Potlatchdeltic Annual Report 2021

PotlatchDeltic Annual Report 2021

Form 10-K (NASDAQ:PCH)

Published: February 18th, 2021

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K

(Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to

Commission File Number 1-32729

POTLATCHDELTIC CORPORATION (Exact name of registrant as specified in its charter)

Delaware 82-0156045 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 601 West 1st Ave., Suite 1600 Spokane, Washington 99201 (Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (509) 835-1500 Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS Trading symbol(s) NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock ($1 par value) PCH The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act ☐ Yes ☒ No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No The aggregate market value of the common stock held by non-affiliates of the registrant at June 30, 2020, was approximately $2,465.0 million, based on the closing price of $38.03. As of February 12, 2021, 66,919,188 shares of the registrant's common stock, par value $1 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE Portions of the deﬁnitive proxy statement for the 2021 annual meeting of stockholders expected to be ﬁled with the Commission on or about March 30, 2021 are incorporated by reference in Part III hereof.

POTLATCHDELTIC CORPORATION AND CONSOLIDATED SUBSIDIARIES Table of Contents

PAGE NUMBER

PART I ITEM 1. BUSINESS 3 ITEM 1A. RISK FACTORS 14 ITEM 1B. UNRESOLVED STAFF COMMENTS 26 ITEM 2. PROPERTIES 26 ITEM 3. LEGAL PROCEEDINGS 26 ITEM 4. MINE SAFETY DISCLOSURES 26

PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES 27 OF EQUITY SECURITIES ITEM 6. SELECTED FINANCIAL DATA 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 29 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 45 Consolidated Statements of Operations 47 Consolidated Statements of Comprehensive Income 48 Consolidated Balance Sheets 49 Consolidated Statements of Cash Flows 50 Consolidated Statements of Stockholders' Equity 51 Index for Notes to Consolidated Financial Statements 52 Notes to Consolidated Financial Statements 53 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 84 ITEM 9A. CONTROLS AND PROCEDURES 84 ITEM 9B. OTHER INFORMATION 86

PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 86 ITEM 11. EXECUTIVE COMPENSATION 86 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER 86 MATTERS ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 86 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 86

PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 87 ITEM 16. FORM 10-K SUMMARY 91

SIGNATURES 92

EXPLANATORY NOTE

For purposes of this report, any references to "the company,” “us,” “we” and “our” include PotlatchDeltic Corporation and its consolidated subsidiaries.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains, in addition to historical information, certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements often reference or describe our expected future financial and operating performance, including without limitation, expected impacts of COVID-19 on our business and our ability to continue operations during the pandemic; expected effectiveness of our hedging instruments and swaps; expected return on pension assets; required contributions to pension plans; recognition of compensation costs relating to our performance share awards (PSAs) and restricted stock units (RSUs); expected amortization of unrecognized compensation cost of PSAs and RSUs; amount of net losses on cash flow hedges expected to be reclassified into earnings in the next 12 months; expected tax payments and deferrals; anticipated share repurchases and dividend payments; anticipated cash balances, cash flows from operations and expected liquidity; potential uses of and estimated payments under our credit facility; expected debt refinancing; expectations regarding the U.S. housing market, home repair and remodeling activity, the lumber and log markets, lumber shipment volumes, sawlog demand, percent of log sales by log supply agreements; timber harvest volumes, sawlog mix and pricing, rural real estate and residential and commercial real estate development sales, and the average price per acre and developed lot; sufficiency of cash to meet operating requirements; expected 2021 capital expenditures; and similar matters.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often involve use of words such as expects, may, could, should, will, believes, anticipates, estimates, projects, intends, plans, targets or approximately, or similar words or terminology. These forward-looking statements are based on our current expectations and assumptions and are not guarantees of future events or performance. The realization of our expectations and the accuracy of our assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The factors listed below and those described under Part I – Item 1A. Risk Factors and Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other factors not described herein because they are not currently known to us or we currently judge them to be immaterial, may cause our actual results to differ significantly from our forward-looking statements. We undertake no obligation to update our forward-looking statements after the date of this report. Risks, Uncertainties and Assumptions

Our actual results of operations could differ materially from our historical results or those expressed or implied by forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include, but are not limited to, the following: • the eﬀect of general economic conditions, including employment rates, interest rate levels, discount rates, housing starts and the general availability of financing for home mortgages; • changes in silviculture; • timber cruising variables; • changes in state forest acts or best management practices; • changes in timber growth rates and harvest levels on our lands; • changes in timber prices and timberland values; • changes in policy regarding governmental timber sales; • changes in requirements for Forest Stewardship Council (FSC ®) or Sustainable Forest Initiative (SFI ®) certification; • changes in the level of residential and commercial construction and remodeling activity; • changes in tariffs, quotas and trade agreements involving wood products; • changes in demand for our products and real estate;

• availability of labor and developable land; • changes in production and production capacity in the forest products industry; • competitive pricing pressures for our products; • unanticipated manufacturing disruptions; • the effect of weather on our harvesting and manufacturing activities; • the risk of loss from fires, floods, windstorms, hurricanes, pest infestation and other natural disasters; • impact of the recent coronavirus (COVID-19) or other potential viral outbreaks on our business, suppliers, consumers, customers and employees; • changes in the cost or availability of shipping and transportation; • performance of our manufacturing operations, including maintenance and capital requirements; • the level of competition from domestic and foreign producers; • changes in raw material and other costs; • changes in principle expenses; • collectability of amounts owed by customers; • changes in the United States (U.S.) and international economies; • changes in exchange rates; • changes in federal and state tax laws and policies; • changes in global or regional climate conditions and governmental response to such changes; • changes in general and industry-specific environmental laws and regulations; • unforeseen environmental liabilities or expenditures; • changes in accounting principles; • the ability to satisfy complex rules in order to remain qualified as a REIT; and • changes in tax laws that could reduce the benefits associated with REIT status.

PART I

ITEM 1. BUSINESS

General

PotlatchDeltic Corporation, formerly known as Potlatch Corporation and also formerly known as Potlatch Holdings, Inc., was incorporated in Delaware in September 2005 to facilitate a restructuring to qualify for treatment as a real estate investment trust (REIT) for federal income tax purposes. It is the successor to the business of the original Potlatch Corporation, which was incorporated in Maine in 1903. On February 20, 2018 (merger date), Deltic Timber Corporation (Deltic) merged into Portland Merger, LLC, a wholly owned subsidiary of Potlatch. Following the merger Potlatch changed its name to PotlatchDeltic Corporation.

We are a leading timberland REIT with operations in seven states where we own approximately 1.8 million acres of timberland. We also own six sawmills and an industrial grade plywood mill, a residential and commercial real estate development business and a rural timberland sales program.

Our operations are organized into three business segments:

• Timberlands; • Wood Products; and • Real Estate

The map below shows the locations of our timberlands, Wood Products mills, real estate development operations, and our corporate oﬃce located in Spokane, Washington.

Additional information regarding each of our business segments is included in this section, as well as in Part II – Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 3: Segment Information in the Notes to Consolidated Financial Statements .

As a REIT, we generally are not subject to federal and state corporate income taxes on our income from investments in real estate that we distribute to our stockholders, including the income derived from the sale of standing timber. We are required to pay federal corporate income taxes on income generated from the operations of PotlatchDeltic’s taxable REIT subsidiaries (PotlatchDeltic TRS), which principally consists of our wood products manufacturing operations and certain real estate investments. We are, however, subject to corporate taxes on built-in gains (the excess of fair market value over tax basis on the merger date) on sales of former Deltic real property held by the REIT during the ﬁve years following the Deltic merger. The sale of standing timber is not subject to built-in gains tax.

Business Strategy Our business strategy encompasses the following key elements: • Timberlands provide stability. We own high-quality timberlands under a tax-efficient REIT structure, representing over 80% of our gross asset value. We manage our timberlands sustainably over the long term using best management practices designed to optimize the balance among timber growth, prudent environmental management and current cash flow, in order to achieve increasing levels of sustainable yield over the long-term. The stability of our timberlands supports a sustainable and growing dividend. • Leverage to lumber prices. We have the highest direct leverage to lumber prices of the timber REITs. Our leverage to lumber is attributable to both our lumber manufacturing business and indexed sawlog prices in Idaho. We are well positioned to take advantage of positive housing fundamentals. Returns earned by this component of our strategy provide funding for discretionary capital allocation opportunities. • Integrated Timberlands and Wood Products operating model. Internal log sales to our mills comprised 37% of our Timberlands revenues in 2020. This represented 51% of our mill needs on a volume basis. This strategy enables us to maximize the value of our assets, and, because we are a net log buyer in the South, our integrated model provides a natural hedge against southern sawlog prices that remain below long-term levels. • Efficient and productive Wood Products facilities. We rank as a top-10 lumber producer in the United States (U.S.) with approximately 1.2 billion board feet of capacity. We also own an industrial grade plywood mill with 160 million square feet of capacity. Discretionary capital expenditures in our mills typically earn returns exceeding 20%. Our shipments have increased 75% in the past six years due to high-return capital projects and the addition of two sawmills as part of the 2018 Deltic merger. • Capturing incremental value of our real estate holdings. A portion of our timberland acreage is more valuable for other purposes, such as residential or commercial development, recreation, conservation, or to other timberland or real estate investors. We continually assess the potential uses of our lands and manage them proactively for the highest value. We have currently identified approximately 120,000 acres of our rural timberlands that we intend to sell over time at a meaningful premium to timberland value. Our real estate development activity is primarily focused on a 4,800-acre premier master-planned community in Little Rock, Arkansas that we acquired as part of the 2018 Deltic merger. • Pursuing attractive acquisitions. We actively pursue timberland acquisitions that meet our financial and strategic criteria. The critical elements of our acquisition strategy generally include acquiring properties that complement our existing land base, are cash flow accretive and have attractive timber or higher and better use (HBU) values. • Committed to responsible environmental, social and governance values . Sustainability is a core corporate value instilled by managing a renewable resource for the long term. We focus on meeting the needs of our stakeholders, now and into the future. We are committed to responsible corporate citizenship and environmental, social and governance (ESG) considerations are integrated in the way we do business every day. We recognize that our environmental commitment, the well-being of our employees, the independence and oversight of our Board of Directors, the positive impact we have in our communities, and our public advocacy can have a profound impact on our success for our stakeholders. Business Segments

Timberlands Segment

We recognize the role forests play in combating climate change because of the powerful positive impact our timberlands provide through carbon sequestration. Leveraging decades of management experience and by working closely with scientific research organizations, we manage our timberlands while considering how climate change could create potential risks and opportunities. We are a leader in forest stewardship and sustainability with rigorous third-party auditing and certiﬁcation of our forest practices. We recognize that some areas need to be conserved and species at risk need to be protected on the lands we manage. Our foresters manage timberlands through the use of a comprehensive timberland environmental management system that focuses on continual improvement. Our timberlands management approach is reinforced through our environmental, health, safety and forest stewardship policies.

Industry Background. The demand for sawlogs is significantly dependent upon price, species, grade, quality, proximity to wood consuming facilities and the ability to meet customer needs. The demand for pulpwood is dependent on the paper and pulp-based manufacturing industries. Both pulpwood and sawlogs are affected by domestic and international economic conditions, global population growth and other demographic factors, industry capacity and the value of the U.S. dollar in relation to foreign currencies. Locally, timber demand and pricing also fluctuates due to the expansion or closure of individual wood products and pulp-based manufacturing facilities.

Local log supplies also change in response to prevailing timber prices. Rising timber prices often lead to increased harvesting on private timberlands, including lands not previously made available for commercial timber operations. In the U.S. South, an oversupply of ready-to-cut standing timber exists due to years of low and deferred harvesting following the last housing market crash which continues to depress sawlog prices. Supplies could tighten in the event of higher demand due to increased U.S. housing starts, increased log and lumber exports and the impacts from weather-related conditions or a natural disaster. Log availability has tightened in the Paciﬁc Northwest and Western Canada as a result of several years of devastating forest ﬁres, and continued harvest restrictions on federal lands. Further, in Western Canada, log availability has also declined as the salvage sawlogs remaining from the damage caused by the mountain pine beetle have mostly been processed.

Timberlands Operations. We strive to maximize cash ﬂow by selling both delivered logs and stumpage sales to external customers while managing our timberlands sustainability over the long-term. The Timberlands segment sells a portion of its logs at market prices to our Wood Products facilities. Intersegment sales to our Wood Products facilities were 37%, 36% and 33% of our total Timberlands segment revenues for 2020, 2019 and 2018, respectively. The segment also sells sawlogs and pulpwood to a variety of forest products companies located near our timberlands. The segment’s customers range in size from small operators to multinational corporations. No third-party customer represented more than 10% of our consolidated revenues in 2020, 2019 or 2018.

In general, our log supply agreements require a specified volume of timber to be delivered to defined customer facilities at prices that are adjusted periodically to reflect market conditions. Prices in our Northern region contracts are adjusted periodically by species to prevailing market prices for logs, lumber, wood chips and other residuals. Additionally, in Idaho for both external and internal customers we index the price of approximately 70% of our sawlogs sold to the price of lumber. Prices in our Southern region contracts are adjusted every three months based on prevailing market prices for logs. Typically, our log supply agreements are in place for one to five years. In 2020, approximately 28% of our harvest volume was sold under log supply agreements. We expect approximately the same amount to be sold under log supply agreements in 2021. The segment also generates revenue from non-timber resources such as from hunting leases, recreation permits and leases, mineral rights leases, biomass production and carbon sequestration. Timberlands Ownership. The Timberlands segment manages approximately 1.8 million acres of timberlands including approxim ately 18,000 acres under long-term leases. The following provides additional information about our timberlands at December 31, 20 20.

Region State Description Acres (in thousands) Northern region Idaho Variety of commercially viable softwood species, such as Douglas fir, grand fir and inland red cedar 627 Minnesota Primarily pine, aspen and hardwoods 20 Total Northern region 647

Southern region Arkansas Primarily southern yellow pine and hardwoods 923 Mississippi Primarily southern yellow pine and hardwoods 98 Alabama Primarily southern yellow pine and hardwoods 91 Louisiana Primarily southern yellow pine and hardwoods 6 Total Southern region 1,118 Total 1,765

The aggregate estimated volume of current standing merchantable timber inventory is updated annually to reflect increases due to reclassification of young growth to merchantable timber when the young growth meets defined diameter specifications, the annual growth rates of merchantable timber and the acquisition of additional merchantable timber and to reflect decreases due to timber harvests and land sales. This estimate is derived using methods consistent with industry practice and is based on statistical methods and field sampling. The estimated timberland volume includes timber in environmentally sensitive areas where the timberlands are managed in a manner consistent with best management practices and state forest practice acts. The following provides additional information about our estimated standing timber inventory at December 31:

(Tons in millions) 2020 2019 Change Northern region1 29.8 32.6 (2.8) Southern region 53.5 53.2 0.3 Total 83.3 85.8 (2.5)

1 The decrease in merchantable timber inventory during 2020 is predominantly a result of the sale of approximately 72,000 acres in Minnesota to The Conservation Fund.

Timberlands Harvest. Our short-term and long-term harvest plans are critical factors in our timberland management process. Each year, we prepare a harvest plan designating the timber tracts and volumes to be harvested during that particular year. Our harvest plans take into account changing market conditions, are designed to contribute to the growth of the remaining timber and reflect our policy of environmental stewardship. These plans optimize harvest schedules, incorporating best forest management practices such as streamside management zones and stand level retention of wildlife habitat features. We conduct all operations in accordance with regulatory and certification requirements that protect water quality, wildlife habitat, and worker safety. Each harvest plan reflects our analysis of the age, size and species distribution of our timber, as well as our expectations about harvest methods, growth rates, the volume of each species to be harvested, anticipated acquisitions and dispositions, thinning operations, regulatory constraints and other relevant information. Since harvest plans are based on projections of weather, timber growth rates, regulatory constraints and other assumptions, many of which are beyond our control, there can be no assurance that we will be able to harvest the volumes projected or the specific timber stands designated in our harvest plans. Detailed harvest information by region and product is presented in Part II – Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following table presents a summary of our total 2020 timber harvest by region.

Timber Harvested (Tons in thousands) Sawlogs Pulpwood Stumpage Total Northern region 1,669 114 23 1,806 Southern region 2,138 1,682 381 4,201 Total 3,807 1,796 404 6,007

Based on our current projections, which are based on constant timberland holdings and take into consideration such factors as market conditions, the ages of our timber stands and recent timberland sales and acquisitions, we expect to harvest approximately 6.0 million tons in 2021.

Sustainable Forestry Practices

Our timberlands are working forests where we ensure appropriate measures are taken to protect biological diversity, water quality and other ecosystem values. Our timberlands also provide unique environmental, cultural, historical and recreational value. We work hard to protect these and other qualities, while still managing our forests to produce financially mature timber. Our timberlands include a wide diversity of softwood and hardwood species. Our timberlands are 100% certified to the SFI® Forest Management standards and 70% of our timberlands in Arkansas are certified to the FSC ® Forest Management standards. We adhere to principles that include commitments to sustainable forestry, responsible practices, forest health and productivity and protection of special sites. We are generally able to realize price premiums for pulpwood from our FSC®-certified lands.

Our foresters maintain an approved contractor list and monitor trained contractors who implement environmental protections and follow speciﬁc prescriptions for the tract being harvested and planting following ﬁnal harvests. We also take an active approach to regulatory developments by participating in standard-setting where possible. We work cooperatively with regulators to create voluntary conservation plans that address environmental concerns while preserving our ability to operate our timberlands efficiently.

Timberland fires continue to increase, particularly in Western Canada and the Pacific Northwest. As the largest private landowner in Idaho, we have implemented several practices to help mitigate fire risk on our Idaho timberlands. Such practices include participating in fire protection districts or cooperative agreements with state, federal and timberland owners where participants contribute assets and resources to fight fires regardless of the location of the fire. During periods of high fire danger, we may prohibit campfires, close access on our timberlands, or adjust harvest schedules to late evening/early mornings and post individuals on site following logging activities to monitor for potential fire outbreaks. Further, from May to October, our agreements with both logging and silviculture contractors require them to have on site specific firefighting resources such as water, water pumps and hand tools. Additionally, remaining slash is reduced to minimize fire risk through either mechanical piling or pre-scribed burning. Our Southern timberlands are less susceptible to fires as they are located in areas that have relatively high humidity. In addition, our Southern harvesting operations result in less slash at final harvest due to stand thinning techniques to promote timber yield, allowing slash to be mechanically spread back into the tract and returning nutrients to the soil. These practices not only help ensure our timberlands are available for future harvest, but also reduces potential environmental impacts that often come from timberland fires.

Wood Products Segment

Operations. We are a top 10 lumber manufacturer in the U.S. with 1.2 billion board feet of capacity. We believe that competitiveness in the industry is largely based on individual mill efficiency and on the availability of competitively priced raw materials on a facility-by-facility basis, rather than the number of mills operated. This is because it is generally not economical to transfer logs between or among facilities, which might permit a greater degree of specialization and operating efficiencies. Instead, each facility must utilize the raw materials that are available to it in a relatively limited geographic area. For these reasons, we believe we are able to compete effectively with companies that have a larger number of mills. We compete based on product quality, customer service and price.

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