Annual Reports

  • 10-K (Mar 7, 2017)
  • 10-K (Mar 4, 2016)
  • 10-K (Mar 3, 2015)
  • 10-K (Mar 5, 2014)
  • 10-K (Mar 8, 2013)
  • 10-K (Mar 8, 2012)

 
Quarterly Reports

 
8-K

 
Other

Deltic Timber 10-K 2012
FORM 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12147

 

 

DELTIC TIMBER CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   71-0795870

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

210 East Elm Street, P. O. Box 7200, El Dorado, Arkansas   71731-7200
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (870) 881-9400

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 Par Value   New York Stock Exchange, Inc.

Series A Participating Cumulative

Preferred Stock Purchase Rights

  New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a small reporting company)    Smaller reporting company   ¨

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on the New York Stock Exchange as of June 30, 2011, was $244,147,919. For purposes of this computation, all officers, directors, and 5% beneficial owners of the registrant (as indicated in Item 12) are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers, or 5% beneficial owners are, in fact, affiliates of the registrant.

Number of shares of Common Stock, $.01 Par Value, outstanding at February 6, 2012, was 12,605,954.

Documents incorporated by reference:

The Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders on April 26, 2012.

 

 

 


Table of Contents

TABLE OF CONTENTS - 2011 FORM 10-K REPORT

 

         Page
Numbers
 
PART I   

Item 1.

  Business      3   

Item 1A.

  Risk Factors      13   

Item 1B.

  Unresolved Staff Comments      16   

Item 2.

  Properties      16   

Item 3.

  Legal Proceedings      16   

Item 4.

  Mine Safety Disclosures      16   
PART II   

Item 5.

  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities      18   

Item 6.

  Selected Financial Data      20   

Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   

Item 7A.

  Quantitative and Qualitative Disclosures About Market Risk      41   

Item 8.

  Financial Statements and Supplementary Data      42   

Item 9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      83   

Item 9A.

  Controls and Procedures      83   

Item 9B.

  Other Information      83   
PART III   

Item 10.

  Directors, Executive Officers, and Corporate Governance      84   

Item 11.

  Executive Compensation      84   

Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      85   

Item 13.

  Certain Relationships and Related Transactions, and Director Independence      85   

Item 14.

  Principal Accountant Fees and Services      85   
PART IV   

Item 15.

  Exhibits and Financial Statement Schedules      86   

Signatures

     90   

 

2


Table of Contents

PART I

 

Item 1. Business

Introduction

Deltic Timber Corporation (“Deltic” or the “Company”) is a natural resources company engaged primarily in the growing and harvesting of timber and the manufacture and marketing of lumber. Deltic owns approximately 445,100 acres of timberland, mainly in Arkansas and north Louisiana, stocked principally with Southern Pine, known in the industry as a type of “softwood.” The Company’s sawmill operations are located at Ola in central Arkansas (the “Ola Mill”) and at Waldo in south Arkansas (the “Waldo Mill”). In addition to its timber and lumber operations, the Company is engaged in real estate development in central Arkansas. The Company also holds a 50 percent interest in Del-Tin Fiber LLC (“Del-Tin Fiber”), a joint venture to manufacture and market medium density fiberboard (“MDF”). Deltic is a calendar-year company for both financial and income tax reporting.

The Company is organized into four segments: (1) Woodlands, which manages all aspects of the Company’s timberlands, including harvesting and sale of timber, timberland sales and acquisitions, oil and gas mineral revenue, and hunting land leases; (2) Mills, which consists of Deltic’s two sawmills that manufacture a variety of softwood lumber products; (3) Real Estate, which includes the Company’s three active real estate developments and a related country club operation; and (4) Corporate, which consists of executive management, accounting, information systems, human resources, purchasing, treasury, income tax, and legal staff functions that provide support services to the operating business units. The Company currently does not allocate the cost of maintaining these support functions to its operating units. Information concerning net sales, operating income, and identifiable assets attributable to each of the Company’s business segments is set forth in Part II of this report in Item 7, “Management’s Discussion and Analysis,” and Item 8, “Financial Statements and Supplementary Data,” Note 21, “Business Segments,” to the consolidated financial statements.

Forest Products Industry

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, employment levels, interest rates, credit availability and associated costs, imports, foreign exchange rates, housing starts, unsold new and existing home inventories, residential and commercial real estate foreclosures, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, fuel cost, and weather conditions. The Mills segment has been affected by the decreased number of housing starts in the United States, which has experienced its lowest levels in 50 years. Several factors influencing the decrease were the recent economic recession, stricter lending practices, and availability of credit brought about by the mortgage loan defaults and construction loan delinquencies that have caused lenders to tighten credit for new developments. In addition, the overall weakness in the banking industry, inventory levels of new and existing homes, declining market value of existing homes, and employment levels have adversely influenced housing starts. The demand and pricing levels for softwood lumber products fell dramatically from 2005 to 2009, and the short-lived upward trend experienced in 2010 was due to a temporary supply/demand imbalance. Any recovery in demand and prices is expected to be gradual and over an extended period and depends primarily on the recovery of the U.S. housing industry. Lumber prices have historically been, and will remain, volatile. Sawtimber prices have generally been more stable than lumber prices but have seen price reductions due to the closure or curtailments of several mills in Deltic’s operating area.

The southern U.S., in which all the Company’s operations are located, is a major timber and lumber producing region. There are an estimated 215 million acres of forestland in the region, of which approximately 43 percent is currently growing softwood. Unlike other major timber-producing areas in North America, most of this acreage is privately held. The estimated breakdown of ownership of softwood timberland in the southern U.S. is 87 percent private, 6 percent national forest, and 7 percent

 

3


Table of Contents

other public. Although there can be no assurance, management anticipates that the southern U.S. timber resource will be subject to strong demand for the foreseeable future and also believes that the South will have a strategic advantage over other U.S. timber-producing regions due to regulations, geography, and other factors.

Woodlands

The Company owns approximately 445,100 acres of timberland, primarily in Arkansas and north Louisiana. Management considers these timberlands to be Deltic’s most valuable asset and the harvest of Company owned stumpage to be its most significant and stable source of income. The Company’s timberlands consist primarily of Southern Pine forests. The Company follows Sustainable Forest Initiative Standards (“SFI”), which is a system of values, objectives, and performance measures that promote sustainable forest management. The timberlands are actively managed to maximize their long-term value and increased productivity through responsible harvest plans, a commitment to reforestation, careful road construction, and other best management practices. The timber harvested from Company timberlands is either converted to lumber in the Company’s sawmills or sold in the domestic market. The Woodlands’ stumpage supplied to the Company’s sawmills is transferred at prices that approximate market in the Mills’ operating area. The Company has continued to acquire timberland in its current operating area since 1996, when it implemented a program to identify non-strategic timberland and higher and better use lands for possible sale and invest the proceeds into timberland suited for growing pine sawtimber. Timberland ownership also provides value through oil and gas lease rentals and royalties and recreational hunting land leases.

The approximate breakdown of the Company’s timberland acreage at year-end 2011 consisted of the following:

 

     Acres  

Pine forest

     128,600   

Pine plantation

     233,800   

Hardwood forest

     8,900   

Other

     73,800   
  

 

 

 

Total

     445,100   
  

 

 

 

The Company’s timberlands are well diversified by age class. The timberland classified as pine forest is primarily managed on an all-aged basis and contains mature timber that is ready to be harvested over the next several years and includes streamside-management zones. Pine plantations are primarily less than 30 years old, with the majority ranging in age from 5 to 25 years. At the approximate age of 20 years, pine plantations begin transitioning from pine pulpwood to pine sawtimber.

Timber Inventory. The Company’s estimated pine sawtimber inventory is calculated for each tract by utilizing growth formulas based on representative sample tracts and tree counts for various diameter classifications. The calculation of pine inventory is subject to periodic adjustments based on sample cruises and actual volumes harvested. The hardwood inventory shown in the following table is an approximation; therefore, the physical quantity of such timber may vary significantly from this approximation.

 

4


Table of Contents

Estimated inventory of standing timber as of December 31, 2011, consisted of the following:

 

     Estimated
Volume
(Tons)
 

Pine timber

  

Sawtimber

     12,751,000   

Pulpwood

     4,527,000   

Hardwood timber

  

Sawtimber

     1,347,000   

Pulpwood

     859,000   

The Company’s annual harvest of pine sawtimber is used primarily by the Mills segment, but at times it may be sold to third parties. Products that can be manufactured from this resource include dimension lumber, boards, timbers, and decking, which are used mainly in residential construction. Deltic’s hardwood sawtimber is sold to third parties and is primarily used in the production of railroad ties, flooring, and pallets. Logs with a diameter of less than nine inches are considered to be pulpwood. Harvests of both pine and hardwood pulpwood are sold to third parties for use primarily in the manufacture of paper.

Timber Growth. Timber growth rate is an important variable for forest products companies since it ultimately determines how much timber can be harvested on a sustainable basis. A higher growth rate permits larger annual harvests as replacement timber regenerates. Growth rates vary depending on species, location, age, and forestry management practices. The growth rate, net of mortality, for Deltic’s Southern Pine timber averages five to six percent of standing inventory per annum. The Company considers a 30 to 35 year rotation optimal for most pine plantations.

Timberland Management. Forestry practices vary by geographic region and depend on factors such as soil productivity, weather, terrain, and the species, size, age, and stocking of timber. The Company actively manages its timberlands based on these factors and other relevant information to increase productivity and maximize the long-term value of its timber assets. In general, the Company’s timberland management involves select harvesting and thinning operations, reforestation, cull timber removal programs, and the introduction of genetically improved seedlings.

Deltic has developed and operates its own seed orchard. Seeds from the orchard are grown by third parties to produce genetically improved seedlings for planting. These seedlings are developed through selective cross-pollination to produce trees with preferred characteristics, such as higher growth rates, fewer limbs, straighter trunks, and greater resistance to disease. However, this process does not involve genetic engineering. The seedlings are used when a site is completely replanted, as in the case of a final harvest of a mature stand. Primarily using seedlings grown from seeds produced at the orchard facility, the Company planted 18,600 acres in 2011 and 11,500 acres in 2010. In addition, the Company also replants part or all of any recently planted pine plantation acreage where there has been a high mortality rate. The Company meets or exceeds, in all material respects, the reforestation recommendations of the Arkansas Forestry Commission’s Best Management Practices. In addition, the Company has been certified under the SFI program with regards to its timberland management practices.

The Company actively utilizes commercial thinning practices. Commercial thinning operations consist of the selective removal of trees within a stand, usually a plantation, to improve overall timber productivity and value by enhancing the growth of the remaining trees while generating revenues from the harvest.

The Company’s silviculture program is designed to control undesirable, competitive vegetation in its forests and to increase pine growth rates and reproduction. Deltic treated about 13,000 acres, 16,500 acres, and 13,400 acres, under this program in 2011, 2010, and 2009, respectively.

 

5


Table of Contents

Harvest Plans. Management views the timberlands as assets with substantial inherent value beyond supplying its sawmills. The Company intends to continue to manage the timberlands on a sustainable-yield basis that permits regeneration of the timberlands over time and has no plans to harvest timber on an ongoing basis at levels that would diminish its timber inventory. In 2011, the Company harvested 606,311 tons of pine sawtimber from its timberlands. Under the current plan, Deltic intends to harvest approximately 600,000 tons of pine sawtimber in 2012.

The Company’s harvest plans are generally designed to project multi-year harvest schedules. In addition, harvest plans are updated at least annually and reviewed on a monthly basis to monitor performance and to make any necessary modifications to the plans in response to changing forestry conditions, market conditions, contractual obligations, regulatory limitations, weather conditions, and other relevant factors.

Since harvest plans can be affected by projections of demand, price, availability of timber from other sources, and other factors that may be outside of the Company’s control; therefore, actual harvesting levels may vary. Management believes that the Company’s harvest plans are sufficiently flexible to permit modification in response to fluctuations in the markets for logs and lumber.

Access. Substantially all of the timberlands are accessible by a system of low impact and low maintenance roads. Deltic generally uses third-party road crews to conduct construction and maintenance of these roads, and the Company regularly exchanges access easements and cooperates with other area forest products companies, private landowners, and the U.S. Forest Service.

Wildlife Management. Deltic actively leases Company lands for hunting purposes and monitors wildlife resources on Company property. The Company complies with the U.S. Endangered Species Act and strives to provide, maintain, and/or enhance habitats for all species with special biological or ecological concerns. The Company leased the hunting rights on approximately 436,000, 433,000, and 438,000 acres in 2011, 2010, and 2009, respectively. For the years ended 2011, 2010, and 2009, the Company had hunting lease revenues totaling $2,155,000, $2,046,000, and $1,893,000, respectively.

Client-Land Management. In addition to managing its own timberlands, Deltic also manages timberlands owned by others under management contracts with one-year renewable terms. This program provided harvest planning, silvicultural improvements, and maintenance work for approximately 73,000 acres in 2011.

Timberland Acquisitions. The Company implemented a timberland acquisition program in late 1996. This ongoing program is designed to enable the Company to continue to increase harvest levels, while expanding its timber inventory which will allow the Company to maintain or increase the volume of logs supplied to its sawmills from its own timberlands, when economically feasible.

Deltic formed an acquisition team to implement its timberland acquisition program. Lands considered for purchase are evaluated based on the location, site index, timber stocking, and growth potential. Approximately 147,000 acres of strategically located pine timberlands have been added since the inception of the program. Individual land purchases have ranged in size from 3 acres to 21,700 acres.

The Company intends to continue to focus its acquisition program on timberlands that range from fully-stocked to cutover tracts. Unlike other timber-producing areas of North America, most of the timberland in the southern U.S. is privately held, making it potentially available for acquisition. There can be no assurance that timber properties suitable for acquisition will be identified by the Company or that, once identified, such properties will ultimately be acquired by the Company.

Land Sales. In 1999, the Company initiated a program to identify for possible sale non-strategic timberlands and higher and better use lands. Approximately 41,400 acres of non-strategic timberlands have been sold since 1999.

Oil and Gas Revenues. The Company receives oil and gas lease rental revenues when it agrees to grant certain mineral rights to third parties for terms that generally range from three to five years. Once production begins on leased mineral acres, it receives oil and gas royalty income payments. Deltic

 

6


Table of Contents

recorded oil and gas lease rental revenues of $2,471,000, $2,016,000, and $2,028,000 in 2011, 2010, and 2009, respectively on related leased acres of 42,300, 37,200, and 35,000, respectively. For the years ended 2011, 2010, and 2009, the Company earned $4,443,000, $4,154,000, and $2,296,000, respectively from oil and gas royalties.

Mills

The Company’s two sawmills are located at Ola in central Arkansas and at Waldo in south Arkansas. Each mill is strategically located near significant portions of the Company’s timberlands, which provide a stable source of raw material stumpage. The mills employ modern technology in order to improve efficiency, reduce labor costs, maximize utilization of the timber resource, and maintain high quality standards of production with safety being one of the highest priorities. Logs processed into lumber are obtained from the Company’s timberlands and from public and private landowners. The Company selects logs for processing in its mills based on size, grade, and the prevailing market price. The Ola Mill is equipped for maximum utilization of smaller diameter logs, while the Waldo Mill can process both smaller and larger diameter logs. The mills produce a variety of softwood lumber products, including dimension lumber, boards, and timbers. These lumber products are sold primarily to wholesale distributors, lumber treaters, large retailers, industrial accounts, and truss manufacturers in the South and Midwest and are used mainly in residential construction, roof trusses, remanufactured products, and laminated beams.

Combined annual permitted capacity of the two mills at December 31, 2011, was 390 million board feet (“MMBF”). The Company’s lumber output decreased to 249 MMBF in 2011 compared to 265 MMBF in 2010, as production was reduced to match market demand. Improving mill efficiencies and controlling manufacturing costs, along with optimizing production levels, remain a primary focus during the current down cycle of the lumber market.

Capital Projects. Deltic has invested significant capital in its sawmills in recent years to increase production capacity and efficiency, decrease costs, improve safety, and expand the product mix. Major capital projects completed at the Ola Mill over the past several years include: (1) redesign and rebuild of the sawmill primary breakdown processing equipment to improve the infeed of logs and overall flow of green lumber; (2) installation of a stick laying stacker to improve lumber drying quality and reduce labor cost; (3) gang control upgrade to improve operating efficiencies; (4) safety improvements, including upgrades to the planer blow system; (5) installation of a new log bucking deck to improve log recovery and increase throughput capacity; and (6) trimmer and edger computer optimization upgrades to improve lumber recovery and quality.

At the Waldo Mill, major capital projects completed over the past several years include: (1) replacement of the planer that was destroyed by fire in August 2007; (2) rebuild of lumber drying kilns and boilers to improve quality and efficiency; (3) installation of a new planer hog system to move scrap material away from the planer mill more efficiently and to allow for increased throughput of finished lumber; (4) various safety improvements, including upgrades to the planer blow system; (5) upgrade to edger computer optimizer to improve lumber recovery and quality; and (6) upgrade to sawmill trimmer fence unit to improve lumber recovery.

Raw Materials. In 2011, the Company’s two sawmills processed 1,039,514 tons of logs, either harvested from its timberlands or purchased from government and private landowners. Practically all of the Woodlands segment’s harvest of pine sawtimber was transferred to the Mills and provided 62 percent of the Mills’ total raw material requirements.

Various factors, including environmental and endangered species concerns, have limited, and will likely continue to limit, the amount of timber offered for sale by U.S. government agencies. Because of this reduced availability of federal timber for harvesting, the Company believes that its supply of timber from the timberlands is a significant competitive advantage. Deltic has historically supplied a significant portion of the timber processed in the sawmills from its timberlands.

 

7


Table of Contents

In order to operate its sawmills economically, the Company relies on purchases of timber from third parties to supplement timber harvests from its own timberlands. The Company has an active timber procurement function for each of its sawmills. As of December 31, 2011, the Company had under contract 185,830 tons of timber on land owned by other parties, including the U.S. Forest Service, which is expected to be harvested over the next three years. During 2011, the Company harvested third-party stumpage and purchased logs from third parties totaling 389,926 tons. Of this volume, purchases from the U.S. Forest Service represented seven percent. The balance of such purchased volume was acquired from private lands.

Due to the closure or curtailment of several mills which were in close proximity to the Company’s mills, there has been a higher availability of privately owned pine timber at lower stumpage prices due to the decreased demand. There is a substantial amount of other private timber acreage in proximity to each of Deltic’s sawmills; therefore, the sources of private timber are many and diverse. The key factors in a landowner’s determination of whether to sell timber to the Company are price, the Company’s relationships with logging contractors, and the ability of the Company to demonstrate the quality of its logging practices to landowners. Typically, a landowner will be more likely to sell timber to a forest products company whose own land has been responsibly managed and harvested.

Residual Wood Products. The Company pursues waste minimization practices at both of its sawmills and seeks to sell all marketable byproducts. Wood chips are usually sold to paper mills, while wood shavings and chips are usually sold to Del-Tin Fiber, and bark is frequently sold for use as fuel. Bark, sawdust, shavings, and wood chips that cannot be sold are used as “hog fuel” to fire the boilers that heat the drying kilns. The Company expects to continue to sell a significant portion of its Waldo Mill’s residual wood shavings and chip production to Del-Tin Fiber at market prices, which are renegotiated annually.

Transportation. Each mill facility has the capability to ship its lumber by truck or rail.

Cyclical Market. While the cyclicality of the lumber market may occasionally require the interruption or reduction of operations at one or both of the Company’s sawmills, suspension of milling activities is unusual. Management is not currently anticipating any interruption of operations at either of Deltic’s sawmills, but no assurance can be given that market conditions or other factors will not render such an action economically advisable in the future.

Real Estate

The Company’s real estate operations were initiated to add value to former timberland strategically located in the growth corridor of west Little Rock, Arkansas. Development activities began with the construction of Chenal Ridge, the initial, 85-lot neighborhood in Chenal Valley on the western edge of the Little Rock city limits in 1985. Since that time, the Company has been developing the remainder of Chenal Valley, a premier upscale planned community with approximately 4,900 acres of residential and commercial properties centered around two Robert Trent Jones, Jr. designed championship golf courses. The property has been developed in stages, and real estate sales to date have consisted primarily of residential lots sold to builders or individuals and commercial tracts sold to area businesses or developers. In addition to Chenal Valley, Deltic created Chenal Downs, a 400-acre equestrian development with controlled access, featuring secluded, five-acre lots, located just outside of Chenal Valley. Red Oak Ridge, Deltic’s first development outside the Little Rock area, is an 800-acre upscale community being developed for residential, resort, or retirement living and is located in Hot Springs, Arkansas. All developed acreage in Chenal Valley has been annexed by the City of Little Rock, while Chenal Downs is located just outside the Little Rock city limits. Red Oak Ridge has been similarly annexed by the City of Hot Springs.

Residential Development. Residential lots were first offered for sale in Chenal Valley during the second half of 1986 with closings beginning in 1987. As of December 31, 2011, 2,738 lots have been developed in 34 neighborhoods, and 2,563 lots have been sold, with about 2,376 residences constructed or under construction. When fully developed, Chenal Valley could include approximately 4,600 single-family residences. However, the actual number of residences in Chenal Valley will depend on final land usages and lot densities. The Company has developed lots in a wide variety of market segments. Lot size has ranged from 0.2 acres to 2.25 acres, and the lot sales price over the life of the development has ranged from $25,000 per lot to over $335,000 per lot.

 

8


Table of Contents

The first phase of Chenal Downs was opened in December 1997, followed by a second phase in November 2000. By the end of 2011, 64 of the 76 developed lots were sold. Lot prices in Chenal Downs range from $89,000 to approximately $187,000. In Red Oak Ridge, the first two neighborhoods were offered for sale in 1998, with a third neighborhood offered in late 2005. These neighborhoods offer a choice of either estate-sized homesites, many of which overlook one of two private lakes, or garden-home sized lots. As of the end of 2011, 89 of the 135 lots offered have been sold, and prices for lots currently offered range from about $30,000 per lot to almost $183,000 per lot.

Commercial Development. Commercial activity to-date has consisted of the sale of approximately 391 acres, including 27 acres in 2011, 19 acres in 2010, and 18 acres in 2009. Commercial property sales to-date have consisted of retail store locations, an office building constructed by the Company on a nine-acre site, multi-family residence sites, convenience store locations, a bank office building site, a site for a 38-acre open-air shopping center, a 37-acre site for a medical center, and outparcels surrounding a retail center constructed and owned by the Company. Under current development plans, Chenal Valley will include approximately 821 acres of commercial property when fully developed.

In 1998 construction was completed on the initial section of Rahling Road, a major connector street to Chenal Parkway, and it provided greater access to Chenal Valley’s commercial acreage. Located at the center of this commercial property is a Company-owned 35,000-square-foot retail center. The retail center was completed in early 2000 and offers retail space for lease. The center is surrounded by 16 outparcels, ranging in size from 0.2 to 1.8 acres. To-date, 11 of these outparcels have been sold. In addition, St. Vincent Hospital opened its Chenal-based medical center in 2011. This, along with the success of the shopping center known as “The Promenade at Chenal” in attracting internationally branded retailers, continues to stimulate interest in the Company’s nearby available commercial property.

No commercial acreage is included in Chenal Downs, and a small amount of commercial property is planned for Red Oak Ridge. The Company will begin to develop and offer commercial sites in Red Oak Ridge as population density increases.

Infrastructure. Infrastructure and other improvements to support the development and sale of residential and commercial property are funded directly by the Company and/or through real property improvement districts. Such properties are developed only when sufficient demand exists and substantially all infrastructure is completed. Future infrastructure investments are primarily for the development and sale of additional property.

Development Amenities. In connection with its Chenal Valley development, the Company developed Chenal Country Club, consisting of the earlier-described golf courses, a clubhouse, and related facilities for use by club members. Since its original construction, Deltic has undertaken substantial remodeling and expansion of the clubhouse to fulfill membership needs. In addition, the Company has built three community parks within the Chenal Valley development for the benefit of the residents of the developed residential areas.

Chenal Downs has been developed around an equestrian center, consisting of stables and a training facility, and also includes bridle trails throughout the development. Red Oak Ridge’s primary amenities currently consist of two lakes and a community park constructed by the Company.

Home Construction. Historically, the Company’s focus with regards to residential real estate development has been on lot development only. However, Deltic has constructed a limited number of speculative homes within its Red Oak Ridge development located in Hot Springs, Arkansas. At December 31, 2011, six homes were available for sale.

Future Development. A number of factors have added significant value to the undeveloped portion of Chenal Valley. Such factors include: (1) the overall success of Chenal Valley as a residential development and its image as one of the premier developments in central Arkansas; (2) the continued westward growth of Little Rock; (3) the Company’s investment in infrastructure in the area; and (4) the established residential base which is now large enough to support commercial development. Management expects the undeveloped portion of Chenal Valley to provide growth and development opportunities in the future.

 

9


Table of Contents

Chenal Downs has been fully developed, but development of Red Oak Ridge is in the early stages, currently consisting of two man-made lakes as the core amenity, initial infrastructure placement, and the first three of several planned neighborhoods.

Continued development in the Highway 10 growth corridor of west Little Rock has significantly affected land values in the area and is expected to create real estate development opportunities for the Company’s approximately 57,000 mostly contiguous acres of timberland located two miles west of Chenal Valley.

Undeveloped Acreage. The success of Chenal Valley has increased the value of the Company’s undeveloped real estate surrounding and within the development. There were no sales of undeveloped real estate in 2011, 2010, or 2009.

Del-Tin Fiber

Deltic owns 50 percent of the membership interest of Del-Tin Fiber, a joint venture to manufacture and market MDF. The Del-Tin Fiber plant is located near El Dorado, Arkansas. Construction of the plant was completed, and initial production began, in 1998. The plant is designed to have an annual capacity of 150 million square feet (“MMSF”), on a 3/4-inch basis, of medium density fiberboard.

Medium Density Fiberboard. MDF, which is used primarily in the furniture, laminate flooring, store fixture, and molding industries, is manufactured from sawmill residuals such as chips, shavings, and sawdust, which are pressed and held together by an adhesive bond. Although the technology has existed for decades, continued improvements in the manufacture of MDF have increased both the quality and market acceptance of the product. MDF, with its real wood appearance and the ability to be finely milled and to accept a variety of finishes, competes primarily with lumber. Effective January 1, 2011, all MDF panel producers in the United States must comply with a new regulation that requires the finished product to contain much less formaldehyde compared to the amount that was previously allowed. Del-Tin Fiber met these new regulations by the end of 2010.

Production. The plant’s production of MDF was 116 MMSF in 2011, 128 MMSF in 2010, and 99 MMSF in 2009. Production in 2010 was increased to meet demand, which increased due to an interruption in imports from Chile in early 2010.

Raw Materials. The Del-Tin Fiber plant provides an additional outlet for wood chip production from the Waldo Mill. The Company expects to continue to sell a significant portion of its Waldo Mill’s residual wood shavings and chip production to Del-Tin Fiber at market prices, which are renegotiated annually. In addition, Del-Tin Fiber has an option to purchase residual wood chips from the Ola Mill. During 2011, 2010, and 2009, Deltic sold approximately $3,654,000, $4,449,000, and $4,457,000, respectively, of these lumber manufacturing by-products to Del-Tin Fiber.

Products and Competition

The Company’s principal products are timber, timberland, softwood lumber products (primarily finished lumber), residual wood products, hunting land leases, oil and gas lease rentals and royalties, and real estate.

Timber. Timber harvested from the timberlands is utilized by the Company’s sawmills or sold to third parties. The Company’s timber sales to third parties accounted for approximately four percent of consolidated net sales in 2011, 2010, and 2009.

The Company competes in the domestic timber market with numerous private industrial and non-industrial land and timber owners. Competitive factors with respect to the domestic timber market generally include price, species and grade, proximity to wood manufacturing facilities, and accessibility.

 

10


Table of Contents

Land Sales. Timberland sold by the Company to third parties consists of both non-strategic timberland, including hardwood bottomland suitable for recreational use, and lands with potential for higher and better use, and amounted to three percent of consolidated net sales in 2011, five percent in 2010, and six percent in 2009.

Lumber Products. The Company’s sawmills produce a wide variety of products, including dimension lumber, boards, and timbers. Lumber is sold primarily to wholesaler distributors, lumber treaters, and truss manufacturers in the South and Midwest and is used in residential construction, roof trusses, and laminated beams. During 2011, 2010, and 2009, lumber sales as a percentage of consolidated net sales were approximately 53 percent, 55 percent, and 52 percent, respectively.

The forest products market is highly competitive with respect to price and quality of products. In particular, competition in the commodity-grade lumber market in which the Company competes is primarily based on price. Deltic competes with other publicly held forest products companies operating in the U.S., many of which have significantly greater financial resources than the Company, as well as privately held lumber producers. The Company also competes with producers in Canada and overseas.

In addition, Deltic’s management expects the Company’s products to experience additional increased competition from engineered wood products and other substitute products. However, due to the geographic location of Deltic’s timberlands and its high-quality timber, the Company’s active timber management program, strategically located and efficient sawmill operations, and highly motivated workforce, Deltic has been able to compete effectively.

Residual Wood Products. The Company’s sawmills produce wood chips, shavings, sawdust, and bark as by-products of the conversion process. During 2011, 2010, and 2009, sales of these residual products accounted for 12 percent, 11 percent, and 13 percent, respectively, of Deltic’s consolidated net sales. Wood chips are the primary source of residual sales and are typically sold to Del-Tin Fiber or to paper mills. In 2011, Deltic’s sawmills produced 322,641 tons of wood chips. The Company expects to continue to sell a significant portion of its wood chip production to Del-Tin Fiber for use in the production of MDF.

Hunting Land Leases. Deltic leases hunting rights for its Woodlands to individuals and groups with its main competitors being other landowners. Per-acre price and location are the primary factors in leasing woodland hunting rights. Hunting lease revenues accounted for two percent of consolidated net sales in 2011, one percent for 2010, and two percent for 2009.

Oil and Gas. The Company has approximately 43,000 net mineral acres of Company owned land either currently under lease or held by production. Once production begins, oil and gas royalty payments are received. Oil and gas lease rental payments are recognized as income over the term of the lease and oil and gas royalty payments are recognized as income when received. Oil and gas lease rental income accounted for two percent, one percent, and two percent of consolidated net sales in 2011, 2010, and 2009, respectively. Oil and gas royalty revenue accounted for four percent, three percent, and two percent of consolidated net sales in 2011, 2010, and 2009, respectively. Oil and gas royalty income is dependent upon the number of producing wells, volume extracted, and market prices, none of which is controlled by the Company.

Real Estate. The Company develops and markets residential lots and commercial sites and also sells undeveloped acreage. Other landowners or developers are Deltic’s competitors in its real estate markets. Deltic generally provides the supporting infrastructure. Residential lots are sold to homebuilders and individuals, while commercial sites are sold to developers and businesses. The Company also sells undeveloped acreage. The Company’s competition is seeking the same customer base with each competitor marketing the benefits of its site locations with related infrastructure or amenities. During 2011, 2010, and 2009, the sales of residential lots and commercial sites as a percentage of consolidated net sales were four percent, six percent, and four percent, respectively. The sale of commercial property can have a significant impact on the Company’s sales but is unpredictable and sporadic.

 

11


Table of Contents

Seasonality

The Company’s operating segments are subject to variances in financial results due to several seasonal factors. Increased housing starts and home remodeling projects during the spring usually push up lumber prices. Forestry operations generally incur silvicultural treatment expenses in the third quarter because they are applied during the fall season in order to achieve maximum effectiveness.

Environmental Matters

The Company is subject to extensive and changing federal, state, and local environmental laws and regulations relating to the protection of human health and the environment, including laws relating to air and water quality, greenhouse gas emissions, the use of herbicides on timberlands, regulation of “wetlands”, and the protection of endangered species. Environmental legislation and regulations, and the interpretation and enforcement thereof, are expected to become increasingly stringent. The Company has made, and will continue to make, expenditures to comply with such requirements in the ordinary course of its operations. Historically, these expenditures have not been material, and the Company expects that this will continue to be the case. Liability under certain environmental regulations may be imposed without regard to fault or the legality of the original actions and may be joint and several with other responsible parties. As a result, in addition to ongoing compliance costs, the Company may be subject to liability for activities undertaken on its properties prior to its ownership or operation and for activities by third parties, including tenants. The Company is not involved with any such sites at this time. The Company leases the rights to drill for oil and gas on some of its lands to third parties. Pursuant to these leases, the lessee is to indemnify the Company from environmental liability relating to the lessee’s operations. Based on its present knowledge, including the fact the Company is not currently aware of any facts that indicate the Company will be required to incur any material costs relating to environmental matters, and currently applicable laws and regulations, the Company believes environmental matters are not likely to have a material adverse effect on the Company’s financial condition, results of operations, or liquidity.

The federal “Endangered Species Act” protects species threatened with possible extinction and restricts timber harvesting activities on private and federal lands. Certain of the Company’s timberlands are subject to such restrictions due to the presence on the lands of the red-cockaded woodpecker, a species protected under the Act. The yellowcheek darter was recently listed as endangered and is found in the Little Red River basin in Arkansas where considerable acreage is owned by Deltic. Although at this time there are no current restrictions, there can be no assurance that the presence of these species or the discovery of other protected species will not subject the Company to future harvesting restrictions. However, based on the Company’s knowledge of its timberlands, the Company does not believe that its ability to harvest its timberlands will be materially adversely affected by the protection of endangered species.

Congress has been considering certain climate control legislation. Due to uncertainties with any proposed legislation, it is difficult to make an assessment of the impact of such legislation upon the Company’s operations until such time as such legislation has been passed, codified, and the appropriate regulation promulgated. The Company will continue to monitor the legislative process and any possible future legislation or regulatory actions and their effects upon its operations.

Access to SEC Filings

The Company maintains an internet website at www.deltic.com. The Company makes available free of charge under the Investor Relations section of its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to any of those reports, and other filings as soon as reasonably practicable after providing such reports to the Securities and Exchange Commission.

 

12


Table of Contents

Employees

As of January 31, 2012, the Company had 438 employees.

 

Item 1A. Risk Factors

Cyclicality of Forest Products Industry

The Company’s results of operations are, and will continue to be, affected by the cyclical nature of the forest products industry. Prices and demand for logs and manufactured wood products have been, and in the future can be expected to be, subject to cyclical fluctuations. The demand for logs and lumber is primarily affected by the level of new residential construction activity. This activity is subject to fluctuations due to changes in economic conditions, availability and cost of financing for developers, mortgage interest rates, new and existing housing inventory levels, foreclosure rates, population growth, weather conditions, and other factors. Decreases in the level of residential construction activity usually will be reflected in reduced demand for logs and lumber resulting in lower prices for the Company’s products and lower revenues, profits, and cash flows. In addition to housing starts, demand for wood products is also significantly affected by repair and remodeling activities and industrial uses, demand for which has historically been less cyclical. Furthermore, changes in industry supply of timber affect prices. Although the Company believes sales of timber by United States government agencies will remain at relatively low levels for the foreseeable future, any reversal of policy that substantially increases such sales could significantly reduce prices for logs and lumber, which could have a material adverse effect on the Company. Furthermore, increased imports from foreign countries could reduce the prices the Company receives for its products. Meanwhile, possible reductions of Canadian imports due to mountain pine beetle infestation could increase prices the Company receives for its products.

Limitations on the Company’s Ability to Harvest Timber

Revenues from the Company’s future operations will depend to a significant extent on its ability to harvest timber pursuant to its harvest plans from its 445,100 acres of timberlands (the “Timberlands”). Harvesting of the Timberlands may be affected by various natural factors, including damage by fire, insect infestation, disease, prolonged drought, severe weather conditions, ice storms, higher than normal amounts of rainfall, and other causes. The effects of these natural factors may be particularly damaging to young timber. To the extent possible, the Company implements measures to limit the risk of damage from such natural causes. The Company is a participant with state agencies and other timberland owners in cooperative fire fighting and fire surveillance programs. In addition, the Timberlands’ extensive system of access roads, firelines, and the physical separation of various tracts provide some protection against fire damage. Nonetheless, one or more major fires on the Timberlands could adversely affect Deltic’s operating results. The Timberlands may also be affected by insect infestation, particularly by the southern pine beetle, and by disease. Additionally, the Timberlands may be affected by severe weather conditions, especially ice storms, tornados, and heavy winds. Although damage from such natural causes usually are localized and affects only a limited percentage of the timber, there can be no assurance that any damage affecting the Timberlands will, in fact, be so limited. As is typical in the forest products industry, the Company does not maintain insurance coverage with respect to damage to the Timberlands. The Company does, however, maintain insurance for loss of logs due to fire and other occurrences following their receipt at the Company’s sawmills.

Operation of Sawmills

The Company’s sawmills are located at Ola in central Arkansas and Waldo in southern Arkansas. The operations of the sawmills are dependent on various factors and there can be no assurance that the Company will be able to continue such operations at current levels of production or that suspension of such operations may not be required in the future. One such factor is the ability of the Company to procure sufficient logs at suitable prices. The Company obtains logs for its sawmills from the Timberlands, other private sources, and federal lands. As previously discussed, prices for logs are cyclical and affected primarily by demand for lumber and other products produced from logs. Another such factor is the ability of the Company to find an outlet for the large volume of residual wood products that result from the milling process. The Company currently markets such products to third parties for the

 

13


Table of Contents

production of paper and other uses. In addition, the Company sells a significant portion of its residual wood chips to Del-Tin Fiber, a joint venture medium density fiberboard plant, in which the Company owns a 50-percent interest. The continued operation of the sawmills is subject generally to the risk of business interruption in the event of a fire or other natural disaster, regulatory actions, or other causes. Deltic mitigates this risk through the procurement of casualty and business interruption insurance. The American Lumber Standards Committee is currently reviewing and testing the design values of all species of visually graded dimension lumber, and in January 2012, it adopted a reduced value for Southern Pine 2X4 lumber for grades No. 2 and lower, effective in June 2012. The timing for completion of this testing process and its impact on lumber markets is currently unknown. However, the Company has lumber stress rating machines at each of its sawmills and already produces a portion of its sales mix as Machine-Stress-Rated (“MSR”) lumber.

Del-Tin Fiber

Deltic owns 50 percent of the membership interest of Del-Tin Fiber, a joint venture to manufacture and market MDF. The Del-Tin Fiber plant is located near El Dorado, Arkansas. Construction of the plant was completed, and initial production began, in 1998. Demand for MDF is subject to many of the same factors as other wood products such as housing starts, furniture production, residential improvements, import fluctuations, and industry capacity. The industry is also facing higher costs resulting from compliance with California Air Resources Board (“CARB”) regulations. Additionally, Del-Tin Fiber operations are subject to risk of business interruptions due to fire or other natural disasters, regulatory actions, or other causes. Del-Tin Fiber procures casualty and business interruption insurance to mitigate this risk. A decline in prices or demand for MDF or disruptions in the manufacturing operations at the Del-Tin Fiber plant could impact the Company’s results of operations and cash flows in future periods, as well as Deltic’s ability to exit the MDF business if desired in the future.

Competition

The forest products industry is highly competitive in terms of price and quality. The products of the Company are subject to increasing competition from a variety of non-wood and engineered wood products. In addition, the Company is subject to a potential increase in competition from lumber products and logs imported from foreign sources. Any significant increase in competitive pressures from substitute products or other domestic or foreign suppliers could have a material adverse effect on the Company.

Federal and State Environmental Regulations

The Company is subject to extensive and changing federal, state, and local environmental laws and regulations relating to the protection of human health and the environment, the provisions and enforcement of which are expected to become more stringent in the future. The Company has made and will continue to make non-material expenditures to comply with such provisions. Based on currently available information, the Company believes environmental regulation will not materially adversely affect the Company, but there can be no assurances that environmental regulation will not have a material adverse effect on the financial condition, results of operations, or liquidity of the Company in the future. Climate control legislation being considered by Congress or potentially more restrictive guidelines issued by governmental regulatory agencies are examples of changes that, if approved, could increase compliance costs as well as direct manufacturing expenses.

Geographic Concentration and Risk Associated with Real Estate Development

The Company’s real estate development projects are located in central Arkansas, specifically, in and west of Little Rock, Arkansas and in Hot Springs, Arkansas. Accordingly, the Company’s real estate operations are particularly vulnerable to any economic downturns or other adverse events that may occur in this region and to competition from nearby residential housing developments. The Company’s results of operations may be affected by the cyclicality of the homebuilding and real estate industries generally. Factors include changes in general and local economic conditions, such as employment levels, consumer confidence and income, housing demand, new and existing housing inventory levels, availability and cost of financing, mortgage interest rates and foreclosures, and changes in government regulation regarding the environment, zoning, real estate taxes, and other local government fees. In addition, the tightening of credit and the economic recession could delay or deter commercial real estate activity and may affect the Company’s operating results.

 

14


Table of Contents

General Economic Conditions

A continued stagnation of the housing industry could impact operating results for the Company. Additionally, a deterioration of the global credit markets and continued weakness of the general economy could adversely affect the Company’s access to capital. Similarly, Deltic’s customers and suppliers’ ability to obtain financing could adversely affect the Company’s business if their ability to operate or fund transactions is impaired.

Reliance on Key Personnel

The Company believes that its continued success will depend in large part on its ability to attract and retain highly skilled and qualified personnel. The Company offers management incentives in a manner that are directly linked to the Company’s performance, which the Company believes will facilitate the attraction, retention, and motivation of highly skilled and qualified personnel. In this regard, the Company has taken steps to retain its key personnel, including the provision of competitive employee benefit programs. Although the Company will seek to employ qualified individuals, in the event that officers or other key employees of the Company cease to be associated with the Company, there can be no assurance that such individuals could be engaged by the Company.

Dividend Policy

The Company currently intends to pay modest quarterly cash dividends. However, the Company anticipates that future earnings will, for the most part, be used to support operations and finance growth of the business. The payment of any dividends will be at the discretion of the Company’s Board of Directors (the “Company Board”). The declaration of dividends and the amount thereof will depend on a number of factors, including the Company’s financial condition, capital requirements, funds from operations, future business prospects, and such other factors as the Company Board may deem relevant, and no assurance can be given as to the timing or amount of any dividend payments.

Anti-Takeover Effects of Certain Statutory, Charter, Bylaw and Contractual Provisions

Several provisions of the Company’s Certificate of Incorporation and Bylaws and of the Delaware General Corporation Law could discourage potential acquisition proposals and could deter or delay unsolicited changes in control of the Company, including provisions creating a classified Board of Directors, limiting the stockholders’ powers to remove directors, and prohibiting the taking of action by written consent in lieu of a stockholders’ meeting. The preferred stock purchase rights attached to the Company’s common stock could have similar anti-takeover effects. In addition, the Company’s Board has the authority, without further action by the stockholders, to fix the rights and preferences of and to issue preferred stock. The issuance of preferred stock could adversely affect the voting power of the owners of the Company’s common stock, including the loss of voting control to others. Transactions subject to these restrictions will include, among other things, the liquidation of the Company; the merger, consolidation, or other combination or affiliation of the Company with another company; discontinuance of or material change in the conduct of a material portion of its businesses independently and with its own employees; redemption or other reacquisition of the Company’s common stock; and the sale, distribution, or other disposition of assets of the Company out of the ordinary course of business.

These provisions and others that could be adopted in the future could discourage unsolicited acquisition proposals or delay or prevent changes in control or management of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices. In addition, these provisions could limit the ability of stockholders to approve transactions that they may deem to be in their best interests.

 

15


Table of Contents
Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

The Company’s properties, primarily located in Arkansas and north Louisiana, consist principally of fee timber and timberlands, purchased stumpage inventory, two sawmills, and residential and commercial real estate held for development and sale. As of December 31, 2011, the Company’s gross investment in timber and timberlands; gross property, plant, and equipment; and investment in real estate held for development and sale consisted of the following:

 

(Thousands of dollars)       

Timberlands

   $ 94,212   

Fee timber and logging facilities

     236,742   

Purchased stumpage inventory

     2,061   

Real estate held for development and sale

     57,408   

Land and land improvements

     6,498   

Buildings and structures

     13,876   

Machinery and equipment

     100,211   
  

 

 

 
   $ 511,008   
  

 

 

 

“Timberlands” consist of the historical cost of land on which fee timber is grown and related land acquisitions stated at acquisition cost. “Fee timber” consists of the historical cost of Company standing timber inventory, including capitalized reforestation costs, and related timber acquisitions stated at acquisition cost. “Logging facilities” consist primarily of the costs of roads constructed and other land improvements. “Purchased stumpage inventory” consists of the purchase price paid for third-party timber, net of amounts harvested. “Real estate held for development and sale” consists primarily of the unamortized costs, including amenities, incurred to develop the real estate for sale and a retail center held for sale. “Land and land improvements” consist primarily of improvements at the Company’s two sawmill locations. “Buildings and structures” and “Machinery and equipment” primarily consist of the sawmill buildings and equipment and the Company’s two real estate sales offices.

The Company owns all of the properties discussed above. The Company’s properties are not subject to mortgages. (For further information on the location and type of the Company’s properties, see the descriptions of the Company’s operations in Item 1.)

 

Item 3. Legal Proceedings

From time to time, the Company is involved in litigation incidental to its business. Currently, there are no material legal proceedings.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

16


Table of Contents

Executive Officers of the Registrant

The age (at January 1, 2012), present corporate office, and length of service in office of each of the Company’s executive officers and persons chosen to become officers are reported in the following listing. Executive officers are elected annually but may be removed from office at any time by the Board of Directors.

Ray C. Dillon - Age 56; President and Chief Executive Officer and a director of the Company, effective July 1, 2003. Prior to joining the Company, Mr. Dillon was employed at Gaylord Container Corporation, where from April 2000 through December 2002, he was Executive Vice President, and preceding his election as Executive Vice President, he was Vice President, Primary Product Operations from April 1997.

Kenneth D. Mann - Age 52; Vice President, Treasurer, and Chief Financial Officer, effective May 1, 2007. From September 2004 to April 2007, Mr. Mann was Controller. From September 2002, to September 2004, Mr. Mann was Manager of Corporate Governance and Investor Relations. From January 1997 to September 2002, Mr. Mann was Assistant Controller.

Jim F. Andrews, Jr. - Age 47; Vice President, General Counsel, and Secretary, effective October 15, 2010. From July 2001 to October 2010, Mr. Andrews served as in-house legal counsel for the Company.

Kent L. Streeter - Age 51; Vice President of Operations, effective November 16, 2003. Prior to joining the Company, Mr. Streeter was Operations Manager of a large paper mill located in the Southeastern United States from January 1997, which has been owned since April 2002, by Temple-Inland, Inc. and prior to that by Gaylord Container Corporation.

David V. Meghreblian - Age 53; Vice President of Real Estate, effective November 16, 2003. From May 2000 to November 2003, Mr. Meghreblian was Vice President of Operations for the Company. From November 1996 to April 2000, Mr. Meghreblian was General Manager of Planning and Investor Relations for Deltic. Prior to such time, Mr. Meghreblian was General Manager of Project Development, a position he held beginning in November 1995.

Byrom L. Walker - Age 50; Controller, effective May 1, 2007. From March 2006 to May 2007, Mr. Walker was Manager of Financial Reporting. Prior to joining the Company, Mr. Walker was Corporate Controller for Teris, LLC, a division of Suez S.A., a position he held from 2004.

 

17


Table of Contents

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Common stock of Deltic Timber Corporation is traded on the New York Stock Exchange under the symbol “DEL”. The following table sets forth the high, low, and closing prices, along with the quarterly dividends declared, for each of the quarters indicated:

 

     Sales Price      Dividend per  
     High      Low      Common Share  

2011

        

First Quarter

   $ 66.99         55.50         .075   

Second Quarter

   $ 74.43         49.53         .075   

Third Quarter

   $ 60.60         46.89         .075   

Fourth Quarter

   $ 76.03         55.96         .075   

2010

        

First Quarter

   $ 54.15         39.99         .075   

Second Quarter

   $ 55.99         41.56         .075   

Third Quarter

   $ 48.04         38.32         .075   

Fourth Quarter

   $ 63.00         42.68         .075   

Common stock dividends were declared to be paid for each quarter during 2011 and 2010. As of December 31, 2011, there were approximately 940 stockholders of record of Deltic’s common stock.

In December 2000, the Company’s Board of Directors authorized a stock repurchase plan of up to $10 million of Deltic common stock. On December 13, 2007, Deltic announced an expansion of its repurchase program by $25 million. There is no stated expiration date regarding this authorization. There were no purchases of shares under the program in 2011. Information pertaining to this plan for the fourth quarter of 2011 is presented in the table below.

 

Period

   Total
Number
of Shares
Purchased
     Average
Price
Paid
Per
Share
     Total
Number of
Shares
Purchased
as Part

of Publicly
Announced
Plans or
Programs
     Maximum
Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
 

October 1 through October 31, 2011

     —           —           —         $ 20,434,011   

November 1 through November 30, 2011

     —           —           —         $ 20,434,011   

December 1 through December 31, 2011

     —           —           —         $ 20,434,011   

Information regarding securities authorized for issuance under equity compensation plans required by this item is contained in Item 12 of this Form 10-K and is incorporated herein by reference.

 

18


Table of Contents
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities (cont.)

 

LOGO

The graphed stock performance represents the cumulative total return for the Company’s common stock compared to issuers with similar capitalization and to peer industry issuers for the period December 31, 2006, through December 31, 2011. The calculated returns assume an investment of $100 on December 31, 2006, and that all dividends were reinvested.

 

19


Table of Contents
Item 6. Selected Financial Data

The following table presents certain selected consolidated financial data for each of the years in the five-year period ended December 31, 2011.

 

(Thousands of dollars, except per share amounts)    2011     2010     2009     2008     2007  

Results of Operations for the Year

          

Net sales

   $ 121,847        141,623        112,012        129,524        128,255   

Operating income

   $ 7,459        17,909        5,870        7,505        19,959   

Net income

   $ 2,659        12,397        3,688        4,384        11,111   

Comprehensive income/(loss)

   $ (4,344     14,880        5,386        (915     14,638   

Earnings per common share

          

Basic

   $ .21        .99        .30        .35        .89   

Assuming dilution

   $ .21        .99        .30        .35        .89   

Cash dividends declared per common share

   $ .30        .30        .30        .30        .30   

Net cash provided/(required) by

          

Operating activities

   $ 14,639        28,898        16,914        10,890        18,213   

Investing activities

   $ (11,112     (864     (25,772     (19,985     (10,993

Financing activities

   $ (4,067     (28,986     11,228        835        (7,906

Percentage return on

          

Average stockholders’ equity

     1.2        5.6        1.8        2.0        5.2   

Average borrowed and invested capital

     2.3        5.3        2.5        3.4        5.7   

Average total assets

     .8        3.5        1.1        1.3        3.4   

Capital Expenditures for the Year

          

Woodlands

   $ 7,817        6,144        25,075        11,436        4,978   

Mills

   $ 3,570        5,330        3,006        6,874        5,345   

Real Estate

   $ 4,223        3,859        4,464        11,222        10,171   

Corporate

   $ 87        235        160        122        74   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 15,697        15,568        32,705        29,654        20,568   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Condition at Year-End

          

Working capital

   $ 3,618        2,520        5,414        4,069        6,609   

Current ratio

     1.28 to 1        1.16 to 1        1.41 to 1        1.34 to 1        1.40 to 1   

Total assets

   $ 341,870        343,273        352,203        334,733        328,744   

Long-term debt

   $ 64,000        65,611        91,222        75,833        66,667   

Stockholders’ equity

   $ 227,123        230,011        216,299        213,164        218,086   

Long-term debt to stockholders’ equity ratio

     .282 to 1        .285 to 1        .422 to 1        .356 to 1        .306 to 1   

 

20


Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

Deltic Timber Corporation (“Deltic” or the “Company”) is a natural resources company engaged primarily in the growing and harvesting of timber and the manufacture and marketing of lumber. Deltic owns approximately 445,100 acres of timberland, mainly in Arkansas and north Louisiana. The Company’s sawmill operations are located at Ola in central Arkansas (the “Ola Mill”) and at Waldo in south Arkansas (the “Waldo Mill”). Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development in the central Arkansas area. The Company also holds a 50 percent interest in Del-Tin Fiber LLC (“Del-Tin Fiber”), a joint venture to manufacture and market medium density fiberboard (“MDF”). Deltic is a calendar-year company for both financial and income tax reporting.

The Company is organized into four segments: (1) Woodlands, which manages all aspects of the timberlands including harvesting and sale of timber, timberland sales and acquisitions, oil and gas mineral revenues, and hunting land leases; (2) Mills, which consists of Deltic’s two sawmills that manufacture a variety of softwood lumber products; (3) Real Estate, which includes the Company’s real estate developments and a related country club operation; and (4) Corporate, which consists of executive management, accounting, information systems, human resources, purchasing, treasury, income tax, and legal staff functions that provide support services to the operating business units. The Company currently does not allocate the cost of maintaining these support functions to its operating units.

The wood products business is affected by a number of factors, including general economic conditions, employment levels, interest rates, credit availability and associated costs, imports, foreign exchange rates, housing starts, new and existing home inventories, residential and commercial real estate foreclosures, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw materials, cost of fuel, and weather conditions. Concerns over the stability of employment and European sovereign debt, along with high inventory levels of pre-existing homes and economic uncertainties, have dampened consumer confidence pertaining to the U.S. housing market. Even though recent economic news in the U.S. has shown the economy to be improving modestly, the U.S. housing market has continued to languish. Until the U.S. housing market can show signs of sustained growth, moving back toward historical levels of annual new home construction, the building products and real estate development markets will continue to be depressed. 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, Deltic’s management focuses on increasing productivity and reducing controllable costs and expenses in its manufacturing processes.

Significant accomplishments for the Company’s operating segments during the year of 2011 include: (1) the Woodlands segment’s harvest of 606,000 tons of pine sawtimber, 449,000 tons of pine pulpwood, and sale of approximately 2,700 acres of non-strategic timberland; (2) the Mills segment’s reported operating profit for the year, despite continued low lumber prices and consumption levels; and (3) the Real Estate segment’s sales of 27 acres of commercial real estate at an average sales price of $117,000 per acre.

The Woodlands segment is the Company’s core operating segment. It reported operating income of $20.4 million, a 16 percent decrease from 2010 results, primarily due to decreased revenues from harvested sawtimber and pulpwood, as a result of decreased per-ton sales prices, combined with sales of fewer acres of timberland at a slightly lower per-acre sales price. Offsetting these decreases were increases in the oil and gas and hunting lease revenues, combined with lower operating expenses, net of hauling activities, and a lower cost of timber harvested. The pine sawtimber harvest volume for 2011 was 606,000 tons compared to 610,000 in 2010, but the average sales price declined 15 percent to $23 per ton, a record low. The 2011 pine pulpwood harvest volume was 449,000 tons, a 31 percent increase from 2010, while the $8 per ton average sales price was a 27 percent decrease from 2010. The hardwood sawtimber harvest volume decreased 61 percent from 2010, to 10,000 tons, and the average sales price was $30, a 17 percent decrease from the prior year. The Company continues to manage the harvest level of its forests on a sustainable-yield basis.

 

 

21


Table of Contents

Over the long-term, there has been a fundamental correlation between pine lumber prices and pine sawtimber prices, but in the short-term, the geographical size differential between the pine lumber and pine sawtimber markets results in the two acting somewhat independently of each other. Pine sawtimber markets operate within local areas, with sales being mainly to sawmills. These mills are subject to a relatively fixed level of raw material requirements that is driven by the facilities’ required production levels. These production levels within a region can influence the price of pine sawtimber. 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 will be less volatile than that of the market for pine lumber. This trend would 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.

Timberland designated as higher and better use consists of tracts with market values that exceed the land’s worth as a pine 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 of hardwood bottomland acreage that is unsuitable for growing pine timber, tracts that are too small to allow efficient timber management, tracts geographically isolated from other Company fee lands, or any other acreage not deemed strategic to Deltic’s operations or growth. Approximately 2,700 acres of non-strategic timberland, primarily hardwood bottomland, were sold during 2011. When possible, the Company utilizes tax deferring, like-kind exchanges to minimize tax consequences of timberland sales. In 2011, Deltic reinvested hardwood bottomland sale proceeds into pine producing timberland, purchasing approximately 2,000 acres.

In addition to pine and hardwood timber sales, the Company receives other benefits from land ownership, such as revenues from hunting leases, mineral lease rentals, mineral royalties, and land easements that provide income to the Woodlands segment. The segment reported hunting lease income of $2.2 million in 2011 and $2 million in 2010. Total mineral revenues, consisting of mineral lease rentals and net oil and gas royalties, were $6.4 million in 2011, compared to $5.7 million in 2010. The majority of this revenue currently comes from an area known as the Fayetteville Shale Play, an unconventional natural gas reservoir being developed in the state of Arkansas. The Company has under lease or held by production approximately 26,200 net mineral acres in the Fayetteville Shale Play. During 2011, the Company received net royalty payments of $3.3 million from the Fayetteville Shale Play, compared to $3 million in 2010. The increase was due to more wells being in production when compared to a year ago. The total of all net oil and gas royalty income, inclusive of the Fayetteville Shale Play, was $3.9 million in 2011 and $3.7 million in 2010. Total income from mineral lease rentals was $2.5 million in 2011 and $2 million in 2010. The ultimate benefit to Deltic from mineral leases remains speculative and unknown to the Company and is contingent on the successful completion of producing wells on Company lands and the prices received for crude oil and natural gas.

The Mills segment reported operating income of $1 million in 2011, despite a weak lumber market. However, this was an 86 percent decrease from 2010, which was primarily due to a supply-side driven shortage of lumber and the resulting increase in lumber prices during 2010. The impact of decreased sales prices in 2011 was partially offset by a lower average manufacturing cost. Current economic forecasts indicate the housing industry’s recovery will be prolonged for some time. As with any commodity market, the Company expects the historical volatility of lumber prices to continue in the future, and management will respond with timely decisions for adjusting production levels to match market demand. Since commodity-based markets rarely benefit from real price growth, after inflation, Deltic focuses on improving production efficiencies and the cost structure for its lumber mills, as evidenced by a continued year-over-year unit cost reduction and improved hourly productivity rates in its manufacturing operations.

 

22


Table of Contents

The Real Estate segment reported break-even results in 2011, a decrease of $2.2 million from 2010. While the number of residential lots sold increased by 3 to 31, the average sales price per lot decreased $18,000, to $63,500 per lot. The decrease was due to the mix of lots sold, as the Company has not reduced lot prices. At December 31, 2011, developed but uncommitted residential lots in Chenal Valley, Chenal Downs, and Red Oak Ridge were 173, 12, and 45, respectively. The Company continues to focus on the long-term financial returns from the total build-out of the Chenal Valley and Red Oak Ridge developments and deems the recent negative trends to reflect anticipated fluctuation, which will have a minimal impact on the overall real estate business model.

A tabular summary of Deltic’s residential real estate activity is as follows:

 

Residential Lots

  

Lots

Sold in

2011

    

Lots Sold

Since

Inception

    

Unsold

Developed

Lots

    

Future

Lots to

Develop

    

Estimated

Total

Lots

 
                

Development

 

Market

              

Chenal Valley

  Little Rock      29         2,563         175         2,162         4,900   

Chenal Downs

  Little Rock      —           64         12         —           76   

Red Oak Ridge

  Hot Springs      —           89         46         865         1,000   

Acquired lots

  Various      2         5         7         —           —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
       31         2,721         240         3,027         5,976   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the year of 2011, Deltic sold approximately 27 acres of commercial real estate within the boundaries of the Chenal Valley development for an average per-acre price of $117,000. A multi-family housing site accounted for 26 of these acres. 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, property location, and acres available. There is no commercial acreage included in the Chenal Downs development. Red Oak Ridge, the Company’s Hot Springs area development, will include a small amount of commercial acreage to be determined by the actual land usages. The Company will begin to develop and offer commercial sites as this development’s population density increases.

A tabular summary of Deltic’s commercial real estate activity is as follows:

 

Commercial Acres

  

Acres

Sold in

2011

    

Acres Sold

Since

Inception

    

Acres

Remaining

    

Estimated

Total

Acres

 
              

Development

  

Market

           

Chenal Valley

   Little Rock      27         391         430         821   
     

 

 

    

 

 

    

 

 

    

 

 

 

Deltic’s real estate activities primarily involve residential lots and commercial acreage; however, the Company has constructed a small number of speculative homes in the Red Oak Ridge development to serve as a catalyst for increasing lot sales activity. This activity has been reviewed for potential triggers for impairment testing, as appropriate. However, management is of the opinion that no such triggering event has occurred.

A tabular summary of Deltic’s speculative home activity is as follows:

 

Development

  

Market

   Homes
Sold in
2011
     Homes
Constructed
Since
Inception
     Homes Sold
Since
Inception
     Homes
Unsold
 

Red Oak Ridge

   Hot Springs      —           15         9         6   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

Equity in earnings of Del-Tin Fiber was $.3 million in 2011, a decrease of $3.8 million from 2010. The decrease was due primarily to lower sales volume and average per-unit sales price, as the MDF market was weaker than the prior year, as 2010 benefitted from a disruption in the supply of moldings from Chile as a result of an earthquake there. In addition, higher costs for raw material used in the manufacture of MDF adversely impacted the plant’s financial results.

Significant Events

On February 4, 2011, Deltic amended and extended its unsecured and committed revolving credit facility. Pursuant to the amendment, the total amount available was decreased $2.5 million to $297.5 million, the term was extended to September 9, 2015, the fixed charge coverage ratio covenant was removed, pricing of the applicable commitment fees and margins was amended, and an option to request an increase in the amount of the aggregate revolving commitments by $50 million was continued. The funds available through this agreement will enable the Company to take full advantage of growth opportunities as they present themselves.

On February 13, 2012, International Paper Company completed its acquisition of Temple-Inland, Inc., Deltic’s joint venture partner in Del-Tin Fiber, LLC. Temple-Inland, Inc. is a now a wholly owned subsidiary of International Paper Company. The acquisition did not change the operating agreement of Del-Tin Fiber, LLC.

Results of Operations

In the following tables, Deltic’s net sales and results of operations are presented for the three years ended December 31, 2011, 2010 and 2009. Explanations of significant variances and additional analyses for the Company’s consolidated and segmental operations follow the tables.

 

     Years Ended December 31,  
(Millions of dollars, except per share amounts)    2011     2010     2009  

Net sales

      

Woodlands

   $ 40.2        43.5        40.1   

Mills

     83.9        99.4        75.7   

Real Estate

     12.3        16.0        13.1   

Eliminations

     (14.6     (17.3     (16.9
  

 

 

   

 

 

   

 

 

 

Net sales

   $ 121.8        141.6        112.0   
  

 

 

   

 

 

   

 

 

 

Operating income

      

Woodlands

   $ 20.4        24.4        23.4   

Mills

     1.0        7.3        (5.8

Real Estate

     —          2.2        .2   

Corporate

     (14.3     (16.0     (12.6

Eliminations

     .4        —          .7   
  

 

 

   

 

 

   

 

 

 

Operating income

     7.5        17.9        5.9   

Equity in earnings of Del-Tin Fiber

     .3        4.1        2.2   

Interest income

     —          .1        .1   

Interest and other debt expense, net of capitalized interest

     (4.0     (3.4     (3.5

Other income

     —          —          .1   

Income taxes

     (1.1     (6.3     (1.1
  

 

 

   

 

 

   

 

 

 

Net income

   $ 2.7        12.4        3.7   
  

 

 

   

 

 

   

 

 

 

Earnings per common share

      

Basic

   $ .21        .99        .30   

Assuming dilution

   $ .21        .99        .30   

 

24


Table of Contents

Consolidated

Net income for 2011 was $2.7 million, $9.7 million less than 2010 due to decreased operating income from the Company’s three operating segments and equity in earnings of Del-Tin Fiber, partially offset by decreased Corporate general and administrative expenses.

Net income for 2010 was $8.7 million more than in 2009 due to improved operating income from all three operating segments and to increased equity in earnings of Del-Tin Fiber, partially offset by increased Corporate general and administrative expenses.

Operating income for 2011 decreased $10.4 million when compared to 2010. The Woodlands segment decreased $4 million due primarily to a lower per-ton average sales price for timber sold and fewer timberland acres being sold; partially offset by increased oil and gas lease rentals and royalty revenues; decreased operating expenses, after net hauling activities; and by reduced cost of fee timber harvested. The Mills segment’s operating income decreased $6.3 million due to a lower average sales price per MBF of lumber sold and decreased sales volume, partially offset by a lower per-unit cost of lumber sold. The Real Estate segment’s financial results decreased $2.2 million, primarily due to lower margins realized from residential lots and commercial acres sold in 2011, when compared to 2010. Corporate operating expense decreased by $1.7 million due to lower general and administrative expenses. Equity in earnings of Del-Tin Fiber decreased $3.8 million due primarily to a lower sales volume, a lower per-unit average sales price, and increased raw material costs.

Operating income for 2010 increased $12 million when compared to 2009. The Woodlands segment increased $1 million due primarily to higher harvest volumes and increased net revenues from oil and gas royalties, partially offset by a decreased margin on timberland sold and increased cost of fee timber harvested. The Mills segment’s operating income increased $13.1 million due to a higher average sales price per MBF of lumber sold, increased sales volume, and a lower per-unit cost of lumber sold. The Real Estate segment results improved $2 million, primarily due to the sale of 19 acres of commercial property at a 48 percent higher average sales price per acre than received for the 18 acres sold in 2009. The $3.4 million increase in Corporate expense was mainly due to higher general and administrative expense, primarily professional fees and employee incentive expense. Equity in Del-Tin Fiber improved $1.9 million, mainly due to an increased sales volume.

Woodlands

Selected financial and statistical data for the Woodlands segment is shown in the following table.

 

     2011      2010      2009  

Net sales (millions of dollars)

        

Pine sawtimber

   $ 14.2         16.8         16.5   

Pine pulpwood

     3.7         3.9         3.3   

Hardwood sawtimber

     .3         .9         .6   

Hardwood pulpwood

     .8         1.2         1.1   

Oil and gas lease rentals

     2.5         2.0         2.0   

Oil and gas royalties

     4.4         4.2         2.3   

Hunting leases

     2.2         2.0         1.9   

Sales volume (thousands of tons)

        

Pine sawtimber

     606         610         579   

Pine pulpwood

     449         344         311   

Hardwood sawtimber

     10         26         20   

Hardwood pulpwood

     113         119         126   

Sales price (per ton)

        

Pine sawtimber

   $ 23         27         29   

Pine pulpwood

     8         11         11   

Hardwood sawtimber

     30         36         31   

Hardwood pulpwood

     7         10         9   

Timberland

        

Net sales (millions of dollars)

   $ 4.1         6.6         6.9   

Sales volume (acres)

     2,726         4,061         4,051   

Sales price (per acre)

   $ 1,500         1,600         1,700   

 

25


Table of Contents

Total net sales in 2011 decreased $3.3 million, or eight percent, when compared to 2010. The pine sawtimber per-ton price decreased 15 percent to $23, while the harvest volume was slightly lower. The pine pulpwood harvest volume was higher by 31 percent, but the average per-ton sales price of $8 was 27 percent lower. The hardwood sawtimber harvest volume was 61 percent lower than 2010, while the average per-ton sales price of $30 was 17 percent lower. The hardwood pulpwood harvest volume was five percent lower than in 2010 and the average per ton sales price of $7 was 30 percent lower. Oil and gas lease rental income increased $.5 million from 2010 and royalty revenues increased $.2 million. Sales of timberland decreased $2.5 million due to fewer acres sold and a lower average per-acre sales price. Revenues from easements and rights-of-way decreased $.3 million, while revenue from hauling fee stumpage to other mills increased $2.6 million.

Total net sales in 2010 increased $3.4 million, or eight percent, when compared to 2009. The pine sawtimber harvest volume increased five percent but was partially offset by a seven percent lower average per-ton sales price. Pine pulpwood harvest volumes increased 11 percent, while the average per-ton sales price remained unchanged from the previous year. The hardwood sawtimber harvest volume in 2010 increased 31 percent, and the average per-ton sales price increased 16 percent from 2009. Oil and gas royalties increased $2.2 million from 2009. Revenues from sales of timberland decreased $.4 million due to a lower average sales price per acre sold.

Operating income for the Woodlands segment for 2011 decreased $4 million, or 16 percent from 2010, due to the items affecting net sales and to increased costs for hauling fee stumpage to other mills, partially offset by lower salaries and benefits, silviculture expense, road maintenance on Company fee timberlands, and cost of fee timber harvested. Operating income for the Woodlands segment for 2010 increased $1 million, or four percent, from 2009, due to the items causing the increase in net sales, offset by an increase in the cost of fee timber harvested and increases in road maintenance expense on Company fee timberlands.

 

26


Table of Contents

Mills

Selected financial and statistical data for the Mills segment is shown in the following table.

 

     2011      2010      2009  

Net sales (millions of dollars)

        

Lumber

   $ 64.5         78.4         58.0   

Residual products

     14.5         16.2         14.5   

Lumber

        

Finished production (MMBF)

     249         265         230   

Sales volume (MMBF)

     254         271         232   

Sales price (per MBF)

   $ 254         290         250   

Net sales in 2011 decreased $15.5 million, or 16 percent, when compared to 2010. The decrease was due to a six percent reduction in sales volume along with a $36, or 12 percent, lower average sales price per MBF of lumber sold. The decreased sales volume was due to reduced production as a result of fewer operating hours to match market demand; however, year-over-year improved hourly productivity rates offset some of the impact of the decrease in hours operated.

Net sales in 2010 increased $23.7 million, or 31 percent, when compared to 2009. The increase was due to a 17 percent higher lumber sales volume combined with a $40, or 16 percent, higher sales price per MBF of lumber sold. The increased sales volume was due to increased operating hours to meet market demand and to improved operating efficiencies.

The decrease in the Mills segment operating income in 2011 from 2010 was due to lower sales volume and a lower average sales price, partially offset by lower per-unit manufacturing costs primarily due to lower raw material log cost and improved operating efficiencies. The increase in the Mills segment’s operating income from 2009 to 2010 was due to the same factors affecting sales revenues, combined with a lower per-unit production cost due to the increased volume produced.

Real Estate

Selected financial and statistical data for the Real Estate segment is shown in the following table.

 

     2011      2010      2009  

Net sales (millions of dollars)

        

Residential lots

   $ 2.0         2.3         1.0   

Commercial acres

     3.2         6.3         4.0   

Speculative homes

     —           —           .6   

Sales volume

        

Residential lots

     31         28         14   

Commercial acres

     27         19         18   

Speculative homes

     —           —           1   

Average sales price (thousands of dollars)

        

Residential lots

   $ 63         81         73   

Commercial acres

     117         334         225   

Speculative homes

     —           —           556   

Total net sales for 2011 decreased $3.7 million, or 23 percent, compared to 2010 due to a decrease in the average per-acre sales price received for commercial acreage sold and to a lower average sales price per residential lot sold due to the sales mix in 2011.

 

27


Table of Contents

Total net sales for 2010 increased $2.9 million, or 22 percent, compared to 2009 due to an increase in the average per-acre sales price received for commercial acreage sold, and to a 100 percent increase in the number of residential lots sold, combined with a higher average sales price per residential lot sold.

The changes in the Real Estate segment’s operating income were due primarily to the same factors impacting net sales, partially offset by decreased operating expenses.

Corporate

The $1.7 million decrease in operating expense for Corporate functions in 2011, when compared to 2010, was due to lower general and administrative expenses, primarily employee incentive plan expenses.

The $3.4 million increase in operating expense for Corporate functions in 2010, when compared to 2009, was due to higher general and administrative expenses, primarily employee incentive plan expenses resulting from the improved financial results for the year, and increased professional fees.

Eliminations

Intersegment sales of timber from Deltic’s Woodlands segment to the Mills segment were $14.6 million in 2011, $17.3 million in 2010, and $16.9 million in 2009. The $2.7 million decrease during 2011 was due primarily to a lower average per-ton log transfer price. The $.4 million increase during 2010, from 2009, was due primarily to an increase in volume transferred, partially offset by a slightly lower average per-ton transfer price. Intersegment transfer prices approximate market prices.

Equity in Del-Tin Fiber

For the year ended December 31, 2011, equity in Del-Tin Fiber recorded by the Company was $.3 million compared to $4.1 million in 2010, and $2.2 million in 2009.

Additional selected financial and statistical data for Del-Tin Fiber is shown in the following table.

 

     2011      2010      2009  

Net sales (millions of dollars)

   $ 64.3         71.7         54.6   

Finished production (MMSF)

     116.3         128.0         99.1   

Sales volume (MMSF)

     116.3         130.0         100.9   

Sales price (per MSF)

   $ 493         501         500   

Sales volume for 2011 decreased ten percent from 2010, with a two percent decrease in the average per-unit sales price. The decrease in both sales price and volume was due to a softer MDF market.

Sales volume for 2010 increased 29 percent from 2009, with only a slight change in the average per-unit sales price. The increased sales volume was mainly due to an interruption of molding imports from Chile during the first half of the year, which was caused by an earthquake on February 27, 2010.

 

28


Table of Contents

Interest Expense

Interest expense for 2011 increased $.5 million, when compared to 2010, mainly due to a higher interest rate. Interest expense for 2010 decreased $.1 million, when compared to 2009, due to lower average outstanding debt.

Income Taxes

The effective income tax rate was 30 percent, 34 percent, and 23 percent in 2011, 2010, and 2009, respectively. The decrease in the effective income tax rate for 2011, when compared to 2010, was due primarily to the effect of permanent tax benefits on lower operating income. The increase in the effective income tax rate for 2010 versus 2009 was due primarily to the expiration, in 2009, of a reduced tax rate on timber capital gains.

Liquidity and Capital Resources

Cash Flows and Capital Expenditures

Net cash provided by operating activities totaled $14.6 million for the year ended December 31, 2011, which compares to $28.9 million for 2010, and $16.9 million for 2009. Changes in operating working capital other than cash and cash equivalents required cash in 2011 of $.9 million, and provided cash of $2.3 million in 2010, and $1.6 million in 2009. The Company’s accompanying Consolidated Statements of Cash Flows and Note 17 of the Consolidated Financial Statements identify other differences between income and cash provided by operating activities for each reported year.

Capital expenditures required cash of $15.6 million in 2011, $15.4 million in 2010, and $32.7 million in 2009.

Total capital expenditures, by segment, for the years ended December 31, 2011, 2010, 2009, are presented in the following table.

 

(Millions of dollars)    2011     2010     2009  

Woodlands, including non-cash land exchanges

   $ 7.8        6.2        25.1   

Mills

     3.6        5.3        3.0   

Real Estate, including development expenditures

     4.2        3.9        4.5   

Corporate

     .1        .2        .1   
  

 

 

   

 

 

   

 

 

 

Total capital expenditures

     15.7        15.6        32.7   

Non-cash land exchange

     (.1     (.2     —     
  

 

 

   

 

 

   

 

 

 

Total capital expenditures requiring cash

   $ 15.6        15.4        32.7   
  

 

 

   

 

 

   

 

 

 

Woodlands capital expenditures included timberland acquisitions of approximately 2,000 acres at a cost of $3.3 million in 2011, 1,300 acres at a cost of $1.6 million in 2010, and 14,000 acres at a cost of $21.8 million in 2009. Reforestation site preparation and planting required $4.4 million in 2011, $3.6 million in 2010, and $2.9 million in 2009, and were the result of expansion of the Company’s planting program due to final harvests of mature stands necessitating regeneration and to recent acquisitions of timberland. In addition, the Company spent $.6 million for construction of roads on Company fee timberlands in 2010.

The majority of capital expenditures at the Ola Mill during 2011 were maintenance related and included $.8 million for various system upgrades and replacements, $.4 million for a lumber tester, and $.1 million for new forklifts. Capital expenditures at the Waldo Mill included $.9 million for boiler upgrades, $.3 million for forklifts, $.2 million for kiln upgrades and carts, $.2 million for a new fence unit at the trimmer, and $.4 million for various system upgrades and replacements.

 

29


Table of Contents

The majority of capital expenditures at the Ola Mill during 2010 were maintenance related and included $.7 million for various system upgrades and replacements, $.4 million for hardsurfacing, $.3 million for new forklifts, and $.2 million for additional land at the plant site. Capital expenditures at the Waldo Mill included $1.3 million for boiler upgrades, $.7 million for log loaders and forklifts, $.4 million for hardsurfacing, $.3 million for a machine stress rated lumber grading machine, $.3 million for mill air compressors, $.4 million for kiln upgrades and carts, and $.3 million for various system upgrades and replacements.

Capital expenditures for 2009 included $.3 million for hard surfacing and $.8 million for various system upgrades and replacements at the Ola Mill and included $.4 million for the re-skin of two kilns and baffle replacements, $.3 million for forklifts, $.2 million to upgrade and relocate a motor control center, and $.2 million for hard surfacing at the Waldo Mill.

Capital expenditures for Real Estate operations related to the cost of residential lot development totaled $.2 million in 2011, $.6 million in 2010, and $.3 million in 2009. Capital expenditures for commercial development totaled $.8 million in 2011 and $.1 million in 2010. There were no land acquisitions in 2011 or 2010, while land acquisitions in 2009 required $.2 million. Infrastructure-related projects required $1.6 million in 2011, $2.2 million in 2010, and $2.5 million in 2009. Golf course renovations totaled $.7 million in 2011, $.4 million in 2010, and $.2 million in 2009. Expenditures for course maintenance equipment totaled $.2 million in 2011 and 2010 and $.1 million in 2009. The Company expended $.5 million in 2011 on clubhouse renovations at Chenal Country Club.

Deltic had commitments of $1.4 million for capital projects in progress at December 31, 2011. Commitments included $.6 million on pending land acquisitions and $.2 million for reforestation site prep for the Woodlands segment, $.2 million for the completion of various projects at the mills, and $.4 million for residential and commercial site development and amenity improvements at the Company’s real estate developments.

The net change in purchased stumpage inventory required cash of $.8 million in 2011, provided cash of $1.2 million in 2010, and required cash of $.2 million in 2009. Advances to Del-Tin Fiber by the Company amounted to $1.8 million, $1.8 million, and $3.8 million in 2011, 2010, and 2009, respectively. The Company received cash repayments from Del-Tin Fiber of $3.3 million in 2011, $6.7 million in 2010, and $5.3 million in 2009. Funds held by trustees to be used to acquire timberland designated as “replacement property” as required for income tax-deferred exchanges increased $.6 million in 2011, and decreased $4.1 million in 2010, and $.2 million in 2009. Initiation fees received from members joining Chenal Country Club are accounted for as a reduction in cost basis of the club rather than net sales, and amounted to $.3 million in 2011, $.4 million in 2010, and $.5 million in 2009.

During 2011, Deltic borrowed $15.5 million under its revolving credit facility and repaid $17.1 million of debt. During 2010, Deltic borrowed $20.3 million under its revolving credit facility and repaid $45.9 million of debt. The Company borrowed $23.5 million under its revolving credit facility and repaid $8.1 million of debt in 2009.

There were no purchases of treasury stock in 2011 or 2010, while the Company purchased 35,571 shares of treasury stock in 2009 for $1.1 million. Cash required to pay common stock dividends totaled $3.8 million in 2011, and $3.7 million in 2010 and 2009. Proceeds from stock option exercises amounted to $2.5 million, $.6 million, and $1 million in 2011, 2010, and 2009, respectively. The Company incurred $1.1 million in fees to facilitate an amendment and extension of its unsecured and committed revolving credit facility in 2011, while there were no such costs in 2010 or 2009. Costs of $.7 million in 2011, $.3 million in 2010, and $.4 million in 2009 were paid for commitment fees related to Deltic’s revolving credit facility. Tax benefits from exercises of stock-based compensation were $.7 million in 2011 and $.2 million in 2010, while there were no benefits in 2009.

 

30


Table of Contents

Financial Condition

Working capital at year-end totaled $3.6 million in 2011 and $2.5 million in 2010. Deltic’s working capital ratio at December 31, 2011, was 1.28 to 1 compared to 1.16 to 1 at the end of 2010. Cash and cash equivalents at the end of 2011 were $3.3 million compared to $3.8 million at the end of 2010. The total indebtedness of the Company at December 31, 2011 decreased to $65.1 million from $66.7 million at December 31, 2010. Deltic’s long-term debt to stockholders’ equity ratio was .282 to 1 at December 31, 2011, compared to .285 to 1 at the end of 2010.

Liquidity

The primary sources of the Company’s liquidity are internally generated funds, access to outside financing, and working capital. The Company’s current strategy for growth continues to emphasize its timberland acquisition program, expanding lumber production as market conditions allow, and developing residential and/or commercial properties at Chenal Valley and Red Oak Ridge.

To facilitate these growth plans, the Company has an agreement with a group of banks which provides an unsecured and committed revolving credit facility. As of December 31, 2011, this facility totaled $297.5 million, with $273.5 million available and includes an option to request an increase of $50 million in revolving commitments. The facility will mature September 9, 2015. The credit agreement contains restrictive covenants, including limitations on the incurrence of debt and requirements to maintain certain financial ratios. (For additional information about the Company’s current financing arrangements, refer to Note 9 to the consolidated financial statements.)

The table below sets forth the most restrictive ratio of covenants in the credit facility and Senior Notes Payable and the status with respect to these covenants as of December 31, 2011 and 2010.

 

     Covenants
Requirements
    Actual Ratios at
Dec. 31, 2011
    Actual Ratios at
Dec. 31, 2010
 

Leverage ratio should be less than:1

     .65 to 1        .262 to 1        .263 to 1   

Total outstanding debt as a percentage of total debt allowed based on the minimum timber market value covenant:2

     2      43.47     38.37

Fixed charge coverage ratio should be greater than:3

     2.50 to 1        3.89 to 1        6.50 to 1   

 

1 

The leverage ratio is calculated as total debt divided by total capital. Total debt includes indebtedness for borrowed money, secured liabilities, obligations in respect of letters of credit, and guarantees. Total capital is the sum of total debt and net worth. Net worth is calculated as total assets minus total liabilities, as reflected on the balance sheet. This covenant is applied at the end of each quarter.

 

2 

Timber market value must be greater than 200 percent of total debt (as defined in (1) above.) The timber market value is calculated by multiplying the average price received for sales of timber for the preceding four quarters by the current quarter’s ending inventory of timber. This covenant is applied at the end of the quarter on a rolling four-quarter basis. The revolving credit facility requirement is for the timber market value to be greater than 175 percent of total debt (as defined in (1) above.)

 

3 

The fixed charge coverage ratio is calculated as EBITDA (earnings before interest, taxes,

 

31


Table of Contents
  depreciation, depletion, and amortization) increased by non-cash compensation expense and other non-cash expenses and decreased by dividends paid and income tax paid, divided by the sum of interest expense and scheduled principal payments made on debt during the period. This covenant is applied at the end of the quarter on a rolling four-quarter basis. This covenant only applies to the Senior Notes Payable.

Based on management’s current operating projections, the Company believes it will remain in compliance with the debt covenants and have sufficient liquidity to finance operations and pay all obligations. However, depending on market conditions and the possibility of further economic deterioration, the Company could request amendments, waivers for the covenants, or obtain refinancing in future periods. There can be no assurance that the Company will be able to obtain amendments or waivers, or negotiate agreeable refinancing terms should it become needed.

In December 2000, the Company’s Board of Directors authorized a stock repurchase program of up to $10 million of Deltic common stock. In December 2007, the Company’s Board of Directors expanded the program by $25 million. As of December 31, 2011, the Company had expended $14.6 million under this program, with the purchase of 370,530 shares at an average cost of $39.28 per share; 35,571 shares were purchased in 2009, 129,996 shares were purchased in 2008, 101,914 shares were purchased under this program in 2007, and seven shares in 2006. There were no shares purchased in 2011 or 2010. In its two previous repurchase programs, Deltic purchased 479,601 shares at an average cost of $20.89 and 419,542 shares at a $24.68 per share average cost, respectively.

Off-Balance Sheet Arrangements, Contractual Obligations, and Commitments

On August 26, 2004, Del-Tin Fiber, through an agreement with multiple lending institutions, refinanced its existing long-term debt by entering into a credit agreement consisting of a letter of credit in the amount of $29.7 million to support the remaining industrial revenue bonds originally issued in 1998 by Union County, Arkansas. Concurrent with this event, on August 26, 2004, Deltic executed a guarantee agreement in connection with this refinancing. Under Deltic’s guarantee agreement, Deltic unconditionally guarantees the due and punctual payment of 50 percent ($14.5 million at December 31, 2011) of Del-Tin Fiber’s obligations under its credit agreement. Deltic considers the status of the payment/performance risk of this guarantee to be low based on the length of time remaining on the bond issue. On February 13, 2012, International Paper Company completed its acquisition of Temple-Inland Inc., Deltic’s joint venture partner in Del-Tin Fiber, LLC. Temple-Inland, Inc. is now a wholly owned subsidiary of International Paper Company. The acquisition did not change the operating agreement of Del-Tin Fiber, LLC.

The Company has both funded and unfunded noncontributory defined benefit retirement plans that cover the majority of its employees. The plans provide defined benefits based on years of service and final average salary. Deltic also has other postretirement benefit plans covering substantially all of its employees. The health care plan is contributory with participants’ contributions adjusted as needed; the life insurance plan is noncontributory. With regards to all of the Company’s employee and retiree benefit plans, Deltic is unaware of any trends, demands, commitments, events, or uncertainties that will result in, or that are reasonably likely to result in the Company’s liquidity increasing or decreasing in any material way, or which would cause the 2011 reported plan information not to be necessarily indicative of future operating performance or future financial condition. (For information about material assumptions underlying the accounting for these plans and other components of the plans, refer to Note 15 to the consolidated financial statements.)

As of December 31, 2011, the Company is not involved in any unconsolidated special-purpose entity transactions.

 

32


Table of Contents

Tabular summaries of the Company’s contractual cash payment obligations and other commercial commitment expirations, by period, are presented in the following tables.

 

(Millions of dollars)    Total      During
2012
     2013
to 2014
     2015
to 2016
     After
2016
 

Contractual cash payment obligations

              

Woodlands committed capital costs

   $ .8         .8         —           —           —     

Real estate development committed capital cost

     3.7         .4         2.6         .7         —     

Mills committed capital cost

     .2         .2         —           —           —     

Long-term debt

     65.1         1.1         —           64.0         —     

Interest on debt1

     14.0         3.0         5.8         5.2         —     

Qualified retirement plan2

     2.3         2.3         —           —           —     

Nonqualified retirement plan3

     2.4         .2         .5         .5         1.2   

Other postretirement benefits4

     5.1         .4         .8         .9         3.0   

Other liabilities

     4.0         2.5         1.3         .2         —     

Unrecognized tax benefits

     1.8         .5         1.3         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 99.4         11.4         12.3         71.5         4.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other commercial commitment expirations

              

Guarantee of indebtedness of Del-Tin Fiber

   $ 14.8         —           —           14.8         —     

Timber cutting agreements

     .6         .5         .1         —           —     

Letters of credit

     .7         .2         .1         .4         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16.1         .7         .2         15.2         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1

Interest commitments are estimated using the Company’s current interest rates for the respective debt agreements over their remaining terms to expiration.

 

2

The Company’s qualified pension plan payments are based on estimated minimum required contributions for year one as provided by the Company’s consulting actuary. Deltic is not able to reliably estimate the required contributions beyond year one. Benefits paid by the qualified pension plan are paid through a trust. Estimated payments from the trust to retirees are not included in this table.

 

3 

The Company’s supplemental retirement plan payments are based on expected future benefit payments as disclosed in Note 15, “Employee Benefit Retirement Plans” in the notes to consolidated financial statements for years one through ten. Deltic cannot reliably estimate the payments beyond year ten as they are not provided by the Company’s actuary and are subject to a variety of factors.

 

4 

Included in other postretirement benefits are payments under the Company’s other postretirement benefit plan based on expected future benefit payments as disclosed in Note 15, “Employee Benefit Retirement Plans” in the notes to consolidated financial statements for years one through ten. Deltic cannot reliably estimate the payments beyond year ten as they are not provided by the Company’s consulting actuary and are subject to a variety of factors.

Outlook

Deltic’s management believes that cash provided from its operations, the remaining amount available under its credit facility, and its ability to access the credit markets will be sufficient to meet its expected cash needs and planned expenditures, including those of the Company’s continued timberland acquisition and stock repurchase programs, and capital expenditures, for the foreseeable future.

 

33


Table of Contents

The preceding discussion of the Company’s liquidity and capital resources contains “forward-looking statements” which were made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements reflect the Company’s current expectations and involve risks and uncertainties. Actual results could differ materially from those included in such forward-looking statements.

Other Matters

Impact of Inflation – General inflation has not had a significant effect on the Company’s operating results during the three years ended December 31, 2011. The Company’s timber operations are more significantly impacted by the forces of supply and demand in the southern United States than by changes in inflation. Lumber manufacturing operations are affected by the supply of lumber available in the North American market and by the demand for lumber by both the North American and foreign export markets. Sales of real estate are affected by changes in the general economy, employment levels, new and existing housing inventories, lending restrictions, and long-term interest rates, specifically as such may manifest themselves in the central Arkansas region.

Market Risk – Market risk represents the potential loss resulting from adverse changes in the value of financial instruments, either derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates, commodity prices, and equity security prices. The Company handles market risks in accordance with its established policies; however, Deltic does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company does consider, on occasion, the need to enter into financial instruments to manage and reduce the impact of changes in interest rates; however, the Company entered into no such instruments during the three-year period ended December 31, 2011. Deltic held various financial instruments at December 31, 2011 and 2010, consisting of financial assets and liabilities reported in the Company’s Consolidated Balance Sheets and off-balance sheet exposures resulting from contractual debt guarantees and letters of credit issued for the benefit of Deltic, primarily in connection with its purchased stumpage procurement and real estate operations. (For additional information regarding these financial instruments, refer to the previous tabular summary of the Company’s other commercial commitment expirations and to Note 13 to the consolidated financial statements.)

Interest Rate Risk – The Company is subject to interest rate risk from the utilization of financial instruments, such as term debt and other borrowings. The fair market value of long-term, fixed-interest rate debt is subject to interest rate risk. Generally, the fair value of fixed-interest rate debt will increase as interest rates fall and will decrease as interest rates rise. Conversely, for floating rate debt, interest rate changes generally do not affect the instruments’ fair value, but do impact future earnings and cash flows, assuming other factors are held constant. The estimated fair values of the Company’s long-term debt, including current maturities, and letters of credit at December 31, 2011 were $72 million, and $.7 million, respectively. A one percentage-point increase in prevailing interest rates would result in decreases in the estimated fair value of long-term debt by $2.3 million, while the fair value of contractual guarantees and the Company’s letters of credit would be unchanged. Fair values were determined using the current rates at which the Company could enter into comparable financial instruments with similar remaining maturities.

Foreign-Exchange Rate Risk - The Company currently has no exposure to foreign-exchange rate risk because all of its financial instruments are denominated in U.S. dollars.

Commodity Price Risk - The Company has no financial instruments subject to commodity price risk.

Equity Security Price Risk - None of the Company’s financial instruments have potential exposure to equity security price risk.

 

34


Table of Contents

The preceding discussion of the Company’s estimated fair value of its financial instruments and the sensitivity analyses resulting from hypothetical changes in interest rates are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect the Company’s current expectations and involve uncertainties. These forward-looking market risk disclosures are selective in nature and only address the potential impact from financial instruments. They do not include other potential effects which could impact Deltic’s business as a result of changes in interest rates, foreign-exchange rates, commodity prices, or equity security prices.

Critical Accounting Policies and Estimates

The Company has identified seven of its current accounting policies as being, in management’s view, critical to the portrayal of the Company’s financial condition and results of operations. Additionally, six of these policies require significant assumptions and/or estimates on the part of management as it pertains to certain factors inherent in the policies. The Company’s senior management has discussed the development and selection of its critical accounting policies and estimates with the Company’s Audit Committee. Deltic has not made any material changes to its critical accounting estimates in the last three years. These policies, along with explanations of the key assumptions and/or estimates considered by management, are described below. (For a listing of all significant accounting policies of the Company, refer to Note 1 to the consolidated financial statements.)

 

  1) Investment in Real Estate Held for Development and Sale — Real estate held for development and sale includes direct costs of land, land development, and indirect costs, including amenities. Indirect and amenity costs are allocated to individual lots or acreage sold based on relative sales value. Direct costs are allocated to the specific neighborhood or commercial real estate tract, while indirect costs for the Company’s three development areas — Chenal Valley, Chenal Downs, and Red Oak Ridge — are allocated to neighborhoods over the entire respective development area based on relative retail values. Management makes the determination of future indirect development costs and the potential future retail value and in so doing considers, among other factors, the cost projections for its development plans provided by independent professional engineering consultants and retail values as provided by independent appraisers.

The key factors involved in determining the Investment in Real Estate Held for Development and Sale are: (1) the treatment of the clubhouse and golf courses at Chenal Country Club, the amenity around which the Chenal Valley development is centered, as an amenity rather than an operating fixed asset and (2) the management estimates required to estimate the future indirect development costs and sales values of the areas of Chenal Valley yet to be developed. Due to accounting for Chenal Country Club as an amenity, the cost of the clubhouse and golf course, including the estimated cost of planned future improvements, is charged against income as real estate is sold rather than depreciating this cost. This amenity treatment also records the initiation fees received from members joining the club as a reduction in the cost basis of the club rather than as net sales. In addition, the Company’s model for allocating the indirect cost to be expensed against each piece of real estate sold requires management to estimate the future indirect costs to be incurred for the entire development, primarily infrastructure costs and future improvements at Chenal Country Club (net of estimated future initiation fees to be received), as well as the potential market value of each tract of undeveloped property within the Chenal Valley development.

Deltic’s investment in real estate held for development and sale primarily consists of residential lots, commercial tracts, and undeveloped acreage marketed to others for further development. Deltic periodically evaluates its holdings for indications of conditions that would lead to an impairment analysis as required by accounting for subsequent measurement of property, plant, and equipment. Our investment in real estate is mainly comprised of former legacy timberland and thus has a low cost basis. Margins on Deltic’s residential real estate average 43 percent, while commercial real estate margins are 83 percent. The central Arkansas area, where Deltic’s developments are located has one of the more stable housing markets in the country; therefore, Deltic has not and does not plan to reduce the current pricing structure for its real estate. Based on these factors, the Company does not foresee impairment losses in its real estate held for development or sale.

 

35


Table of Contents
  2) Investment in Del-Tin Fiber — Investment in Del-Tin Fiber LLC (“Del-Tin Fiber”), a 50 percent-owned limited liability company, is accounted for under the equity method. The Company’s carrying value for its investment in Del-Tin Fiber is evaluated for possible impairment, as applicable under the requirements of equity method accounting for investments in partnerships, unincorporated joint ventures, and limited liability companies. This evaluation as of December 31, 2002, based on the intent of the Company’s Board of Directors to exit the business, resulted in a determination that the Company’s investment was impaired as of December 31, 2002, and the carrying amount of the investment was written off, to zero, for the 2002 Consolidated Balance Sheet. On December 11, 2003, the Company’s Board of Directors revised its intent in regard to selling Deltic’s interest in the joint venture. The resulting evaluation of fair value for the related investment indicated that fair value exceeded carrying value, which was zero as of December 31, 2003, and the Company resumed recording its equity share of the operating results of Del-Tin Fiber. Likewise, cash advances to the joint venture are recorded as increases in the Company’s investment in the facility, while cash distributions received from the joint venture are reflected as reductions in its investment.

For Deltic’s investment in Del-Tin Fiber, the key determinations by management are (1) the accounting treatment for this investment under the equity method of accounting rather than as a consolidated subsidiary since the joint venture is 50 percent owned by both owners, (2) the factors used in evaluating the impairment of the investment’s carrying value, and (3) the estimate of the fair value of the Company’s guarantee of Del-Tin Fiber’s credit agreement. Deltic management has determined that there is no control by either company due to having a Board of Managers with equal representation. As such, the assets and liabilities of Del-Tin Fiber are not included in the amounts reported on the Company’s balance sheet for any period. (For additional information about the Company’s investment in Del-Tin Fiber, refer to Note 4 to the consolidated financial statements.)

 

  3) Timber and Timberlands — Timber and timberlands, which includes timberland, fee timber, purchased stumpage inventory, and logging facilities, are stated at cost less cost of fee timber harvested and accumulated depreciation of logging facilities and includes no estimated future reforestation cost. The cost of timber consists of fee timber acquired and reforestation costs, which includes site preparation, seedlings, and reforestation labor. The cost of fee timber harvested is based on the volume of timber harvested in relation to the estimated volume of timber recoverable. Logging facilities, which consist primarily of roads constructed and other land improvements, are depreciated using the straight-line method over a ten-year estimated life. The Company estimates its fee timber inventory using statistical information and data obtained from physical measurements and other information-gathering techniques. Fee timber carrying costs, commercial thinning, silviculture, and timberland management costs are expensed as incurred.

The Company classifies its timberlands and fee timber as either strategic or non-strategic. Strategic timberland, including pine forest and pine plantations, are prime pine sawtimber growing platforms located within or immediately adjacent to the Company sawmills’ operating regions. Deltic manages these acres using modern silviculture methods to achieve optimal volume and quality of its pine sawtimber. The Company harvests sawtimber and pulpwood in accordance with its harvest plans and generally converts sawtimber into lumber in its own sawmills and sells pulpwood in the market. Upon harvest, strategic timberlands are reforested. The Company’s timberland acquisition program is focused on the acquisition of timberland in its current operating regions. The Company considers the acquisition and the occasional sale of strategic timberlands as investing activities. The Company has legacy hardwood and other acreage which either cannot be harvested for conversion in Company

 

36


Table of Contents

sawmills, reforested as pine plantations, managed efficiently using modern silviculture methods due to the size of the tract or proximity to other Deltic fee timberlands, or all three. These timberlands have been identified as non-strategic and/or higher and better use timberlands and are expected to be sold over time. The Woodlands segment manages an annual program to sell a portion of these non-strategic timberlands and/or harvest hardwoods for the sale to third parties. The Company considers this program as an operating activity of its Woodlands segment.

In order to acquire and sell assets, primarily timberlands, in a tax efficient manner, the Company enters into like-kind exchange (“LKE”) tax-deferred transactions. The Company generally enters into forward transactions, in which property is sold and the proceeds are reinvested by acquiring similar property; and reverse transactions, in which property is acquired and similar property is subsequently sold. A qualified LKE intermediary is used to facilitate LKE transactions. Proceeds from forward LKE transactions are held by the intermediary and are classified as restricted cash because the funds must be reinvested in similar properties. If the acquisition of suitable LKE properties is not completed within 180 days of the sale of the company-owned property, the proceeds are distributed to Deltic by the intermediary and are reclassified as available cash and applicable income taxes are determined. Amounts deposited with a third party towards the potential future purchase of property are included in other investments and non-current receivables in the consolidated balance sheets and as an investing activity shown as funds held by trustee in the consolidated statements of cash flow. At December 31, 2011, $.6 million of land proceeds was deposited with a LKE intermediary and there were no funds at December 31, 2010. An exchange accommodation titleholder, a type of variable interest entity, is used to facilitate reverse like-kind exchanges. The acquired assets are held by the exchange accommodation titleholder until the exchange transactions are complete. If the Company determines that it is the primary beneficiary of the exchange accommodation titleholder, Deltic includes the assets held by the exchange accommodation titleholder in timber and timberlands assets on the consolidated balance sheets and recognizes any income or expense attributed to the property in the consolidated income statements.

The key components of the Timber and Timberlands policy are: (1) management’s decision to maintain separate timber cost pools for each legal entity within the Deltic consolidated group and (2) the required estimation of timber inventory volume, by species, for each of these companies in order to calculate the cost of fee timber harvested per ton. Management has elected to maintain a separate cost pool for the timber owned by each company, thus resulting in a different cost per ton for fee timber harvested for each. The mix of harvest by company for any period can significantly affect the amount of cost of fee timber harvested expense reported. Per-ton costs for 2011 ranged from $4.56 to $31.89 per ton for pine sawtimber. Had the Company opted to use a composite depletion rate, cost of pine sawtimber harvested would have been $.2 million more in 2011, $.3 million less in 2010, and $.3 million more in 2009, ($.1 million, $.2 million, and $.2 million, respectively, net of applicable income taxes) than as reported due to the mix of harvest by company during the year. In determining these rates, management must estimate the volume of timber existing on its timberlands. To estimate these fee timber inventories, the Company relies on its experienced forestry personnel and their use of statistical information and data obtained by actual physical measurements and other information-gathering techniques. The recognized cost of fee timber harvested is impacted by the accuracy of this volume estimation. (For additional information about the Company’s timber and timberlands, refer to Note 5 to the consolidated financial statements.)

Assets used in the Woodlands segment shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The recoverability test is based on undiscounted future cash flows over the expected life of the asset. Impairment recognition and measurement would occur at the lowest level for which we have identifiable cash flows. At December 31, 2011, the composite basis in fee timber is

 

37


Table of Contents

$7 per ton assuming no future growth. Gross margin on pine sawtimber for 2011, when the average sales price was $23 per ton, was 77 percent. A harvest cycle, (which ranges between 20 and 35 years) would be used to evaluate the recoverability of our timber and timberlands. Due to the long life and low basis, the Company does not expect to incur impairment loss in the future for its timber and timberland assets.

 

  4) Property, Plant, and Equipment — Property, plant, and equipment is stated at cost less accumulated depreciation. Depreciation of buildings, equipment, and other depreciable assets is primarily determined using the straight-line method. Expenditures that substantially improve and/or increase the useful life of facilities or equipment are capitalized. Maintenance and repair costs are expensed as incurred. Gains and losses on disposals or retirements are included in income as they occur.

Property, plant, and equipment assets are evaluated for possible impairment on a specific asset basis or in groups of similar assets, as applicable, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future net cash flows to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and depreciation ceases.

Management also evaluates any asset or group of assets for which potential impairment might exist and has determined that there are none requiring an impairment write-down. This process requires management’s estimate of future cash flows generated by each asset or group of assets. For any instance where this evaluation process might indicate impairment exists, the appropriate asset’s carrying value would be written down to fair value, and the amount of the write-down would be charged against the results of continuing operations. (For additional information about the Company’s property, plant, and equipment, refer to Note 6 to the consolidated financial statements.)

 

  5) Share-Based Compensation — The Company uses fair value recognition provisions for share-based payment transactions. Under the fair value recognition provisions, share-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. For the valuation of stock options, Deltic uses a binomial model to estimate fair value. The fair value of restricted stock awards is determined by reference to the fair market value of the Company’s common stock on the date of grant. For restricted stock performance units, the Monte Carlo simulation is used to estimate fair value. The Company recognizes compensation cost on a straight-line basis over the requisite service period.

Deltic issues restricted stock performance units whose vesting is contingent upon meeting certain financial performance goals based upon the Company’s total stockholder return compared to the total return of a Paper and Forest Products Index (“the Index”) selected by the Compensation Committee and calculated by Standard and Poor’s. Determining the appropriate amount to expense is based on likelihood of achievement of the stated goals and requires judgment, including forecasting future financial results. This estimate may be revised periodically due to changes in awards. The cumulative impact of any revision is reflected in the period of change.

The Company uses historical volatility over the ten-year trading life of its stock to determine volatility assumptions. Risk-free interest rates are based on historical rates and forward-looking factors. The expected dividend yield is based on the Company’s average dividend yield from 2007 to 2010. The pre-vesting forfeiture rate is based on historical rates and forward-looking factors. The expected option term is based on the term of the option, historical exercise, and expiration experience.

 

38


Table of Contents

Assumptions for the 2011, 2010, and 2009 valuation of stock options and restricted stock performance units consisted of the following:

 

     2011     2010     2009  

Weighted expected volatility

     36.70     34.57     32.05 %

Dividend yield

     0.62     0.61     0.63

Expected term of options (in years)

     6.27       6.27        6.27  

Risk-free interest rate – stock options

     3.79     3.92     2.60

Risk-free interest rate – restricted stock performance units

     2.09     2.13     1.47

 

  6) Revenue Recognition — The Company recognizes revenue when the following criteria are met: (1) persuasive evidence of an agreement exists, (2) delivery has occurred or services have been rendered, (3) the price to the buyer is fixed and determinable, and (4) collectibility is reasonably assured. Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership. Revenue from the sale of lumber and wood by-products is recorded at the time of shipment due to terms of such sale being designated free on board (“f.o.b.”) shipping point. Revenue from the sale of timber-cutting rights to third parties is recorded when legal title passes to the purchaser, which is generally upon delivery of a legally executed timber deed and receipt of payment for the timber. Revenue from intersegment timber sales is recorded when the timber is harvested. Such intersegment sales, which are made at prices which generally approximate market, are eliminated in the consolidated financial statements. Revenue from timberland and real estate sales is recorded at the time the purchaser executes the real estate closing documents and makes payment to the title company handling the closing. When oil and gas lease rental agreements are signed and the amounts are received, they are recorded as either short-term or long-term deferred revenue, and the revenue is recognized on a straight-line basis over the term of the lease. The Company’s share of gross oil and gas royalties are recorded as revenues when received, and any related severance tax or other deductions are included in operating expenses.

 

  7) Income Taxes — The Company uses the asset and liability method of accounting for income taxes. Under this method, the provision for income taxes includes amounts currently payable and amounts deferred as tax assets and liabilities, based on differences between financial statement carrying amounts and the tax bases of existing assets and liabilities, and is measured using the enacted tax rates that are expected to be in effect when the differences reverse. Deferred tax assets may be reduced by a valuation allowance when it is established that it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date.

The key management decisions related to income taxes are: (1) the determination of current taxability of transactions, (2) the election to capitalize or expense costs incurred, (3) the decision regarding the appropriate depreciation method for income tax purposes (these three factors ultimately affect the Company’s cash flows for income taxes paid and determine the differences between the financial statement carrying amounts and tax bases of existing assets and liabilities), and (4) management’s estimation of the appropriateness of valuation allowances to reduce any deferred tax assets that exist. Deltic’s management periodically evaluates the Company’s ability to realize future benefits of deferred tax assets by reviewing the expected turnaround of deferred tax liabilities and the amount of future taxable income and by evaluating tax planning strategies that could possibly be implemented to realize

 

39


Table of Contents

deferred tax assets. The Company maintains liabilities for unrecognized tax benefits for various uncertain tax positions taken in its tax return. These liabilities are estimated based on judgment of the probable outcome of the uncertain tax positions and are adjusted periodically based on changing facts and circumstances. Changes to the liabilities for unrecognized tax benefits could materially affect operating results in the period of change.

Related-Party Transactions

The Company has contracted to provide to Del-Tin Fiber a portion of the plant’s fiber and wood supply at market prices. This arrangement benefits Del-Tin Fiber by ensuring a portion of its raw material needs while providing the Company with a purchaser of residual by-products produced by its lumber mills, if needed. The price that Deltic receives for these transactions is a negotiated market price. During 2011, 2010, and 2009, Deltic sold Del-Tin Fiber approximately $3.7 million, $4.4 million, and $4.5 million each year, respectively, of these residual by-products.

Effect of Recently Issued Authoritative Accounting Guidance

(For information regarding the effect of recently issued authoritative accounting guidance, refer to the related section in Note 1 to the consolidated financial statements.)

Environmental Matters

Deltic is committed to protecting the environment and has certain standards with which it must comply based on federal, state, and local laws for the protection of the environment. Costs of compliance through 2011 have not been material, and the Company’s management currently has no reason to believe that such costs will become material for the foreseeable future.

Contingencies

The Company is involved in litigation incidental to its business from time to time. Currently, there are no material legal proceedings outstanding.

Outlook

Pine sawtimber harvested from Deltic’s fee lands in 2012 is projected to be 550,000 to 600,000 tons. Finished lumber production and resulting sales volumes are projected at 250 to 275 million board feet for 2012; however, these volumes are dependent upon market conditions. Deltic anticipates that closings for residential lots will be 15 to 25 lots for the year of 2012, barring further declines in economic growth or residential construction activity. The Company plans to continue recognizing its share of equity in the financial results of Del-Tin Fiber.

The Company’s capital expenditures budget for the year of 2012 provides for expenditures totaling $17.9 million. The Woodlands capital budget of $8.8 million includes $3.6 million for timberland acquisitions, which will be dependent on the availability of acreage at prices that meet the Company’s criteria for timber stocking, growth potential, site index, and location. The capital budget includes $4.7 million for reforestation and site preparation. During 2012, various sawmill projects are expected to require $5.1 million. The capital budget for Real Estate operations of $3.7 million includes expenditures for residential lot development of $.1 million and for commercial real estate development of $.5 million, and will depend upon the current demand for residential lots and commercial acreage. In addition, the Real Estate segment is budgeted to spend $1.9 million for various infrastructure and improvement district assessments, and $1.1 million on other amenity improvements. Capital and other expenditures are under constant review, and these budgeted amounts may be adjusted to reflect changes in the Company’s estimated cash flows from operations, borrowings, or repayments under credit facilities, or general economic conditions.

 

40


Table of Contents

Certain statements contained in this report that are not historical in nature constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “intends,” “plans,” “estimates,” or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements reflect the Company’s current expectations and involve certain risks and uncertainties, including those disclosed elsewhere in this report. Therefore, actual results could differ materially from those included in such forward-looking statements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information with respect to quantitative and qualitative disclosures about market risk of the Company is set forth under the caption “Other Matters - Market Risk” in Item 7 of Part II of this report.

 

41


Table of Contents
Item 8. Financial Statements and Supplementary Data

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2011 and 2010

(Thousands of dollars)

 

     2011     2010  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 3,291        3,831   

Trade accounts receivable – net

     4,821        4,604   

Other receivables

     1        98   

Inventories

     4,353        6,061   

Prepaid expenses and other current assets

     3,862        3,593   
  

 

 

   

 

 

 

Total current assets

     16,328        18,187   

Investment in real estate held for development and sale

     57,408        56,101   

Investment in Del-Tin Fiber

     7,113        8,249   

Other investments and noncurrent receivables

     885        479   

Timber and timberlands – net

     228,274        226,090   

Property, plant, and equipment – net

     30,187        32,557   

Deferred charges and other assets

     1,675        1,610   
  

 

 

   

 

 

 

Total assets

   $ 341,870        343,273   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Current maturities of long-term debt

   $ 1,111        1,111   

Trade accounts payable

     1,867        2,395   

Accrued taxes other than income taxes

     1,971        1,986   

Income taxes payable

     —          13   

Deferred revenues and other accrued liabilities

     7,761        10,162   
  

 

 

   

 

 

 

Total current liabilities

     12,710        15,667   

Long-term debt

     64,000        65,611   

Deferred tax liabilities – net

     1,211        5,345   

Other noncurrent liabilities

     36,826        26,639   

Commitments and contingencies

     —          —     

Stockholders’ equity

    

Cumulative preferred stock - $.01 par, authorized 20,000,000 shares, none issued

     —          —     

Common stock - $.01 par, authorized 50,000,000 shares, 12,813,879 shares issued

     128        128   

Capital in excess of par value

     80,842        79,081   

Retained earnings

     163,170        164,286   

Treasury stock

     (7,288     (10,758

Accumulated other comprehensive loss

     (9,729     (2,726
  

 

 

   

 

 

 

Total stockholders’ equity

     227,123        230,011   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 341,870        343,273   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

42


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income

For the Years Ended December 31, 2011, 2010, and 2009

(Thousands of dollars, except per share amounts)

 

     2011     2010     2009  

Net sales

   $ 121,847        141,623        112,012   
  

 

 

   

 

 

   

 

 

 

Costs and expenses

      

Cost of sales

     87,325        93,405        79,947   

Depreciation, amortization, and cost of fee timber harvested

     11,806        13,235        12,617   

General and administrative expenses

     15,257        17,074        13,578   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     114,388        123,714        106,142   
  

 

 

   

 

 

   

 

 

 

Operating income

     7,459        17,909        5,870   

Equity in earnings of Del-Tin Fiber

     318        4,058        2,216   

Interest income

     38        157        121   

Interest and other debt expense, net of capitalized interest

     (4,029     (3,453     (3,501

Other income

     3        54        54   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     3,789        18,725        4,760   

Income taxes

     (1,130     (6,328     (1,072
  

 

 

   

 

 

   

 

 

 

Net income

   $ 2,659        12,397        3,688   
  

 

 

   

 

 

   

 

 

 

Earnings per common share

      

Basic

   $ .21        .99        .30   

Assuming dilution

     .21        .99        .30   

Dividends declared per common share

   $ .30        .30        .30   

Weighted average common shares outstanding (thousands)

      

Basic

     12,450        12,364        12,317   

Diluted

     12,552        12,460        12,417   

See accompanying notes to consolidated financial statements.

 

43


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income/(Loss)

For the Years Ended December 31, 2011, 2010, and 2009

(Thousands of dollars)

 

     2011     2010     2009  

Net income

   $ 2,659        12,397        3,688   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss)

      

Items related to employee benefit plans:

      

Net gain/(loss) arising during period1

     (11,485     3,764        2,210   

Reclassification adjustment for gains/(losses) included in net income:

      

Amortization of prior service cost2

     7        7        51   

Amortization of actuarial gains3

     155        513        731   

Amortization of plan amendment4

     (199     (199     (199

Income tax benefit/(expense) related to items of other comprehensive income/(loss)

     4,519        (1,602     (1,095
  

 

 

   

 

 

   

 

 

 

Net change in other comprehensive income/(loss)

     (7,003     2,483        1,698   
  

 

 

   

 

 

   

 

 

 

Comprehensive income/(loss)

   $ (4,344     14,880        5,386   
  

 

 

   

 

 

   

 

 

 

 

1 

Related tax effect (in thousands) is $4,506, $(1,476), and $(867) for 2011, 2010, and 2009, respectively

 

2 

Related tax effect (in thousands) is $(3), $(3), and $(20) for 2011, 2010, and 2009, respectively

 

3 

Related tax effect (in thousands) is $(62), $(201), and $(286) for 2011, 2010, and 2009, respectively

 

4 

Related tax effect (in thousands) is $78, $78, and $78 for 2011, 2010, and 2009, respectively

See accompanying notes to consolidated financial statements.

 

44


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2011, 2010, and 2009

(Thousands of dollars)

 

     2011     2010     2009  

Operating activities

      

Net income

   $ 2,659        12,397        3,688   

Adjustments to reconcile net income to net cash provided by operating activities

      

Depreciation, amortization, and cost of fee timber harvested

     11,806        13,235        12,617   

Stock-based compensation expense

     2,067        1,696        1,705   

Deferred income taxes

     1,109        (2,667     (345

Real estate development expenditures

     (3,540     (3,471     (4,304

Real estate costs recovered upon sale

     1,694        2,778        2,051   

Timberland costs recovered upon sale

     1,256        1,712        1,654   

Equity in earnings of Del-Tin Fiber

     (318     (4,058     (2,216

Net increase in provisions for pension and other postretirement benefits

     136        1,015        1,268   

Decrease/(increase) in operating working capital other than cash and cash equivalents

     (920     2,265        1,559   

Other changes in assets and liabilities

     (1,310     3,996        (763
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     14,639        28,898        16,914   
  

 

 

   

 

 

   

 

 

 

Investing activities

      

Capital expenditures requiring cash, excluding real estate development

     (12,014     (11,957     (28,365

Net change in purchased stumpage inventory

     (764     1,151        (172

Advances to Del-Tin Fiber

     (1,822     (1,807     (3,789

Repayments from Del-Tin Fiber

     3,275        6,720        5,345   

Net change in funds held by trustee

     (568     4,107        189   

Other – net

     781        922        1,020   
  

 

 

   

 

 

   

 

 

 

Net cash required by investing activities

     (11,112     (864     (25,772
  

 

 

   

 

 

   

 

 

 

Financing activities

      

Proceeds from borrowings

     15,500        20,300        23,500   

Repayments of notes payable and long-term debt

     (17,111     (45,911     (8,111

Treasury stock purchases

     (55     (26     (1,112

Common stock dividends paid

     (3,775     (3,749     (3,733

Proceeds from stock option exercises

     2,463        586        1,034   

Excess tax benefits from stock-based compensation exercises

     698        161        14   

Other – net

     (693     (347     (364

Deferred financing costs

     (1,094     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash provided/(required) by financing activities

     (4,067     (28,986     11,228   
  

 

 

   

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

     (540     (952     2,370   

Cash and cash equivalents at beginning of year

     3,831        4,783        2,413   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 3,291        3,831        4,783   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

45


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31, 2011, 2010, and 2009

(Thousands of dollars)

 

     2011     2010     2009  

Cumulative preferred stock - $.01 par, authorized 20,000,000 shares, no shares issued at end of each year

   $ —          —          —     
  

 

 

   

 

 

   

 

 

 

Common stock - $.01 par, authorized 50,000,000 shares, 12,813,879 shares issued at end of each year

     128        128        128   
  

 

 

   

 

 

   

 

 

 

Capital in excess of par value

      

Balance at beginning of year

     79,081        78,290        78,660   

Exercise of stock options

     347        (64     (119

Stock-based compensation expense

     2,067        1,696        1,705   

Restricted stock awards

     (1,456     (1,540     (1,859

Tax effect on stock awards

     756        325        (146

Restricted stock forfeitures

     47        374        49   
  

 

 

   

 

 

   

 

 

 

Balance at end of year

     80,842        79,081        78,290   
  

 

 

   

 

 

   

 

 

 

Retained earnings

      

Balance at beginning of year

     164,286        155,638        155,683   

Net income

     2,659        12,397        3,688   

Common stock dividends declared, $.30 per share

     (3,775     (3,749     (3,733
  

 

 

   

 

 

   

 

 

 

Balance at end of year

     163,170        164,286        155,638   
  

 

 

   

 

 

   

 

 

 

Treasury stock

      

Balance at beginning of year – 308,846; 363,208; and 412,177 shares, respectively

     (10,758     (12,548     (14,400

Shares purchased – 869; 606; and 35,571, respectively

     (55     (26     (1,112

Forfeited restricted stock – 877; 8,317; and 1,200 shares, respectively

     (47     (374     (49

Shares issued for incentive plans – 102,296; 63,285; and 85,740 shares, respectively

     3,572        2,190        3,013   
  

 

 

   

 

 

   

 

 

 

Balance at end of year – 208,296; 308,846; and 363,208 shares, respectively, at cost

     (7,288     (10,758     (12,548
  

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive loss

      

Balance at beginning of year

     (2,726     (5,209     (6,907

Net change in other comprehensive income/(loss), net of income taxes

     (7,003     2,483        1,698   
  

 

 

   

 

 

   

 

 

 

Balance at end of year

     (9,729     (2,726     (5,209
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 227,123        230,011        216,299   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

46


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

Note 1 – Significant Accounting Policies

Description of Business — Deltic Timber Corporation (“Deltic” or the “Company”) is a natural resources company engaged primarily in the growing and harvesting of timber and the manufacture and marketing of lumber. Deltic owns approximately 445,100 acres of timberland, primarily in Arkansas and north Louisiana. The Company’s sawmill operations are located at Ola in central Arkansas and at Waldo in south Arkansas. In addition to its timber and lumber operations, the Company is engaged in real estate development in central Arkansas. The Company also holds a 50 percent interest in Del-Tin Fiber, LLC, a joint venture to manufacture and market medium density fiberboard (“MDF”).

Business Environment — The Company 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, new and existing housing inventory, foreclosures, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of contractors for logging, hauling, and shipping, the availability of raw materials, costs of fuel, and weather conditions.

Principles of Consolidation — The consolidated financial statements of Deltic Timber Corporation include the accounts of Deltic, all majority-owned subsidiaries, and any variable interest entities of which it is the primary beneficiary. Equity investments and joint ventures are accounted for under the equity method if it is determined that the Company does not have control of the entity. Significant intercompany transactions and accounts have been eliminated.

Use of Estimates — In the preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America, management has made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results may differ from those estimates.

Cash Equivalents — Cash equivalents include investments that have a maturity of three months or less from the date of purchase.

Accounts Receivable and Allowance for Bad Debt — The Company records trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the trade accounts receivable balances and charged to the provision for doubtful accounts. The allowance is based upon review of specific receivables outstanding and considers factors such as current overall economic conditions, industry-specific economic conditions, historical customer performance, and anticipated customer performance. In the consolidated statements of income, bad debt expense is included in cost of sales. Charges to bad debt expense were $63,000, $56,000, and $43,000 in 2011, 2010, and 2009, respectively. At December 31, 2011 and 2010, the balance in the allowance account was $65,000 and $72,000, respectively.

Inventories — Inventories of logs, lumber, and supplies are stated at the lower of cost or market within Deltic’s operating areas, primarily using the average cost method. Log costs include harvest and transportation cost as appropriate. Lumber costs include materials, labor, and production overhead. (For additional information, see Note 2 – Inventories.)

Investment in Real Estate Held for Development and Sale — Real estate held for development and sale includes direct costs of land and land development and indirect costs, including amenities. Indirect and amenity costs are allocated to individual lots or acreage sold based on relative retail sales value. Direct costs are allocated

 

47


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 1 – Significant Accounting Policies (cont.)

 

to a specific neighborhood or commercial real estate tract, while indirect costs for the Company’s three development areas — Chenal Valley, Chenal Downs, and Red Oak Ridge — are allocated to neighborhoods over the entire respective development area based on relative retail sales values.

Investment in Del-Tin Fiber — Investment in Del-Tin Fiber LLC (“Del-Tin Fiber”), a 50 percent-owned limited liability company, is accounted for using the equity method and evaluated for possible impairment, as applicable under the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 323, Investments – Equity Method and Joint Ventures. Management has determined there is no control by either 50 percent owner and therefore, accounts for Del-Tin Fiber under the equity method. Cash advances to the joint venture are recorded as increases in the Company’s investment carrying value, while cash repayments received from the joint venture result in reductions in investment carrying value. (For additional information, see Note 4 – Investment in Del-Tin Fiber.)

Timber and Timberlands — Timber and timberlands, which includes timberland, fee timber, purchased stumpage inventory, and logging facilities, are stated at cost, less the cost of fee timber harvested and accumulated depreciation of logging facilities, and include no estimated future reforestation cost. The cost of timber consists of fee timber acquired and reforestation costs, which includes site preparation, seedlings, and labor. The cost of fee timber harvested is based on the volume of timber harvested in relation to the estimated volume of timber recoverable. Logging facilities, which consist primarily of roads constructed and other land improvements, are depreciated using the straight-line method over a ten-year estimated life. The Company estimates its fee timber inventory using statistical information and data obtained from physical measurements and other information gathering techniques. Fee timber carrying costs, commercial thinning, silviculture, and timberland management costs are expensed as incurred.

The Company classifies its timberlands and fee timber as either strategic or non-strategic. Strategic timberland, including pine forest and pine plantations, is prime pine sawtimber growing platforms located within or immediately adjacent to the Company sawmills’ operating regions. Deltic manages these acres using modern silviculture methods to achieve optimal volume and quality of its pine sawtimber. The Company harvests sawtimber and pulpwood in accordance with its harvest plans and generally converts sawtimber into lumber in its own sawmills and sells pulpwood in the market. Upon harvest, strategic timberlands are reforested. The Company’s timberland acquisition program is focused on the acquisition of timberland in its current operating regions. The Company considers the acquisition and the occasional sale of strategic timberlands as investing activities. The Company has legacy hardwood and other acreage which cannot be either harvested for conversion in Company sawmills, reforested as pine plantations, managed efficiently using modern silviculture methods due to the size of the tract or proximity to other Deltic fee timberlands, or all three. These timberlands have been identified as non-strategic and/or higher and better use timberlands and are expected to be sold over time. The Woodlands segment manages an annual program to sell a portion of these non-strategic timberlands and/or harvest hardwoods for the sale to third parties. The Company considers this program as an operating activity of its Woodlands segment.

In order to acquire and sell assets, primarily timberlands, in a tax efficient manner, the Company enters into like-kind exchange (“LKE”) tax-deferred transactions. The Company generally enters into forward transactions, in which property is sold and the proceeds are reinvested by acquiring similar property; and reverse transactions, in which property is acquired and similar property is subsequently sold. A qualified LKE intermediary is used to facilitate LKE transactions. Proceeds from forward LKE transactions are held by the intermediary and are classified as restricted cash because the funds must be reinvested in similar properties. If the acquisition of suitable LKE properties is not completed within 180 days of the sale of the company-owned property, the proceeds are distributed to Deltic by

 

48


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 1 – Significant Accounting Policies (cont.)

 

the intermediary and are reclassified as available cash and applicable income taxes are determined. Amounts deposited with a third party towards the potential future purchase of property are included in other investments and non-current receivables in the consolidated balance sheets and as an investing activity as changes in funds held by trustee in the consolidated statements of cash flows. At December 31, 2011 and 2010, the Company had $.6 million and none, respectively, of proceeds from land sales deposited with a LKE intermediary. An exchange accommodation titleholder, a type of variable interest entity, is used to facilitate reverse like-kind exchanges. The acquired assets are held by the exchange accommodation titleholder until the exchange transactions are complete. If the Company determines that it is the primary beneficiary of the exchange accommodation titleholder, Deltic includes the assets held by the exchange accommodation titleholder in timber and timberlands assets on the consolidated balance sheets and recognizes any income or expense attributed to the property in the consolidated income statements.

Property, Plant, and Equipment — Property, plant, and equipment assets are stated at cost less accumulated depreciation. Depreciation of buildings, equipment, and other depreciable assets is primarily determined using the straight-line method. Expenditures that substantially improve and/or increase the useful life of facilities or equipment are capitalized. Maintenance and repair costs are expensed as incurred. Gains and losses on disposals or retirements are recognized in the period they occur.

Property, plant, and equipment assets are evaluated for possible impairment on a specific asset basis or in groups of similar assets, as applicable, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future net cash flows to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and depreciation ceases.

Revenue Recognition — The Company recognizes revenue when the following criteria are met: (1) persuasive evidence of an agreement exists, (2) delivery has occurred or services have been rendered, (3) the price to the buyer is fixed and determinable, and (4) collectability is reasonably assured. Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership. Revenue from the sale of lumber and wood by-products is recorded at the time of shipment due to terms of such sale being designated free on board (“f.o.b.”) shipping point. Revenue from the sale of timber-cutting rights to third parties is recorded when legal title passes to the purchaser, which is generally upon delivery of a legally executed timber deed and receipt of payment for the timber. Revenue from intersegment timber sales is recorded when the timber is harvested; such intersegment sales, which are made at prices which generally approximate market within Deltic’s operating area, are eliminated in the consolidated financial statements.

Revenue from the leasing of land for hunting purposes is deferred when received and subsequently recognized over the one-year lease term, which begins September 1. At December 31, 2011 and 2010, the Company had deferred hunting lease revenue totaling $1,491,000 and $1,419,000, respectively, reflected in the consolidated balance sheets in deferred revenues and other accrued liabilities. Revenue from mineral lease rental payments is deferred when received and recognized ratably over the lease term. Mineral royalty payments are recognized when received. At December 31, 2011 and 2010, the Company had deferred mineral lease revenue of $5,339,000 and $6,026,000, respectively, of which $3,284,000 and $3,765,000 is included in other noncurrent liabilities for 2011 and 2010, respectively, and $2,055,000 and $2,261,000 is included in other current liabilities, respectively. Revenue from sales of timberland and real estate is recorded when the sale is closed

 

49


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 1 – Significant Accounting Policies (cont.)

 

and legal title is transferred and the buyer’s initial and continuing investment is adequate, which is generally at the time the purchaser executes the real estate closing documents and makes payment to the title company handling the closing.

Income Taxes — The Company uses the asset and liability method of accounting for income taxes. Under this method, the provision for income taxes includes amounts currently payable and amounts deferred as tax assets and liabilities, based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, and is measured using the enacted tax rates that are expected to be in effect when the differences reverse. Deferred tax assets are reduced by a valuation allowance which is established when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date. The Company continuously reviews state and federal tax returns for uncertain tax provisions. Tax benefits are recorded if it is more-likely-than-not that the positions will be sustained upon examination by the taxing authorities, and liabilities are recorded if it is deemed less likely that the position taken would prevail. These liabilities are adjusted in the period in which it is determined that the issue is settled with the relevant taxing authority, the expiration of statute of limitation for a tax year in question, a change in tax laws, or other facts become known.

Property Taxes — Property taxes applicable to the Company’s assets are estimated and accrued in the period of assessment. At December 31, 2011 and 2010, the Company had accrued property tax expense totaling $1,782,000 and $1,775,000, respectively, reflected in the consolidated balance sheets in accrued taxes other than income taxes.

Share-Based Compensation — The Company applies a fair value-based measurement method in accounting for share-based payment transactions with employees, recognizing the cost as the services are performed. (For additional information, see Note 16 – Incentive Plans.)

Pensions and Other Postretirement Benefits — The Company sponsors both qualified and nonqualified, noncontributory, defined benefit retirement plans that cover substantially all employees. Benefits are based on years of service and final career-average-pay formulas as defined by the plans. The qualified plan is funded to accumulate sufficient assets to provide for accrued benefits. The nonqualified plan, a supplemental executive plan, is not funded; payments to retirees due under this plan are made on a monthly basis.

The Company also sponsors a defined benefit health care plan and a life insurance benefit plan for substantially all retired employees. The Company measures the costs of its obligations for these plans based on its health care cost trends and actuarial assumptions, including discount rates, mortality rates, assumed rates of return, compensation increases, and turnover rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income/(loss) and amortized to net periodic cost over future periods using the corridor method. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience and market conditions.

Net periodic costs are recognized as employees render the services necessary to earn these post retirement benefits. (For additional information, see Note 15 – Employee and Retiree Benefit Plans.)

 

50


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 1 – Significant Accounting Policies (cont.)

 

Advertising Costs — Advertising costs, primarily related to marketing efforts for the Company’s real estate developments, are expensed as incurred. These costs amounted to $768,000 in 2011, $982,000 in 2010, and $987,000 in 2009, and are reflected in the consolidated statements of income.

Capitalized Interest — The Company capitalizes interest for qualifying assets during construction by applying the Company’s capitalization rate to the average amount of accumulated expenditures for the asset during the period. Interest is most often capitalized as an indirect cost for real estate development in the Company’s real estate operations. (For additional information, see Note 17 – Supplemental Cash Flows Disclosures.)

Capital Expenditures — Capital expenditures include additions to investment in real estate held for development and sale; timber and timberlands; and property, plant, and equipment.

Net Change in Purchased Stumpage Inventory — Purchased stumpage inventory consists of timber-cutting rights purchased from third parties specifically for use in the Company’s sawmills. Depending on the timing of acquisition and usage of this acquired stumpage inventory, the net change in this inventory can either be a source or use of cash in the Company’s consolidated statements of cash flows.

Earnings per Common Share — Basic earnings per share is computed using the two-class method and is based on earnings available to common shareholders less accrued preferred dividends, if any, and the weighted average number of common shares outstanding. The diluted earnings per share amounts are computed based on earnings available to common shareholders and the weighted average number of common shares outstanding, including shares assumed to be issued under the Company’s stock incentive plans using the treasury-stock method, unless anti-dilutive. (For a reconciliation of amounts used in per share computations, see Note 18 – Earnings per Share.)

Shipping and Handling Costs — Shipping and handling costs, such as freight to our customers’ destinations, are included in cost of sales in the Company’s consolidated statements of income. These costs, when included in the amount invoiced to customers, are also recognized in net sales.

Off-Balance Sheet Arrangements — The Company evaluates its transactions to determine if any variable interest entities exist. If it is determined that Deltic is the primary beneficiary of a variable interest entity, that entity is consolidated into Deltic’s financial statements.

Effect of Recently Issued Authoritative Accounting Guidance — Financial Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements” became effective January 1, 2011, for the Company as to disclosures about changes in Level 3 fair value measurements. The adoption of this guidance had little impact on the Company’s consolidated financial statements.

Financial Accounting Standards Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements,” was effective January 1, 2011, for the Company and provides new guidance for revenue recognition for certain arrangements. The impact of the adoption of this guidance had no impact on the Company’s consolidated financial statements.

Financial Accounting Standards Update No. 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) (Topic 820),” becomes effective January 1, 2012, for the Company. The new guidance will result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS standards. The Company is currently evaluating the impact on reporting requirements.

 

51


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 1 – Significant Accounting Policies (cont.)

 

Financial Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income,” becomes effective for the Company January 1, 2012, and is intended to increase the prominence of other comprehensive income in the financial statements. The adoption of this guidance will have little impact on the Company’s consolidated financial statements.

Subsequent events – The Company has evaluated subsequent events through the date the financial statements were issued.

Note 2 – Inventories

Inventories at December 31 consisted of the following:

 

(Thousands of dollars)    2011      2010  

Logs

   $ 1,100         2,132   

Lumber

     2,925         3,562   

Materials and supplies

     328         367   
  

 

 

    

 

 

 
   $ 4,353         6,061   
  

 

 

    

 

 

 

The Company utilizes the lower of cost or market basis for determining inventory-carrying values. Lumber inventory amounts at December 31, 2011 and 2010, are stated at lower of cost or net realizable value.

Note 3 – Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets at December 31 consisted of the following:

 

(Thousands of dollars)    2011      2010  

Short-term deferred tax assets

   $ 2,180         2,265   

Refundable income taxes

     1,050         809   

Prepaid expenses

     196         219   

Other current assets

     436         300   
  

 

 

    

 

 

 
   $ 3,862         3,593   
  

 

 

    

 

 

 

Note 4 – Investment in Del-Tin Fiber

Deltic owns 50 percent of the membership of Del-Tin Fiber, which operates a medium density fiberboard (“MDF”) plant near El Dorado, Arkansas.

At December 31, 2011 and 2010, the Company’s share of the underlying net assets of Del-Tin Fiber exceeded its investment by $14,958,000 and $15,730,000, respectively. The difference relates primarily to the Company’s write-off of its carrying amount for its investment in Del-Tin Fiber as of

 

52


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 4 – Investment in Del-Tin Fiber (cont.)

 

December 31, 2002, which was not recorded by Del-Tin Fiber. The equity in earnings of Del-Tin Fiber recognized by the Company exceeds its ownership percentage of Del-Tin Fiber’s earnings because the difference in basis between the Company and Del-Tin Fiber is being adjusted to account for Del-Tin Fiber’s operating results as if it were a consolidated subsidiary.

Cumulative net losses for Del-Tin Fiber have amounted to $75,867,000, of which $37,934,000 is the Company’s share. As of December 31, 2011, the Company’s total contributions to Del-Tin Fiber, net of repayments, are $60,005,000. During 2011, 2010, and 2009, net repayments of $1,453,000, $4,913,000, and $1,556,000, respectively, were received from Del-Tin Fiber.

On August 26, 2004, the Company executed a guarantee agreement in connection with the refinancing of the debt of Del-Tin Fiber, which included both a five-year term loan and a long-term bond obligation. In connection with the bond obligation, Del-Tin Fiber has issued a letter of credit in support of the bond obligation, and both Deltic and the other joint venture partner agreed to guarantee Del-Tin Fiber’s performance under the letter of credit at inception. The Company’s guarantee under the letter of credit was renewed on July 21, 2011, and will expire on August 31, 2016. In connection with the issuance of Deltic’s original guarantee of the letter of credit, the fair value of the guarantee of the bonds was determined to be de minimus. In reviewing the payment/performance risk associated with this guarantee, Deltic continues to consider the risk minimal based on Del-Tin’s balance sheet, past performance, and length of time remaining on the guarantee.

Under the operating agreement, Del-Tin Fiber’s employees operate the plant. Deltic negotiates annually to provide a portion of the plant’s fiber and wood fuel supply at market prices. During 2011, 2010, and 2009, Deltic sold to Del-Tin Fiber approximately $3,654,000, $4,449,000, and $4,457,000, respectively, of these lumber manufacturing by-products. As of December 31, 2011 and 2010, the Company had receivables from Del-Tin Fiber of $54,000 and $158,000, respectively.

Del-Tin Fiber’s Condensed Balance Sheet Information as of December 31, 2011 and January 1, 2011, and results of operations for each of the years in the three-year period ended December 31, 2011, consisted of the following:

 

(Thousands of dollars)    2011      2010  

Condensed Balance Sheet Information

     

Current assets

   $ 7,362         7,382   

Property, plant, and equipment – net

     68,480         72,686   

Other noncurrent assets

     217         23   
  

 

 

    

 

 

 

Total assets

   $ 76,059         80,091   
  

 

 

    

 

 

 

Current liabilities

   $ 2,916         3,133   

Long-term debt

     29,000         29,000   

Members’ capital

     44,143         47,958   
  

 

 

    

 

 

 

Total liabilities and members’ capital

   $ 76,059         80,091   
  

 

 

    

 

 

 

 

53


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 4 – Investment in Del-Tin Fiber (cont.)

 

(Thousands of dollars)    2011     2010     2009  

Condensed Income Statement Information

      

Net sales

   $ 64,307        71,679        54,573   
  

 

 

   

 

 

   

 

 

 

Costs and expenses

      

Cost of sales

     56,364        56,496        43,826   

Depreciation

     5,668        5,261        4,465   

General and administrative expenses

     2,203        2,418        2,078   

Loss on asset disposition

     47        297        90   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     64,282        64,472        50,459   
  

 

 

   

 

 

   

 

 

 

Operating income

     25        7,207        4,114   

Interest and other debt expense

     (934     (790     (1,124

Other income

     —          —          125   
  

 

 

   

 

 

   

 

 

 

Net income/(loss)

   $ (909     6,417        3,115   
  

 

 

   

 

 

   

 

 

 

Note 5 – Timber and Timberlands

Timber and timberlands at December 31 consisted of the following:

 

(Thousands of dollars)    2011     2010  

Purchased stumpage inventory

   $ 2,062        1,298   

Timberlands

     93,714        92,472   

Fee timber

     233,029        228,813   

Logging facilities

     2,601        2,554   
  

 

 

   

 

 

 
     331,406        325,137   

Less accumulated cost of fee timber harvested and facilities depreciation

     (104,284     (99,859
  

 

 

   

 

 

 

Strategic timber and timberlands

     227,122        225,278   

Non-strategic timber and timberlands

     1,152        812   
  

 

 

   

 

 

 
   $ 228,274        226,090   
  

 

 

   

 

 

 

In 1999, the Company initiated a program to identify and sell non-strategic timberlands and use the sales proceeds to purchase pine timberlands that are strategic to its operations. In 2008, Deltic identified approximately 10,000 acres of non-strategic timberlands that existed within its timberland base to be sold. Other non-strategic acreage exists within the Company’s land base, but Deltic has not completely identified the number of acres that fit within this category. As the Company identifies these acres and determines they are either smaller tracts of pine timberland that cannot be strategically managed or tracts of hardwood bottomland that cannot be converted into pine growing acreage, they will be sold. As of December 31, 2011 and 2010, approximately 2,500 acres and 1,900 acres, respectively were available for sale. Included in the Woodlands operating income are gains from sales of non-strategic timberland of $2,797,000, $4,782,000, and $5,197,000 in 2011, 2010, and 2009, respectively. Occasionally Deltic engages in land-for-land exchanges that are recorded as sales due to the nature of the land involved.

Gains were recognized from non-monetary land exchanges of $47,000, $71,000, and $23,000 in 2011, 2010, and 2009, respectively.

 

54


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 5 – Timber and Timberlands (cont.)

 

Cost of fee timber harvested amounted to $4,963,000, $5,763,000, and $4,613,000 in 2011, 2010, and 2009, respectively. Depreciation of logging facilities was $93,000, $79,000, and $61,000 for the years 2011, 2010, and 2009, respectively.

Note 6 – Property, Plant, and Equipment

Property, plant, and equipment at December 31 consisted of the following:

 

(Thousands of dollars)    Range of
Useful Lives
   2011     2010  

Land

   N/A    $ 357        125   

Land improvements

   10-20 years      6,141        6,107   

Buildings and structures

   10-20 years      13,876        12,522   

Machinery and equipment

   3-15 years      100,211        98,039   
     

 

 

   

 

 

 
        120,585        116,793   

Less accumulated depreciation

        (90,398     (84,236
     

 

 

   

 

 

 
      $ 30,187        32,557   
     

 

 

   

 

 

 

Depreciation of property, plant, and equipment charged to operations was $6,749,000, $7,392,000, and $7,943,000 in 2011, 2010, and 2009, respectively. Gains on disposals or retirements of assets included in operating income were $36,000, $74,000, and $45,000 in 2011, 2010, and 2009, respectively.

Note 7 – Deferred Revenues and Other Accrued Liabilities

Deferred revenues and other accrued liabilities at December 31 consisted of the following:

 

(Thousands of dollars)    2011      2010  

Deferred revenues – current

   $ 4,027         4,176   

Vacation accrual

     954         965   

Deferred compensation

     1,421         3,772   

All other current liabilities

     1,359         1,249   
  

 

 

    

 

 

 
   $ 7,761         10,162   
  

 

 

    

 

 

 

Note 8 – Other Noncurrent Liabilities

Other noncurrent liabilities at December 31 consisted of the following:

 

(Thousands of dollars)    2011      2010_  

Accumulated postretirement benefit obligation

   $ 10,904         8,989   

Excess retirement plan

     4,063         3,139   

Accrued pension liability

     14,443         5,622   

Deferred revenue – long-term portion

     3,284         3,765   

Uncertain tax positions liability

     1,771         3,011   

All other noncurrent payables

     2,361         2,113   
  

 

 

    

 

 

 
   $ 36,826         26,639   
  

 

 

    

 

 

 

 

55


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 9 – Credit Facilities

The Company has an agreement with SunTrust Bank together with other banks, which provides an unsecured and committed revolving credit facility totaling $297,500,000 and includes an option to request an increase in the amount of aggregate revolving commitments by $50,000,000. The most recent amendment of this credit facility occurred on February 4, 2011, and expires on September 9, 2015. To facilitate the amendment, $1,094,000 in fees were incurred and are being amortized as additional interest over the term of the agreement, together with the remaining unamortized prior costs of $266,000. At December 31, 2011 and 2010, $24,000,000 and $24,500,000, respectively, were outstanding and included in long-term debt. As of December 31, 2011 and 2010, $273,500,000 and $275,500,000, respectively, were available in excess of all borrowings outstanding under or supported by the respective facilities. Borrowings under the current agreement bear interest at a base rate or an adjusted Eurodollar rate plus an applicable margin, depending upon the type of loan the Company executes. The applicable margin component of the interest rate varies with the type of loan and the Company’s total debt to capital ratio. The agreement contains certain restrictive financial covenants, including a leverage ratio of no greater than .65 to 1.0, minimum timber market value greater than 175 percent of outstanding total senior indebtedness, and limitations on the incurrence of debt. Fees associated with the current revolving credit facility include a commitment fee of .25 to .40 percent per annum on the unused portion of the committed amount.

The Company may also borrow up to $1,000,000 under a short-term credit facility with BancorpSouth. The agreement expires December 31, 2012, with annual renewal. The amount available to the Company under this facility is reduced by any borrowings by the Company. As of December 31, 2011 and 2010, Deltic had no borrowings outstanding under this line of credit, resulting in $1,000,000 available to the Company. Borrowings bear interest based upon the New York Prime rate. Deltic also has an agreement with BancorpSouth to provide letters of credit. New letters of credit are requested by the Company and are approved and issued by BancorpSouth on a case-by-case basis. Outstanding letters of credit as of December 31, 2011 and 2010 were $654,000 and $705,000, respectively.

Note 10 – Indebtedness

The Company’s indebtedness at December 31 consisted of the following:

 

(Thousands of dollars)    2011      2010  

Notes payable, 2.03%*, due 2015 (See Note 9)

   $ 24,000         24,500   

Senior notes payable, 6.10%, due 2016

     40,000         40,000   

Senior notes payable, 6.01%, due 2012

     1,111         2,222   
  

 

 

    

 

 

 
     65,111         66,722   

Less: Current maturities of long-term debt

     1,111         1,111   
  

 

 

    

 

 

 

Long-term debt at December 31

   $ 64,000         65,611   
  

 

 

    

 

 

 

 

  * Weighted average interest rate at December 31, 2011.

The Company has private placement debt outstanding of $40,000,000 of Series A Senior Notes (“Notes”) with Pacific Coast Farm Credit, a division of American AgCredit, due and payable December 18, 2016. The interest rate for the Notes has been 6.10 percent since December 18, 2008, and will remain at that rate for the remainder of the term of the Notes. No installment payments are required, but the terms allow for prepayments at the option of the Company. The agreement contains certain restrictive financial covenants, including a minimum consolidated net worth of the sum of $175,567,000, plus 50 percent of net income accrued during each quarter thereafter commencing after

 

56


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 10 – Indebtedness (cont.)

 

December 31, 2006, plus 100 percent of the net proceeds from any public or private offering of common or preferred stock of the Company, a maximum funded debt/capitalization ratio of .6 to 1, a fixed charge coverage ratio of not less than 2.5 to 1, and to maintain a timber market value greater than 200 percent of outstanding total senior indebtedness.

The Company has private placement debt outstanding of $1,111,000 of senior notes with Modern Woodmen of America. These unsecured notes have a fixed stated interest rate of 6.01 percent and will mature on December 20, 2012. Semiannual installments of $555,000, or such lesser amount as shall be outstanding, were required beginning on December 20, 2008. The note terms allow for prepayment at the option of the Company in an amount of not less than five percent of the principal amount outstanding at the time of any prepayment. The agreement contains the same restrictive financial covenants as the Series A Senior Notes. The Company incurred $55,000 of costs related to the issuance and amendment of these notes, which were deferred and are being amortized as additional interest expense over the term of the underlying debt.

As of December 31, 2011, the scheduled maturities of long-term debt for the next five years are $1,111,000 in 2012, none in 2013 and 2014, $24,000,000 in 2015, and $40,000,000 in 2016. (For additional information regarding financial instruments, see Note 9 – Credit Facilities and Note 13 – Fair Value of Financial Instruments.)

 

57


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 10 – Indebtedness (cont.)

 

Some covenant requirements of the Senior Notes are the same as for the revolving credit facility, some are more restrictive, and some apply only to the Senior Notes.

The table below sets forth the most restrictive ratio requirements of the covenants for the credit facility and Senior Notes Payable and the status with respect to these covenants as of December 31, 2011 and 2010.

 

     Covenants
Requirements
    Actual Ratios at
Dec. 31, 2011
    Actual Ratios at
Dec. 31, 2010
 

Leverage ratio should be less than:1

     .65 to 1        .262 to 1        .263 to 1   

Total outstanding debt as a percentage of total debt allowed based on the minimum timber market value covenant:2

     2      43.47     38.37

Fixed charge coverage ratio should be greater than:3

     2.50 to 1        3.89 to 1        6.50 to 1   

 

1 

The leverage ratio is calculated as total debt divided by total capital. Total debt includes indebtedness for borrowed money, secured liabilities, obligations in respect of letters of credit, and guarantees. Total capital is the sum of total debt and net worth. Net worth is calculated as total assets minus total liabilities, as reflected on the balance sheet. This covenant is applied at the end of each quarter.

 

2 

Timber market value must be greater than 200 percent of total debt (as defined in (1) above.) The timber market value is calculated by multiplying the average price received for sales of timber for the preceding four quarters by the current quarter’s ending inventory of timber. This covenant is applied at the end of the quarter on a rolling four-quarter basis. The revolving credit facility requirement is for the timber market value to be greater than 175 percent of total debt (as defined in (1) above.)

 

3 

The fixed charge coverage ratio is calculated as EBITDA (earnings before interest, taxes, depreciation, depletion, and amortization) increased by non-cash compensation expense and other non-cash expenses and decreased by dividends paid and income tax paid, divided by the sum of interest expense and scheduled principal payments made on debt during the period. This covenant is applied at the end of the quarter on a rolling four-quarter basis. This covenant only applies to the Senior Notes Payable.

Based on management’s current operating projections, the Company believes it will remain in compliance with the debt covenants. However, depending on market conditions and potential economic uncertainties, in future periods the Company may need to request amendments, waivers for covenants, or obtain refinancing. There can be no assurance that the Company will be able to obtain amendments or waivers or negotiate agreeable refinancing terms should it become necessary.

 

 

58


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 11 – Income Taxes

The components of income tax expense/(benefit) related to income from operations for the years ended December 31, 2011, 2010, and 2009 are as follows:

 

(Thousands of dollars)    2011     2010     2009  

Federal

      

Current

   $ 930        7,448        1,142   

Deferred

     1        (1,594     (251
  

 

 

   

 

 

   

 

 

 
     931        5,854        891   
  

 

 

   

 

 

   

 

 

 

State

      

Current

     (909     1,547        275   

Deferred

     1,108        (1,073     (94
  

 

 

   

 

 

   

 

 

 
     199        474        181   
  

 

 

   

 

 

   

 

 

 

Total income tax expense

   $ 1,130        6,328        1,072   
  

 

 

   

 

 

   

 

 

 

The following table provides a reconciliation of the Company’s income tax expense at the statutory U.S. federal rate of 35 percent to the actual income tax expense for the years ended December 31, 2011, 2010, and 2009.

 

(Thousands of dollars)    2011     2010     2009  

U.S. Federal income tax using statutory tax rate

   $ 1,326        6,554        1,666   

State tax, net of federal tax benefit

     160        748        74   

Permanent differences

     (306     (380     (8

Tax effects resulting from:

      

Recognition of state net operating loss carry forward available to offset uncertain tax liabilities

     —          (505     188   

Tax rate changes on timber gains

     —          (61     (718

Other

     (50     (28     (130
  

 

 

   

 

 

   

 

 

 

Income tax provision as reported

   $ 1,130        6,328        1,072   
  

 

 

   

 

 

   

 

 

 

The Company’s deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010, consisted of the following:

 

(Thousands of dollars)    2011     2010  

Deferred tax assets

    

Investment in real estate held for development and sale

   $ 15,943        15,231   

Postretirement and other employee benefits

     15,863        11,321   

Other deferred tax assets

     4,078        5,268   
  

 

 

   

 

 

 

Total deferred tax assets

     35,884        31,820   
  

 

 

   

 

 

 

Deferred tax liabilities

    

Investment in Del-Tin Fiber

     (5,571     (5,823

Timber and timberlands

     (24,861     (24,032

Property, plant, and equipment

     (4,318     (4,222

Other deferred tax liabilities

     (165     (182
  

 

 

   

 

 

 

Total deferred tax liabilities

     (34,915     (34,259
  

 

 

   

 

 

 

Net deferred tax assets/(liabilities)

   $ 969        (2,439
  

 

 

   

 

 

 

 

59


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 11 – Income Taxes (cont.)

 

The net deferred tax asset/(liability) is classified in the accompanying consolidated balance sheets as follows:

 

(Thousands of dollars)    2011     2010  

Current tax asset

   $ 2,180        2,265   

Non-current tax assets

     —          641   

Long-term tax liabilities

     (1,211     (5,345
  

 

 

   

 

 

 

Net deferred tax asset/(liability)

   $ 969        (2,439
  

 

 

   

 

 

 

In assessing the realizability of deferred tax assets, Deltic’s management considers whether it is more-likely-than-not that some portion or all of the Company’s total deferred tax assets will not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the temporary differences are anticipated to reverse, management believes it is more-likely-than-not that the Company will realize the benefits of its deferred tax assets at December 31, 2011, as reductions of future taxable income or by utilizing available tax planning strategies. However, the amount of the net deferred tax assets considered realizable could be adjusted in the future if estimates of taxable income are revised.

Unrecognized tax benefits represent potential future obligations to taxing authorities if uncertain tax positions the Company has taken, primarily on previously filed state income tax returns, are not sustained. Liabilities established for unrecognized tax benefits may not be combined with deferred tax assets or liabilities; however, when the unrecognized tax benefit is directly associated with a tax position taken in a tax year that results (or resulted) in the recognition of a deferred tax asset for an Net Operating Loss (“NOL”) for that year and such NOL has not yet been utilized, net presentation is appropriate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding both interest and any related federal benefits) is as follows:

 

(Thousands of dollars)    2011     2010  

Balance at January 1

   $ 3,015        1,938   

Increases related to current year tax positions

     —          1,185   

Increases/(decreases) related to prior year tax positions

     (4     (65

Lapse of statute

     (1,237     (43
  

 

 

   

 

 

 

Balance at December 31

   $ 1,774      $ 3,015   
  

 

 

   

 

 

 

If the Company were to prevail on all unrecognized tax benefits recorded on the balance sheet, approximately $1,225,000, as of December 31, 2011, would benefit the effective tax rate. The Company’s policy is to recognize interest expense related to unrecognized tax benefits in interest expense and penalties in other expenses. During 2011, the Company recognized $119,000 in interest expense for these items. The Company had approximately $205,000 and $18,000 accrued in deferred revenue and other accrued liabilities for interest and penalties at December 31, 2011 and 2010, respectively. The Company is no longer subject to federal and state income tax examination by tax authorities for years before 2008.

 

60


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

 

Note 12 – Stockholders Rights Plan

The Company has a Stockholders Rights Plan (“Rights Plan”), which provides for each eligible common shareholder to receive a dividend of one preferred stock purchase right (“Right”) for each outstanding share of the Company’s common stock held. On October 19, 2006, the Company’s Board of Directors amended the Rights Plan to, among other items, extend its term to December 31, 2016, and to increase the exercise price of the rights to $200 per share. The Rights will detach from the common stock and become exercisable: (1) following a specified period of time after the date of the first public announcement that a person or group of affiliated or associated persons (“Acquiring Person”), has become the beneficial owner of 15 percent or more of the Company’s common stock or (2) following a specified amount of time of the commencement of a tender or exchange offer by any Acquiring Person, which would, if consummated, result in such persons becoming the beneficial owner of 15 percent or more of the Company’s common stock. In either case, the detachment of the Rights from the common stock is subject to extension by a majority of the directors of the Company. The Rights have certain anti-takeover effects and will cause substantial dilution to any Acquiring Person that attempts to acquire the Company without conditioning the offer on a substantial number of Rights being acquired. Other terms of the Rights are set forth in, and the foregoing description is qualified in its entirety by, the Rights Agreement between the Company and Harris N.A. (formerly known as Harris Trust and Savings Bank), as Rights Agent.

Note 13 – Fair Value of Financial Instruments

Fair value measurement accounting establishes a fair value hierarchy based on the quality of inputs used to measure fair value, with level 1 being the highest quality and level 3 being the lowest quality. Level 1 inputs are quoted prices in active markets on identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included in Level 1. Level 3 inputs are unobservable inputs which reflect assumptions about pricing by market participants.