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Deltic Timber 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
Form 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended March 31, 2010

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

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, 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 to 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 ¨    No ¨.

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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨        No x.

Number of shares of Common Stock, $.01 Par Value, outstanding at March 31, 2010, was 12,499,223.

 

 

 


Table of Contents

TABLE OF CONTENTS – FIRST QUARTER 2010 FORM 10-Q REPORT

 

          Page
Number

PART I – Financial Information

  

Item 1.

   Financial Statements      1

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    18

Item 3.

   Quantitive and Qualitative Disclosures About Market Risk    28

Item 4.

   Controls and Procedures    28

PART II – Other Information

  

Item 1.

   Legal Proceedings    29

Item 1A.

   Risk Factors    29

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    29

Item 3.

   Defaults Upon Senior Securities    29

Item 4.

   (Removed and Reserved)    29

Item 5.

   Other Information    29

Item 6.

   Exhibits    30

Signatures

   31


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

    Consolidated Balance Sheets    

(Thousands of dollars)

 

     (Unaudited)
March 31,
2010
     December 31,
2009
 

Assets

     

Current assets

     

Cash and cash equivalents

   $ 5,552       4,783   

Trade accounts receivable, net of allowance for doubtful accounts of $88 and $68, respectively

     7,516       4,888   

Other receivables

     48       86   

Inventories

     4,534       5,917   

Prepaid expenses and other current assets

     2,978       2,842   
               

Total current assets

     20,628       18,516   

Investment in real estate held for development and sale

     56,064       56,096   

Investment in Del-Tin Fiber

     9,579       9,104   

Other investments and noncurrent receivables

     4,788       4,882   

Timber and timberlands – net

     229,355       228,893   

Property, plant, and equipment – net

     33,171       33,886   

Deferred charges and other assets

     796       826   
               

Total assets

   $ 354,381       352,203   
               

Liabilities and Stockholders’ Equity

     

Current liabilities

     

Trade accounts payable

   $ 3,069       2,824   

Current maturities of long-term debt

     1,111       1,111   

Accrued taxes other than income taxes

     2,277       1,824   

Income taxes payable

     494       362   

Deferred revenues and other accrued liabilities

     6,692       6,981   
               

Total current liabilities

     13,643       13,102   

Long-term debt, excluding current maturities

     91,222       91,222   

Deferred tax liabilities – net

     5,542       5,448   

Other noncurrent liabilities

     25,642       26,132   

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

     77,286       78,290   

Retained earnings

     156,954       155,638   

Treasury stock

     (10,876    (12,548

Accumulated other comprehensive loss

     (5,160    (5,209
               

Total stockholders’ equity

     218,332       216,299   
               

Total liabilities and stockholders’ equity

   $ 354,381       352,203   
               

See accompanying notes to consolidated financial statements.

 

1


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income/(Loss)

                          (Unaudited)                         

(Thousands of dollars, except per share amounts)

 

     Three Months Ended
March 31,
 
     2010      2009  

Net sales

   $ 31,935       22,862   
               

Costs and expenses

     

Cost of sales

     21,464       17,447   

Depreciation, amortization, and cost of fee timber harvested

     3,049       3,416   

General and administrative expenses

     3,763       3,208   
               

Total costs and expenses

     28,276       24,071   
               

Operating income/(loss)

     3,659       (1,209

Equity in earnings of Del-Tin Fiber

     488       757   

Interest income

     98       2   

Interest and other debt expense

     (913    (903

Interest capitalized

     16       63   

Other income/(expense)

     2       133   
               

Income/(loss) before income taxes

     3,350       (1,157

Income tax expense

     (1,097    (17
               

Net income/(loss)

   $ 2,253       (1,174
               

Income/(loss) per common share

     

Basic

   $ .18       (.09

Diluted

   $ .18       (.09

Dividends declared per common share

   $ .075       .075   
               

Weighted average common shares outstanding (thousands)

     

Basic

     12,349       12,299   

Diluted

     12,396       12,299   

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Thousands of dollars)

 

     Three Months Ended
March 31,
 
       2010         2009    

Operating activities

    

Net income/(loss)

   $ 2,253      (1,174

Adjustments to reconcile net income/(loss) to net cash provided by operating activities

    

Depreciation, amortization, and cost of fee timber harvested

     3,049      3,416   

Deferred income taxes

     356      574   

Real estate development expenditures1

     (394   (122

Real estate costs recovered upon sale

     415      —     

Timberland costs recovered upon sale

     99      100   

Equity in earnings of Del-Tin Fiber

     (488   (757

Stock-based compensation expense

     480      412   

Net increase in liabilities for pension and other postretirement benefits

     246      247   

Net decrease in deferred compensation for stock-based liabilities

     (625   (1,069

Increase in operating working capital other than cash and cash equivalents

     (817   (1,469

Other – changes in assets and liabilities

     (217   211   
              

Net cash provided by operating activities

     4,357      369   
              

Investing activities

    

Capital expenditures requiring cash, excluding real estate development1

     (2,438   (4,598

Net change in purchased stumpage inventory

     (453   (502

Advances to Del-Tin Fiber

     (677   (1,850

Repayments from Del-Tin Fiber

     690      1,385   

Net change in funds held by trustee

     (25   2,765   

Other – net

     142      435   
              

Net cash required by investing activities

     (2,761   (2,365
              

Financing activities

    

Proceeds from borrowings

     —        3,500   

Repayments of notes payable and long-term debt

     —        (1,500

Treasury stock purchases

     (26   (1,112

Common stock dividends paid

     (937   (933

Proceeds from stock option exercises

     154      7   

Excess tax benefits from stock-based compensation expense

     60      —     

Other – net

     (78   (75
              

Net cash required by financing activities

     (827   (113
              

Net increase/(decrease) in cash and cash equivalents

     769      (2,109

Cash and cash equivalents at January 1

     4,783      2,413   
              

Cash and cash equivalents at March 31

   $ 5,552      304   
              

1Certain 2009 real estate development expenditures amounts have been revised to conform to the
 2010 presentation.

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

                              (Unaudited)                             

(Thousands of dollars)

 

        Three Months Ended
March 31,
 
        2010      2009  

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 in 2010 and 2009

       128       128   
                 

Capital in excess of par value

       

Balance at beginning of period

       78,290       78,660   

Exercise of stock options

       (4    (3

Stock based compensation expense

       480       412   

Restricted stock awards

       (1,540    (1,859

Tax effect of stock awards

       60       (255
                 

Balance at end of period

       77,286       76,955   
                 

Retained earnings

       

Balance at beginning of period

       155,638       155,683   

Net income/(loss)

       2,253       (1,174

Common stock dividends

       (937    (933
                 

Balance at end of period

       156,954       153,576   
                 

Treasury stock

       

Balance at beginning of period – 363,208 and 412,177 shares, respectively

       (12,548    (14,400

Shares purchased – 606 and 35,571 shares, respectively

       (26    (1,111

Shares issued for incentive plans – 49,158 and 52,637 shares, respectively

       1,698       1,869   
                 

Balance at end of period – 314,656 and 395,111 shares, respectively

       (10,876    (13,642
                 

Accumulated other comprehensive loss

       

Balance at beginning of period

       (5,209    (6,907

Change in other comprehensive income net of tax

       49       90   
                 

Balance at end of period

       (5,160    (6,817
                 

Total stockholders’ equity

     $ 218,332       210,200   
                 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Other Comprehensive Income/(Loss)

                                            (Unaudited)                                          

(Thousands of dollars)

 

     Three Months Ended
March 31,
 
     2010     2009  

Net income/(loss)

   $ 2,253      (1,174
              

Other comprehensive income

    

Items related to employee benefit plans:

    

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

    

Amortization of prior service cost

     2      13   

Amortization of actuarial loss

     128      184   

Amortization of plan amendment

     (50   (50

Income tax expense related to items of other comprehensive income

     (31   (57
              

Other comprehensive income

     49      90   
              

Comprehensive income/(loss)

   $ 2,302      (1,084
              

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 – Accounting Policies

Basis of Presentation

The consolidated financial statements have been prepared by Deltic Timber Corporation (the “Company” or “Deltic”). Certain information and accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations of the Securities and Exchange Commission. Although management of the Company believes the disclosures contained herein are adequate to make the information presented not misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009. Preparation of consolidated financial statements requires management to make estimates and assumptions. These estimates and assumptions affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company has changed the cash flow classification of operating activities to include real estate development capital expenditures. Previously, real estate development capital expenditures were reported as investing activities. The Company believes that this classification is preferable because the cash inflows and cash outflows associated with real estate assets held for sale should be classified in a consistent manner and that classification within operating activities better reflects the fact that these cash outflows are directly related to the Company’s operations of developing and selling real estate. Certain accounts in the prior-year statement of cash flow have been revised for comparative purposes to conform to the presentation in the current-year financial statements.

Management believes the accompanying consolidated financial statements contain all adjustments, including normal recurring accruals and adjustments, which in the opinion of management are necessary to present fairly its financial position as of March 31, 2010, and the results of its operations and cash flows for the three months ended March 31, 2010 and 2009. These consolidated financial statements are not necessarily indicative of results to be expected for the full year.

Recently issued Accounting Pronouncements

Financial Accounting Standards update No. 2010-06, Improving Disclosures about Fair Value Measurements is effective January 1, 2010, for the Company and requires more detailed information about valuation techniques, inputs used in determining fair value, and transfers into and out of Level 1 and Level 2 of the fair value hierarchy.

 

6


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 2 – Inventories

Inventories at the balance sheet dates consisted of the following:

 

(Thousands of dollars)    March 31,
2010
     Dec. 31,
2009

Logs

   $ 801      1,367

Lumber

     3,255      4,211

Materials and supplies

     478      339
             
   $ 4,534      5,917
             

Note 3 – Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets at the balance sheet dates consisted of the following:

 

(Thousands of dollars)    March 31,
2010
     Dec. 31,
2009

Short-term deferred tax assets

   $ 1,695      1,989

Refundable income taxes

     346      353

Prepaid expenses

     507      216

Other current assets

     430      284
             
   $ 2,978      2,842
             

Note 4 – Investment in Del-Tin Fiber

The Company owns 50 percent of the membership of Del-Tin Fiber L.L.C. (“Del-Tin”), which operates a medium density fiberboard (“MDF”) plant near El Dorado, Arkansas. The Company’s membership in Del-Tin is discussed in more detail in Note 4 – Investment in Del-Tin Fiber, in the Company’s 2009 annual report on Form 10-K.

On August 26, 2004, the Company executed a guarantee agreement in connection with the refinancing of the debt of Del-Tin, which included both a five-year term loan and a long-term bond obligation. In connection with the bond obligation, Del-Tin 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’s performance under the letter of credit at inception. The Company’s guarantee under the letter of credit expires on August 31, 2011. 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. The Company’s guarantee of the $30,000,000, five-year term loan expired in September of 2009.

 

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Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

At March 31, 2010, and December 31, 2009, the Company’s share of the underlying net assets of Del-Tin exceeded its investment by $16,348,000 and $16,580,000, respectively. The difference relates primarily to the Company’s write-off of its carrying amount for its investment in Del-Tin as of December 31, 2002, which was not recorded by Del-Tin. The equity in earnings of Del-Tin recognized by the Company exceeds its ownership percentage of Del-Tin’s earnings because the difference in basis between the Company and Del-Tin is being adjusted to account for Del-Tin’s operating results as if it were a consolidated subsidiary.

The financial position for Del-Tin as of the balance sheet dates and results of operations consisted of the following:

 

(Thousands of dollars)    March 31,
2010
       Jan. 2,
2010
 

Condensed Balance Sheet Information

       

Current assets

   $ 9,279         7,396   

Property, plant, and equipment – net

     74,471         75,438   

Other noncurrent assets

     53         63   
                 

Total assets

   $ 83,803         82,897   
                 

Current liabilities

   $ 2,949         2,528   

Long-term debt

     29,000         29,000   

Members’ capital

     51,854         51,369   
                 

Total liabilities and members’ capital

   $ 83,803         82,897   
                 
     Three Months Ended
March 31,
 
     2010        2009  

Condensed Income Statement Information

       

Net sales

   $ 15,416         13,863   
                 

Costs and expenses

       

Cost of sales

     12,810         10,740   

Depreciation

     1,293         1,175   

General and administrative expenses

     597         555   
                 

Total costs and expenses

     14,700         12,470   
                 

Operating income

     716         1,393   

Interest income

     40         26   

Interest and other debt expense

     (177      (257

Other loss

     (8      —     
                 

Net income

   $ 571         1,162   
                 

 

8


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 5 – Timber and Timberlands

Timber and timberlands at the balance sheet dates consisted of the following:

 

(Thousands of dollars)    March 31,
2010
       Dec. 31,
2009
 

Purchased stumpage inventory

   $ 2,902         2,449   

Timberlands

     91,688         92,032   

Fee timber

     225,584         224,002   

Logging facilities

     2,331         2,301   
                 
     322,505         320,784   

Less accumulated cost of fee timber harvested and facilities depreciation

     (95,256      (94,096
                 

Strategic timber and timberlands

     227,249         226,688   

Non-strategic timber and timberlands

     2,106         2,205   
                 
   $ 229,355         228,893   
                 

In 1999, the Company initiated a program to identify non-strategic timberlands for possible sale. As of March 31, 2010 and December 31, 2009, approximately 5,700 and 6,000 acres of non-strategic timberlands were available for sale, respectively. Included in the Woodlands operating income are gains from sales of non-strategic hardwood bottomland of $263,000 and $308,000 for the three months ended March 31, 2010 and 2009, respectively.

Note 6 – Property, Plant, and Equipment

Property, plant, and equipment at the balance sheet dates consisted of the following:

 

(Thousands of dollars)    March 31,
2010
       Dec. 31,
2009
 

Land

   $ 125         125   

Land improvements

     5,596         5,463   

Buildings and structures

     11,056         11,056   

Machinery and equipment

     95,967         94,993   
                 
     112,744         111,637   

Less accumulated depreciation

     (79,573      (77,751
                 
   $ 33,171         33,886   
                 

Note 7 – Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2010, was 33 percent. The Company’s policy is to recognize interest expense related to unrecognized tax benefits in interest expense and penalties in other expenses. During the three months ended March 31, 2010, the Company recognized $1,000 in interest expense from these items. The Company had approximately $18,000 accrued in deferred revenues and other accrued liabilities for interest and penalties at March 31, 2010. If the Company were to prevail on all unrecognized tax benefits recorded on the balance sheet, approximately $1,833,000 would benefit the effective rate.

 

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Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 7 – Income Taxes (cont.)

 

The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2006.

Note 8 – Deferred Revenue and Other Accrued Liabilities

Deferred revenues and other accrued liabilities at the balance sheet dates consisted of the following:

 

(Thousands of dollars)    March 31,
2010
   Dec. 31,
2009

Deferred revenues – current

   $ 3,050    3,614

Vacation accrual

     966    938

Deferred compensation

     659    1,054

All other current liabilities

     2,017    1,375
           
   $ 6,692    6,981
           

Note 9 – Other Noncurrent Liabilities

Other noncurrent liabilities at the balance sheet dates consisted of the following:

 

(Thousands of dollars)    March 31,
2010
   Dec. 31,
2009

Accumulated postretirement benefit obligation

   $ 8,542    8,355

Excess retirement plan

     3,757    3,729

Accrued pension liability

     8,830    8,877

Deferred revenue – long term portion

     1,126    1,494

Uncertain tax positions liability

     2,024    1,895

Other noncurrent liabilities

     1,363    1,782
           
   $ 25,642    26,132
           

 

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Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 10 – Employee and Retiree Benefit Plans

Components of net periodic retirement expense and other postretirement benefits expense consisted of the following:

 

     Three Months
Ended March 31,
 
(Thousands of dollars)    2010        2009  

Funded qualified retirement plan

       

Service cost

   $ 282         277   

Interest cost

     407         396   

Expected return on plan assets

     (361      (297

Amortization of prior service cost

     5         15   

Recognized actuarial loss

     108         171   
                 

Net retirement expense

   $ 441         562   
                 

Unfunded nonqualified retirement plan

       

Service cost

   $ 33         28   

Interest cost

     57         49   

Amortization of prior service cost

     (3      (3

Recognized actuarial loss

     20         12   
                 

Net retirement expense

   $ 107         86   
                 

Other postretirement benefits

       

Service cost

   $ 82         81   

Interest cost

     117         119   

Amortization of plan amendment

     (50      (50
                 

Other postretirement benefits expense

   $ 149         150   
                 

The Company made contributions to its qualified plan of $375,000 during the first three months of 2010. The expected long-term rate of return on pension plan assets is 7.50 percent.

Recently enacted U.S. health care reform legislation is expected to affect companies that offer post-employment benefits to employees. Based on management’s current understanding of this new legislation and the types of benefits currently offered by the benefit plan, the financial impact to the Company was immaterial and did not require a remeasurement of its other postretirement benefits.

 

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Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 11 – Stock-Based Compensation

The Consolidated Statement of Income for the three months ended March 31, 2010 and 2009, included $480,000 and $412,000, respectively, of stock-based compensation expense reflected in general and administrative expenses.

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

 

     2010  

Expected term of options (in years)

     6.27   

Weighted expected volatility

     34.57

Dividend yield

     .61

Risk-free interest rate performance restricted shares

     2.13

Risk-free interest rate – options

     3.92

Stock price as of valuation date

   $ 44.84   

Stock Options – A summary of stock options as of March 31, 2010, and changes during the three-month period then ended are presented below:

 

Options

   Shares     Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term (Years)
   Aggregate
Intrinsic
Value
($000)

Outstanding at January 1, 2010

   168,914      $ 42.97      

Granted

   32,159        44.84      

Exercised

   (4,595     33.55      

Forfeited/expired

   —          —        
              

Outstanding at March 31, 2010

   196,478      $ 43.50    6.9    $ 843
                        

Exercisable at March 31, 2010

   111,759      $ 43.37    5.4    $ 571
                        

The aggregate intrinsic value in the table above is the sum of the amounts by which the quoted market price of the Company’s common stock exceeded the exercise price of the options at March 31, 2010, for those options for which the quoted market price was in excess of the exercise price. This amount changes over time based on changes in the fair market value of the Company’s stock.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11 – Stock-Based Compensation (cont.)

 

Restricted Stock and Restricted Stock Units – A summary of nonvested restricted stock as of March 31, 2010, and changes during the three-month period then ended are presented below:

 

Nonvested Restricted Stock

   Shares        Weighted
Average

Grant-Date
Fair Value

Nonvested at January 1, 2010

   70,963         $ 46.89

Granted

   20,733           44.84

Vested

   (12,231        53.23

Forfeited

   —             —  
               

Nonvested at March 31, 2010

   79,465         $ 45.38
               

As of March 31, 2010, there was $2,053,000 of unrecognized compensation cost related to nonvested restricted stock. That cost is expected to be recognized over a weighted-average period of 2.4 years.

Performance Units – A summary of nonvested restricted stock performance units as of March 31, 2010, and changes during the three months then ended are presented below:

 

Nonvested Restricted Stock Performance Units

   Shares        Weighted
Average

Grant-Date
Fair Value

Nonvested at January 1, 2010

   46,874         $ 51.15

Granted

   14,471           58.66

Vested

   (9,359        55.93

Forfeited

   —             —  
               

Nonvested at March 31, 2010

   51,986         $ 52.38
               

As of March 31, 2010, there was $1,706,000 of unrecognized compensation cost related to nonvested restricted stock performance units. That cost is expected to be recognized over a weighted-average period of 2.5 years.

Note 12 – Contingencies

At various times, the Company may be involved in litigation incidental to its operations. Currently, there are no material legal proceedings outstanding.

 

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Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 13 – Fair Value Measurement

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.

Following is a description of the valuation methodologies used for liabilities measured at fair value.

Nonqualified employee savings plan: Consists of mutual funds, which are valued at the net asset value of shares held by the plan at the balance sheet date, at quoted market prices.

The fair value measurements for the Company’s financial liabilities accounted for at fair value on a recurring basis at March 31, 2010, are presented in the following table:

 

           Fair Value Measurements at Reporting Date Using
    March 31,
2010
     Quoted prices in
Active Markets for
Identical Assets
(Liabilities)

Inputs
     Significant
Observable
Inputs
     Significant
Unobservable
Inputs
(Thousands of dollars)        Level 1      Level 2      Level 3

Liabilities

                

Nonqualified employee savings plan

  $ 696      696          
                          

The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at March 31, 2010. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The table excludes financial instruments included in current assets and liabilities, except current maturities of long-term debt, all of which have fair values approximating carrying values.

 

     2010
(Thousands of dollars)    Carrying
Amount
   Estimated
Fair Value

Financial liabilities

     

Long-term debt, including current liabilities

   $92,333    96,939

Long-term debt, including current liabilities – The fair value is estimated by discounting the scheduled debt payment streams to present value based on market rates for which the Company’s debt could be valued.

 

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Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 14 – Earnings per Common Share

The amounts used in computing earnings per share consisted of the following:

 

     Three Months Ended
March 31,
 
(Thousands, except per share amounts)    2010      2009  

Net income/(loss)

   $ 2,253      (1,174
               

Weighted average number of common shares used in basic EPS

     12,349      12,299   

Potentially dilutive shares

     47      —     
               

Weighted average number of common shares and dilutive potential common stock used in EPS assuming dilution

     12,396      12,299   
               

Earnings per common share

       

Basic

   $ .18      (.09

Assuming dilution

   $ .18      (.09

Options to purchase shares, which were outstanding but not included in the computation of diluted earnings per share because the options exercise price was greater than the average market price of the common shares, were 77,534 and 102,407 for the three months ended March 31, 2010 and 2009, respectively. Restricted performance shares, which were outstanding but not included in the computation of diluted earnings per share because they do not meet the metrics established for awarding, were 41,668 and zero at March 31, 2010 and 2009, respectively.

Note 15 – Supplemental Cash Flow Disclosures

Additional information concerning cash flows are as follows:

 

         Three Months Ended
March 31,
  (Thousands of dollars)    2010        2009
 

Income taxes paid in cash

   $ 506            14
 

Interest paid

     185         190

 

Non-cash investing and financing activities excluded from the statement of cash flows include:

 

                 Three Months Ended
March 31,
    (Thousands of dollars)    2010        2009
 

Issuance of restricted stock

   $ 1,540         1,859
     

Land exchanges

     —           35

 

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Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 – Supplemental Cash Flow Disclosures (cont.)

 

(Increases)/decreases in working capital, other than cash and cash equivalents, consisted of the following:

 

     Three Months Ended
March 31,
 
(Thousands of dollars)    2010        2009  

Trade accounts receivable

   $ (2,628      (1,556

Other receivables

     38         10   

Inventories

     1,383         607   

Prepaid expenses

     (440      (1,240

Trade accounts payable

     245         411   

Accrued taxes other than income taxes

     453         433   

Deferred revenues and other accrued liabilities

     132         (134
                 
   $ (817      (1,469
                 

Note 16 – Variable Interest Entity

The acquisition of certain timberlands in Calhoun County, Arkansas, in October 2009, was structured to qualify as the first step of a reverse like-kind exchange under Internal Revenue Code Section 1031 and Internal Revenue Service (“IRS”), Revenue Procedure 2000-37. Prior to closing on the purchase, the Company assigned all of its right and duties under the purchase and sale agreement to Hampton Acquisition, LLC (“Hampton”) a company unaffiliated with Deltic. Hampton, as an exchange accommodation titleholder, acquired the timberlands. Deltic loaned to Hampton an amount equal to the purchase price of the assets.

Hampton will hold the assets pursuant to a qualified exchange accommodation agreement until the second step of the like-kind exchange is completed. As of the date of the closing, the assets held by Hampton are under lease to Deltic in a net lease whereby Deltic has the benefits and risks of all revenues and costs attributed to the properties.

Based on the provisions of the FASB codification related to consolidations of variable interest entities, FASC 810-10, the Company determined that Hampton is a variable interest entity for which Deltic is the primary beneficiary. Accordingly, Hampton was consolidated into Deltic subsequent to the completion of the purchase of timberlands on October 7, 2009. As a result of the consolidation, Deltic included $6,100,000 on the balance sheet in timber and timberland assets, and recognized on the income statement the revenues and expenses attributed to the property.

The second step of this reverse like-kind exchange was concluded on April 14, 2010, and all assets were transferred to Deltic on that date.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 17 – Business Segments

Information about the Company’s business segments consisted of the following:

 

     Three Months Ended
March 31,
 
(Thousands of dollars)    2010        2009  

Net sales

       

Woodlands

   $ 9,023         9,895   

Mills

     24,615         16,028   

Real Estate

     2,296         1,572   

Eliminations*

     (3,999      (4,633
                 
   $ 31,935         22,862   
                 

Income/(loss) before income taxes

       

Operating income

       

Woodlands

   $ 5,079         5,674   

Mills

     2,499         (3,552

Real Estate

     (714      (1,025

Corporate

     (3,469      (2,890

Eliminations

     264         584   
                 

Operating income/(loss)

     3,659         (1,209

Equity in earnings of Del-Tin Fiber

     488         757   

Interest income

     98         2   

Interest and other debt expense

     (913      (903

Interest capitalized

     16         63   

Other income/expense

     2         133   
                 
   $ 3,350         (1,157
                 

Depreciation, amortization, and cost of fee timber harvested

       

Woodlands

   $ 1,219         1,390   

Mills

     1,697         1,867   

Real Estate

     112         137   

Corporate

     21         22   
                 
   $ 3,049         3,416   
                 

Capital expenditures

       

Woodlands

   $ 1,423         3,966   

Mills

     825         579   

Real Estate

     535         168   

Corporate

     49         42   
                 
   $ 2,832         4,755   
                 

*Primarily intersegment sales of timber from Woodlands to Mills.

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

The Company recorded net income of $2.3 million for the first quarter of 2010, compared to a loss of $1.2 million for the same period of 2009. While the Woodlands segment continued its role as the established core operation of the Company during the first quarter and provided $5.1 million in operating income, this was $.6 million below the same period in 2009. The decrease was the result of lower pine sawtimber harvest volume and average stumpage prices. The Mills segment reported operating income of $2.5 million, an improvement of $6.1 million when compared to the first quarter of 2009. The Mills improvement reflects benefits from supply-side market factors, the result of which was increased lumber prices, and production efficiencies during the current quarter. The Real Estate segment reported a loss of $.7 million in the current-year quarter compared to a loss of $1 million for the same period of 2009. The improvement is due to an increase in residential lot sales activity in the current year. Corporate segment expense was $.6 million higher in the first quarter of 2010 versus the corresponding period of 2009, a result of higher general and administrative expenses. This was primarily from additional accrued taxes on employee incentive plan expenses, which were due to the increase in the market value of share-based awards. Deltic owns a 50 percent interest in Del-Tin Fiber, LLC and recorded related equity in income of $.5 million in the current quarter, a $.3 million decrease from the first quarter of 2009 due largely to a lower average sales price for MDF and increased resin cost.

Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. This environment is affected by a number of factors including general economic conditions, interest rates, credit availability and associated costs, imports, foreign exchange rates, housing starts, new and existing home inventories, residential and commercial real estate foreclosures, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. Most recently, the United States economy and the housing sector have been gradually moving toward recovery. Along with this positive trend the wood products sector has been experiencing increased sales realizations for its products due to supply-side market factors caused by poor logging conditions because of wet weather in much of the southern United States. As the wet weather conditions abate and logging conditions improve, resulting in increased mill sawlog inventories, lumber production may increase potentially causing lumber prices to moderate from current levels. However, given its relative size and the nature of most commodity markets, the Company has little or no control over pricing levels for its lumber products. However, the Company continues its efforts to increase operating efficiencies, reduce controllable manufacturing costs, manage production levels to match market demand, and to seek other cost reducing measures.

Wet weather conditions influenced logging harvest activities in the first quarter of 2010. The pine sawtimber harvest decreased 9,043 tons to 146,488 tons when compared to the 2009 first quarter harvest of 155,531 tons. The average price received for pine sawtimber was $26 per ton in the current quarter of 2010, a decrease of $3 per ton from the 2009 first quarter. However, the per-ton prices for pine stumpage began to move upward during the current quarter due to the reduced harvest volumes and the increased demand for pine stumpage related to improved lumber market conditions. The pine pulpwood harvest of 79,379 tons in the first quarter of 2010 was 10,454 tons fewer than the 89,833 tons harvested in the first quarter of 2009. Because of low fiber supplies at area papermills, the price received for pine pulpwood increased $5 per ton to $16 per ton, when compared to a year ago. The Company also sold approximately 232 acres of recreational-use hardwood bottomland at an average sales price of $1,587 per acre during the first quarter of 2010 compared to sales of approximately 277 acres at an average price of $1,485 per acre for the same period of 2009. In addition, the Woodlands segment reported hunting lease income of $.5 million in the first quarters of 2010 and 2009.

Deltic’s Woodlands segment also receives revenues from mineral lease rentals and mineral royalty payments. In the first quarters of 2010 and 2009, income from mineral lease rentals was $.5 million. The Company has under lease approximately 31,600 net mineral acres in the area known as the “Fayetteville Shale Play,” an unconventional natural gas reservoir now being developed in the state of Arkansas. In the first quarter of 2010, the Company received net royalty payments of $.8 million from the defined Fayetteville Shale Play, compared to $.4 million received in the first quarter of 2009.

 

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Table of Contents

The total of all royalty income, including the Fayetteville Shale Play, was $.9 million and $.4 million for the first quarter of 2010 and 2009, respectively. The ultimate benefit to Deltic from these mineral leases remains speculative and unknown to the Company and is contingent on the level of natural gas prices and the successful extraction and sale of natural gas from the area.

The Mills segment benefited from an improved lumber market this quarter, which was primarily due to the reduced lumber supply, as most mills were unable to obtain adequate sawlog inventories due to poor logging conditions. The average sales price of $310 per MBF in the first quarter of 2010 was a 32 percent increase from $234 per MBF received in the first quarter of 2009. Lumber sales were 63.7 million board feet in the current period of 2010, an increase of 22 percent compared to 52.3 million board feet for the same period of 2009. Due to log availability from Company-owned lands, the Mills were able to increase production to match market requirements. Approximately one-half of stumpage supplied to its sawmills comes from Company fee timberlands. However, as with any commodity market, the Company expects the historical lumber market volatility to continue in the future. Deltic will continue to manage production levels to meet that of market demand, while controlling operating costs.

The Real Estate segment closed six residential lot sales during the first quarter of 2010 with an average per-lot sales price of $129,600 compared to no sales in 2009’s first quarter. In response to current market demands, one neighborhood of smaller-sized lots was offered in the first quarter of 2010. Development of this neighborhood will begin in the second quarter of 2010 and all 20 lots have been placed under contract. No commercial sales occurred in either the first quarter of 2010 or 2009. The commercially zoned acreage near the area of “The Promenade at Chenal,” an upscale shopping center within Chenal Valley and a planned lifestyle medical center, continues to receive interest as this area becomes more fully developed. Commercial real estate sales activity is by nature less predictable than residential activity.

Operating results for Del-Tin are affected by the overall medium density fiberboard (“MDF”) market and the plant’s operating performance. Del-Tin’s operational income decreased $.3 million, to $.5 million during the first quarter of 2010, when compared to 2009, due primarily to lower prices for MDF sold and resin glue cost increases, partially offset by increased sales volume. The MDF market trended upward during the month of March due to supply-side factors related to decreased imports from Chile following a major earthquake there on February 27, 2010. With regard to the Company’s equity position in Del-Tin, Deltic continues to reduce depreciation expense related to the add-back per thousand square feet manufactured, which relates to the impairment taken by the Company in 2002 that was not recorded at the Del-Tin level. The difference in basis between the Company and Del-Tin is being adjusted to account for Del-Tin’s operating results as if it were a consolidated subsidiary. (For further discussion, refer to Note 4 to the consolidated financial statements.)

 

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Table of Contents

Results of Operations

In the following tables, Deltic’s net sales and results of operations are presented for the quarters ended March 31, 2010 and 2009. Explanations of significant variances and additional analyses for the Company’s consolidated and segment operations follow the tables.

 

     Quarter Ended March 31,  
(Millions of dollars, except per share amounts)    2010        2009  

Net sales

       

Woodlands

   $ 9.0         9.9   

Mills

     24.6         16.0   

Real Estate

     2.3         1.6   

Eliminations

     (4.0      (4.6
                 

Net sales

   $ 31.9         22.9   
                 

Operating income/(loss)

       

Woodlands

   $ 5.1         5.7   

Mills

     2.5         (3.6

Real Estate

     (.7      (1.0

Corporate

     (3.5      (2.9

Eliminations

     .3         .6   
                 

Operating income/(loss)

     3.7         (1.2

Equity in earnings of Del-Tin Fiber

     .5         .8   

Interest income

     .1         —     

Interest and other debt expense

     (.9      (.9

Other income

     —           .1   

Income taxes

     (1.1      —     
                 

Net income/(loss)

   $ 2.3         (1.2
                 

Income/(loss) per common share

       

Basic and diluted

   $ .18         (.09

Consolidated

The $3.5 million increase in net income was the result of improved financial results for the Company’s Mills and Real Estate segments, partially offset by decreased operating income from the Woodlands segment and increased Corporate general and administrative expenses.

Operating income increased $4.9 million. The Woodlands segment decreased $.6 million due primarily to a decreased pine sawtimber harvest and lower average per-ton sales price combined with lower other income mainly from well-site damages. These were partially offset by increased revenues from oil and gas royalties and pine pulpwood sales. The Mills segment operations improved $6.1 million mainly due to a $76 per MBF, or 32 percent increase, in the average lumber sales price combined with a 22 percent increase in lumber sales volume. The Real Estate segment’s results improved $.3 million mainly due to increased sales of residential lots. Corporate expense increased $.6 million due to higher general and administrative expenses.

 

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Table of Contents

Woodlands

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

 

     Quarter Ended March 31,
     2010    2009

Gross sales (millions of dollars)

     

Pine sawtimber

   $ 3.8    4.5

Pine pulpwood

     1.2    1.0

Hardwood sawtimber

     —      .1

Hardwood pulpwood

     .2    .3

Oil and gas lease rentals

     .5    .5

Oil and gas royalties (gross)

     1.0    .5

Hunting leases

     .5    .5

Sales volume (thousands of tons)

     

Pine sawtimber

     146.5    155.5

Pine pulpwood

     79.4    89.8

Hardwood sawtimber

     1.0    3.4

Hardwood pulpwood

     13.3    33.2

Sales price (per ton)

     

Pine sawtimber

   $ 26    29

Pine pulpwood

     16    11

Hardwood sawtimber

     31    33

Hardwood pulpwood

     14    8

Timberland

     

Net sales (millions of dollars)

   $ .4    .4

Sales volume (acres)

     232    277

Sale price (per acre)

   $ 1,587    1,485

Net sales decreased $.9 million in 2010 when compared to the 2009 first quarter. Wet weather contributed to poor logging conditions in Deltic’s operating area during the first quarter of 2010 and caused harvest volumes to decrease. Sales of pine sawtimber decreased $.7 million due to a six percent lower harvest volume at a sales price of $26 per ton, which is ten percent lower than 2009’s $29 per ton price. Sales of pine pulpwood increased $.2 million mainly due to a 45 percent increase in the per-ton sales price, partially offset by a 12 percent lower harvest volume. Revenues from hardwood products declined $.2 million. Net oil and gas royalties in the first quarter of 2010 increased $.5 million when compared to the same period of 2009. 2010’s revenues from hauling stumpage to other mills and other income, primarily from well-site damages, decreased $.2 million and $.5 million respectively. The decrease in operating results was due primarily to the decrease in net sales.

 

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Table of Contents

Mills

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

 

       Quarter Ended March 31,
       2010      2009

Net sales (millions of dollars)

         

Lumber

     $ 19.8      12.3

Residual by-products

       3.9      3.1

Lumber

         

Finished production (MMBF)

       60.5      53.3

Sales volume (MMBF)

       63.7      52.3

Sales price (per MBF)

     $ 310      234

Net sales increased $8.6 million, or 54 percent, due to higher average lumber sales prices and increased lumber sales volume. The average lumber sales price in the first quarter of 2010 increased $76 from the first quarter of 2009. The first quarter of 2010 lumber sales volume increased 22 percent from first quarter 2009. The Mills segment also benefited from lower log costs, due to the lower prices for pine sawtimber stumpage, and improved hourly production rates at the Mills.

Real Estate

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

 

       Quarter Ended March 31,
       2010      2009

Net sales (millions of dollars)

         

Residential lots

     $ .8      —  

Chenal Country Club

       1.4      1.5

Sales volume

         

Residential lots

       6      —  

Average sales price (thousands of dollars)

         

Residential lots

     $ 130      —  

Net sales for the first quarter 2010 increased $.7 million from the first quarter 2009 due to an increase in the number of residential lots closed. The improved operating results were also due to increased residential real estate sales activity.

Corporate

The increase in operating expense for Corporate functions was due to higher general and administrative expenses, primarily employee incentive plan expenses resulting from additional accrued taxes due to the increase in market value of share-based awards.

 

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Table of Contents

Eliminations

Intersegment sales of timber from Deltic’s Woodlands to the Mills segment decreased $.6 million to $4 million. The decrease was due to a lower transfer price from the Woodlands segment and a decrease in the volume of logs coming into Deltic sawmills from its fee timberlands. Transfer prices are approximately that of market which were higher in the same quarter last year.

Equity in Del-Tin Fiber

For the first quarter of 2010, Deltic’s equity in Del-Tin was $.5 million compared to $.8 million for the same period of 2009. The $.3 million decrease in the first quarter of 2010 when compared to 2009 was due to a lower sales price per thousand square feet, (“MSF”) and increased resin costs partially offset by increased sales volume. Additional selected financial and statistical data for Del-Tin is shown in the following table.

 

     Quarter Ended
March 31,
     2010      2009

Net sales (millions of dollars)

   $ 15.4      13.9

Finished production (MMSF)

     30.4      26.5

Board sales (MMSF)

     31.5      26.8

Sales price (per MSF)

   $ 489      518

Income Taxes

The effective income tax rate was 33 percent for 2010 and one percent for 2009. The increase was primarily because 2009’s federal tax benefit was essentially offset by a discrete state tax provision.

Liquidity and Capital Resources

Cash Flows and Capital Expenditures

Net cash provided by operating activities total $4.4 million for the first three months of 2010 compared to $.4 million for the same period of 2009. Changes in operating working capital, other than cash and cash equivalents, required cash of $.8 million and $1.5 million in 2010 and 2009, respectively. The Company’s accompanying Consolidated Statements of Cash Flows identifies other differences between net income and cash provided by operating activities for each reporting period.

Capital expenditures required cash of $2.8 million in the current-year period and $4.7 million a year ago. Capital expenditures by segment consisted of the following:

 

     Three Months Ended
March 31,
 
(Thousands of dollars)    2010      2009  

Woodlands, including land exchanges

   $ 1,423      3,966   

Mills

     825      579   

Real Estate, including development expenditures

     535      168   

Corporate

     49      42   
               

Capital expenditures

     2,832      4,755   

Non-cash land exchange

     —        (35
               

Capital expenditures requiring cash

   $ 2,832      4,720   
               

 

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Table of Contents

The net change in purchased stumpage inventory to be utilized in the Company’s sawmill operations used cash of $.5 million in both 2010 and 2009. The Company advanced Del-Tin Fiber $.7 million in the first quarter of 2010, and received repayments of $.7 million. This compares to a net advance to Del-Tin of $.5 million for the same period of 2009. Funds held by trustees to be used for acquisitions of timberland designated as “replacement property” for income tax purposes, as required for tax-deferred exchanges, were unchanged in the first quarter of 2010 versus a decrease of $2.8 million for the same period of 2009. Deltic received proceeds from other investing activities of $.1 and $.4 million in 2010 and 2009, respectively. Deltic had no borrowings or repayments in 2010 versus net borrowings of $2 million in 2009. The Company had $1.1 million of treasury stock purchases in 2009, while there were no purchases in 2010. Deltic paid dividends on common stock of $.9 million during both 2010 and 2009. Proceeds from stock option exercises and related tax benefits in 2010 increased $.2 million from 2009 which had no benefit since no options were exercised in that period.

Financial Condition

Working capital totaled $7 million at March 31, 2010, and $5.4 million at December 31, 2009. Deltic’s working capital ratio at March 31, 2010 was 1.51 to 1, compared to 1.41 to 1 at the end of 2009. Cash and cash equivalents at the end of the first quarter of 2010 increased $.8 million from December 31, 2009. Deltic’s long-term debt to stockholders’ equity ratio was .418 to 1 at March 31, 2010 and .422 to 1 at December 31, 2009.

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, in addition to 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 totaling $300 million, inclusive of a $50 million letter of credit feature. The agreement will expire on September 9, 2012. As of March 31, 2010, $251 million was available. 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 included in the Company’s 2009 annual report on Form 10-K.)

The table below sets forth the covenants in the credit facility and status with respect to these covenants as of March 31, 2010 and December 31, 2009.

 

     Covenants
Requirements
   Actual Ratios at
March 31, 2010
   Actual Ratios at
Dec. 31, 2009

Leverage ratio should be less than:

   .65 to 1    .330 to 1    .332 to 1

Fixed charge coverage ratio should be greater than:

   2.5 to 1    5.99 to 1    5.14 to 1

Minimum timber market value must be greater than 175% of total senior indebtedness, presented as a ratio:

   1.75 to 1    4.13 to 1    3.97 to 1

 

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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 the possibility of the return of economic deterioration, the Company may need to request amendments, or 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 March 31, 2010, 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; no shares have been purchased in 2010, 35,571 shares were purchased 2009, 129,996 shares were purchased in 2008, 101,914 shares were purchased under this program in 2007, and seven shares in 2006. 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 refinanced its existing long-term debt by entering into a credit agreement consisting of a letter of credit and term loan with multiple lending institutions. The funds provided from this credit agreement were used, together with the existing balance in Del-Tin Fiber’s debt service reserve and bond sinking fund accounts, to redeem $60 million of its $89 million industrial revenue bonds. Under the new credit agreement, the lenders, on September 1, 2004, issued on Del-Tin Fiber’s behalf, 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 the refinancing of the debt of Del-Tin Fiber. Under Deltic’s guarantee agreement, Deltic unconditionally guarantees the due and punctual payment of 50 percent ($14.5 million at March 31, 2010) of Del-Tin’s obligation under its credit agreement. Deltic considers the current status of the payment/performance risk of this guarantee to be low based on history and the length of time remaining on the guarantee.

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. (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 included in the Company’s 2009 annual report on Form 10-K.)

 

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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
2010
   2011
to 2012
   2013
to 2014
   After
2014

Contractual cash payment obligations

              

Real estate development committed capital costs

   $ 5.3    .6    2.4    2.3    —  

Woodlands land acquisition and committed capital costs

     .2    .2    —      —      —  

Mills committed capital costs

     .7    .7    —      —      —  

Long-term debt

     92.3    1.1    51.2    —      40.0

Interest on debt*

     18.4    3.0    5.8    4.8    4.8

Retirement plans

     15.0    .8    2.5    2.9    8.8

Other postretirement benefits

     4.6    .3    .8    .9    2.6

Unrecognized tax benefits

     1.9    —      1.6    .3    —  

Other long-term liabilities

     2.0    .6    1.4    —      —  
                          
   $ 140.4    7.3    65.7    11.2    56.2
                          

Other commercial commitment expirations

              

Guarantee of indebtedness of Del-Tin Fiber

   $ 14.5    —      14.5    —      —  

Timber cutting agreements

     .5    .2    .3    —      —  

Letters of credit

     .4    —      .3    .1    —  
                          
   $ 15.4    .2    15.1    .1    —  
                          

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

Outlook

Deltic’s management believes that cash provided from its operations and the remaining amount available under its credit facility will be sufficient to meet its expected cash needs and planned expenditures, including those of the Company’s continued timberland acquisition, real estate development, and stock repurchase programs, additional advances to Del-Tin Fiber, and capital expenditures, for the foreseeable future.

Critical Accounting Policies and Estimates

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. The Company has prepared its consolidated financial statements to conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts in these financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. The Company has disclosed its critical accounting policies in its 2009 annual report on Form 10-K, and this disclosure should be read in conjunction with this Form 10-Q.

 

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Table of Contents

Impact of Recently Effective Accounting Pronouncements

(For information regarding the impact of recently effective accounting pronouncements, refer to Note 1 to the consolidated financial statements.)

Outlook

Pine sawtimber harvest levels are expected to be 140,000 to 150,000 tons in the second quarter of 2010 and 525,000 to 575,000 tons for the year. Finished lumber sales volume will continue to be subject to market conditions, and is estimated at 65 to 75 million board feet for the second quarter and 240 to 260 million board feet for the year. Residential lot sales are projected to be four to six lots and 20 to 30 lots for the second quarter and the year, respectively.

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.

 

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Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risk has not changed significantly from that set forth under the caption “Quantitative and Qualitative Disclosures About Market Risk,” in item 7A of Part II of its 2009 annual report on Form 10-K. Those disclosures should be read in conjunction with this Form 10-Q.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Deltic Timber Corporation (“the Company” or “Deltic”) has established disclosure controls and procedures to ensure that material information relating to the Company including its consolidated subsidiaries is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors.

Based on their evaluation as of March 31, 2010, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

Changes in Internal Control Over Financial Reporting

Deltic’s management, with the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter, and have concluded that there was no change to Deltic’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect Deltic’s internal control over financial reporting.

 

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Table of Contents

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A of Part I in the Company’s 2009 annual report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchase of Equity Securities

 

    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
1

Jan. 1 through Jan. 31, 2010

           $20,434,011

Feb. 1 through Feb. 28, 2010

   6062   $43.00       $20,434,011

Mar. 1 through Mar. 31, 2010

           $20,434,011

1In December 2000, the Company’s Board of Directors authorized a stock repurchase plan of up to $10 million of Deltic common stock. In December 2007, this plan was expanded by $25 million. There is no stated expiration date regarding this authorization.

2Represents shares withheld to pay taxes in connection with vesting of restricted stock awards.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Removed and Reserved

None.

 

Item 5. Other Information

None.

 

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Item 6.     Exhibits     
    Index to Exhibits
         

Exhibit
Designation

       

Nature of Exhibit

   

31.1

     Chief Executive Officer Certification Required by Section 302 of the Sarbanes-Oxley Act of 2002.
   

31.2

     Chief Financial Officer Certification Required by Section 302 of the Sarbanes-Oxley Act of 2002.
   

32

     Certification Required by Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DELTIC TIMBER CORPORATION

 

Date:

 

May 6, 2010

    By:  

/s/ Ray C. Dillon

       

Ray C. Dillon, President

(Principle Executive Officer)

Date:

 

May 6, 2010

    By:  

/s/ Kenneth D. Mann

       

Kenneth D. Mann, Vice President,

Finance and Administration

(Principle Financial Officer)

Date:

 

May 6, 2010

    By:  

/s/ Byrom L. Walker

       

Byrom L. Walker, Controller

(Principal Accounting Officer)

 

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