DEL » Topics » Executive Overview

This excerpt taken from the DEL 10-Q filed May 7, 2009.

Executive Overview

The Company recorded a net loss of $1.2 million for the first quarter of 2009, compared to a loss of $.4 million for the same period of 2008. The Woodlands segment, Deltic’s established core operation, provided $5.7 million in operating income during the current quarter of 2009. Deltic’s Real Estate and Mills segments reported operating losses in the first quarter of 2009. The Real Estate segment recorded a loss of $1 million in the current-year quarter compared to a loss of $.6 million for the corresponding period of 2008 due to a lack of sales activity in the 2009 period. The Company’s Mills segment recorded an operating loss of $3.6 million in the first quarter of 2009, which compares to a loss of $4.4 million in the first quarter of 2008. The improvement reflects increased hourly production rates and lower log costs, which helped to offset the historical low sales price per MBF of lumber sold and low demand due to reduced housing starts that is affecting the forest products industry. Deltic owns a 50 percent interest in Del-Tin Fiber L.L.C. and recorded related equity income of $.8 million for the first quarter of 2009, an increase from $.7 million for the same quarter of 2008.

Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. This environment is affected by a number of factors including general economic conditions, interest rates, credit availability and associated costs, imports, foreign exchange rates, housing starts, new and existing home inventories, foreclosures, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. The downturn in the United States economy and uncertainties in the financial sector have negatively impacted any recovery of the housing market and industries closely associated with that market. The current inventory of unsold homes and low-level of housing starts indicated weakness continued in the housing market. With this, residential lot sales and lumber demand will continue to be affected for the foreseeable future. Because of mill curtailments and closures, the lumber supply of late has been moving toward demand levels and with the recent seasonal increase in construction activity, lumber sales prices were moving slightly upward at the end of the first quarter. Given its relative size and the nature of most commodity markets, the Company has little or no control over pricing levels for its lumber products. However, the Company will continue its efforts to increase operating efficiencies, reduce controllable manufacturing costs, manage production levels to match demand, and implement other cost reducing measures required by the market.

For the first quarter of 2009, pine sawtimber harvest levels decreased 24,843 tons to 155,531 tons, when compared to the first quarter of 2008’s harvest level of 180,374 tons. The decrease is due in part to weather and timing of the harvest. Deltic plans to keep 2009’s total pine sawtimber harvest volume comparable to the level in 2008, thus continuing to manage the timberlands on a sustainable-yield basis. The average sales price for pine sawtimber was $29 per ton in the first quarter of 2009, a 22 percent decrease from the first quarter of 2008. The decrease is a result of lower demand due to curtailments and closures of sawmills in Deltic’s operating region. The Company harvested 89,833 tons of pine pulpwood during the first quarter of 2009, a decrease of 9,943 tons from the same period in 2008. The average sales price was $11 per ton, a 31 percent decrease from $16 per ton for the first quarter of 2008. Lower pulpwood prices and volume are due to decreased demand for fiber by area papermills. The Company sold approximately 277 acres of non-strategic hardwood bottomland at an average sales price of $1,485 per acre during the first quarter of 2009 compared to sales of approximately 674 acres at an average sales price of $2,128 per acre for the same period of 2008. The 2009 decrease in the per-acre sales price is due to the location and quality of land sold. The Woodlands segment reported hunting lease income of $.5 million in the first quarter of 2009 essentially unchanged from first quarter of 2008.

Advances in technology and increased pricing levels for natural gas have resulted in the viability of expanded natural gas exploration within the state of Arkansas. One current area of activity known as the “Fayetteville Shale Play” is an unconventional natural gas reservoir ranging in depth from 1,300 feet to 6,500 feet, and is spread across multiple Arkansas counties. Deltic has leased approximately 32,100 net mineral acres in this area to various exploration enterprises and received applicable lease bonus payments and the possibility of future royalty income should production be established. The Company

 

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continues to evaluate additional leasing requests within the currently defined boundary of the Fayetteville Shale Play, although future leasing will probably not be significant within the boundary currently defined by the Arkansas Oil and Gas Commission. The ultimate benefit to Deltic from these mineral leases remains speculative and unknown to the Company and is contingent on the successful extraction and sale of natural gas from this area. Deltic’s gas royalties from the defined Fayetteville Shale Play area were approximately $133,000 per month during the first quarter of 2009 compared to $40,000 per month during the first quarter of 2008. Deltic has reported total oil and gas royalty income of $.4 million and $.3 million for the first quarter of 2009 and 2008, respectively. Oil and gas lease rental income was $.5 million for the first quarter of 2009 and 2008.

The Mills segment continues to operate in a weak market as the forest products industry struggles to balance production with demand. The average sales price was $234 per MBF in the first quarter of 2009, a three percent decrease from the average sales price of $240 per MBF for the same quarter of 2008. Lumber sales were 52.3 million board feet in the current period of 2009, a decrease when compared to 62.5 million board feet for the same period of 2008, as the Company reduced operating hours to balance production with demand. Deltic will continue to manage production levels to approximate market demand. The Mills showed financial improvement in the first quarter 2009 versus 2008 because of increased hourly productivity rates and lower log cost. As with any commodity market, the Company expects the historical volatility of lumber prices to continue in the future. The Company plans for over half of the logs supplied to its sawmills to come from its strategically located fee timberlands.

The Real Estate segment closed no residential lot sales during the first quarter of 2009, a reduction of seven residential lots when compared to the same quarter in 2008. Deltic has a low cost basis in its three developments, which allows it to maintain lot sales prices while waiting on the market to improve. Deltic’s lot development plans provide for lot offerings that represent most real estate market segments for planned communities. The Company has an adequate supply of lots in the three market segment tiers and does not plan to develop any new neighborhoods in 2009. Future annual development activity will be dependent upon the demand for the Company’s residential lots. Commercial real estate sales activity is by nature less predictable than residential activity. No commercial sales occurred in the first quarter of 2009 or 2008. Multi-family housing sites and commercially zoned acreage in and around the area of “The Promenade at Chenal,” an upscale shopping center within Chenal Valley, continue to receive interest, but tightened credit markets and economic uncertainties have impacted the timing of potential sales transactions. The Company had no sales of undeveloped acreage during the first quarter of 2009 or 2008.

Operating results for Del-Tin Fiber are affected by the overall medium density fiberboard (“MDF”) market and the plant’s operating performance. Del-Tin’s operational income increased during the first quarter of 2009, when compared to 2008, due primarily to lower wood and resin glue costs. The overall MDF market has been able to achieve better supply and demand balance versus other wood product markets. With regard to the Company’s equity position in Del-Tin, Deltic continues to reduce depreciation expense related to the add-back per thousand square feet manufactured, which relates to the impairment taken by the Company in 2002 that was not recorded at the Del-Tin level. The difference in basis between the Company and Del-Tin is being adjusted to account for Del-Tin’s operating results as if it were a consolidated subsidiary. (For further discussion, refer to Note 4 to the consolidated financial statements.)

 

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This excerpt taken from the DEL 10-K filed Mar 6, 2009.

Executive Overview

Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. This environment is affected by a number of factors, including general economic conditions, interest rates, availability and costs of credit, imports, foreign exchange rates, housing starts, new and existing home inventories, home foreclosures, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw materials, cost of fuel, and weather conditions. Given its relative size and the nature of most commodity markets, the Company has little or no influence over the market’s pricing levels for its wood products. Accordingly, the Company will continually seek to reduce controllable costs and expenses from its manufacturing processes. Sales of real estate are affected by general economic conditions, interest rates, home foreclosures, new and existing home inventories, and the availability and cost of credit; specifically as such factors are manifested in the Company’s operating area of central Arkansas.

Significant accomplishments for the Company’s operating segments during the year of 2008 include: (1) the Woodlands segment capitalized on the strong demand for pulpwood and achieved a 15 percent higher average sales price per ton for pine pulpwood and a 22 percent higher average sales price per ton for hardwood pulpwood; (2) the sale of approximately 5,100 acres of non-strategic, recreational-use, hardwood bottomland and the utilization of the proceeds to enhance Deltic’s core timberland holdings; (3) the Mills segment achieved positive cash flow in the current year due to continued improvements in operating efficiencies and the benefits from reduced unit manufacturing cost, primarily through lower log supply cost; and (4) the Real Estate segment’s Red Oak Ridge development reported its second best level of annual residential sales activity.

The Woodlands segment maintained its position as the Company’s established core operation. The 2008 pine sawtimber harvest volume increased slightly to 580,000 tons when compared to 2007’s volume of 576,000 tons, but the average sales price decreased 18 percent to $33 per ton. Despite the decline in the average pine sawtimber sales price, the segment’s 2008 overall operating income increased by $3 million, or 12 percent. The improvement was due to increased sales of non-strategic hardwood bottomland; higher revenues from hunting and oil and gas lease rentals and royalties, and easements and rights-of-way; and increased other revenues resulting from the natural gas drilling activity occurring on the Company’s fee lands, including damages for acreage taken out of timber production for wellsite locations, and fees for allowing seismic testing. Since Deltic expects the markets for residential housing and lumber to remain depressed through 2009, prices received for pine sawtimber harvested for this period are not expected to improve from current levels.

While lumber production levels within a region can influence pine sawtimber prices, lumber prices typically do not. Over the long-term, there is a fundamental correlation between the level of lumber prices and pine sawtimber prices. However, in the short-term, the geographical size differential between the lumber and pine sawtimber markets results in the two acting somewhat independently of each other. Pine sawtimber markets operate primarily within local or regional areas with sales being mainly to sawmills. These mills are subject to a relatively fixed level of demand for raw materials that is driven by the facilities’ required production levels. Changes in pricing levels within the lumber market typically do not have an immediate effect on the existing demand for raw materials in the short-term; therefore, the resulting impact on pine sawtimber prices will usually lag in timing and be less volatile than the market for lumber. This trend would typically also be true in the short-term during times of a depressed lumber market. Ultimately, the Company’s ability to sell pine sawtimber at acceptable prices in the future will be dependent upon the size or existence of markets for manufactured lumber and other wood products. The Company continues to manage the harvest level of its forests on a sustainable-yield basis.

 

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Timberland designated as higher and better use consists of tracts with market values that exceed the land’s worth as a timber growing platform. Deltic’s approximately 57,000-acre timberland holdings in the expanding westward growth corridor of Little Rock, Arkansas, is an example of such land. Non-strategic timberland is composed primarily of hardwood bottomland acreage not suitable for the growing of pine timber for which the demand by recreational users for hunting, etc. has increased in recent years, tracts too small to allow efficient timber management, those geographically isolated from other Company fee lands, or any other acreage not deemed strategic to Deltic’s operations or growth. Approximately 5,100 acres of non-strategic hardwood bottomland was sold during 2008. Additional sales of these acres will continue in 2009 and beyond as market conditions allow. The sales of the non-strategic hardwood bottomland were accomplished in conjunction with acquiring 5,000 acres of pine timberland. By utilizing the tax-deferring, like-kind exchange method, Deltic was able to minimize the tax consequences and invested or will invest timberland sale proceeds into pine timberland.

In addition to pine and hardwood timber sales, the Company receives additional values of land ownership, such as revenues from hunting leases, mineral lease rentals and royalties, and land easements, that have historically provided additional income to Deltic’s Woodlands segment. Recent advances in technology and increased pricing levels have resulted in the economic viability of expanded natural gas exploration within the state of Arkansas. One current area of activity, known as the “Fayetteville Shale Play”, is an unconventional natural gas reservoir, ranging in depth from 1,300 feet to 6,500 feet, and is spread across multiple Arkansas counties. Deltic has leased approximately 32,100 acres in this area to various exploration enterprises and received applicable lease rental payments, with the possibility of future royalty income should production be established. The Company continues to evaluate additional leasing requests within the currently defined boundary of the Fayetteville Shale Play, although future leasing will probably not be significant within this boundary. Production has begun in a few areas and Deltic received over $1.3 million in royalty payments from this area in 2008. The ultimate benefit to Deltic from these mineral leases remains speculative and unknown to the Company and is contingent on the level of natural gas prices and the successful extraction and sale of natural gas from the area.

For the Mills segment, the status of the lumber market and the resulting pricing for the Company’s commodity softwood lumber products will continue to impact operating strategies and financial results. By the end of 2008, the seasonally adjusted annual rate of housing starts had reached its lowest level in 50 years. Factors affecting this decline were the U.S. economic recession, falling home prices, stricter mortgage lending practices brought about by sub-prime loan failures, construction loan delinquencies that are causing lenders to tighten credit for new developments, increased home foreclosure rates, and increased new and existing home inventory levels. The segment’s 2008 average lumber sales price declined six percent when compared to 2007. Lumber sales volume increased 17 percent compared to 2007 due mainly to the three-month suspension of production at the Waldo Mill while undergoing fire related repairs in 2007 combined with improved hourly production rates throughout 2008. As with any commodity market, the Company expects the historical volatility of lumber prices to continue in the future. Other factors impacting future lumber prices include the level of production capacity utilized, inventory levels, and the level of repair and remodeling activity. Many industry analysts are projecting that the market for new housing will not improve during 2009. That, along with excess production capacity and high inventory levels, could have a negative impact on lumber sales prices. As in the past, Deltic will make timely management decisions to take advantage of supply and demand situations.

Since commodity-based markets rarely benefit from real price growth, after inflation, Deltic has concentrated management’s attention, in regard to its manufacturing operations, on improving sales realizations through product and customer mix enhancements and improving production efficiencies and the cost structure at its lumber mills. The Company has achieved improved production efficiencies at both of its sawmills, largely as a result of an intensive capital upgrade program over the past four years. This improvement has been more significant at the Ola Mill, as the upgrade program there has focused on maximizing hourly productivity rates with the smaller log size available as raw material for the mill. In 2008, Deltic installed a new log bucking system at this sawmill, improving the log-to-lumber yield ratio there. Deltic will continue to seek opportunities that will enable it to increase operating efficiencies, while reducing controllable cost.

 

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Sales activity levels for the Company’s real estate developments have been affected by economic conditions that influence the level of housing starts in the central Arkansas region, including general economic conditions, new and existing housing inventories, home foreclosure rates, and stricter lending requirements for homebuyers and builders. These conditions contributed to a decrease in the overall demand for residential lots in Chenal Valley, the largest of the Company’s three active developments, as evidenced by Chenal Valley’s 25 residential lot closings. This was a reduction of 48 lots from 2007’s level of 73 residential lot closings. As of December 31, 2008, there were 174 developed lots in Chenal Valley uncommitted. The Company opened 32 new lots during 2008 to maintain a specific mix of lot offerings. Ultimately, the impact to Deltic’s overall real estate business model from fluctuations, both positive and negative, in the annual volumes of residential lot sales is deemed minimal in light of the Company’s continued focus on the long-term financial returns from the ultimate build-out of the Chenal Valley development. In Deltic’s other two active developments, Red Oak Ridge had sales of 12 lots and Chenal Downs had two lot sales. Deltic has 61 developed lots in Red Oak Ridge and 13 in Chenal Downs uncommitted as of year-end 2008. While Chenal Downs is fully developed, Deltic plans to develop additional lots within Red Oak Ridge as demanded by market conditions. Actual future annual lot development levels will be dependent upon the demand for the Company’s residential lots.

The Real Estate segment’s average sales price for residential lots sold in 2008 was $78,000, which was a decrease of 13 percent when compared to 2007, due to the current-year sales mix. The Company has not nor does it plan to reduce the sales price of its residential lots. Deltic’s lot development plans provide for a mix of lot offerings that represent all real estate market segments for a planned community. Neighborhoods adjoining Chenal Country Club’s second 18-hole, championship golf course designed by Robert Trent Jones, Jr. represent the highest priced market segment in the Chenal Valley development. Average prices for non-golf course lots are lower and vary between neighborhoods depending on other factors such as lot size and location. The mix of lot offerings for any given year will be driven by lot inventory and expected demand.

Commercial real estate sales activity is by nature less predictable than residential activity. With the number of residents and past growth in West Little Rock, specifically Chenal Valley, the Company continues to receive interest in multi-family housing sites and commercial real estate in and around the vicinity of “The Promenade at Chenal,” an upscale shopping center within Chenal Valley that opened in 2008, though economic uncertainties and stricter lending requirements has had an impact on commercial acreage closings. There were no sales of commercial real estate acreage in 2008 compared to 26 acres in 2007. Future pricing trends for commercial real estate sales are difficult to predict and are influenced by multiple factors, which include intended use of the site, and property location and access. No commercial acreage is included in the Chenal Downs development. Red Oak Ridge includes a small amount of commercial property, depending on actual final land usages. The Company will begin to develop and offer commercial sites as this development’s population density increases. There were no sales of undeveloped acreage during 2008, while the Company sold approximately 680 acres in 2007.

Operating results for Del-Tin Fiber are affected primarily by the overall MDF market and plant operating performance. Del-Tin was able to operate at a profitable level during 2008 by passing through the higher raw material costs, in the form of price increases, and improved production efficiencies. The demand for thin board, used in store fixtures and laminate flooring, remained strong through the first nine months of 2008, but with the reduction in housing starts along with the current recession, the market began weakening in the fourth quarter. Del-Tin has continued to maximize earnings potential of the thin board production by developing a strategy to grow market share for this product.

Operationally, Del-Tin Fiber maintained its uptime percentage and premium grade production levels. The facility was able to push through increased raw material costs to its customers; however, Del-Tin will continue to be affected by decreased supply and increased costs for wood fiber used in the manufacturing process. The wood fiber supply and cost issues are due largely to a shortage of softwood residual wood chips as area lumber mills curtailed production in reaction to lumber market conditions. With reduced mill production levels, the volume of residual by-product chips produced decreases proportionally. During 2007 and 2008, the resin glue utilized to bond MDF in the manufacturing process increased significantly in price due to substantial price increases in methanol, which is a raw material used in the manufacture of the resin glue. Due to decreases in the cost of methanol in late 2008 and curtailments by wood product manufacturing facilities that use the resin glue, there is currently an increased supply of resin glue. With this reduction in cost to manufacture resin glue and increased supply, Del-Tin’s cost for resin is starting to decrease.

 

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For 2009, wood fiber cost is expected to remain near current levels, while resin glue prices are projected to decrease. Manufacturers have been able to recover a portion of their raw materials cost through price increases, though it may slip some with the decreased cost for resin glue. Del-Tin Fiber’s efforts will be concentrated on further improvements in its hourly productivity level and other plant operating efficiencies, while making additional reductions in the plant’s manufacturing cost structure where possible.

On May 22, 2008, the Food, Conservation, and Energy Act of 2008 was enacted. Within this Act was the TREE Act, which included a provision for a reduced federal tax rate on qualified timber gains for one year. Gains on qualified timber sales beginning May 23, 2008, through May 22, 2009, will be taxed at a 15 percent alternate tax rate for corporations. Efforts are ongoing to extend this provision for another year or to make this legislation permanent, but law changes are not certain until passed by both houses of Congress and signed into law by the President. Due to the lack of taxable income for Deltic in 2008, the effects of this act were inconsequential for the year, but could provide a lower effective tax rate in 2009. Deltic has benefited from various discrete tax items in 2008 that combined to provide a lower effective tax rate.

This excerpt taken from the DEL 10-Q filed Nov 7, 2008.

Executive Overview

The Company recorded net income of $2.5 million for the third quarter of 2008 compared to income of $.2 million for the same period of 2007. The Woodlands segment continued its role as the established core operation of the Company during the third quarter, providing $5.1 million in operating income despite downward pressure on pine sawtimber stumpage prices compared to $4.9 million in the third quarter of 2007. The Company’s Mills segment recorded operating income of $1.8 million in 2008’s third quarter compared to a loss of $.8 million for the third quarter of 2007. The Real Estate segment recorded an operating loss for the 2008 third quarter of $.5 million, which compares to breakeven results for the same period of 2007. Deltic owns a 50 percent interest in Del-Tin Fiber L.L.C. and recorded equity in earnings of $.7 million for the third quarter of 2008, an increase from $.3 million for the same quarter of 2007. The Company had an income tax benefit of $.5 million for the third quarter of 2008 compared to expense of $.2 million for the same period of 2007 due primarily to the benefit of a lower effective income tax rate related to statutory changes with the enactment of the TREE Act that was part of the Food, Conservation, and Energy Act of 2008 that reduced the federal tax rate on qualified timber sale gains in 2008 and 2009 and benefits from other discrete tax items.

Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. This environment is affected by a number of factors including general economic conditions, interest rates, credit availability, imports, foreign exchange rates, housing starts, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. The difficult conditions affecting the U.S. economy, banking system, and housing markets continues to influence the Company’s operating environment. Tightened credit markets, economic uncertainties, and the large inventories of homes continued through the third quarter. Housing starts in the U.S. have declined 31 percent from September 2007 to September 2008, to the lowest level in 17 years, and have impacted the Company’s operating environment. There was some lumber price improvement in the third quarter of 2008 due to reduced supply, but the continued economic weakness exacerbated by the crisis in the financial markets is causing prices to soften. Given Deltic’s size and the nature of the commodity market that it operates within, the Company has little or no control over pricing levels for its forest products. Deltic continues to benefit from increased sawmill efficiencies and timely management actions to take advantage of supply and demand situations.

For the third quarter of 2008, pine sawtimber harvest levels increased 43,371 tons, to 147,436 when compared to the third quarter of 2007. During the third quarter of 2007, the Company’s fee timber harvest was curtailed because the Waldo Mill was shut down for approximately two months during that period for fire related repairs. The Company plans to consume the 2008 annual harvest in its sawmills and to keep the harvest level volume approximately the same as in 2007, and will continue to manage Company timberlands on a sustainable-yield basis. The average pine sawtimber price per ton decreased ten dollars, or 26 percent, to $29 per ton during the third quarter due to downward pressure from the higher-than-normal availability of privately owned pine sawtimber and reduced demand caused by the closure or curtailment of several sawmills in the Company’s operating area. The Company harvested 84,138 tons of pine pulpwood during the third quarter of 2008, a decrease of 21,861 tons from the same period in 2007. The average sales price was $13 per ton, no change from the third quarter of 2007. The Company sold approximately 185 acres of non-strategic hardwood bottomland at an average sales price of $1,469 per acre during the third quarter of 2008 compared to sales of 360 acres at $1,964 for the same period of 2007. Recreational users of hardwood bottomland continue to provide a market for the non-strategic land sales. The Woodlands segment reported hunting lease income of $.4 million for the third quarters of 2008 and 2007.

Recent advances in technology and increased pricing levels for natural gas have resulted in the viability of expanded natural gas exploration within the state of Arkansas. One current area of activity known as the “Fayetteville Shale Play” is an unconventional natural gas reservoir ranging in depth from 1,300 feet to 6,500 feet, and is spread across multiple Arkansas counties. Deltic has leased

 

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approximately 32,000 net mineral acres in this area to various exploration enterprises and received applicable lease bonus payments and the possibility of future royalty income should production be established. The Company continues to evaluate additional leasing requests within the currently defined boundary of the Fayetteville Shale Play, although future leasing will probably not be significant within the boundary currently defined by the Arkansas Oil and Gas Commission. The ultimate benefit to Deltic from these mineral leases remains speculative and unknown to the Company and is contingent on the successful extraction and sale of natural gas from this area. Deltic’s gas royalties from the defined Fayetteville Shale Play area have averaged about $132,000 per month during the third quarter of 2008. Deltic has reported total oil and gas royalty income of $.5 million and $.1 million for the third quarter of 2008 and 2007, respectively. Oil and gas lease income was $.5 million for the third quarter of 2008 compared to $.3 million for the same period of 2007.

The Mills segment benefited from reduced lumber inventories and curtailed capacities, which have led to a slight increase in average sales price in the third quarter of 2008 of three dollars per MBF, to $307 per MBF compared to the third quarter of 2007’s average of $304 per MBF. Lumber sales were 69.5 million board feet in the current period of 2008, an increase when compared to 45.6 million board feet for the same period of 2007 due to the fire related Waldo Mill shutdown in 2007. The Mills segment reported positive margins each month of the quarter due to increased productivity and lower log cost. As with any commodity market, the Company expects the historical volatility of lumber prices and demand to continue in the future. The Company continues to expect about half of the logs supplied to its sawmills will come from its strategically located fee timberlands.

The Real Estate segment closed the sale of 11 residential lots during the third quarter of 2008, versus 24 residential lots for the same quarter in 2007. The average sales price per lot declined $10,000 per lot when compared to the same quarter last year due to the mix of lots sold. Deltic’s lot development plans provide for lot offerings that represent most real estate market segments for planned communities. The Company opened one new neighborhood, Accadia Court, within Chenal Valley in late September, consisting of 32 lots in the middle-tier of its three price levels, to maintain the planned lot inventory mix. The Company sold six lots within the Chenal Valley development in the third quarter of 2008 versus 22 during the same period of 2007. In Deltic’s other two developments, Red Oak Ridge and Chenal Downs, five lots were sold during the third quarter of 2008 versus two during the same period of 2007. Chenal Downs is fully developed. Deltic does not plan to develop any additional residential lots in 2008 or 2009. Future annual development activity will be dependent upon the demand for the Company’s residential lots. Commercial real estate sales activity is by nature less predictable than residential sales. The Company continues to see interest in commercially zoned acreage in and around the area of “The Promenade at Chenal”, an upscale shopping center within Chenal Valley, but tightened credit caused by uncertainties in the credit markets have impacted the timing of potential sales transactions.

Operating results for Del-Tin Fiber are affected by the overall medium density fiberboard (“MDF”) market and the plant’s operating performance. Del-Tin has been able to operate at a profitable level during 2008 by passing through the higher raw materials costs, in the form of price increases, and improving production efficiencies. The demand for thin board, used in store fixtures and laminate flooring, remained strong through the third quarter, but is starting to soften due to the reduction in housing starts. Del-Tin produced 28 percent of its product mix as thin board in the third quarter. With regard to the Company’s equity position in Del-Tin, Deltic continues to reduce depreciation expense related to the add-back per thousand square feet manufactured, which relates to the impairment taken by the Company in 2002, which was not recorded at the Del-Tin level. The difference in basis between the Company and Del-Tin is being adjusted to account for Del-Tin’s operating results as if it were a consolidated subsidiary. (For further discussion, refer to Note 4 to the consolidated financial statements.)

On May 22, 2008, the Food, Conservation, and Energy Act of 2008 was enacted. Within this Act was the TREE Act which included a provision for a reduced federal tax rate on qualified timber gains for one year. Gains on qualified timber sales beginning May 23, 2008, through May 22, 2009, will be taxed at a 15 percent alternate tax rate for corporations. The effects of this act have been reported in the current period of 2008 and reduced the effective tax rate for the current period and year. Deltic has also benefited from various discrete items which when combined with a lower effective tax rate resulted in a $.5 million benefit in the third quarter.

 

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This excerpt taken from the DEL 10-Q filed Aug 6, 2008.

Executive Overview

The Company recorded net income of $2.5 million for the second quarter of 2008 compared to income of $2.6 million for the same period of 2007. The Woodlands segment provided $7.4 million in operating income during the second quarter of 2008, maintaining its position as the established core operation of the Company. The difficult conditions in the U.S. housing market continue to affect Deltic’s Real Estate and Mills segment. The Real Estate segment recorded an operating loss for the 2008 second quarter of $.3 million compared to income of $5.2 million for the same period of 2007. The results for the second quarter of 2007 include two commercial sales of approximately 26 acres at $241,000 per acre, while there were no sales of commercial real estate during the second quarter of 2008. The Company’s Mills segment recorded an operating loss of $.6 million in 2008’s second quarter. Deltic owns a 50 percent interest in Del-Tin Fiber L.L.C. and recorded equity in earnings of $.7 million for the second quarter of 2008, down slightly from $.8 million for the same quarter of 2007. Income tax expense was $.5 million for the second quarter of 2008 compared to $1.7 million for the same period of 2007 due primarily to lower pretax income combined with the benefit of a lower effective income tax rate due to statutory changes related to enactment of the TREE Act that was part of the recently approved Food, Conservation, and Energy Act of 2008 that reduced the federal tax rate on qualified timber sale gains in 2008 and 2009.

Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. This environment is affected by a number of factors including general economic conditions, interest rates, imports, foreign exchange rates, housing starts, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. The continued weakness in both the U.S. economy and housing markets continue to influence the Company’s operating environment. Tightened credit markets, high fuel prices, and the large inventories of homes continued through the second quarter with no expectation of improvement in the near future. These factors helped to cause housing starts in the U.S. to decline 43 percent from June 2007 to June 2008. In May, new home sales were down 40 percent from a year ago, the lowest level in 17 years, which also contributed to the decrease in the Real Estate segment activity. There was some lumber price improvement in the second quarter of 2008 due to the seasonal spring building increase. The Company expects continued instability in lumber prices due to weak market conditions. Given Deltic’s size and the nature of the commodity market that it operates within, the Company has little or no control over pricing levels for its forest products. As a result of Deltic’s operating environment it continues to focus on increasing efficiencies, while reducing its controllable cost.

For the second quarter of 2008, pine sawtimber harvest levels increased 46,760 tons, when compared to the second quarter of 2007, to 143,191 tons. The increase is due in part to timing related to the Company’s plans to use the 2008 annual harvest internally in its sawmills and seasonal weather conditions. Deltic intends to keep 2008’s total pine sawtimber harvest volume comparable to the level in 2007, thus continuing to manage the timberlands on a sustainable-yield basis. The Company harvested 89,618 tons of pine pulpwood during the second quarter of 2008, a decrease of 21,975 tons from the same period in 2007. The average sales price was $15 per ton, a 15 percent increase from $13 per ton for the second quarter of 2007. The Company sold approximately 971 acres of non-strategic hardwood bottomland at an average sales price of $2,300 per acre during the second quarter of 2008 compared to sales of 63 acres at $1,557 for the same period of 2007. Recreational users of hardwood bottomland continue to provide a market for the non-strategic land sales.

Recent advances in technology and increased pricing levels for natural gas have resulted in the viability of expanded natural gas exploration within the state of Arkansas. One current area of activity known as the “Fayetteville Shale Play” is an unconventional natural gas reservoir ranging in depth from 1,300 feet to 6,500 feet, and is spread across multiple Arkansas counties. Deltic has leased approximately 32,000 net mineral acres in this area to various exploration enterprises and received applicable lease bonus payments and the possibility of future royalty income should production be established. The Company continues to evaluate additional leasing requests within the currently defined

 

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boundary of the Fayetteville Shale Play, although future leasing will probably not be significant within the boundary currently defined by the Arkansas Oil and Gas Commission. The ultimate benefit to Deltic from these mineral leases remains speculative and unknown to the Company and is contingent on the successful extraction and sale of natural gas from this area. Deltic’s gas royalties from the defined Fayetteville Shale Play area have increased to approximately $100,000 per month during the second quarter of 2008.

The Mills segment continued to experience weak market conditions which have caused the average sales price in the second quarter of 2008 to decline $17 per MBF, to $289 per MBF, or 5.6 percent, from the second quarter of 2007’s average of $306 per MBF. Lumber sales were 70.1 million board feet in the current period of 2008, an increase when compared to 63.8 million board feet for the same period of 2007 due to improved mill productivity. Lumber prices increased through May, and the Mills segment reported positive margins for the months of May and June due to increased productivity and improved cost structure. As with any commodity market, the Company expects the historical volatility of lumber prices and demand to continue in the future. The Company continues to expect about half of the logs supplied to its sawmills will come from its strategically located fee timberlands.

The Real Estate segment closed the sale of seven residential lots during the second quarter of 2008, a reduction of 13 residential lots when compared to the same quarter in 2007. The average sales price per lot declined $16,000 when compared to the same quarter last year due to the mix of lots sold. Deltic’s lot development plans provide for lot offerings that represent most real estate market segments for planned communities. The Company plans to offer one new neighborhood within Chenal Valley in late August, consisting of 32 lots in the middle-tier of its three price levels, to maintain the planned lot inventory mix. The Company sold six lots within the Chenal Valley development in the second quarter of 2008 versus 17 during the same period of 2007. In Deltic’s other two developments, Red Oak Ridge and Chenal Downs, one lot was sold during the second quarter of 2008 versus three during the same period of 2007. Chenal Downs is fully developed and Deltic does not plan to develop any additional lots within Red Oak Ridge during 2008. Future annual development activity will be dependent upon the demand for the Company’s residential lots. Commercial real estate sales activity is by nature less predictable than residential activity. There were no commercial real estate sales during the second quarter of 2008 while the Company sold approximately 26 acres at $241,000 per acre during the same period of 2007. Multi-family housing sites continue to receive interest, as well as commercial real estate in and around the area of “The Promenade at Chenal”, an upscale shopping center within Chenal Valley. The developers of the center plan for 25 to 30 businesses to be open by year-end. Currently a movie theatre is open and the first stores are expected to open in August.

Operating results for Del-Tin Fiber are affected by the overall medium density fiberboard (“MDF”) market and the plant’s operating performance. The demand for thin board, used in store fixtures and laminated flooring, was strong in 2007 and has remained strong through the first half of 2008. Del-Tin produced 25 to 35 percent of its product mix as thin board and plans to grow its market for this product. Cost of wood fiber, resin glue, and wax used in the manufacturing process continues to remain high, but Del-Tin has been able to recover a portion of these costs through MDF sales price increases. With regard to the Company’s equity position in Del-Tin, Deltic continues to reduce depreciation expense related to the add-back per thousand square feet manufactured, which relates to the impairment taken by the Company in 2002, which was not recorded at the Del-Tin level. The difference in basis between the Company and Del-Tin is being adjusted to account for Del-Tin’s operating results as if it were a consolidated subsidiary. (For further discussion, refer to Note 4 to the consolidated financial statements.)

On May 22, 2008, the Food, Conservation, and Energy Act of 2008 was enacted. Within this Act was the TREE Act which included a provision for a reduced federal tax rate on qualified timber gains for one year. Gains on qualified timber sales beginning May 23, 2008, through May 22, 2009, will be taxed at a 15 percent alternate tax rate for corporations. The effects of this act have been reported in the current period of 2008 and reduced the effective tax rate for the current period and year.

 

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This excerpt taken from the DEL 10-Q filed May 8, 2008.

Executive Overview

The Company recorded a net loss of $.4 million for the first quarter of 2008 compared to income of $6.6 million for the same period of 2007. The Woodlands segment remained the established core operation of the Company by providing $8.4 million in operating income during the current quarter of 2008. Deltic’s Real Estate and Mills segments continue to be affected by the slowdown in the U.S. housing market and each reported an operating loss in the first quarter of 2008. The Real Estate segment recorded a loss for the quarter of $.6 million in the current year compared to income of $7.4 million for the corresponding period of 2007. The results for the 2007 period included a sale of 680 acres of undeveloped real estate at $12,000 per acre, while no undeveloped or commercial real estate sales occurred in the first quarter of 2008. The Company’s Mills segment recorded an operating loss of $4.4 million in the first quarter of 2008 compared to a loss of $2.0 million in the first quarter of 2007, due mainly to a $52 per thousand board feet (“MBF”), or 18 percent, decrease in the finished lumber sales realization, to $240 per MBF. Deltic owns a 50 percent interest in Del-Tin Fiber L.L.C. and recorded income of $.7 million for the first quarter of 2008, up from $.2 million for the same quarter of 2007.

Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. This environment is affected by a number of factors including general economic conditions, interest rates, imports, foreign exchange rates, housing starts, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. The ongoing housing slump has brought new home sales to a 17 year low, while housing starts continue to be 37 percent below prior year levels. Factors impacting the U.S. housing market are increased new home inventory levels which reached their highest point in 26 years, stricter lending practices brought about by sub-prime mortgage failures, current liquidity issues within the banking industry, and uncertainties in the U.S. economy. The Company’s sales of real estate were affected by these factors and resulted in a reduction in residential lot sales when compared to the first quarter of 2007. Conditions in the housing market continue to depress the demand for softwood lumber products, thus lowering consumption levels. Given its relative size and the nature of most commodity markets, the Company has little or no control over pricing levels for its lumber products. The Company will continue to focus on increasing operating efficiencies and reducing controllable manufacturing costs.

For the first quarter of 2008, pine sawtimber harvest levels decreased 56,451 tons, when compared to the first quarter of 2007, to 180,374 tons. The decrease is due in part to timing related to the Company’s plans to use the 2008 annual harvest internally in its sawmills and partly to weather conditions during the first quarter of 2008. Deltic plans to keep 2008’s total pine sawtimber harvest volume comparable to the level in 2007, thus continuing to manage the timberlands on a sustainable-yield basis. The Company harvested 99,776 tons of pine pulpwood during the first quarter of 2008, a decrease of 50,338 tons from the same period in 2007. The average sales price was $16 per ton, a 14 percent increase from $14 per ton for the first quarter of 2007. Increased prices for pulpwood have been attributed in part to reduced production of residual wood chips from area sawmills due to production curtailments caused by the depressed lumber market. The Company sold approximately 674 acres of non-strategic hardwood bottomland at an average sales price of $2,128 per acre during the first quarter of 2008 compared to no sales of timberland for the same period of 2007.

Recent advances in technology and increased pricing levels for natural gas have resulted in the viability of expanded natural gas exploration within the state of Arkansas. One current area of activity known as the “Fayetteville Shale Play” is an unconventional natural gas reservoir ranging in depth from 1,300 feet to 6,500 feet, and is spread across multiple Arkansas counties. Deltic has leased approximately 32,000 net mineral acres in this area to various exploration enterprises and received applicable lease bonus payments and the possibility of future royalty income should production be established. The Company continues to evaluate additional leasing requests within the currently defined boundary of the Fayetteville Shale Play, although future leasing will probably not be significant within the boundary currently defined by the Arkansas Oil and Gas Commission. The ultimate benefit to Deltic from

 

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these mineral leases remains speculative and unknown to the Company and is contingent on the successful extraction and sale of natural gas from this area. Deltic’s gas royalties from the defined Fayetteville Shale Play area were approximately $40,000 per month during the first quarter of 2008.

The Mills segment continued to operate in a depressed lumber market which has caused the average sales price in the first quarter of 2008 to decline $52 per MBF, to $240 per MBF, or 18 percent, from the first quarter of 2007’s average of $292 per MBF. Lumber sales were 62.5 million board feet in the current period of 2008, an increase when compared to 61.6 million board feet for the same period of 2007, due mainly to improved hourly production rates for the sawmills. As with any commodity market, the Company expects the historical volatility of lumber prices to continue in the future. The Company plans for over half of the logs supplied to its sawmills to come from its strategically located fee timberlands.

The Real Estate segment closed the sale of seven residential lots during the first quarter of 2008, a reduction of seven residential lots when compared to the same quarter in 2007. The average sales price per lot declined $32,000 when compared to the same quarter last year due to the mix of lots sold. Deltic’s lot development plans provide for lot offerings that represent most real estate market segments for planned communities. The Company will offer one new neighborhood within Chenal Valley in August, consisting of 32 lots in the middle-tier of its three price levels, to maintain its planned lot inventory mix. The Company sold six lots within the Chenal Valley development in the first quarter of 2008 versus 12 during the same period of 2007. In Deltic’s other two developments, Red Oak Ridge and Chenal Downs, one lot was sold during the first quarter of 2008 versus two during the same period of 2007. Chenal Downs is fully developed and Deltic does not plan to develop any additional lots within Red Oak Ridge during 2008. Future annual development activity will be dependent upon the demand for the Company’s residential lots. Commercial real estate sales activity is by nature less predictable than residential activity. No commercial sales occurred in the first quarter of 2008 or 2007. Multi-family housing sites continue to receive interest, and interest in commercial real estate acreage in the area of “The Promenade at Chenal”, an upscale shopping center within Chenal Valley, has increased as the opening date for the center nears. Currently about one-half of the tenants of The Promenade anticipate opening by mid-summer, with a formal grand opening of The Promenade planned for later this year. The Company had no sales of undeveloped acreage during the current period of 2008 compared to 680 acres sold at $12,000 per acre during the same period of 2007.

Operating results for Del-Tin Fiber are affected by the overall medium density fiberboard (“MDF”) market and the plant’s operating performance. The demand for thin board, used in store fixtures and laminated flooring, was strong in 2007 and has remained strong through the first quarter of 2008. Del-Tin produced 25 to 35 percent of its product mix in this board and plans to grow its market for this product. Cost of wood fiber, resin glue, and wax used in the manufacturing process continues to remain higher than normal, but Del-Tin has been able to recover a portion of these costs through MDF sales price increases. Del-Tin’s operational income increased during the first quarter of 2008, when compared to 2007, due primarily to the greater percentage of thin board sales. With regard to the Company’s equity position in Del-Tin, Deltic continues to reduce depreciation expense related to the add-back per thousand square feet manufactured, which relates to the impairment taken by the Company in 2002, which was not recorded at the Del-Tin level. The difference in basis between the Company and Del-Tin is being adjusted to account for Del-Tin’s operating results as if it were a consolidated subsidiary. (For further discussion, refer to Note 4 to the consolidated financial statements.)

The proposed Farm Bill, currently being considered by Congress, includes a timber measure known as the Tree Act that would reduce the federal tax rate on qualified timber gain. If passed by Congress and signed into law by the President this Act may lower Deltic’s effective tax rate.

 

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This excerpt taken from the DEL 10-Q filed Nov 7, 2007.

Executive Overview

The Company reported net income of $.2 million for the third quarter of 2007 compared to $6.3 million for the same period of 2006. Like other forest product companies, Deltic continues to be impacted by the depressed housing and softwood lumber markets. Deltic’s Woodlands segment provided $4.9 million operating income in the third quarter. The Company’s Mills segment recorded an operating loss of $.8 million in 2007’s third quarter. The Real Estate segment’s operations broke even during the third quarter. Deltic owns a 50 percent interest in Del-Tin Fiber L.L.C., and recorded related equity income of $.3 million for the third quarter of 2007.

Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. This environment is affected by a number of factors including general economic conditions, interest rates, imports, foreign exchange rates, housing starts, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. The downward trend in new home sales began during the second half of 2005, and the level of housing starts continued to drop, reaching its slowest pace in more than 14 years in September 2007. Factors affecting this decline in the new housing market were higher mortgage rates, increased home inventory levels, and the impact of stricter lending practices due to sub-prime loans failing in the mortgage banking industry. The Company’s sales of real estate were affected by these factors, which helped to cause a reduction in residential lot sales as compared to the first nine months of 2006. The decline in the housing market has led in large part to a continued lower demand in the first nine months of 2007 for softwood lumber products. Given its relative size and the nature of most commodity markets, the Company has little or no control over pricing levels for its lumber products but will continue to focus on increasing efficiencies and reducing controllable manufacturing cost.

On August 9, 2007, the Company experienced a fire in the planer section of its operating facility located in Waldo, Arkansas. Damage was extensive to this portion of the facility and operations at the facility have been temporarily suspended while repairs are made to the damaged area. Costs of repair or replacement of property and equipment and business interruption are covered under the terms of applicable insurance policies, subject to deductibles. All property insurance proceeds are expected to be reinvested to fully restore the Waldo operations. The Company expects to be fully operational in November 2007.

For the third quarter of 2007, the pine sawtimber harvest level decreased 17,571 tons to 104,065 and sales price declined from $44 to $39 per ton when compared to the third quarter of 2006. Since the Company’s mills are the primary consumer of company timber, a fire at the Waldo Mill impacted the timing of the pine sawtimber harvest in that region. The Company expects the Mill to resume production in November, which will allow Deltic to resume harvesting in conjunction with the Mill startup. Deltic plans to keep 2007’s total pine sawtimber harvest volume comparable to the harvest level in 2006, and will continue to manage the timberlands on a sustainable-yield basis. Ultimately, the Company’s ability to sell pine sawtimber at acceptable prices in the future will be dependent upon the health of the markets for manufactured lumber and other wood products. The Company harvested 105,999 tons of pine pulpwood during the third quarter of 2007, compared to 120,288 tons from the same period in 2006. The average sales price was $13 per ton, an 86 percent increase from $7 for the third quarter of 2006. Deltic recorded an increase in pine pulpwood revenues of $.5 million when compared to the third quarter of 2006. The increased demand and prices for pulpwood has been attributed in part to reduced production of residual wood chips from area sawmills due to production curtailments caused by the depressed lumber market, and to the impact of wet weather conditions on pulpwood harvesting activity in the Company’s operating region during the first half of 2007. The Company also sold approximately 360 acres of non-strategic timberland for $1,964 per acre during the third quarter of 2007 versus no acres sold during the same period of 2006.

As reported during the past several quarters, advances in technology and increased pricing levels for natural gas have resulted in the viability of expanded natural gas exploration within the state of Arkansas. One area known as the “Fayetteville Shale Play”, an unconventional natural gas reservoir, is spread across multiple central Arkansas counties. Deltic has leased approximately 26,000 net mineral acres in this area to various exploration enterprises and has received applicable lease bonus payments in addition to the possibility of future royalty income should production be established. The Company continues to evaluate additional leasing requests within the Fayetteville Shale Play, although future leasing will probably not be significant unless the defined boundary of the Play expands. The ultimate benefit to Deltic from these mineral leases is contingent on the successful extraction and sale of natural gas from the area.

 

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The Mills segment reported an operating loss of $.8 million in the third quarter of 2007 compared to a loss of $3.5 million in 2006. The average sales price for lumber in the third quarter of 2007 increased $10 per thousand board feet (“MBF”), or three percent, to $304 per MBF compared to $294 per MBF for the same period of 2006. Lumber sales volumes declined in the third quarter of 2007 by 28 percent from the third quarter of 2006 to 45.6 million board feet. This reduction was primarily caused by the Waldo Mill being temporarily shut down for the fire related repairs, even though the Company continued to sell lumber from existing finished inventory. The Company expects to resume production in November. Operating efficiencies at the Ola Mill improved significantly during the third quarter of 2007 when compared to the same period of 2006, which reduced average cost per MBF of lumber produced. As with any commodity market, Deltic expects the historical volatility of lumber prices to continue in the future. The Company continues to anticipate a significant percentage of logs supplied to both of its sawmills to come from strategically located Company fee timber lands.

The Real Estate segment closed the sale of 24 residential lots during the third quarter versus 23 lots for the same quarter in 2006. The average sales price per lot declined 20 percent, to $83,900, when compared to the same quarter last year. The reported average sales price for residential lots for a specific period is dependent upon the mix of lot sales. Deltic’s lot development plans provide for a mix of lot offerings that represent most real estate market segments for planned communities. Due to the current pace of new home starts and the current sufficient lot inventory, there are no significant capital expenditures planned for residential lot development for the remainder of 2007. The Company sold 22 lots within the Chenal Valley development in the third quarter of 2007 versus 10 during the same period of 2006. In Deltic’s other two developments, Red Oak Ridge and Chenal Downs, two lots were sold during the third quarter of 2007 compared to 13 lots in the same period of 2006. Chenal Downs is fully developed and Deltic does not plan to develop any additional lots within Red Oak Ridge for the remainder of 2007. Future annual development activity will depend on the demand for the Company’s residential lots. There were no commercial sales for the third quarter of 2007, while commercial sales of approximately 53 acres at $246,300 per acre occurred in the third quarter of 2006. Although there were no sales of commercial real estate in the third quarter of 2007, interest in Deltic’s commercial real estate, especially for multifamily use, remains strong.

During 2004, the Company disclosed plans for a 1,170-acre, 187 lot, upscale residential development, The Ridges at Nowlin Creek, on a portion of its land holdings located within the Highway 10 growth corridor west of Chenal Valley. A portion of the development would have been located within the watershed of Lake Maumelle, a principal source of drinking water for Little Rock. Even though the Company’s development plans incorporated the most modern and proven best management practices to create a low impact development fully protective of water quality in the lake, and the local water utility, Central Arkansas Water, had just commissioned preparation of a new comprehensive watershed management plan, the water utility nonetheless commenced an action in September 2005 to condemn approximately 680 acres of company land located within the watershed, including approximately 640 acres of The Ridges at Nowlin Creek. On March 28, 2007, the Company and Central Arkansas Water entered into a full and complete settlement of the condemnation. Pursuant to the terms of the settlement, the Company sold Central Arkansas Water 680.06 acres of land for $8.2 million, and Central Arkansas Water granted to the Company an option to repurchase said land for the same consideration should Central Arkansas Water determine the land is not needed for watershed protection or should Central Arkansas Water cease to utilize said land for such purpose. The term of the option is 90 years. The Company intends to further assess the viability of proceeding to develop the remaining acreage of its planned real estate development, The Ridges at Nowlin Creek.

Operating results for Del-Tin Fiber L.L.C. are affected by the overall medium density fiberboard (“MDF”) market and the plant’s operating performance. Del-Tin experienced a reduction in operational income during the first nine months of 2007 because of decreased production due to uncertain market conditions for traditional products and available supply of fiber. These unfavorable factors combined with increased raw material wood chip cost negatively impacted the financial performance at Del-Tin Fiber in 2007 when compared to 2006. With regard to the Company’s equity position in Del-Tin, these decreases were partially offset by the reduction in depreciation expense related to the add-back per thousand square feet (“MSF”) due to the impairment taken by the Company in 2002 which was not recorded by Del-Tin. The difference in basis between the Company and Del-Tin is being adjusted to account for Del-Tin’s operating results as if it were a consolidated subsidiary.

 

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This excerpt taken from the DEL 10-Q filed Aug 8, 2007.

Executive Overview

The Company recorded net income of $2.6 million for the second quarter of 2007 compared to $3 million for the same period of 2006. While several factors affected the Company’s results for the period, the most significant impact came from the depressed housing market, which was evidenced by the lower demand and sales prices for lumber manufactured in Deltic’s Mills segment and fewer sales of residential lots in the Real Estate segment. Deltic’s Woodlands segment provided $4 million in operating income in the second quarter. The Real Estate segment provided $5.2 million in operating income for the second quarter of 2007, mainly due to the sale of approximately 26 acres of commercial real estate. The Company’s Mills segment recorded an operating loss of $.7 million in 2007’s second quarter. Deltic owns a 50 percent interest in Del-Tin Fiber L.L.C. and recorded related equity income of $.8 million for the second quarter of 2007, down slightly from $.9 million for the same quarter of 2006.

Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. This environment is affected by a number of factors including general economic conditions, interest rates, imports, foreign exchange rates, housing starts, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. The downward trend in new home sales began in the second half of 2005, and the level of housing starts reached its slowest pace in more than six years during the first half of 2007. Factors affecting this decline in new home sales were a somewhat slower American economy, higher mortgage interest rates, increased home inventory levels, and the impact of stricter lending practices due to sub-prime loans failing in the mortgage banking industry. The Company’s sales of real estate were affected by these factors which helped to cause a reduction in residential lot sales from the first half of 2006. This decline in the housing market has been a significant factor to continued lower demand in the first six months of 2007 for softwood lumber products. The market has recently experienced slight sales price increases due to reduced lumber supplies caused by industry curtailments and declining imports of softwood lumber products from Canada, mainly related to the rise in the value of the Canadian dollar. Given its relative size and the nature of most commodity markets, the Company has little or no control over pricing levels for its lumber; therefore, the Company will continue to focus on increasing efficiencies and reducing controllable manufacturing cost

For the second quarter of 2007, pine sawtimber harvest levels decreased 57,376 tons to 96,431 when compared to the second quarter of 2006. The primary reason for this decline was management’s decision to accelerate the 2007 sale of pine sawtimber to third-parties during the first quarter of 2007 in order to optimize the return on the pine sawtimber harvest. The Company plans to keep 2007’s total pine sawtimber harvest volume comparable to the level in 2006, while continuing to manage the timberlands on a sustainable-yield basis. Ultimately, the Company’s ability to sell pine sawtimber at acceptable prices in the future will be dependent upon the health of the markets for manufactured lumber and other wood products. The Company harvested 111,593 tons of pine pulpwood during the second quarter of 2007, an increase of 15,622 tons from the same period in 2006. The average sales price was $13 per ton, a 55 percent increase from $8 for the second quarter of 2006. Deltic recorded an increase in pine pulpwood revenues of $.6 million when compared to the second quarter a year ago. Increased demand and prices for pulpwood has been attributed in part to reduced production of residual wood chips from area sawmills due to production curtailments caused by a depressed lumber market, and to the impact of wet weather conditions on pulpwood harvesting activity in the Company’s operating region. The Company sold approximately 63 acres of timberland for $1,557 per acre during the second quarter of 2007 versus 160 acres of timberland at $1,047 per acre during the same period of 2006.

Advances in technology and increased pricing levels for natural gas have resulted in the viability of expanded natural gas exploration within the state of Arkansas. One current area of activity known as the “Fayetteville Shale Play” is an unconventional natural gas reservoir spread across multiple Arkansas counties. Deltic has leased approximately 26,000 net mineral acres in this area to various exploration enterprises and received applicable lease bonus payments; in addition to the possibility of future royalty income should production be established. The Company continues to evaluate additional leasing

 

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requests within the Fayetteville Shale Play, although future leasing will probably not be significant unless the defined boundary of the Play expands. The ultimate benefit to Deltic from these mineral leases is contingent on the successful extraction and sale of natural gas from the area.

The Mills segment continues to encounter a depressed lumber market which caused the average sales price in the second quarter of 2007 to decrease $29, or nine percent, to $306 from the second quarter of 2006 average of $335 per MBF. Lumber sales declined in the second quarter of 2007 by 18 percent to 63.8 million board feet from the second quarter of 2006, primarily due to a reduction in operating hours as a result of weakened market conditions. As with any commodity market, the Company expects the historical volatility of lumber prices to continue in the future. The Company continues to anticipate a significant percentage of logs supplied to both of its sawmills will come from strategically located Company fee timberlands.

The Real Estate segment closed the sale of 20 residential lots during the second quarter, a reduction of 12 residential lots when compared to the same quarter in 2006. The average sales price per lot declined 28 percent, to $87,900, when compared to the same quarter last year. The reported average sales price for residential lots for a specific period is dependent upon the mix of lot sales. Deltic’s lot development plans provide for a mix of lot offerings that represent most real estate market segments for planned communities. Due to the pace of new home starts and the current sufficient lot inventory, planned capital expenditures for residential lot development have been reduced for 2007. The Company does not plan to offer any additional lots within Chenal Valley in 2007. The Company sold 17 lots within the Chenal Valley development in the second quarter of 2007 versus 26 during the same period of 2006. In Deltic’s other two developments, Red Oak Ridge and Chenal Downs, three lots were sold during the second quarter of 2007 versus six during the same period of 2006. Chenal Downs is fully developed and Deltic does not plan to develop any additional lots within Red Oak Ridge in 2007. Future annual development activity will be dependent upon the demand for the Company’s residential lots. Two commercial sales of approximately 26 acres at $241,000 per acre occurred in the second quarter of 2007 while there were no commercial sales for the same period in 2006. Both of these sales were for use as multifamily housing and one will consist of the first condominium project on the golf courses in the Company’s Chenal Valley development. Even though residential lot sales activity is below historical levels, interest in commercial acreage, especially for multifamily use, remains strong.

During 2004, the Company disclosed plans for a 1,170-acre, 187 lot, upscale residential development, The Ridges at Nowlin Creek, on a portion of its land holdings located within the Highway 10 growth corridor west of Chenal Valley. A portion of the development would have been located within the watershed of Lake Maumelle, a principal source of drinking water for Little Rock. Even though the Company’s development plans incorporated the most modern and proven best management practices to create a low impact development fully protective of water quality in the lake, and the local water utility, Central Arkansas Water, had just commissioned preparation of a new comprehensive watershed management plan, the water utility nonetheless commenced an action in September 2005 to condemn approximately 680 acres of Company land located within the watershed, including approximately 640 acres of The Ridges at Nowlin Creek. On March 28, 2007, the Company and Central Arkansas Water entered into a full and complete settlement of the condemnation. Pursuant to the terms of the settlement, the Company sold Central Arkansas Water 680.06 acres of land for $8.2 million, and Central Arkansas Water granted to the Company an option to repurchase said land for the same consideration should Central Arkansas Water determine the land is not needed for watershed protection or should Central Arkansas Water cease to utilize said land for such purpose. The term of the option is 90 years. The Company intends to further assess the viability of proceeding to develop the remaining acreage of its planned real estate development, The Ridges at Nowlin Creek.

Operating results for Del-Tin Fiber L.L.C. are affected by the overall medium density fiberboard (“MDF”) market and the plant’s operating performance. Del-Tin experienced a reduction in operational income during the first half of 2007, because of decreased production due to uncertain market conditions for traditional products and available supply of fiber. For the Company’s equity, these decreases were partially offset by the reduction in depreciation expense related to the add-back per thousand square feet (“MSF”) of impairment based on the remaining production life of Del-Tin’s production assets.

 

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On June 21, 2007, the Board of Directors of Deltic announced a quarterly dividend of $0.075 per share that will be paid to stockholders of record as of September 1, 2007, with a payment due date of September 15, 2007. The liability for this dividend was recorded in the Company’s second quarter consolidated financial statements. In 2006, this announcement was made at the August Board of Directors Meeting and recorded in the third quarter’s consolidated financial statements.

This excerpt taken from the DEL 10-Q filed May 9, 2007.

Executive Overview

The Company recorded net income of $6.6 million for the first quarter of 2007 compared to $4 million for the same period of 2006. Deltic’s Woodlands segment continued its role as the established core operation of the Company during the first quarter, providing $10 million in operating income. The Real Estate segment provided $7.4 million in operating income for the first quarter of 2007, mainly due to the sale of 680 acres of undeveloped real estate, consisting mostly of a part of the Company’s proposed The Ridges at Nowlin Creek real estate development, to Central Arkansas Water in connection with the settlement of condemnation litigation. The Company’s Mills segment recorded a loss of $2 million in 2007’s first quarter, a decrease of $3.6 million when compared to the corresponding quarter of 2006. This decrease was the result of a reduction in lumber sales volume from 71.7 million board feet to 61.6 million in the current quarter and a 20 percent decrease in sales price to $292 per thousand board feet (“MBF”) in the first quarter of 2007. Deltic owns a 50 percent interest in Del-Tin Fiber L.L.C. and recorded income of $.2 million for the first quarter of 2007, down slightly from $.3 million for the same quarter of 2006.

Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. This environment is affected by a number of factors including general economic conditions, interest rates, imports, foreign exchange rates, housing starts, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. The downward trend in new home sales started in the second half of 2006 and the level of housing starts reached its slowest pace in more than six years during the first quarter of 2007. Factors affecting this decline in new home sales were a somewhat slower American economy, rising new home inventories, and the impact of sub-prime loans failing in the mortgage banking industry, which combined to cause a 38 percent reduction in housing starts from a year ago. The Company’s sales of real estate were affected by these factors and caused a reduction in residential lot sales from the first quarter of 2006. This decline in the housing market has been a significant factor to continued lower demand and pricing levels in the first quarter of 2007 for softwood lumber products. Given its relative size and the nature of most commodity markets, the Company has little or no control over pricing levels for its lumber. Therefore, the Company will continue to focus on increasing efficiencies and reducing controllable manufacturing cost.

For the first quarter of 2007, pine sawtimber harvest levels increased 22,910 tons, to 236,825, when compared to the first quarter of 2006. Management chose to accelerate the 2007 harvest to optimize the return on the pine sawtimber harvest. The Company plans to keep 2007’s total pine sawtimber harvest volume comparable to the level in 2006, while continuing to manage the timberlands on a sustainable yield basis. Ultimately, the Company’s ability to sell pine sawtimber at acceptable prices in the future will be dependent upon the health of the markets for manufactured lumber and other wood products. The Company harvested 150,114 tons of pine pulpwood during the first quarter of 2007, a significant increase of 62,549 tons from the same period in 2006. The average price paid was $14 per ton, a 56 percent increase from $9 for the first quarter of 2006. Deltic recorded an increase in pine pulpwood revenues of $1.2 million when compared to the first quarter a year ago. Increased demand and prices for pulpwood has been attributed in part to reduced production of residual wood chips from area sawmills due to production curtailments caused by depressed lumber market. There were no sales of timberland for higher and better use during the first quarter of 2006.

Advances in technology and increased pricing levels for natural gas have resulted in the viability of expanded natural gas exploration within the state of Arkansas. One current area of activity known as the “Fayetteville Shale Play” is an unconventional natural gas reservoir spread across multiple Arkansas counties. Deltic has leased approximately 26,000 net mineral acres in this area to various exploration enterprises and received applicable lease bonus payments, in addition to the possibility of future royalty income should production be established. The Company continues to evaluate additional leasing requests within the Fayetteville Shale Play, although future leasing will probably not be significant unless the defined boundary of the Play expands. The ultimate benefit to Deltic from these mineral leases is contingent on the successful extraction and sale of natural gas from the area.

 

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The Mills segment continues to encounter a depressed lumber market which caused the average sales price in the first quarter of 2007 to decrease $72, or 20 percent, to $292, from the first quarter of 2006 average of $364 per MBF. Lumber sales declined in the first quarter of 2007 by 14 percent to 61.6 million board feet from the same period in 2006, primarily due to a reduction in operating hours as a result of weakened market conditions. The Company is pleased with the Mills’ improved efficiencies and lower cost per MBF when compared to the first quarter of 2006. As with any commodity market, the Company expects the historical volatility of lumber prices to continue in the future. The Company continues to anticipate that a significant percentage of logs supplied to both of its sawmills will come from strategically located Company fee timberlands.

The Real Estate segment closed the sale of 14 residential lots during the first quarter, a reduction of 13 residential lots when compared to the same quarter in 2006. The average sales price per lot declined slightly when compared to the same quarter last year. The reported average sales price for residential lots for a specific period is dependent upon the mix of lot sales. Deltic’s lot development plans provide for a mix of lot offerings that represent most real estate market segments for planned communities. Due to the pace of new home starts and the current sufficient lot inventory, planned capital expenditures for residential lot development have been reduced for 2007, and the Company does not plan to offer any additional lots within Chenal Valley in 2007. The Company sold 12 lots within the Chenal Valley development in the first quarter of 2007 versus 22 during the same period of 2006. In Deltic’s other two developments, Red Oak Ridge and Chenal Downs, two lots were sold during the first quarter of 2007 versus five during the same period of 2007. Chenal Downs is fully developed and Deltic does not plan to develop any additional lots within Red Oak Ridge in 2007. Future annual development activity will be dependent upon the demand for the Company’s residential lots. Commercial real estate sales activity is by nature less predictable than residential activity. No commercial sales occurred in the first quarter of 2007 or 2006.

During 2004, the Company disclosed plans for a 1,170-acre, 187 lot, upscale residential development, The Ridges at Nowlin Creek, on a portion of its land holdings located within the Highway 10 corridor west of Chenal Valley. A portion of the development would have been located within the watershed of Lake Maumelle, a principal source of drinking water for Little Rock. Even though the Company’s development plans incorporated the most modern and proven best management practices to create a low impact development fully protective of water quality in the lake, and the local water utility, Central Arkansas Water, had just commissioned preparation of a new comprehensive watershed management plan, the water utility nonetheless commenced an action in September 2005 to condemn approximately 680 acres of Company land located within the watershed, including approximately 640 acres of The Ridges at Nowlin Creek. On March 28, 2007, the Company and Central Arkansas Water entered into a full and complete settlement of the condemnation. Pursuant to the terms of the settlement, the Company sold Central Arkansas Water 680.06 acres of land for $8.2 million, and Central Arkansas Water granted to the Company an option to repurchase said land for the same consideration should Central Arkansas Water determine the land is not needed for watershed protection or should Central Arkansas Water cease to utilize said land for such purpose. The term of the option is 90 years. The Company intends to further assess the viability of proceeding to develop the remaining acreage of its planned real estate development, The Ridges at Nowlin Creek.

Operating results for Del-Tin Fiber L.L.C. are affected by the overall medium density fiberboard (“MDF”) market and the plant’s operating performance. Del-Tin experienced a reduction in operational income during the first quarter of 2007, due to decreased production due to market conditions and increased cost. These decreases were partially offset by the reduction in depreciation expense related to the add-back per thousand square feet (“MSF”) of impairment based on the remaining production life of Del-Tin’s production assets. (For further discussion, refer to Note 3 to the consolidated financial statements.)

 

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