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Deltic Timber 10-Q 2014
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, 2014

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  x    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, 2014, was 12,709,144.

 

 

 


Table of Contents

TABLE OF CONTENTS – FIRST QUARTER 2014 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      21   
Item    3.   Quantitative and Qualitative Disclosures About Market Risk      30   
Item    4.   Controls and Procedures      31   
     PART II – Other Information   
Item    1.   Legal Proceedings      32   
Item    1A.   Risk Factors      32   
Item    2.   Unregistered Sales of Equity Securities and Use of Proceeds      32   
Item    3.   Defaults Upon Senior Securities      32   
Item    4.   Mine Safety Disclosures      32   
Item    5.   Other Information      32   
Item    6.   Exhibits      33   
Signatures        34   


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

(Thousands of dollars)

 

     March 31,
2014
    December 31,
2013
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 6,507        4,374   

Trade accounts receivable, net of allowance for doubtful accounts of $141 and $172, respectively

     11,102        7,331   

Inventories

     14,317        12,439   

Prepaid expenses and other current assets

     3,382        3,155   
  

 

 

   

 

 

 

Total current assets

     35,308        27,299   

Investment in real estate held for development and sale

     57,096        57,953   

Timber and timberlands – net

     355,392        248,833   

Property, plant, and equipment – net

     73,624        75,259   

Deferred charges and other assets

     2,058        2,000   
  

 

 

   

 

 

 

Total assets

   $ 523,478        411,344   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Trade accounts payable

   $ 7,838        8,198   

Accrued taxes other than income taxes

     2,485        2,210   

Income taxes payable

     2,766        1,077   

Deferred revenues and other accrued liabilities

     8,184        10,330   
  

 

 

   

 

 

 

Total current liabilities

     21,273        21,815   

Long-term debt

     199,000        90,000   

Deferred tax liabilities – net

     7,495        7,514   

Other noncurrent liabilities

     25,058        25,743   

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

     84,168        84,796   

Retained earnings

     193,360        189,720   

Treasury stock

     (4,366     (5,693

Accumulated other comprehensive loss

     (2,638     (2,679
  

 

 

   

 

 

 

Total stockholders’ equity

     270,652        266,272   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 523,478        411,344   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

1


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

 

(Thousands of dollars, except per share amounts)

 

     Three Months Ended
March 31,
 
     2014     2013  

Net sales

   $ 55,379        41,563   
  

 

 

   

 

 

 

Costs and expenses

    

Cost of sales

     36,606        23,528   

Depreciation, amortization, and cost of fee timber harvested

     4,843        2,651   

General and administrative expenses

     5,123        4,920   
  

 

 

   

 

 

 

Total costs and expenses

     46,572        31,099   

Gain on involuntary conversion

     —          84   
  

 

 

   

 

 

 

Operating income

     8,807        10,548   

Equity in earnings of Del-Tin Fiber

     —          1,084   

Interest income

     2        3   

Interest and other debt expense, net of capitalized interest

     (1,175     (1,030

Other income/(expense)

     61        (20
  

 

 

   

 

 

 

Income before income taxes

     7,695        10,585   

Income tax expense

     (2,784     (3,811
  

 

 

   

 

 

 

Net income

   $ 4,911        6,774   
  

 

 

   

 

 

 

Earnings per common share

    

Basic

   $ .39        .53   

Assuming dilution

   $ .39        .53   

Dividends declared and paid per common share

   $ .10        .10   

Weighted average common shares outstanding (thousands)

    

Basic

     12,557        12,563   

Assuming dilution

     12,606        12,604   

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

 

(Thousands of dollars)

 

     Three Months Ended
March 31,
 
     2014     2013  

Net income

   $ 4,911        6,774   
  

 

 

   

 

 

 

Other comprehensive income

    

Items related to employee benefit plans:

    

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

    

Amortization of prior service cost

     2        1   

Amortization of actuarial loss

     69        142   

Amortization of plan amendment

     (30     (30
  

 

 

   

 

 

 

Other comprehensive income

     41        113   
  

 

 

   

 

 

 

Comprehensive income

   $ 4,952        6,887   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

(Thousands of dollars)

 

     Three Months Ended
March 31,
 
     2014     2013  

Operating activities

    

Net income

   $ 4,911        6,774   

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

    

Depreciation, amortization, and cost of fee timber harvested

     4,843        2,651   

Deferred income taxes

     (316     548   

Real estate development expenditures

     (284     (191

Real estate costs recovered upon sale

     1,039        539   

Timberland costs recovered upon sale

     81        139   

Equity in earnings of Del-Tin Fiber

     —          (1,084

Stock-based compensation expense

     802        664   

Net increase in liabilities for pension and other postretirement benefits

     199        500   

Net decrease in deferred compensation for stock-based liabilities

     (601     (590

Increase in operating working capital other than cash and cash equivalents

     (7,015     (443

Other – changes in assets and liabilities

     45        (496
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,704        9,011   
  

 

 

   

 

 

 

Investing activities

    

Capital expenditures requiring cash, excluding real estate development

     (108,939     (11,833

Net change in purchased stumpage inventory

     (362     (944

Advances to Del-Tin Fiber

     —          (1,025

Repayments from Del-Tin Fiber

     —          750   

Net change in funds held by trustee

     (125     7   

Other – net

     90        193   
  

 

 

   

 

 

 

Net cash required by investing activities

     (109,336     (12,852
  

 

 

   

 

 

 

Financing activities

    

Proceeds from borrowings

     109,000        12,000   

Treasury stock purchases

     (8     (10

Common stock dividends paid

     (1,271     (1,270

Proceeds from stock option exercises

     54        750   

Excess tax benefits from stock-based compensation expense

     143        170   

Other – net

     (153     —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     107,765        11,640   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     2,133        7,799   

Cash and cash equivalents at January 1

     4,374        5,613   
  

 

 

   

 

 

 

Cash and cash equivalents at March 31

   $ 6,507        13,412   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

(Thousands of dollars)

 

     Three Months Ended
March 31,
 
     2014     2013  

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 2014 and 2013

     128        128   
  

 

 

   

 

 

 

Capital in excess of par value

    

Balance at beginning of period

     84,796        82,597   

Exercise of stock options

     9        124   

Stock-based compensation expense

     802        664   

Restricted stock awards

     (1,290     (935

Tax effect of stock awards

     (149     172   

Restricted stock forfeitures

     —          41   
  

 

 

   

 

 

 

Balance at end of period

     84,168        82,663   
  

 

 

   

 

 

 

Retained earnings

    

Balance at beginning of period

     189,720        168,608   

Net income

     4,911        6,774   

Common stock dividends

     (1,271     (1,270
  

 

 

   

 

 

 

Balance at end of period

     193,360        174,112   
  

 

 

   

 

 

 

Treasury stock

    

Balance at beginning of period – 134,609 and 141,974 shares, respectively

     (5,693     (5,000

Shares purchased – 115 and 134 shares, respectively

     (8     (10

Forfeited restricted stock – none and 570 shares, respectively

     —          (41

Shares issued for incentive plans – 29,989 and 43,998 shares, respectively

     1,335        1,561   
  

 

 

   

 

 

 

Balance at end of period – 104,735 and 98,680 shares, respectively

     (4,366     (3,490
  

 

 

   

 

 

 

Accumulated other comprehensive loss

    

Balance at beginning of period

     (2,679     (14,103

Change in other comprehensive income net of tax

     41        113   
  

 

 

   

 

 

 

Balance at end of period

     (2,638     (13,990
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 270,652        239,423   
  

 

 

   

 

 

 

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, 2013. 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.

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, 2014, and the results of its operations and cash flows for the three months ended March 31, 2014 and 2013. These consolidated financial statements are not necessarily indicative of results to be expected for the full year. The Company has evaluated subsequent events through the date the financial statements were issued.

Note 2 – Inventories

Inventories at the balance sheet dates consisted of the following:

 

(Thousands of dollars)    March 31,
2014
     Dec. 31,
2013
 

Raw materials

   - Logs    $ 1,378         1,612   
   - Del-Tin – wood fiber      370         440   

Finished goods

   - Lumber      4,880         4,145   
   - Medium density fiberboard (“MDF”)      4,024         3,110   
   - MDF consigned to others      897         708   

Supplies

        2,768         2,424   
     

 

 

    

 

 

 
      $ 14,317         12,439   
     

 

 

    

 

 

 

 

6


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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,
2014
     Dec. 31,
2013
 

Short-term deferred tax assets

   $ 1,880         1,901   

Refundable income taxes

     —           109   

Prepaid expenses

     935         692   

Other current assets

     567         453   
  

 

 

    

 

 

 
   $ 3,382         3,155   
  

 

 

    

 

 

 

Note 4 – Business Combinations

On April 1, 2013, the Company acquired the remaining 50 percent membership interest of Del-Tin Fiber L.L.C. (“Del-Tin Fiber”) for an agreed-upon amount of approximately $20,000,000, which was considered to be comprised of a cash payment of $5,170,000 and the value of 50 percent of the long-term debt. Del-Tin Fiber was an existing joint venture that operates an MDF manufacturing facility in El Dorado, Arkansas. The acquisition resulted in Deltic obtaining a controlling financial interest in Del-Tin Fiber due to the Company’s 100 percent ownership of the membership interest of Del-Tin Fiber. As a result, Deltic began treating Del-Tin Fiber as a consolidated subsidiary of the Company as of the acquisition date. Prior to the acquisition, the Company reported Del-Tin Fiber as an equity method investment.

The table below summarizes the allocation of the purchase price to the fair value of assets and liabilities acquired on April 1, 2013, which was finalized in the fourth quarter of 2013.

 

(Thousands of dollars)       

Accounts receivable

   $ 4,229   

Inventories

     4,805   

Other current assets

     360   

Property, plant, and equipment

     40,960   

Intangible assets1

     1,700   

Other assets

     171   

Current liabilities

     (1,653

Deferred tax liabilities

     (2,203

Long-term liabilities

     (29,000
  

 

 

 

Net assets acquired

   $ 19,369   
  

 

 

 

 

1 

The acquired intangible assets consist of internally developed software which is being amortized over three years.

 

7


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 4 – Business Combinations (cont.)

 

The results of Del-Tin Fiber’s operations have been included in the consolidated financial statements subsequent to the acquisition date and were included in the Company’s Manufacturing segment.

The following unaudited supplemental pro forma financial information for the three months ended March 31, 2013 represents the results of operations of Deltic Timber Corporation as if the Del-Tin Fiber acquisition had occurred on January 1, 2013. This information is based on historical results of operations, adjusted for certain acquisition accounting adjustments, and does not purport to represent Deltic’s actual results of operation as if the acquisition transaction described above would have occurred as of January 1, 2013, nor is it necessarily indicative of future results.

 

(Thousands of dollars, except per share amounts)    Three Months Ended
March 31, 2013
 

Net sales

   $ 59,129   

Net income

     7,210   

Basic and diluted earnings per common share

     .57   

For additional information concerning the acquisition of Del-Tin Fiber, see Note 4 of the Notes to Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013.

Note 5 – Timber and Timberlands

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

 

(Thousands of dollars)    March 31,
2014
    Dec. 31,
2013
 

Purchased stumpage inventory

   $ 2,750        2,388   

Timberlands

     150,966        102,609   

Fee timber

     313,454        253,768   

Logging facilities

     2,628        2,628   
  

 

 

   

 

 

 
     469,798        361,393   

Less accumulated cost of fee timber harvested and facilities depreciation

     (114,821     (113,056
  

 

 

   

 

 

 

Strategic timber and timberlands

     354,977        248,337   

Non-strategic timber and timberlands

     415        496   
  

 

 

   

 

 

 
   $ 355,392        248,833   
  

 

 

   

 

 

 

During the first quarter of 2014, Deltic acquired approximately 64,500 acres of timber and timberland for $106,627,000.

 

8


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 5 – Timber and Timberlands (cont.)

 

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 timberlands 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 that they are either smaller tracts of pine timberlands that cannot be strategically managed or tracts of hardwood bottomland that cannot be converted into pine-growing acreage, they will be sold. As of March 31, 2014, approximately 840 acres of these lands were available for sale. Included in the Woodlands operating income are gains from sales of non-strategic timberland of $72,000 and $378,000 for the three months ended March 31, 2014 and 2013, 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,
2014
    Dec. 31,
2013
 

Land

   $ 947        947   

Land improvements

     8,870        8,835   

Buildings and structures

     22,659        22,599   

Machinery and equipment

     147,066        145,741   
  

 

 

   

 

 

 
     179,542        178,122   

Less accumulated depreciation

     (105,918     (102,863
  

 

 

   

 

 

 
   $ 73,624        75,259   
  

 

 

   

 

 

 

Note 7 – Deferred Revenues and Other Accrued Liabilities

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

 

                                           
(Thousands of dollars)    March 31,
2014
     Dec. 31,
2013
 

Deferred revenues – current

   $ 2,952         3,697   

Vacation accrual

     1,335         1,290   

Deferred compensation

     1,309         3,442   

All other current liabilities

     2,588         1,901   
  

 

 

    

 

 

 
   $ 8,184         10,330   
  

 

 

    

 

 

 

 

9


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 8 – Other Noncurrent Liabilities

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

 

(Thousands of dollars)    March 31,
2014
     Dec. 31,
2013
 

Accumulated postretirement benefit obligation

   $ 10,541         10,391   

Excess retirement plan

     4,566         4,457   

Accrued pension liability

     6,264         6,383   

Deferred revenue – long-term portion

     602         649   

Uncertain tax positions liability

     1,185         1,185   

Other noncurrent liabilities

     1,900         2,678   
  

 

 

    

 

 

 
   $ 25,058         25,743   
  

 

 

    

 

 

 

Note 9 – Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2014, was 36 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, 2014, the Company recognized $46,000 in interest expense from these items. The Company had approximately $685,000 accrued in deferred revenues and other accrued liabilities for interest and penalties at March 31, 2014. If the Company were to prevail on all unrecognized tax benefits recorded on the balance sheet, approximately $776,000 would benefit the effective rate. The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2010.

 

10


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)    2014     2013  

Funded qualified retirement plan

    

Service cost

   $ 369        387   

Interest cost

     460        389   

Expected return on plan assets

     (573     (473

Amortization of prior service cost

     5        5   

Recognized actuarial loss

     41        213   
  

 

 

   

 

 

 

Net retirement expense

   $ 302        521   
  

 

 

   

 

 

 

Unfunded nonqualified retirement plan

    

Service cost

   $ 76        36   

Interest cost

     93        48   

Amortization of prior service cost

     (2     (3

Recognized actuarial loss

     73        19   
  

 

 

   

 

 

 

Net retirement expense

   $ 240        100   
  

 

 

   

 

 

 

Other postretirement benefits

    

Service cost

   $ 105        113   

Interest cost

     124        108   

Recognized actuarial loss

     —          2   

Amortization of plan amendment

     (50     (50
  

 

 

   

 

 

 

Net other postretirement benefits expense

   $ 179        173   
  

 

 

   

 

 

 

The Company made contributions to its qualified plan of $375,000 during the first three months of 2014, and expects to continue to fund the plan at the same monthly level over the remainder of 2014. The expected long-term rate of return on pension plan assets is 7.50 percent.

 

11


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 11 – Other Comprehensive Income Disclosures

The following tables detail the changes in accumulated other comprehensive loss (“AOCL”) by component for the three months ended March 31, 2014 and 2013:

Changes in Accumulated Other Comprehensive Loss by Component (Net of Tax)

 

(Thousands of dollars)    Defined
Benefit
Funded
Retirement
Plan
    Defined
Benefit
Unfunded

Retirement
Plan
    Post
Retirement
Benefit
Plan
    Total  

AOCL at January 1, 2014

   $ (2,410     (482     213        (2,679

Amounts reclassified from AOCL

     28        43        (30     41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income/(loss)

     28        43        (30     41   
  

 

 

   

 

 

   

 

 

   

 

 

 

AOCL at March 31, 2014

   $ (2,382     (439     183        (2,638
  

 

 

   

 

 

   

 

 

   

 

 

 
(Thousands of dollars)    Defined
Benefit
Funded
Retirement
Plan
    Defined
Benefit
Unfunded

Retirement
Plan
    Post
Retirement
Benefit
Plan
    Total  

AOCL at January 1, 2013

   $ (9,552     (3,380     (1,171     (14,103

Amounts reclassified from AOCL

     132        10        (29     113   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income/(loss)

     132        10        (29     113   
  

 

 

   

 

 

   

 

 

   

 

 

 

AOCL at March 31, 2013

   $ (9,420     (3,370     (1,200     (13,990
  

 

 

   

 

 

   

 

 

   

 

 

 

 

12


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 11 – Other Comprehensive Income Disclosures (cont.)

 

Reclassification Out of Accumulated Other Comprehensive Loss

Details about AOCL Components

 

     Three Months Ended March 31, 2014  
(Thousands of dollars)    Defined
Benefit
Funded
Retirement
Plan
    Defined
Benefit
Unfunded
Retirement
Plan
    Post
Retirement
Benefit
Plan
    Total  

Amortization of prior service costs

   $ 5        (2     —          3   

Amortization of actuarial losses

     41        73        —          114   

Amortization of plan amendment

     —          —          (50     (50
  

 

 

   

 

 

   

 

 

   

 

 

 

Total before tax

     46        71        (50     67   

Income tax expense

     (18     (28     20        (26
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications – net of tax

   $ 28        43        (30     41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts in parentheses indicate expenses. These items are included in the computation of net periodic retirement and postretirement costs. See Note 10 – Employee and Retiree Benefit Plans.

 

     Three Months Ended March 31, 2013  
(Thousands of dollars)    Defined
Benefit
Funded
Retirement
Plan
    Defined
Benefit
Unfunded
Retirement
Plan
    Post
Retirement
Benefit
Plan
    Total  

Amortization of prior service costs

   $ 5        (3     —          2   

Amortization of actuarial losses

     213        19        2        234   

Amortization of plan amendment

     —          —          (50     (50
  

 

 

   

 

 

   

 

 

   

 

 

 

Total before tax

     218        16        (48     186   

Income tax expense

     (86     (6     19        (73
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications – net of tax

   $ 132        10        (29     113   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts in parentheses indicate expenses. These items are included in the computation of net periodic retirement and postretirement costs. See Note 10 – Employee and Retiree Benefit Plans.

 

13


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 11 – Other Comprehensive Income Disclosures (cont.)

 

Tax Effects by Component

 

     Three Months Ended March 31, 2014  
(Thousands of dollars)    Before
Tax
Amount
    Tax
(Expense)
or Benefit
    Net of
Tax
Amount
 

Amortization of prior service costs

   $ 3        (1     2   

Amortization of actuarial losses

     114        (45     69   

Amortization of plan amendment

     (50     20        (30
  

 

 

   

 

 

   

 

 

 
   $ 67        (26     41   
  

 

 

   

 

 

   

 

 

 

 

     Three Months Ended March 31, 2013  
(Thousands of dollars)    Before
Tax
Amount
    Tax
(Expense)
or Benefit
    Net of
Tax
Amount
 

Amortization of prior service costs

   $ 2        (1     1   

Amortization of actuarial losses

     234        (92     142   

Amortization of plan amendment

     (50     20        (30
  

 

 

   

 

 

   

 

 

 
   $ 186        (73     113   
  

 

 

   

 

 

   

 

 

 

Note 12 – Stock-Based Compensation

The Consolidated Statements of Income for the three months ended March 31, 2014 and 2013, included $802,000 and $664,000, respectively, of stock-based compensation expense reflected in general and administrative expenses.

Assumptions for the valuation of 2014 stock options and restricted stock performance units consisted of the following:

 

     2014  

Expected term of options (in years)

     6.27   

Weighted expected volatility

     37.38

Dividend yield

     .55

Risk-free interest rate – performance restricted shares

     1.23

Risk-free interest rate – options

     2.99

Stock price as of valuation date

   $ 63.21   

Restricted performance share valuation

   $ 80.56   

Grant date fair value – stock options

   $ 21.87   

 

14


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 12 – Stock-Based Compensation (cont.)

 

Stock Options – A summary of stock options as of March 31, 2014, 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, 2014

     131,456      $ 59.64         

Granted

     26,611        63.35         

Exercised

     (1,077     49.89         

Expired

     (460     36.61         
  

 

 

         

Outstanding at March 31, 2014

     156,530      $ 60.40         6.8       $ 970   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at March 31, 2014

     92,329      $ 56.18         5.4       $ 905   
  

 

 

   

 

 

    

 

 

    

 

 

 

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, 2014, 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. As of March 31, 2014, there was $1,424,000 of unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 2.3 years.

Restricted Stock and Restricted Stock Units – A summary of nonvested restricted stock as of March 31, 2014, 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, 2014

     79,591      $ 62.31   

Granted

     24,951        63.30   

Vested

     (19,132     44.84   
  

 

 

   

 

 

 

Nonvested at March 31, 2014

     85,410      $ 66.51   
  

 

 

   

As of March 31, 2014, there was $3,523,000 of unrecognized compensation cost related to nonvested restricted stock. That cost is expected to be recognized over a weighted-average period of 2.5 years.

 

15


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 12 – Stock-Based Compensation (cont.)

 

Performance Units – A summary of nonvested restricted stock performance units as of March 31, 2014, 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, 2014

     52,625      $ 80.87   

Granted

     16,613        80.70   

Units not meeting vesting conditions

     (12,652     58.66   
  

 

 

   

 

 

 

Nonvested at March 31, 2014

     56,586      $ 85.78   
  

 

 

   

As of March 31, 2014, there was $3,001,000 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 13 – Contingencies

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

Note 14 – 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.

Following is a description of the valuation methodologies used for assets and 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.

 

16


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 14 – Fair Value of Financial Instruments (cont.)

 

The fair value measurements for the Company’s financial liabilities accounted for at fair value on a recurring basis at March 31, 2014, are presented in the following table:

 

            Fair Value Measurements at Reporting Date Using:  
     March 31,      Quoted Prices in
Active  Markets

for Identical
Liabilities

Inputs
     Significant
Observable
Inputs
     Significant
Unobservable
Inputs
 
(Thousands of dollars)    2014      Level 1      Level 2      Level 3  

Liabilities

           

Nonqualified employee savings plan

   $ 1,345         1,345         —           —     

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.

The following table presents the carrying amounts and estimated fair values of financial instruments at March 31, 2014 and 2013. 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.

 

     March 31, 2014      March 31, 2013  
(Thousands of dollars)    Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial liabilities

           

Long-term debt, including current liabilities

   $ 199,000         203,218       $ 75,000         80,028   

 

17


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 15 – Earnings per Common Share

The amounts used in computing earnings per share and the effect on income and weighted average number of shares outstanding of dilutive potential common stock consisted of the following:

 

     Three Months Ended
March 31,
 
(Thousands, except per share amounts)    2014      2013  

Net earnings allocated to common stock

   $ 4,859         6,706   

Net earnings allocated to participating securities

     52         68   
  

 

 

    

 

 

 

Net income allocated to common stock and participating securities

   $ 4,911         6,774   
  

 

 

    

 

 

 

Weighted average number of common shares used in basic EPS

     12,557         12,563   

Effect of dilutive stock awards

     49         41   
  

 

 

    

 

 

 

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

     12,606         12,604   
  

 

 

    

 

 

 

Earnings per common share

     

Basic

   $ .39         .53   

Assuming dilution

   $ .39         .53   

Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method.

The following table provides information about potentially dilutive securities that were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive, or in the case of the restricted performance shares, did not meet the metrics established for awarding.

 

     Three Months Ended
March 31,
 
     2014      2013  

Options

     50,657         24,058   

Restricted performance shares

     56,586         52,625   

 

18


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 16 – Supplemental Cash Flow Disclosures

Additional information concerning cash flows is as follows:

 

     Three Months Ended
March 31,
 
(Thousands of dollars)    2014     2013  

Income taxes paid in cash

   $ 1,158        —     

Interest paid

     414        109   

Interest capitalized

     (29     (9

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

 

     Three Months Ended
March 31,
 
(Thousands of dollars)    2014      2013  

Issuance of restricted stock

   $ 1,290         935   

Land exchanges and capital expenditures accrued, not paid

     546         1,389   

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

 

     Three Months Ended
March 31,
 
(Thousands of dollars)    2014     2013  

Trade accounts receivable

   $ (3,771     (2,186

Inventories

     (1,878     (722

Prepaid expenses and other current assets

     (261     (593

Trade accounts payable

     (907     635   

Accrued taxes other than income taxes

     275        487   

Income taxes payable

     1,689        2,967   

Deferred revenues and other accrued liabilities

     (2,162     (1,031
  

 

 

   

 

 

 
   $ (7,015     (443
  

 

 

   

 

 

 

 

19


Table of Contents

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)    2014     2013  

Net sales

    

Woodlands

   $ 10,402        9,373   

Manufacturing2

     46,540        34,108   

Real Estate

     3,503        2,329   

Eliminations1

     (5,066     (4,247
  

 

 

   

 

 

 
   $ 55,379        41,563   
  

 

 

   

 

 

 

Income before income taxes

    

Operating income

    

Woodlands

   $ 5,313        4,634   

Manufacturing2

     8,342        11,337   

Real Estate

     153        (644

Corporate

     (4,826     (4,643

Eliminations

     (175     (136
  

 

 

   

 

 

 

Operating income

     8,807        10,548   

Equity in earnings of Del-Tin Fiber2

     —          1,084   

Interest income

     2        3   

Interest and other debt expense, net of capitalized interest

     (1,175     (1,030

Other income/(expense)

     61        (20
  

 

 

   

 

 

 
   $ 7,695        10,585   
  

 

 

   

 

 

 

Depreciation, amortization, and cost of fee timber harvested

    

Woodlands

   $ 1,803        1,292   

Manufacturing2

     2,937        1,250   

Real Estate

     83        85   

Corporate

     20        24   
  

 

 

   

 

 

 
   $ 4,843        2,651   
  

 

 

   

 

 

 

Capital expenditures

    

Woodlands

   $ 108,044        10,279   

Manufacturing2

     1,424        2,788   

Real Estate

     298        342   

Corporate

     3        4   
  

 

 

   

 

 

 
   $ 109,769        13,413   
  

 

 

   

 

 

 

 

1 

Primarily intersegment sales of timber from Woodlands to Manufacturing.

2 

Del-Tin Fiber became a consolidated subsidiary, reported in the Manufacturing segment, upon acquisition of a controlling interest of its ownership effective April 1, 2013.

 

20


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

Executive Overview

The Company reported net income of $4.9 million for the first quarter of 2014, compared to $6.8 million for the first quarter of 2013. The decrease was primarily due to lower operating income for the Manufacturing segment, which reported operating income of $8.3 million, a decrease of $3 million when compared to the first quarter of 2013. This reduction was mainly the result of slowed residential home construction activity throughout much of the United States that resulted in lower sales volumes and average sales prices for wood products. Deltic’s management believes persistent winter weather conditions played a large role in this decrease in construction. The decrease in operating income for the Manufacturing segment was partially offset by improvements in operating income for the Woodlands and Real Estate segments. The Woodlands segment provided $5.3 million in operating income in the current-year quarter, $.7 million more than in the same period a year ago. The Real Estate segment’s operating income was $.2 million, a $.9 million improvement from the first quarter of 2013, due to an increase in the number of residential lots sold. Corporate segment operating expense was $4.8 million in the first quarter of 2014, a $.2 million increase from the corresponding period of 2013.

Deltic is a vertically integrated natural resources company operating in a commodity-based business environment that is engaged in the growing and harvesting of timber, and the manufacture and marketing of lumber and medium density fiberboard (“MDF”), with a major diversification in real estate development. The Company’s operations and financial results are affected by a number of factors which include, but are not limited to, general economic conditions, U.S. employment levels, interest rates, credit availability and associated costs, imports of lumber and MDF, foreign exchange rates, housing starts, new and existing home inventories, residential and commercial real estate foreclosures, residential and commercial repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw materials, natural gas pricing and weather conditions. Residential construction activity slowed somewhat in the first quarter of 2014, due to harsh winter weather conditions experienced in the United States and market slowdown. Home builders believe that the low inventories of homes for sale indicates possible pent-up demand for houses once the weather has allowed home construction activity to increase. As with most commodity markets, and given Deltic’s relative size, the Company maintains little or no influence over the market’s pricing levels or demand for its wood products. However, Deltic’s management will continue to use its vertical integration strategy, diversity of assets, and the ability to quickly adapt production levels to capture market opportunities being created by the housing recovery.

The Woodlands segment serves as the foundation of Deltic’s vertically integrated strategy, supplying a significant percentage of the Manufacturing segment’s raw material stumpage needs. The pine sawtimber harvest in the first quarter of 2014 was 209,548 tons, a 16 percent increase from the 181,069 tons harvested in the first quarter of 2013, due to timing of the tracts harvested. The timing, combined with the mix of sawtimber on those tracts, allowed the Company to accelerate the annual harvest in the current quarter. The average per-ton sales price for pine sawtimber was $24, compared to $23 per ton received in 2013’s first quarter. The pine pulpwood harvest volume for the first quarter of 2014 was 109,009 tons, an 11,999 ton increase from the first quarter of 2013, while the average per-ton sales price decreased $1 to $8 per ton. The increase in pine pulpwood harvested was mainly due to the mix of inventory growing on the tracts harvested. During the current year’s first quarter, the Company sold 160 acres of non-strategic recreational-use bottomland, at an average sales price of $1,000 per acre versus 288 acres at $1,800 per acre in 2013’s first quarter. However, during the first quarter of 2014, Deltic acquired approximately 64,500 acres of pine timberland within its current operating regions.

The Woodlands segment’s operating results include other benefits derived from land ownership, such as revenues from hunting leases, mineral lease rentals, mineral royalties, and land easements. Hunting lease revenues were $.6 million in the first quarter of both 2014 and 2013. Oil and gas lease rental income was $.4 million in the first quarter of both 2014 and 2013. Oil and gas royalty payments received, primarily from wells in the Fayetteville Shale Play, totaled $1.1 million in the first quarter of 2014, compared to the $.9 million received in the first quarter a year ago. The increase was due to higher production volumes of natural gas, due to an increase in the number of producing wells, combined with higher sales prices received for natural gas produced. 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.

 

21


Table of Contents

The Manufacturing segment produces both dimension lumber and MDF. The Company sold 64.3 million board feet of lumber in the first quarter of 2014, a decrease of 6.8 million board feet when compared to 71.1 million board feet sold in the same period of 2013. The ten percent decrease in sales volume was mainly due to reduced construction activity caused by harsh winter weather conditions during the first quarter of 2014. The average lumber sales price received in the current quarter of $378 per thousand board feet was a $24 per thousand board feet, or six percent, decrease from the same period of 2013. The segment also sold 28.5 million square feet of MDF in the first quarter of 2014. The average sales price for MDF during the first quarter of 2014 was $577 per thousand square feet sold. During the same quarter of 2013, while the plant was still a joint venture, the sales volume of MDF was 29.1 million square feet and the average sales price was $573 per thousand square feet. Because of the historical volatility in the lumber and MDF markets, Deltic closely monitors market conditions and plans to react quickly to adjust production levels to meet changes in demand.

The Real Estate segment sold 23 residential lots during the first quarter of 2014, with an average per-lot sales price of $88,900, compared to sales of 12 lots with an average per-lot sales price of $74,400 in 2013’s first quarter. The majority of the lots sold in the first quarter of 2014 were the result of the lots put under contract in a new neighborhood in Chenal Valley when it was offered for sale in the fourth quarter of 2013. The increase in the per-lot sales price was due to the mix of lots sold. No commercial acreage sales occurred in either the first quarter of 2014 or 2013. The commercial real estate acreage within Chenal Valley continues to receive interest from potential buyers, especially, property located near “The Promenade at Chenal,” an upscale shopping center that includes internationally branded retailers, and property located adjacent to St. Vincent West, a medical center that recently opened. However, due to the unpredictable nature of commercial real estate sales activity, the Company cannot anticipate the timing of closing for any commercial real estate transaction.

Effective in the second quarter of 2013, as a result of the acquisition of the remaining ownership of the Del-Tin Fiber facility, financial results of Del-Tin Fiber were included in Deltic’s Manufacturing segment. Prior to this, the results were accounted for under the equity method. Therefore, no equity in earnings was reported in the first quarter of 2014, while for the first quarter of 2013, the Company reported $1.1 million in equity earnings. (For additional information, refer to Note 4 to the Consolidated Financial Statements.)

In March 2014, Deltic successfully completed a 64,443-acre acquisition of timberland in the Company’s Ola Woodlands Region that will be strategically beneficial to its operations there, as the pine sawtimber harvested from this land will be processed into lumber in the Company’s Ola Sawmill. The acreage is contiguous, which is highly desirable to efficiently manage it and was previously under management by Forest Investment Associates. It is highly complementary to the other Deltic timberland in the Ola Region, and is located only 35 miles from the Ola Sawmill. The timber growing on this acreage was essentially all pine, with approximately 65 percent in the pine sawtimber class, and consisted primarily of pine plantations, with a good distribution, ranging from newly planted stands to mature tracts of 31 plus year old. (For additional information, refer to Note 5 to the Consolidated Financial Statements.)

 

22


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, 2014 and 2013. 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)    2014     2013  

Net sales

    

Woodlands

   $ 10.4        9.3   

Manufacturing

     46.5        34.1   

Real Estate

     3.5        2.3   

Eliminations

     (5.0     (4.2
  

 

 

   

 

 

 

Net sales

   $ 55.4        41.5   
  

 

 

   

 

 

 

Operating income/(loss)

    

Woodlands

   $ 5.3        4.6   

Manufacturing

     8.3        11.3   

Real Estate

     .2        (.7

Corporate

     (4.8     (4.6

Eliminations

     (.2     (.1
  

 

 

   

 

 

 

Operating income

     8.8        10.5   

Equity in earnings of Del-Tin Fiber1

     —          1.1   

Interest and other debt expense

     (1.2     (1.0

Other income

     .1        —     

Income taxes

     (2.8     (3.8
  

 

 

   

 

 

 

Net income

   $ 4.9        6.8   
  

 

 

   

 

 

 

Earnings per common share

    

Basic and assuming dilution

   $ .39        .53   

 

1 

For the first quarter of 2014, Del-Tin Fiber’s results were consolidated into the Manufacturing segment, while during the first quarter of 2013, results from Del-Tin Fiber were reported in equity in earnings of Del-Tin Fiber.

Consolidated

Net income for the first quarter of 2014 was $4.9 million, a $1.9 million decrease from the first quarter of 2013. Lower financial results from the Manufacturing segment, combined with increased Corporate general and administrative expenses, were partially offset by improved financial results for the Woodlands and Real Estate segments. Income tax expense was less due to lower pretax income.

Operating income decreased $1.7 million from the first quarter of 2013. The Woodlands segment’s operating income was $.7 million more than the prior year due to a higher volume of pine sawtimber harvested; an increase in net oil and gas royalty revenue; and lower replanting expense on fee timberlands; partially offset by a lower margin on timberland sold, due to fewer acres sold, and a higher cost of fee timber harvested. The Manufacturing segment’s operating income decreased by $3 million in the current quarter, due to reduced lumber sales volumes and prices, partially offset by the inclusion of the MDF plant’s operating income in the current-year first quarter. The Real Estate segment results increased $.9 million due to the increase in the number of residential lots sold from the prior year. Corporate expense was $.2 million higher in the current quarter, due to increased general and administrative expenses.

 

23


Table of Contents

Woodlands

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

 

     Quarter Ended March 31,  
     2014      2013  

Net sales (millions of dollars)

     

Pine sawtimber

   $ 4.9         4.1   

Pine pulpwood

     .9         .9   

Hardwood sawtimber

     .1         —     

Hardwood pulpwood

     .3         .2   

Oil and gas lease rentals

     .4         .4   

Oil and gas royalties

     1.1         .9   

Hunting leases

     .6         .6   

Hauling to other mills

     1.8         1.6   

Sales volume (thousands of tons)

     

Pine sawtimber

     209.5         181.1   

Pine pulpwood

     109.0         97.0   

Hardwood sawtimber

     1.7         .9   

Hardwood pulpwood

     17.5         14.6   

Sales price (per ton)

     

Pine sawtimber

   $ 24         23   

Pine pulpwood

     8         9   

Hardwood sawtimber

     43         39   

Hardwood pulpwood

     16         12   

Timberland

     

Net sales (millions of dollars)

   $ .2         .5   

Sales volume (acres)

     160         288   

Sales price (per acre)

   $ 962         1,806   

Net sales increased $1.1 million when compared to the 2013 first quarter. Pine sawtimber sales were higher by $.8 million due to a 16 percent increase in harvest volume and a 4 percent higher average stumpage price. Revenues from sales of non-strategic timberland were $.3 million less, due to decreases in the average sales price per acre and the number of acres sold. Oil and gas royalty revenue increased $.2 million from the amount reported in the first quarter of 2013 due to higher natural gas prices and volume of gas produced. Operating income was $.7 million more than in the 2013 first quarter, due to the same factors affecting net sales, combined with lower expense for replanting fee timberland, but were partially offset by a higher cost of fee timber harvested.

 

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Manufacturing

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

 

     Quarter Ended March 31,  
     2014      2013  

Net sales (millions of dollars)

     

Lumber

   $ 24.3         28.6   

Residual by-products1

     2.7         4.3   

Medium density fiberboard (“MDF”)2

     16.4         N/A   

Freight

     1.2         1.2   

Lumber

     

Finished production (MMBF)

     66.6         70.4   

Sales volume (MMBF)

     64.3         71.1   

Sales price (per MBF)

   $ 378         402   

MDF (3/4 inch basis)2

     

Finished production (MMSF)2

     30.5         N/A   

Sales volume (MMSF)2

     28.5         N/A   

Sales price (per MSF)2

   $ 577         N/A   

 

1 

Intrasegment residual sales have been eliminated in 2014.

2 

Deltic acquired the remaining ownership of Del-Tin Fiber from its joint venture partner on April 1, 2013. Prior to the acquisition Del-Tin Fiber was treated as an equity investment.

Since April 2013, the operating results of Del-Tin Fiber have been consolidated into the Manufacturing segment. Net sales increased $12.4 million over the first quarter of 2013, primarily due to the inclusion of $18.3 million in sales of MDF and related freight revenues in 2014. This increase was partially offset by lower lumber and residual sales revenues of $5.9 million. The average lumber sales price in the first quarter of 2014 decreased $24 per MBF, or six percent, from the average sales price in the first quarter of 2013. The sales volume in the first quarter of 2014 was ten percent lower, as the Company reduced production to match market demand. The average sales price of MDF in 2014 increased by $4 per MSF, to $577 per MSF, while the sales volume decreased by .6 MMSF due primarily to disruptions in some shipping lanes resulting from winter weather conditions. Operating income for the Manufacturing segment was $3 million less in the 2014 period, due to the same items affecting net sales.

As a result of the acquisition of Del-Tin Fiber, selected information below has been included for comparative purposes which represents results for Del-Tin Fiber for the three months ended March 31, 2013.

 

     2013  

MDF (3/4 inch basis)*

  

Net sales (millions of dollars)

   $ 16.7   

Finished production (MMSF)

     30.3   

Sales volume (MMSF)

     29.1   

Sales price (per MSF)

   $ 573   

 

* Information presented for 2013 represents the totals for the Del-Tin Fiber joint venture of which the first three months were previously presented as information for an equity investment.

 

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Real Estate

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

 

     Quarter Ended March 31,  
     2014      2013  

Net sales (millions of dollars)

     

Residential lots

   $ 2.0         .9   

Chenal Country Club

     1.3         1.3   

Sales volume

     

Residential lots

     23         12   

Average sales price (thousands of dollars)

     

Residential lots

   $ 89         74   

Net sales for the first quarter of 2014 were $1.2 million higher, due to an increase in the number of residential lots sold and higher average sales price per lot sold. The improved operating income in the first quarter 2014 was due to the increase in the number of residential lots sold and to reduced operating expenses.

Corporate

The $.2 million increase in operating expense for Corporate functions was due to higher general and administrative expenses.

Eliminations

Intersegment sales of timber from Deltic’s Woodlands to the Manufacturing segment increased $.8 million, to $5 million for 2014’s first quarter. During the first quarter of 2014, Deltic transferred an increased volume of fee timber to its sawmills, at a slightly higher per-ton transfer price. Transfer prices reflect that of the market. Intercompany sales elimination exceeded the intercompany cost elimination by $.2 million as the percentage of intercompany fee timber in inventory at the Company’s sawmills increased during the current period.

Income Taxes

The effective income tax rate was 36 percent for the first quarter of both 2014 and 2013.

Liquidity and Capital Resources

Cash Flows and Capital Expenditures

Net cash provided by operating activities totaled $3.7 million for the first three months of 2014 compared to $9 million in 2013. Cash from operations and borrowings on the revolving credit facility provided the cash needed to fund timberland acquisitions and capital expenditures during the period ended March 31, 2014. Changes in operating working capital, other than cash and cash equivalents, required cash of $7 million and $.4 million in 2014 and 2013, 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.

 

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Capital expenditures required cash of $109.2 million in the current-year period and $12 million a year ago. The increase was mainly due to a significant timberland acquisition in the first quarter of 2014. Capital expenditures by segment consisted of the following:

 

     Three Months Ended
March 31,
 
(Thousands of dollars)    2014     2013  

Woodlands, including land exchanges

   $ 108,044        10,279   

Manufacturing

     1,424        2,788   

Real Estate, including development expenditures

     298        342   

Corporate

     3        4   
  

 

 

   

 

 

 

Capital expenditures

     109,769        13,413   

Non-cash land exchanges and accrued liabilities

     (546     (1,389
  

 

 

   

 

 

 

Capital expenditures requiring cash

   $ 109,223        12,024   
  

 

 

   

 

 

 

The net change in purchased stumpage inventory to be utilized in the Company’s sawmill operations used cash of $.4 million in 2014 and $.9 million in 2013. The Company advanced Del-Tin Fiber $1 million in the first quarter of 2013, and received repayments of $.7 million, which was during the period that it was a joint venture. 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, increased $.1 million in 2014 versus no change in 2013. Deltic received proceeds from other investing activities of $.1 million in 2014 and $.2 million in 2013. Deltic had $109 million in net borrowings in 2014 versus $12 million in 2013. Deltic paid dividends on common stock of $1.3 million in 2014 and 2013. Proceeds from stock option exercises and related tax benefits were $.2 million in 2014 and $.9 million in 2013.

Financial Condition

Working capital totaled $14 million at March 31, 2014, and $5.5 million at December 31, 2013. Deltic’s working capital ratio at March 31, 2014 was 1.66 to 1, compared to 1.25 to 1 at the end of 2013. Cash and cash equivalents at the end of the first quarter of 2014 increased $2.1 million from December 31, 2013. Deltic’s long-term debt to stockholders’ equity ratio was .735 to 1 at March 31, 2014 and .338 to 1 at December 31, 2013.

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 $340 million, and includes an option to request an increase in the amount of aggregate revolving commitments by $50 million. As of March 31, 2014, there was $130 million outstanding in borrowings on the credit facility, leaving $210 million 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 Notes 9 and 10 to the consolidated financial statements included in the Company’s 2013 annual report on Form 10-K.)

 

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The table below sets forth the most restrictive ratio of covenants in the credit facility and Senior Notes Payable and status with respect to these covenants as of March 31, 2014 and December 31, 2013.

 

     Covenants
Requirements
    Actual Ratios at
March 31, 2014
    Actual Ratios at
Dec. 31, 2013
 

Leverage ratio should be less than:1

     .60 to 1        .424 to 1        .254 to 1   

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

     —   2      91.03     48.24

Fixed charge coverage ratio should be greater than:3

     2.50 to 1        9.62 to 1        10.04 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. The revolving credit facility requirement is for the leverage ratio to be less than .65 to 1.

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 and have sufficient liquidity to finance operations and pay all obligations. However, depending on future 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, 2014, the Company had expended $16.8 million under this program, with the purchase of 406,694 shares at an average cost of $41.23 per share; no shares have been purchased in 2014. 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.

 

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Table of Contents

Off-Balance Sheet Arrangements, Contractual Obligations, and Commitments

The Company has both funded and unfunded noncontributory defined benefit retirement plans that cover all eligible employees, excluding employees of the subsidiaries. The plans provide defined benefits based on years of service and final average salary. Deltic also has other postretirement benefit plans for all of its eligible retired employees, excluding employees of the subsidiaries. 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 16 to the consolidated financial statements included in the Company’s 2013 annual report on Form 10-K.)

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
2014
     2015
to 2016
     2017
to 2018
     After
2018
 

Contractual cash payment obligations

              

Woodlands committed capital costs

   $ .1         .1         —           —           —     

Real estate development committed capital costs

     10.9         8.2         1.8         .9         —     

Manufacturing committed capital costs

     5.5         5.5         —           —           —     

Long-term debt

     199.0         —           40.0         130.0         29.0   

Interest on debt*

     16.5         4.0         9.0         2.8         .7   

Retirement plans

     3.9         1.3         .6         .4         1.6   

Other postretirement benefits

     4.9         .3         .8         .8         3.0   

Unrecognized tax benefits

     1.2         1.2         —           —           —     

Other liabilities

     3.9         2.0         1.9         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 245.9         22.6         54.1         134.9         34.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other commercial commitment expirations

              

Timber cutting agreements

   $ 1.1         .9         .2         —           —     

Letters of credit

     .6         —           .4         .2         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1.7         .9         .6         .2         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* 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, and capital expenditures, for the foreseeable future.

 

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Table of Contents

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 in conformity with accounting principles generally accepted in the United States, which requires 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 2013 annual report on Form 10-K, and this disclosure should be read in conjunction with this Form 10-Q.

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 155,000 to 165,000 tons in the second quarter of 2014 and 575,000 to 625,000 tons for the year. Finished lumber sales volumes are estimated at 65 to 75 million board feet for the second quarter of 2014 and 270 to 290 million board feet for the year. MDF sales volumes for the second quarter and year of 2014 are estimated to be 25 to 35 million square feet and 110 to 130 million square feet, respectively. Actual lumber and MDF sales volumes are subject to market conditions, as impacted by the level of residential home construction and remodeling activity. Residential lot sales are projected to be 8 to 12 lots and 60 to 80 lots for the second quarter of 2014, and the year, respectively. Even though commercial acreage in Chenal Valley has received interest from potential buyers, it is difficult to anticipate future closings due to the volatile nature of commercial real estate transactions and the significant number of factors related to any sale.

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,” “may,” “will,” “believes,” “should,” “approximately,” “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 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 2013 annual report on Form 10-K. Those disclosures should be read in conjunction with this Form 10-Q.

 

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Table of Contents
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, 2014, 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, and this information was accumulated and communicated to the Company’s Management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

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 2013 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 Programs1
 

Jan. 1 through

          

Jan. 31, 2014

     —          —           —         $ 18,230,681   

Feb. 1 through

          

Feb. 28, 2014

     115 2    $ 64.06         —         $ 18,230,681   

Mar. 1 through

          

Mar. 31, 2014

     —          —           —         $ 18,230,681   

 

1 

In 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.

2 

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

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

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Table of Contents
Item 6. Exhibits

Index to Exhibits

 

Exhibit

Designation

  

Nature of Exhibit

10.27    Asset purchase and sale agreement by and among Hawthorn Timberlands, LLC, Deltic Timber Corporation, and First American Title Insurance Company, dated March 6, 2014, filed herewith.
10.28    Asset purchase and sale agreement by and among Keystone Forest Investments, LLC, Deltic Timber Corporation, and First American Title Insurance Company, dated March 6, 2014, filed herewith.
10.29    Asset purchase and sale agreement by and among Sustainable Growth, LLC, Deltic Timber Corporation, and First American Title Insurance Company, dated March 6, 2014, filed herewith.
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.
101    Interactive Data: The following financial information from Deltic Timber Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2014, formatted in Extensible Business Reporting Language (“XBRL”): (1) the Consolidated Balance Sheets; (2) the Consolidated Statements of Income; (3) the Consolidated Statements of Comprehensive Income; (4) the Consolidated Statements of Cash Flows; (5) the Consolidated Statements of Stockholders’ Equity; and (6) the Notes to Consolidated Financial Statements.

 

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Table of Contents

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 2, 2014       By:  

/s/ Ray C. Dillon

        Ray C. Dillon, President
        (Principal Executive Officer)
Date: May 2, 2014       By:  

/s/ Kenneth D. Mann

        Kenneth D. Mann, Vice President,
        Finance and Administration
        (Principal Financial Officer)
Date: May 2, 2014       By:  

/s/ Byrom L. Walker

        Byrom L. Walker, Controller
        (Principal Accounting Officer)

 

34

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