SPOKANE, Wash.-- Potlatch Corporation, a real estate investment trust (REIT), today reported net earnings of $44.1 million, or $1.13 per diluted common share, for the fourth quarter of 2006, compared to third quarter net earnings of $24.2 million, or $.62 per diluted common share, and net earnings of $9.9 million, or $.34 per diluted common share, for the fourth quarter of 2005. Earnings for the fourth quarter of 2006 included $39.3 million, or $24.0 million net of tax ($.62 per diluted common share), representing the company's total share of the negotiated settlement of the softwood lumber trade dispute between the U.S. and Canada. This was partially offset by an income tax adjustment of $3.9 million, or $.10 per diluted common share, primarily related to the transfer of assets from the REIT to the company's taxable REIT subsidiary, which includes all of the manufacturing businesses. This affected the company's deferred tax liability adjustment as a result of the REIT conversion. Earnings for the third quarter of 2006 included a 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, which also affected the deferred tax liabilities adjusted as a result of the REIT conversion. Excluding the $39.3 million (and related tax effect) from the settlement of the softwood lumber trade dispute, the $3.9 million income tax adjustment in the fourth quarter and the $9.2 million tax benefit in the third quarter, earnings for the fourth quarter of 2006 were higher than the third quarter due primarily to better results for the Land Sales and Development and Consumer Products segments. The favorable comparison to the third quarter was partially offset by lower earnings for the Pulp and Paperboard segment. Fourth quarter 2006 earnings were better than the fourth quarter of 2005 due primarily to improved results for the Resource and Pulp and Paperboard segments. Net revenues for the fourth quarter of 2006 were $390.0 million, compared with $399.1 million for the third quarter of 2006 and $389.3 million for the fourth quarter of 2005, respectively. Net earnings for the year ended December 31, 2006, totaled $139.1 million, or $3.79 per diluted common share, compared to net earnings of $33.0 million, or $1.13 per diluted common share, for the year ended December 31, 2005. Earnings for 2006 included a net tax benefit of $56.5 million, or $1.55 per diluted common share, related primarily to the company's January 1, 2006, conversion to a REIT. Net revenues for 2006 were $1.61 billion, compared with net revenues of $1.50 billion for 2005. Cash provided by operating activities for the year ended December 31, 2006, was $188.7 million, compared to $66.4 million for the same period in 2005. During the fourth quarter of 2006, the company paid a regular quarterly distribution of $19.0 million. The aggregate total of Potlatch's regular quarterly distributions in 2006, its first year as a REIT, was $76.1 million, compared to an aggregate total of $17.5 million for its regular quarterly dividends in 2005. Resource The Resource segment reported operating income of $19.6 million for the fourth quarter of 2006, compared with $19.3 million in the third quarter and $13.4 million earned in the fourth quarter of 2005. Compared to the third quarter, segment income for the fourth quarter of 2006 was slightly higher due primarily to higher Arkansas fee harvest levels and a smaller loss for the company's Boardman, Oregon, hybrid poplar operation in the fourth quarter. These improvements were mostly offset by lower selling prices for logs in Idaho for the fourth quarter of 2006 compared to the third quarter. The higher income for the fourth quarter of 2006 compared to the same period in 2005 was due primarily to a significantly higher harvest of fee timber in Idaho, partially offset by decreased fee harvest levels and lower selling prices for logs in Arkansas. Land Sales and Development The Land Sales and Development segment, which is a new segment beginning in 2006, was created to provide more focus on maximizing the value of Potlatch's land assets. The segment reported operating income of $9.1 million for the fourth quarter of 2006, compared with operating income of $0.8 million in the third quarter of 2006 and $14.9 million for the fourth quarter of 2005. The higher income for the fourth quarter of 2006 compared to the third quarter was due largely to the sale of a conservation easement in Arkansas for $6.7 million during the fourth quarter. Income for the fourth quarter of 2006 was lower than the fourth quarter of 2005 because most of the company's land sales activity was on hold in 2006 pending the initial assessment of all its lands for alternative values, which was completed in late 2006. Wood Products Excluding the $39.3 million from the settlement of the softwood lumber trade dispute, the Wood Products segment recorded an operating loss of $5.4 million for the fourth quarter of 2006, compared with a loss of $5.2 million in the third quarter and income of $0.4 million in the fourth quarter of 2005. "Although markets for our lumber products, especially for our southern lumber, remained depressed throughout the fourth quarter of 2006, we did experience some improvement in pricing near the end of the quarter," noted Michael J. Covey, Potlatch chairman, president and chief executive officer. Due to the poor lumber markets in the South, the company's Warren, Arkansas, lumber mill took temporary downtime during the fourth quarter of 2006. Income from the company's plywood operation was lower in the fourth quarter of 2006 due primarily to decreases in average selling prices compared to the third quarter of 2006 and the fourth quarter of 2005. Pulp and Paperboard For the fourth quarter of 2006, the Pulp and Paperboard segment reported operating income of $7.0 million, versus income of $14.3 million in the third quarter and a loss of $4.3 million for the fourth quarter of 2005. "Markets for our pulp and paperboard products remained strong throughout the fourth quarter, and both pricing and shipments for our paperboard were higher compared to the third quarter and 2005's fourth quarter," Covey noted. "Unfortunately, very high wood fiber costs for our Lewiston, Idaho, pulp and paperboard operation had a significant unfavorable effect on fourth quarter 2006 earnings compared to the two comparable periods," Covey added. The high wood fiber costs were due largely to very high chip prices resulting mainly from sawmill curtailments in the West. Consumer Products The Consumer Products segment reported operating income of $7.2 million for the fourth quarter of 2006, compared with operating income of $6.2 million and $7.4 million reported for the third quarter of 2006 and the fourth quarter of 2005, respectively. Compared to the third quarter, the higher income for the fourth quarter of 2006 was primarily due to lower freight, energy and maintenance costs, which were partially offset by decreased shipments and higher pulp costs. The slightly lower income for the fourth quarter of 2006 compared to the fourth quarter of 2005 was due largely to significantly higher pulp costs, combined with higher freight and packaging costs. These unfavorable comparisons were mostly offset by a 22% increase in shipments. Other Items Excluding the income tax adjustment of $3.9 million primarily related to the transfer of assets from the REIT to the company's taxable REIT subsidiary in the fourth quarter of 2006, the company recorded an income tax provision of $12.4 million for the fourth quarter of 2006. The income tax provision was due primarily to pre-tax income for the company's taxable REIT subsidiary. Outlook In the fourth quarter of 2006, Potlatch completed its initial assessment of all of its land for alternative values. "As a result of the initial assessment of our lands, we identified 250,000 to 300,000 acres, or 17% to 20% of our total land holdings, as having values that are potentially greater than for timberland," Covey said. "Sales of these lands are expected to occur within the next ten years, with the goal of utilizing Internal Revenue code section 1031 like-kind exchange transactions for tax efficiency, thus maximizing cash flows," he added. The company expects to sell 15,000 to 20,000 acres in 2007. In December 2006, the company announced an agreement to acquire approximately 76,000 acres of high-value forestland in Wisconsin for $64.5 million. The transaction was completed in January. The company plans to match this purchase with sales of like-kind properties that have recently closed and those that may occur in the first half of 2007 in our 1031 exchange program and thus not be subject to built-in-gains taxes on those sales. "The company expects overall timber harvest levels and revenue to increase in 2007 due to an increased harvest in Arkansas and the acquisition of the Wisconsin timberland," Covey added. "Harvest levels in Arkansas were deferred in 2006 due to unfavorable market conditions. We also expect results for 2007 to be favorably affected by mix improvements for our consumer tissue products. For our Idaho pulp and paperboard operation, we have seen some moderation of the acute wood chip and residual shortage that drove wood fiber prices significantly higher in 2006's fourth quarter, and we are cautiously optimistic that this situation will continue to improve as we move into the Spring period. Markets for paperboard are expected to remain strong throughout the first quarter of 2007, while wood products markets are expected to remain weak early in 2007, as high inventories of unsold new homes continue to impact the level of new home construction."