the disappointing results. Late in 1993, the company temporarily discontinued the sale of market pulp and will not reenter the market until significant pricing improvements are possible. Also late in 1993, following the completion of a $400.0 million modernization project at the Lewiston pulp and paperboard mill, the company announced the potential elimination of up to 200 jobs. Management is in the process of formulating a plan, which is expected to be implemented in the first half of 1994. Any liability associated with the plan cannot be estimated until details of the plan are finalized. 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. However, tissue product shipments increased 22 percent during the year largely as a result of the successful startup and operation of these new facilities.
Comparison of 1992 with 1991
Potlatch consolidated net sales of $1.33 billion increased 7 percent over 1991's $1.24 billion. Earnings per common share were $2.71, compared with $1.92 in 1991. The earnings for 1992 include a $26.2 million pre-tax gain from the sale of the company's packaging operations and a $3.3 million pre-tax charge related to a litigation settlement. The after-tax effect of these nonrecurring items was a net gain of $14.7 million or $.51 per common share.
The wood products segment reported earnings of $99.8 million, significantly higher than the $12.6 million earned in 1991. The earnings improvement was largely the result of higher selling prices for lumber and panel products brought about by timber supply constraints in the Pacific Northwest and increased demand. Operational improvements and new facilities within the segment also contributed to the increase.
Earnings for the printing papers segment were $27.3 million, compared with $30.2 million reported in 1991. The weak market conditions for printing papers which characterized 1991 worsened during 1992 resulting in a 10 percent earnings decrease for this segment.
The other pulp-based products segment reported 1992 earnings of $33.3 million, down from 1991's $89.0 million. Results for the Pulp and Paperboard Group generally reflected lower paperboard sales realizations, higher wood costs due to timber supply constraints in the Pacific Northwest and operational difficulties in Idaho. The Consumer Products Division continued to experience very competitive market conditions during 1992, with lower sales realizations for tissue products resulting in reduced earnings for the division.
Income Taxes
The company's effective tax rates for 1993, 1992 and 1991 were 41.0 percent, 36.7 percent and 34.5 percent, respectively.
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 with an initial adjustment of deferred tax balances from prior years to reflect the tax rates in effect at adoption. The company recorded the cumulative effect of the above-mentioned adjustment in the first quarter of 1993, which increased income by $43.8 million or $1.50 per share.
In the third quarter of 1993, the federal statutory tax rate was increased from 34 percent to 35 percent retroactive to January 1, 1993. In addition to the effect of the tax increase on 1993 earnings, 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.
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, such as health care and life insurance, rather than the pay-as-you-go (cash) basis which the company had been using prior to adoption. 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).
Postemployment Benefits
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.
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 solid 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 1993, 1992 and 1991 were 29,183,871, 29,110,179 and 29,012,079, 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 1993, 1992 and 1991 were $166.6 million, $155.1 million and $146.3 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
Effective January 1, 1993, the company adopted the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the liability method for recording differences in financial and taxable income.
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, which requires accrual basis recognition of postretirement benefits rather than the pay-as-you-go (cash) basis which the company had been using prior to adoption.
Postemployment Benefits
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.
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 $27.8 million higher at December 31, 1993, and $24.5 million higher at December 31, 1992. In 1993 and 1992, 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 $2.4 million ($.08 per common share) and $1.1 million ($.04 per common share), respectively.
Depreciation charged against income amounted to $108.4 million in 1993 ($95.8 million in 1992 and $87.5 million in 1991).
Authorized but unexpended appropriations totaled $212.1 million at December 31, 1993. Of that amount, $168.2 million is budgeted to be expended in 1994.
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 $12.0 million in 1993 ($9.1 million in 1992 and $7.6 million in 1991). Amortization of logging roads and related facilities amounted to $.7 million in 1993, 1992 and 1991.
Note 4. Taxes on Income
Effective January 1, 1993, the company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The statement requires the liability method for recording differences in financial and taxable income with an initial adjustment of deferred tax balances from prior years to reflect the tax rates in effect at adoption. The company recorded the cumulative effect of the above-mentioned adjustment 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.
Under the provisions of SFAS No. 109, the effect of a change in tax laws or rates is included in income in the period the change is enacted and includes a cumulative recalculation of deferred tax balances based on the new tax laws or rates in effect. Such a change occurred in the third quarter of 1993 with the enactment of the Omnibus Budget Reconciliation Act of 1993, which increased the statutory federal tax rate from 34 percent to 35 percent retroactive to January 1, 1993. In addition to the effect of the tax increase on 1993 earnings, 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.
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 1993 and 34 percent in 1992 and 1991) to earnings before taxes on income and cumulative effect of accounting changes due to the following:
Principal current and noncurrent defered tax assets and liabilities at December 31:
Noncurrent deferred tax assets at December 31, 1993, are net of an $8.1 million valuation allowance. 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.
Deferred income taxes of $225.4 million at December 31, 1992, resulted principally from using accelerated depreciation for federal tax purposes. Prepaid expenses include the tax effects of other timing differences in the amount of $27.3 million at December 31, 1992.
The company's federal income tax returns have been examined and settlements have been reached for all years through 1986, 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 1987 through 1988 are presently being negotiated at the appellate level. The company believes that adequate provision has been made for possible assessments of additional taxes.
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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 the availability of long-term financing and the likelihood of the commercial paper being outstanding for more than a year, these borrowings have been classified as long-term debt.
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 require the company to comply with certain restrictive covenants. At December 31, 1993, the company was in compliance with such covenants.
Payments due on long-term debt during each of the five years subsequent to December 31, 1993:
The above installments do not include any payments on commercial paper outstanding.
At December 31, 1993, 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 agreement. The short-term credit lines are LIBOR based and permit the company to borrow anytime through May 31, 1994. The revolving credit agreement permits the company to borrow any time through October 1, 1996, and may be extended on an annual basis. At December 31, 1993, none of the short-term lines were being utilized, while a portion of the revolving credit was being used to back outstanding commercial paper.
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.
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 $6.3 million in 1993, $7.3 million in 1992 and $5.9 million in 1991. The 1991 pension expense presented above excludes $8.0 million for early retirement programs which is included in Other income and expense in the Statements of Earnings.
Company-sponsored retirement plans cover all employees and directors. 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 and is paid for the lesser of 10 years or years of service as a 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, 1993 and 1992 was $15.2 million and $10.0 million, respectively. These amounts are included in the total for Plans Where Accumulated Benefits Exceed Assets.
The projected benefit obligation at December 31, 1993, 1992 and 1991, was determined using an assumed discount rate of 7.75 percent, 8.5 percent and 9 percent, respectively and an assumed long-term rate of salaried compensation increase of 5 percent, 6 percent and 6.5 percent, respectively. The assumed rate of return on plan assets was 9.5 percent for 1993 and 9 percent for 1992 and 1991. The actual return on plan assets has averaged more than 12 percent over the past 16 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 $2.7 million for 1993, $2.6 million for 1992 and $2.6 million for 1991 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 (SFAS) 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 rather than the pay-as-you-go (cash) basis which the company used prior to adoption. 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. Prior to adoption of SFAS No. 106, these assets were included in Other assets in the Balance Sheets.
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:
Adopting SFAS No. 106 had the effect of increasing the 1993 postretirement benefit cost by $7.2 million, excluding the transition amount. Postretirement benefit cost on a pay-as-you-go basis totaled $5.7 million for 1992 and $5.5 million for 1991 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, 1993, was 7.75 percent. The expected long- term rate of return on plan assets for 1993 was 9.5 percent.
The health care cost trend rate assumption used in determining the accumulated postretirement benefit obligation at December 31, 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, 1993, to $169.0 million and increased the net periodic cost for 1993 to $15.8 million from the $13.2 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, 1993. 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, 1993 and 1992 and the related statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993. In connection with our audits of the financial statements, we also have audited the financial statement schedules on pages 35-37. These financial statements and financial statement schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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, 1993 and 1992 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, 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
Portland, Oregon
January 26, 1994
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.
(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, filed as Exhibit (4)(a) to the Annual Report on Form 10-K for the fiscal year ended December 31, 1989 ("1989 Form 10-K").
*(4)(b) Form of Debenture for the $100 Million Principal Amount of 9-5/8% Sinking Fund Debentures due April 15, 2016, filed as Exhibit (4)(b) to the 1989 Form 10-K.
*(4)(c) Form of Debenture for the $100 Million Principal Amount of 9-1/8% Credit Sensitive Debentures due December 1, 2009, filed as Exhibit (4)(c) to the 1989 Form 10-K.
*(4)(d) Officers' Certificate, dated December 6, 1989, filed as Exhibit (4)(d) to the 1989 Form 10-K.
*(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), filed as Exhibit (10)(a)(i) to the 1989 Form 10-K.
(10)(b)(iv) Potlatch Corporation Severance Program for Executive Employees, as amended and restated as of February 24, 1989.
*Incorporated by reference.
*(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)(i) Potlatch Corporation Salaried Employees' Supplemental Benefit Plan (As Amended and Restated Effective January 1, 1988).
*(10)(d)(ii) Amendment, effective as of December 31, 1992, to Plan described in Exhibit (10)(d)(i), filed as Exhibit (10)(d)(ii) to the 1992 Form 10-K.
*(10)(f)(iii) 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)(r) 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.
*(10)(s)(iii) 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, filed as Exhibit (10)(s)(iii) to the 1989 Form 10-K.
*(10)(s)(iv) 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, filed as Exhibit (10)(s)(iv) to the 1989 Form 10-K.
*(10)(s)(v) 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)(t) Potlatch Corporation Deferred Compensation Plan for Directors, dated February 20, 1981, as amended December 3, 1982, filed as Exhibit (10)(t) to the 1992 Form 10-K.
*(10)(t)(i) Potlatch Corporation Directors' Retirement Plan, effective October 1, 1989, filed as Exhibit (10)(t)(i) to the 1989 Form 10-K.
*Incorporated by reference.
Exhibit Index (cont.)
*(10)(t)(ii) Amendment dated May 24, 1991, to Exhibit (10)(t), filed as Exhibit (10)(t)(ii) to the 1991 Form 10-K.
(10)(w)(vi) Compensation of Directors, dated May 20, 1993.
*(10)(x) 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)(x)(i) Amendment No. 5 to Schedule A to Exhibit (10)(x), filed as Exhibit (10)(x)(i) to the 1992 Form 10-K.
(10)(x)(ii) Amendment No. 6 to Schedule A to Exhibit (10)(x).
*(10)(y) 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)(y)(i) Amendment No. 4 to Schedule A to Exhibit (10)(y), filed as Exhibit (10)(y) to the 1992 Form 10-K.
(10)(y)(ii) Amendment No. 5 to Schedule A to Exhibit (10)(y).
(10)(z) Potlatch Corporation 1989 Stock Incentive Plan adopted December 8, 1988 and as amended and restated February 24, 1989.
*(10)(z)(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, filed as Exhibit (10)(z)(i) to the 1989 Form 10-K.
*(10)(z)(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 1990-1993, filed as Exhibit (10)(z)(ii) to the 1990 Form 10-K.
*(10)(aa) 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.
(24) Consent of Independent Auditors.
(25) Powers of Attorney.
*Incorporated by reference.