Potlatch Reports Third Quarter Results

Potlatch Corporation (NYSE:PCH), a real estate investment trust (REIT), today reported net earnings of $24.2 million, or $.62 per diluted common share, for the third quarter of 2006, compared to second quarter net earnings of $8.0 million, or $.21 per diluted common share, and net earnings of $11.1 million for the third quarter of 2005. Results for the third quarter of 2006 included a net tax benefit of $9.2 million, or $.23 per diluted common share, primarily related to an agreement reached with the Internal Revenue Service regarding tax issues pertaining to open tax years. Excluding the net tax benefit, third quarter 2006 net income was $15.0 million, or $.39 per diluted common share. Compared to the second quarter, results for the third quarter of 2006 reflected continued improvement in our pulp and paperboard business and higher results for the Resource segment, which were partially offset by lower results for the Wood Products segment. Third quarter 2006 results were better than the third quarter of 2005 due primarily to improved results for the Pulp and Paperboard and Consumer Products segments. Net revenues for the third quarter of 2006 were $398.1 million, compared with $414.6 million and $405.5 million recorded in the second quarter of 2006 and third quarter of 2005, respectively. Net earnings for the first nine months of 2006 totaled $95.0 million, or $2.65 per diluted common share, compared to net earnings of $23.0 million, or $.79 per diluted common share, for the first nine months of 2005. Results for the first nine months of 2006 included a net tax benefit of $60.4 million, or $1.68 per diluted common share, related primarily to the company’s January 1, 2006, conversion to a REIT. Cash provided by operating activities for the nine months ended September 30, 2006, was $137.9 million, compared to $43.9 million for the same period in 2005. During the third quarter of 2006, the company paid $19.0 million in distributions and made an $18.1 million voluntary contribution to its qualified pension plans. Resource The Resource segment reported operating income of $19.3 million for the third quarter of 2006, compared with $9.8 million in the second quarter and $20.0 million earned in the third quarter of 2005. Compared to the second quarter, the higher operating income for the third quarter of 2006 was due primarily to seasonal increases in Idaho fee harvest levels, which were partially offset by lower selling prices for logs in Idaho and Arkansas. The slightly lower earnings for the third quarter of 2006 compared to the same period in 2005 were due primarily to decreased harvest of fee timber and lower selling prices for logs in Arkansas, combined with a loss at the company’s Boardman, Oregon, hybrid poplar operation. The Boardman operation was in a development stage in the third quarter of 2005, and most of the expenses were capitalized in that quarter. Following the start of harvesting operations in late 2005, most operating costs are now expensed. Increased fee harvest and higher selling prices for logs in Idaho partially offset the unfavorable comparison. Land Sales and Development The Land Sales and Development segment, which is a new segment beginning in 2006, reported operating income of $0.8 million for the third quarter of 2006, compared with operating income of $1.5 million in the second quarter and $6.0 million for 2005’s third quarter. The lower results for the third quarter of 2006 as compared to the second quarter were due to the sale of a conservation easement in Minnesota during the second quarter. The year over year quarterly results were lower for 2006 due to larger strategic sales that occurred in 2005. Most of our land sales activity is on hold pending the completion of an on-going assessment of our land for alternative values and identification of suitable property for tax deferred exchanges. Wood Products The Wood Products segment recorded an operating loss of $5.2 million for the third quarter of 2006, compared with income of $3.5 million and $5.9 million in the second quarter of 2006 and the third quarter of 2005, respectively. "Markets for our lumber products deteriorated significantly, especially for our southern lumber products,” noted Michael J. Covey, Potlatch president and chief executive officer. "Sales prices for our southern yellow pine lumber products were down 13% from the second quarter of 2006 and 21% from the third quarter of 2005, while log prices were relatively flat, thus eroding margins during the third quarter,” Covey added. Due to the poor lumber markets in the South, the company’s two Arkansas lumber mills took temporary downtime during the third quarter, and additional downtime is being taken at these lumber mills in the fourth quarter. Pulp and Paperboard For the third quarter of 2006, the Pulp and Paperboard segment reported operating income of $14.3 million, versus $3.9 million in the second quarter and $0.4 million for the third quarter of 2005. "Markets for our pulp and paperboard products continued to strengthen during the third quarter,” Covey said. "Average sales prices for both pulp and paperboard were higher in the third quarter of 2006 compared to the second quarter of 2006 and third quarter of 2005, with selling prices for paperboard increasing 3% and 6%, respectively, versus the two comparable periods,” Covey noted. Higher costs for wood fiber in Idaho and maintenance partially offset the favorable comparisons to the second quarter of 2006 and third quarter of 2005. Consumer Products The Consumer Products segment reported operating income of $6.2 million for the third quarter of 2006, compared with operating income of $7.0 million and $2.4 million reported for the second quarter of 2006 and third quarter of 2005, respectively. Compared to the second quarter, the lower earnings for the third quarter of 2006 were primarily due to higher pulp costs and 5% fewer shipments. Record shipments were recorded in the second quarter of 2006, due primarily to the sale of additional consumer tissue products and parent rolls in order to balance our inventories. The improved results for the third quarter of 2006 compared to the same quarter in 2005 were largely due to increased shipments and higher net selling prices, partially offset by higher pulp, freight and packaging costs. The higher net selling prices were due to a combination of price increases and sheet count reductions. Other Items Excluding the net tax benefit of $9.2 million primarily related to the agreement reached with the Internal Revenue Service regarding tax issues pertaining to open tax years, the company recorded an income tax benefit of $4.6 million for the third quarter of 2006, compared with income tax provisions of $1.3 million and $6.6 million for the second quarter of 2006 and third quarter of 2005, respectively. The income tax benefit was due to a pre-tax loss for the company’s taxable REIT subsidiary, which includes all of the manufacturing businesses. During the third quarter of 2006, we redeemed the remaining $5.5 million balance of our 10% Senior Subordinated Notes. Premium-related and deferred debt issuance costs associated with the redemption were more than offset by interest rate swap income associated with the notes. The U.S. and Canada reached a negotiated settlement to the softwood lumber trade dispute during the third quarter. As a result of the settlement, Potlatch expects to receive an estimated $40 million payment within six months of the effective date of October 13, 2006. The company anticipates receiving 50% or more of the payment in the fourth quarter of 2006. Outlook Pulp, paperboard and consumer tissue markets are expected to remain strong for the remainder of 2006, with some additional strengthening of paperboard markets likely. These improvements are expected to be partially offset by continued overall poor markets for lumber and higher wood fiber costs, especially for our Idaho pulp and paperboard operation, due to very high chip prices resulting at least partly from sawmill curtailments in the West. We expect that it may take several months for the capacity in North America to adjust to housing starts at current levels. Although we have not seen significant erosion of log prices in our operating areas, it is possible that weak markets will cause log prices to decline in the future. About Potlatch Potlatch is a REIT with 1.5 million acres of forestland in Arkansas, Idaho, Minnesota and Oregon. Through a taxable REIT subsidiary, the company also operates 13 manufacturing facilities that produce lumber and panel products and bleached pulp products, including paperboard and tissue products. A conference call will be held today, October 31, at 8 a.m. Pacific time (11 a.m. Eastern). Those interested can access the conference call by dialing 1-866-314-9013 for U.S./Canada and 1-617-213-8053 for calls outside the U.S./Canada. Participants will be asked to provide passcode number 38999387. The conference call may also be accessed through the Potlatch Corporation website at www.potlatchcorp.com. For those unable to participate in the live call, an archived recording will be available through the Potlatch Corporation website for approximately one year following the conference call. A telephone replay of the conference call will be available until November 7, 2006, by calling 1-888-286-8010 for U.S./Canada, or 1-617-801-6888 for calls outside the U.S./Canada, and entering passcode number 96459995. Forward-Looking Statements This press release contains certain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995 as amended, including without limitation, statements regarding the amount and timing of expected payments under the U.S./Canada softwood lumber trade dispute settlement, direction of markets, and future costs and prices. These forward-looking statements are based on current expectations, estimates, assumptions and projections that are subject to change, and actual results may differ materially from the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, changes in the United States and international economies; changes in exchange rates between the U.S. Dollar and other currencies; changes in the level of construction activity; changes in worldwide demand for our products; changes in worldwide production and production capacity in the forest products industry; competitive pricing pressures for our products; unanticipated manufacturing disruptions; changes in general and industry-specific environmental laws and regulations; unforeseen environmental liabilities or expenditures; weather conditions; changes in raw material, energy, and other costs; implementation or revision of governmental policies and regulations affecting import and export controls or taxes; the ability to satisfy complex rules in order to remain qualified as a REIT; changes in tax laws that could reduce the benefits associated with REIT status; unanticipated actions by the Canadian government or other Canadian interests with respect to the softwood lumber trade dispute settlement and other risks and uncertainties described from time to time in the company’s public filings with the Securities and Exchange Commission. The company does not undertake to update any forward-looking statements. Potlatch Corporation and Consolidated Subsidiaries Statements of Operations Unaudited (Dollars in thousands - except per-share amounts)   Three Months Ended Nine Months Ended Sept. 30, June 30, Sept. 30, September 30,         2006      2006      2005      2006      2005  Revenues   $ 398,108    $ 414,623    $ 405,540    $ 1,215,212    $ 1,110,923  Costs and expenses: Depreciation, depletion and amortization 22,989  22,314  21,729  67,995  60,404  Materials, labor and other operating expenses 334,625  353,917  340,359  1,028,248  932,169    Selling, general and administrative expenses     23,206      22,093      18,999      68,946      61,284          380,820      398,324      381,087      1,165,189      1,053,857  Earnings from operations 17,288  16,299  24,453  50,023  57,066    Interest expense (7,229) (7,323) (7,236) (21,911) (21,722) Debt retirement costs 53  -  -  53  -  Interest income     355      295      514      1,452      1,827  Earnings before taxes 10,467  9,271  17,731  29,617  37,171  Provision (benefit) for taxes     (13,765)     1,273      6,641      (65,386)     14,125  Net earnings   $ 24,232    $ 7,998    $ 11,090    $ 95,003    $ 23,046  Net earnings per common share: (a) Basic $ .63  $ .21  $ .38  $ 2.66  $ .79  Diluted .62  .21  .38  2.65  .79  Average shares outstanding (in thousands): Basic 38,724  38,681  29,179  35,688  29,055    Diluted     38,858      38,819      29,401      35,870      29,238    Certain 2005 amounts have been reclassified to conform to the 2006 presentation.   (a) On March 31, 2006, the Company paid a special earnings and profit distribution, consisting of approximately 9.1 million shares of common stock and $89 million in cash, in association with the REIT conversion. Reflected below are pro forma results giving effect to the common stock distribution for diluted earnings per common share for all periods presented, as if the common stock distribution had occurred at the beginning of each period: Three Months Ended Nine Months Ended Sept. 30, June 30, Sept. 30, September 30, 2006    2006    2005    2006    2005  Diluted earnings per common share As reported $ .62  $ .21  $ .38  $ 2.65  $ .79  Pro forma $ .62  $ .21  $ .29  $ 2.45  $ .60  Potlatch Corporation and Consolidated Subsidiaries Condensed Balance Sheets Unaudited (Dollars in thousands - except per-share amounts)   September 30, December 31,           2006      2005  Assets Current assets: Cash and short-term investments $ 16,752  $ 63,833  Receivables, net 117,191  114,641  Inventories 160,192  209,696    Prepaid expenses     17,077      15,006  Total current assets 311,212  403,176  Land other than timberlands 8,556  8,507  Plant and equipment, at cost less accumulated depreciation 566,261  589,161  Timber, timberlands and related logging facilities 393,781  400,595  Other assets     253,664      227,358            $ 1,533,474    $ 1,628,797  Liabilities and Stockholders' Equity Current liabilities: Current installments on long-term debt $ 3,157  $ 2,357    Accounts payable and accrued liabilities     163,856      144,943  Total current liabilities 167,013  147,300  Long-term debt 324,464  333,097  Other long-term obligations 252,392  245,867  Deferred taxes 124,610  197,385  Stockholders' equity     664,995      705,148            $ 1,533,474    $ 1,628,797    Stockholders' equity per common share $ 17.16  $ 24.01  Working capital $ 144,199  $ 255,876  Current ratio     1.9:1      2.7:1    Certain 2005 amounts have been reclassified to conform to the 2006 presentation. Potlatch Corporation and Consolidated Subsidiaries Condensed Statements of Cash Flows Unaudited (Dollars in thousands)   Nine Months Ended September 30,         2006    2005  Cash Flows From Operations Net earnings $ 95,003  $ 23,046  Adjustments to reconcile net earnings to net operating cash flows: Depreciation, depletion and amortization 67,995  60,404  Deferred taxes (72,775) -  Cost of permit timber harvested 3,229  3,747  Equity-based compensation expense 2,970  1,628  Employee benefit plans (981) (2,907) Working capital changes 60,569  (42,040)   Funding of qualified pension plans   (18,092)   -        Net cash provided by operating activities   137,918    43,878    Cash Flows From Investing Decrease in short-term investments 48,263  60,917  Additions to plant and properties (37,243) (91,162)   Other, net   (4,514)   (6,430)       Net cash provided by (used for) investing activities   6,506    (36,675)   Cash Flows From Financing Change in book overdrafts 3,228  837  Issuance of common stock 6,261  -  Repayment of long-term debt (7,833) (1,078) Issuance of treasury stock 513  10,880  Purchase of treasury stock -  (1,868) Distributions to common stockholders (146,112) (13,103) Income tax benefit resulting from the exercise of employee stock options 1,233  -    Other, net   (532)   491        Net cash used for financing activities   (143,242)   (3,841)   Increase in cash 1,182  3,362  Cash at beginning of period   6,133    8,646    Cash at end of period   $ 7,315    $ 12,008    Certain 2005 amounts have been reclassified to conform to the 2006 presentation. Highlights Unaudited (Dollars in thousands - except per-share amounts)   Three Months Ended Nine Months Ended Sept. 30, June 30, Sept. 30, Sept. 30,         2006      2006      2005      2006      2005  Distributions per common share (1)   (annual rate) $ 1.96    $ 1.96    $ .60    $ 1.96    $ .60  (1) Distributions for 2006 reflect the annualized rate, after adjustment for a special earnings and profit distribution of $15.15 per common share paid in the first quarter. Segment Information (Dollars in thousands)   Three Months Ended Nine Months Ended Sept. 30, June 30, Sept. 30, September 30,           2006      2006      2005      2006      2005  Revenues   Resource   $ 84,710    $ 68,787    $ 90,794    $ 218,689    $ 209,195    Land sales and development     1,139      2,031      6,938      3,810      9,502  Wood products Lumber 89,703  107,671  103,795  302,771  289,602  Plywood 12,657  15,368  12,943  42,452  40,197  Particleboard 5,928  5,012  4,036  15,138  13,286      Other     9,209      9,773      10,183      30,053      26,925    Total wood products revenues     117,497      137,824      130,957      390,414      370,010  Pulp and paperboard Paperboard 131,080  132,130  133,178  395,743  372,682  Pulp 23,004  15,317  18,099  53,811  45,317      Other     302      294      206      915      681    Total pulp and paperboard revenues     154,386      147,741      151,483      450,469      418,680    Consumer products     113,232      117,142      95,541      329,909      281,203  470,964  473,525  475,713  1,393,291  1,288,590  Intersegment revenues     (72,856)     (58,902)     (70,173)     (178,079)     (177,667)   Total revenues   $ 398,108    $ 414,623    $ 405,540    $ 1,215,212    $ 1,110,923    Operating income (loss) Resource $ 19,262  $ 9,764  $ 19,957  $ 43,408  $ 42,954  Land sales and development 788  1,491  6,043  2,768  7,496  Wood products (5,161) 3,481  5,943  5,581  28,212  Pulp and paperboard 14,302  3,913  402  16,560  2,695  Consumer products 6,186  6,984  2,379  20,059  3,230    Eliminations     (6,578)     1,049      (1,506)     (4,859)     625  28,799  26,682  33,218  83,517  85,212  Corporate     (18,332)     (17,411)     (15,487)     (53,900)     (48,041) Earnings before taxes   $ 10,467    $ 9,271    $ 17,731    $ 29,617    $ 37,171    Certain 2005 amounts have been reclassified to conform to the 2006 presentation.