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Deltic Timber 10-Q 2015

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 September 30, 2015

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 October 21, 2015, was 12,429,464.

 

 

 


Table of Contents

TABLE OF CONTENTS – THIRD QUARTER 2015 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

     20   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     36   
Item 4.  

Controls and Procedures

     36   
PART II – Other Information   
Item 1.  

Legal Proceedings

     37   
Item 1A.  

Risk Factors

     37   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     37   
Item 3.  

Defaults Upon Senior Securities

     37   
Item 4.  

Mine Safety Disclosures

     37   
Item 5.  

Other Information

     37   
Item 6.  

Exhibits

     38   
Signatures      39   


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

(Thousands of dollars)

 

     September 30,
2015
    December 31,
2014
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 1,479        2,761   

Trade accounts receivable, net of allowance for doubtful accounts of $118 and $123, respectively

     9,611        9,087   

Inventories

     12,409        11,494   

Prepaid expenses and other current assets

     6,294        5,964   
  

 

 

   

 

 

 

Total current assets

     29,793        29,306   

Investment in real estate held for development and sale

     58,778        56,139   

Timber and timberlands – net

     363,037        364,410   

Property, plant, and equipment – net

     80,017        74,164   

Deferred charges and other assets

     2,768        3,250   
  

 

 

   

 

 

 

Total assets

   $ 534,393        527,269   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Trade accounts payable

   $ 12,252        6,814   

Accrued taxes other than income taxes

     1,678        2,149   

Deferred revenues and other accrued liabilities

     10,025        7,223   
  

 

 

   

 

 

 

Total current liabilities

     23,955        16,186   

Long-term debt

     210,000        203,000   

Deferred tax liabilities – net

     1,293        1,102   

Other noncurrent liabilities

     39,830        39,340   

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

     87,006        86,575   

Retained earnings

     202,079        204,327   

Treasury stock

     (19,163     (11,978

Accumulated other comprehensive loss

     (10,735     (11,411
  

 

 

   

 

 

 

Total stockholders’ equity

     259,315        267,641   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 534,393        527,269   
  

 

 

   

 

 

 

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
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Net sales

   $ 50,150        58,301        144,210        172,285   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

        

Cost of sales

     38,642        39,539        105,898        115,674   

Depreciation, amortization, and cost of fee timber harvested

     5,519        4,716        15,795        14,180   

General and administrative expenses

     3,955        5,264        14,254        15,108   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     48,116        49,519        135,947        144,962   

Other income – business interruption claim

     —          —          516        —     

Gain on involuntary conversion of assets

     —          —          704        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2,034        8,782        9,483        27,323   

Interest income

     2        —          3        3   

Interest and other debt expense, net of capitalized interest

     (1,927     (1,081     (5,201     (3,816

Other income

     5        238        109        281   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     114        7,939        4,394        23,791   

Income tax expense

     (76     (1,965     (1,612     (7,608
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 38        5,974        2,782        16,183   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share

        

Basic

   $ —          .47        .22        1.28   

Assuming dilution

   $ —          .47        .22        1.27   

Dividends per common share

        

Paid

   $ .10        .10        .30        .30   

Declared

   $ .10        .10        .40        .40   

Weighted average common shares outstanding (thousands)

        

Basic

     12,439        12,448        12,454        12,516   

Assuming dilution

     12,491        12,495        12,512        12,571   

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)

 

     Nine Months Ended
September 30,
 
     2015     2014  

Net income

   $ 2,782        16,183   
  

 

 

   

 

 

 

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        4   

Amortization of actuarial loss

     695        209   

Amortization of plan amendment

     (21     (91
  

 

 

   

 

 

 

Other comprehensive income

     676        122   
  

 

 

   

 

 

 

Comprehensive income

   $ 3,458        16,305   
  

 

 

   

 

 

 

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)

 

     Nine Months Ended
September 30,
 
     2015     2014  

Operating activities

    

Net income

   $ 2,782        16,183   

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

    

Depreciation, amortization, and cost of fee timber harvested

     15,795        14,180   

Deferred income taxes

     (650     (2,080

Real estate development expenditures

     (5,088     (1,053

Real estate costs recovered upon sale

     2,022        2,522   

Timberland costs recovered upon sale

     25        174   

Stock-based compensation expense

     2,503        2,409   

Net increase in liabilities for pension and other postretirement benefits

     2,619        817   

Net decrease in deferred compensation for stock-based liabilities

     (595     (413

(Increase)/decrease in operating working capital other than cash and cash equivalents

     4,502        (6,871

Other changes in assets and liabilities

     (266     (810
  

 

 

   

 

 

 

Net cash provided by operating activities

     23,649        25,058   
  

 

 

   

 

 

 

Investing activities

    

Capital expenditures requiring cash, excluding real estate development

     (19,334     (11,013

Timberland acquisition expenditures requiring cash

     (581     (118,156

Net change in purchased stumpage inventory

     (690     78   

Proceeds from involuntary conversion of assets

     1,590        —     

Other – net

     444        1,047   
  

 

 

   

 

 

 

Net cash required by investing activities

     (18,571     (128,044
  

 

 

   

 

 

 

Financing activities

    

Proceeds from borrowings

     115,000        120,000   

Repayments of notes payable and long-term debt

     (108,000     (5,000

Treasury stock purchases

     (9,630     (7,866

Common stock dividends paid

     (3,782     (3,797

Proceeds from stock option exercises

     728        245   

Excess tax benefits from stock-based compensation expense

     55        160   

Other – net

     (731     (449
  

 

 

   

 

 

 

Net cash provided/(required) by financing activities

     (6,360     103,293   
  

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

     (1,282     307   

Cash and cash equivalents at January 1

     2,761        4,374   
  

 

 

   

 

 

 

Cash and cash equivalents at September 30

   $ 1,479        4,681   
  

 

 

   

 

 

 

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)

 

     Nine Months Ended
September 30,
 
     2015     2014  

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 2015 and 2014

     128        128   
  

 

 

   

 

 

 

Capital in excess of par value

    

Balance at beginning of period

     86,575        84,796   

Exercise of stock options

     (94     (37

Stock-based compensation expense

     2,503        2,409   

Restricted stock awards

     (1,677     (1,290

Tax effect of stock awards

     (355     (132

Restricted stock forfeiture

     54        —     
  

 

 

   

 

 

 

Balance at end of period

     87,006        85,746   
  

 

 

   

 

 

 

Retained earnings

    

Balance at beginning of period

     204,327        189,720   

Net income

     2,782        16,183   

Common stock dividends declared

     (5,030     (5,055
  

 

 

   

 

 

 

Balance at end of period

     202,079        200,848   
  

 

 

   

 

 

 

Treasury stock

    

Balance at beginning of period – 231,790 and 134,609 shares, respectively

     (11,978     (5,693

Shares purchased – 157,524 and 131,947 shares, respectively

     (9,630     (7,866

Restricted shares forfeitures – 835 shares and none, respectively

     (54     —     

Shares issued for incentive plans – 45,322 and 34,579 shares, respectively

     2,499        1,572   
  

 

 

   

 

 

 

Balance at end of period – 344,827 and 231,977 shares, respectively

     (19,163     (11,987
  

 

 

   

 

 

 

Accumulated other comprehensive loss

    

Balance at beginning of period

     (11,411     (2,679

Change in other comprehensive income, net of tax

     676        122   
  

 

 

   

 

 

 

Balance at end of period

     (10,735     (2,557
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 259,315        272,178   
  

 

 

   

 

 

 

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, 2014. Preparation of consolidated financial statements requires management to make estimates and assumptions. These estimates and assumptions affect reported amounts of assets and liabilities, 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 September 30, 2015, and the results of its operations and cash flows for the three months and nine months ended September 30, 2015 and 2014. 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.

Recently Issued Authoritative Accounting Pronouncements and Guidance

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018 and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating what effect ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

On April 7, 2015, FASB issued ASU No. 2015-03, “Interest: Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The guidance in the new standard is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs. The new standard is effective for the Company on January 1, 2016 and will be applied on a retrospective basis. The Company believes this will have an immaterial impact on its financial statements.

 

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)    Sept. 30,
2015
     Dec. 31,
2014
 
Raw materials  

- Logs

   $ 2,106         772   
 

- Del-Tin - wood fiber

     653         384   
Finished goods  

- Lumber

     3,978         4,168   
 

- Medium density fiberboard (“MDF”)

     2,806         3,889   
 

- MDF consigned to others

     974         926   
Supplies        1,892         1,355   
    

 

 

    

 

 

 
     $ 12,409         11,494   
    

 

 

    

 

 

 

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)    Sept. 30,
2015
     Dec. 31,
2014
 

Short-term deferred tax assets

   $ 2,081         2,087   

Refundable income taxes

     2,436         2,537   

Prepaid expenses

     1,246         654   

Other current assets

     531         686   
  

 

 

    

 

 

 
   $ 6,294         5,964   
  

 

 

    

 

 

 

Note 4 – Timber and Timberlands

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

 

(Thousands of dollars)    Sept. 30,
2015
     Dec. 31,
2014
 

Purchased stumpage inventory

   $ 2,310         1,620   

Timberlands

     155,895         155,704   

Fee timber

     326,006         322,714   

Logging facilities

     2,733         2,720   
  

 

 

    

 

 

 
     486,944         482,758   

Less accumulated cost of fee timber harvested and facilities depreciation

     (124,204      (118,670
  

 

 

    

 

 

 

Strategic timber and timberlands

     362,740         364,088   

Non-strategic timber and timberlands

     297         322   
  

 

 

    

 

 

 
   $ 363,037         364,410   
  

 

 

    

 

 

 

 

7


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 4 – Timber and Timberlands (cont.)

There were no timberland acquisitions during the third quarter of 2015. During the nine months ended September 30, 2015, Deltic acquired approximately 304 acres of timberlands located in the Company’s current operating area for cash payments of approximately $581,000 and acquired 40 acres in a non-cash exchange transaction in the first quarter. Cash paid for timberland acquisition expenditures in the three months and nine months ended September 30, 2014, were $50,000 for 30 acres and $118,156,000 for 72,100 acres, respectively. Deltic invests in and holds strategic fee timber as a productive asset, and any expenditure to acquire such timber and timberlands is an investing activity on the Company’s Consolidated Statements of Cash Flows.

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 September 30, 2015, approximately 617 acres of these lands were available for sale. Included in the Woodlands operating income were gains from sales of timberland of $6,000 and $564,000 for the three months ended September 30, 2015, and 2014, respectively, and $102,000 and $857,000 for the nine months ended September 30, 2015 and 2014, respectively. Occasionally Deltic engages in land-for-land exchanges that are recorded as sales due to the nature of the land involved. For the nine months ending September 30, 2015, $25,000 of gains were included in operating income from non-monetary exchanges, and there were no such gains in the same period of 2014.

Note 5 – Property, Plant, and Equipment

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

 

(Thousands of dollars)    Sept. 30,
2015
     Dec. 31,
2014
 

Land

   $ 947         947   

Land improvements

     9,626         8,163   

Buildings and structures

     23,137         22,680   

Machinery and equipment

     165,413         152,641   
  

 

 

    

 

 

 
     199,123         184,431   

Less accumulated depreciation

     (119,106      (110,267
  

 

 

    

 

 

 
   $ 80,017         74,164   
  

 

 

    

 

 

 

 

8


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 6 – Deferred Revenues and Other Accrued Liabilities

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

 

(Thousands of dollars)    Sept. 30,
2015
     Dec. 31,
2014
 

Deferred revenues – current

   $ 3,819         3,310   

Dividend payable

     1,248         —     

Vacation accrual

     1,510         1,312   

Deferred compensation

     939         1,166   

All other current liabilities

     2,509         1,435   
  

 

 

    

 

 

 
   $ 10,025         7,223   
  

 

 

    

 

 

 

Note 7 – Other Noncurrent Liabilities

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

 

(Thousands of dollars)    Sept. 30,
2015
     Dec. 31,
2014
 

Accumulated postretirement benefit obligation

   $ 12,941         12,343   

Excess retirement plan

     9,925         9,372   

Accrued pension liability

     15,357         14,955   

Deferred revenue – long-term portion

     149         383   

Other noncurrent liabilities

     1,458         2,287   
  

 

 

    

 

 

 
   $ 39,830         39,340   
  

 

 

    

 

 

 

Note 8 – Income Taxes

The Company’s effective income tax rate for the three months and nine months ended September 30, 2015, was 66 percent and 37 percent, respectively. The difference in the statutory income tax rate and the effective income tax rate was due to lower pretax income and the effects of the recognition of a tax return true-up, combined with lower permanent differences such as for the manufacturing deduction. The effective income tax rate for the nine months ended September 30, 2014 benefited from the recognition of $776,000 in changes in the balances of uncertain tax positions. The Company’s policy is to recognize interest expense related to unrecognized tax benefits in interest expense and penalties in other expenses. At September 30, 2015, there were no unrecognized tax benefits recorded on the balance sheet. The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2012.

Note 9 – Credit Facilities and Indebtedness

Deltic entered into a First Amendment to the Company’s Second Amended and Restated Credit Agreement with the consent of the lenders thereto, effective August 25, 2015, in which the Company was permitted to expand its credit facilities so that the Company could enter into a new $100,000,000 Term Loan Credit Agreement with American AgCredit, PCA, as described in the following paragraph.

 

9


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 9 – Credit Facilities and Indebtedness (cont.)

 

Deltic entered into a new $100,000,000 ten-year term loan credit agreement (the “Credit Agreement”) with American AgCredit, PCA, effective August 27, 2015. The Credit Agreement has a 4.05 percent fixed rate of interest and a maturity date of August 27, 2025. The Credit Agreement has the same financial covenants as those found in the Company’s Second Amended and Restricted Revolving Credit Agreement as amended on August 25, 2015.

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
September 30,
     Nine Months Ended
September 30,
 
(Thousands of dollars)    2015      2014      2015      2014  

Defined benefit funded retirement plan

           

Service cost

   $ 490         369         1,469         1,107   

Interest cost

     505         460         1,515         1,379   

Expected return on plan assets

     (602      (572      (1,807      (1,717

Amortization of prior service cost

     1         4         3         13   

Recognized actuarial loss

     209         41         629         123   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net retirement expense

   $ 603         302         1,809         905   
  

 

 

    

 

 

    

 

 

    

 

 

 

Defined benefit unfunded retirement plan

           

Service cost

   $ 130         75         389         226   

Interest cost

     123         94         370         280   

Amortization of prior service cost

     —           (2      —           (6

Recognized actuarial loss

     152         73         456         220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net retirement expense

   $ 405         240         1,215         720   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other postretirement benefit plan

           

Service cost

   $ 132         104         395         314   

Interest cost

     139         125         419         373   

Recognized actuarial loss

     20         —           59         —     

Amortization of plan amendment

     (11      (49      (34      (149
  

 

 

    

 

 

    

 

 

    

 

 

 

Net other postretirement benefits expense

   $ 280         180         839         538   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company made voluntary contributions to its qualified plan of $775,000 during the first nine months of 2015, and does not expect to make other payments during the remainder of 2015. The expected long-term rate of return on pension plan assets is 7.50 percent. Effective January 1, 2015, Deltic closed the defined benefit funded retirement plan to any new or rehired salaried and hourly non-represented entrants. In connection with this closure, additional Company 401(k) contributions are made for all employees hired on or after that date.

 

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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 nine months ended September 30, 2015 and 2014:

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, 2015

   $ (7,615      (3,064      (732      (11,411

Amounts reclassified from AOCL

     384         277         15         676   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income

     384         277         15         676   
  

 

 

    

 

 

    

 

 

    

 

 

 

AOCL at September 30, 2015

   $ (7,231      (2,787      (717      (10,735
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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

     83         130         (91      122   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income

     83         130         (91      122   
  

 

 

    

 

 

    

 

 

    

 

 

 

AOCL at September 30, 2014

   $ (2,327      (352      122         (2,557
  

 

 

    

 

 

    

 

 

    

 

 

 

Reclassification Out of Accumulated Other Comprehensive Loss

Details about AOCL Components:

 

     Nine Months Ended September 30, 2015  
(Thousands of dollars)    Defined
Benefit
Funded
Retirement
Plan
     Defined
Benefit
Unfunded
Retirement
Plan
     Post
Retirement
Benefit
Plan
     Total  

Amortization of prior service costs

   $ 3         —           —           3   

Amortization of actuarial losses

     629         456         59         1,144   

Amortization of plan amendment

     —           —           (34      (34
  

 

 

    

 

 

    

 

 

    

 

 

 

Total before tax

     632         456         25         1,113   

Income tax benefit/(expense)

     (248      (179      (10      (437
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reclassifications – net of tax

   $ 384         277         15         676   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 11 – Other Comprehensive Income Disclosures (cont.)

 

     Nine Months Ended September 30, 2014  
(Thousands of dollars)    Defined
Benefit
Funded
Retirement
Plan
     Defined
Benefit
Unfunded
Retirement
Plan
     Post
Retirement
Benefit
Plan
     Total  

Amortization of prior service costs

   $ 13         (6      —           7   

Amortization of actuarial losses

     123         220         —           343   

Amortization of plan amendment

     —           —           (149      (149
  

 

 

    

 

 

    

 

 

    

 

 

 

Total before tax

     136         214         (149      201   

Income tax benefit/(expense)

     (53      (84      58         (79
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reclassifications – net of tax

   $ 83         130         (91      122   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

Tax Effects by Component

 

     Nine Months Ended September 30, 2015  
(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

     1,144         (449      695   

Amortization of plan amendment

     (34      13         (21
  

 

 

    

 

 

    

 

 

 
   $ 1,113         (437      676   
  

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30, 2014  
(Thousands of dollars)    Before
Tax
Amount
     Tax
(Expense)
or Benefit
     Net of
Tax
Amount
 

Amortization of prior service costs

   $ 7         (3      4   

Amortization of actuarial losses

     343         (134      209   

Amortization of plan amendment

     (149      58         (91
  

 

 

    

 

 

    

 

 

 
   $ 201         (79      122   
  

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 12 – Stock-Based Compensation

The Consolidated Statements of Income for the three months ended September 30, 2015 and 2014, included $825,000 and $803,000, respectively, of stock-based compensation expense reflected in general and administrative expenses. For the nine months ended September 30, 2015 and 2014, the amounts were $2,503,000 and $2,409,000, respectively.

Assumptions for the valuation of 2015 stock options and restricted stock performance units consisted of the following:

 

     2015  

Expected term of options (in years)

     6.27   

Weighted expected volatility

     38.64

Dividend yield

     .56

Risk-free interest rate – performance restricted shares

     1.15

Risk-free interest rate – options

     1.92

Stock price as of valuation date

   $ 65.89   

Restricted performance share valuation

   $ 77.52   

Grant date fair value – stock options

   $ 24.40   

Stock Options – A summary of stock options as of September 30, 2015, and changes during the nine months 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, 2015

     151,753       $ 60.99         

Granted

     22,494         65.89         

Exercised

     (16,155      45.07         

Forfeited

     (743      67.09         
  

 

 

          

Outstanding at September 30, 2015

     157,349       $ 63.30         6.2       $ 258   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2015

     96,911       $ 61.41         4.8       $ 258   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2015, 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 September 30, 2015, there was $1,060,000 of unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 1.8 years.

 

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Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 12 – Stock-Based Compensation (cont.)

 

Restricted Stock and Restricted Stock Units – A summary of nonvested restricted stock as of September 30, 2015, and changes during the nine months then ended are presented below:

 

Nonvested Restricted Stock

   Shares      Weighted
Average
Grant-Date
Fair Value
 

Nonvested at January 1, 2015

     85,410       $ 66.51   

Granted

     21,005         66.06   

Vested

     (18,682      63.54   

Forfeited

     (358      67.24   
  

 

 

    

Nonvested at September 30, 2015

     87,375       $ 67.04   
  

 

 

    

As of September 30, 2015, there was $2,749,000 of unrecognized compensation cost related to nonvested restricted stock. That cost is expected to be recognized over a weighted-average period of 1.9 years.

Performance Units – A summary of nonvested restricted stock performance units as of September 30, 2015, and changes during the nine months then ended are presented below:

 

Nonvested Restricted Stock Performance Units

   Shares      Weighted
Average
Grant-Date
Fair Value
 

Nonvested at January 1, 2015

     56,586       $ 85.78   

Granted

     20,297         77.52   

Units not meeting vesting conditions

     (12,135      85.56   

Forfeited

     (477      83.55   
  

 

 

    

Nonvested at September 30, 2015

     64,271       $ 83.23   
  

 

 

    

As of September 30, 2015, there was $2,654,000 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 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.

 

14


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 14 – Business Interruption Claim and Gain on Involuntary Conversion of Assets

On March 10, 2015, the Company experienced a fire at its MDF plant located in El Dorado, Arkansas. Damage was limited to the press portion of the facility and operations at the facility were temporarily suspended while repairs were made to the damaged area. Most of the repairs were completed in April 2015 and the plant became fully operational in that month. The Company maintains insurance coverage for both business interruption and property damage. Deltic settled the insurance claims during the second quarter and recorded the applicable income from the business interruption claim and gains on involuntary conversion of assets in the operating income section of the consolidated income statement. The claim for business interruption insurance was settled for a total of $2,452,000, of which $516,000 was reported in Other Operating Income in the Company’s Consolidated Statements of Income for the quarter ending June 30, 2015 and $1,936,000 was a reimbursement of business operating expenses. The total deductible for the business interruption policy was approximately $948,000, which was recognized as expense in the first half of 2015. The Company had adequate property damage insurance coverage to enable it to recover the replacement cost of its property and equipment that was destroyed by the fire. During the second quarter, the Company settled property claims of $5,969,000 for property damage. The claims for property damage included $4,379,000 for inventory, contents, and repair costs, and $1,590,000 for replacement cost of a new press belt and DPA duct. The total deductible for the property policy was $1,000,000, which was recognized as expense in the first quarter of 2015. After a write-off of basis in the amount of $886,000 for the old press belt and DPA duct in the first quarter of 2015, the Company recognized a gain from involuntary conversion of assets in the amount of $704,000 which was reported in Other Operating Income in the Company’s Consolidated Statement of Income for the quarter ending June 30, 2015.

Note 15 – 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.

The 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.

 

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Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 15 – 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 September 30, 2015, are presented in the following table:

 

            Fair Value Measurements at Reporting Date Using  
     Sept. 30,
2015
     Quoted Prices in
Active Markets
for Identical
Liabilities
Inputs
     Significant
Observable
Inputs
     Significant
Unobservable
Inputs
 
(Thousands of dollars)       Level 1      Level 2      Level 3  

Liabilities

           

Nonqualified employee savings plan

   $ 1,458         1,458         —           —     

Long-term debt, including current maturities – 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 September 30, 2015 and 2014. 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.

 

     September 30, 2015      September 30, 2014  
(Thousands of dollars)    Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial liabilities

           

Long-term debt, including current maturities

   $ 210,000         212,098         205,000         209,160   

 

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Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 16 – 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:

 

(Thousands, except per share amounts)    Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Net earnings allocated to common stock

   $ 38         5,907         2,749         16,006   

Net earnings allocated to participating securities

     —           67         33         177   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common stock and participating securities

   $ 38         5,974         2,782         16,183   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares used in basic EPS

     12,439         12,448         12,454         12,516   

Effect of dilutive stock awards

     52         47         58         55   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     12,491         12,495         12,512         12,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

           

Basic

   $ —           .47         .22         1.28   

Assuming dilution

   $ —           .47         .22         1.27   

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 diluted 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
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Options

     72,595         76,968         72,595         103,119   

Restricted performance shares

     64,271         56,586         64,271         56,586   

 

17


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 17 – Supplemental Cash Flow Disclosures

Additional information concerning cash flows is as follows:

 

     Nine Months Ended
September 30,
 
(Thousands of dollars)    2015      2014  

Income taxes paid in cash

   $ 2,116         11,564   

Interest paid

     3,385         2,854   

Interest capitalized

     (45      (61

Non-cash investing and financing activities excluded from the Consolidated Statement of Cash Flows include:

 

     Nine Months Ended
September 30,
 
(Thousands of dollars)    2015      2014  

Issuance of restricted stock

   $ 1,677         1,290   

Land exchanges

     39         —     

Capital expenditures accrued, not paid

     612         501   

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

 

     Nine Months Ended
September 30,
 
(Thousands of dollars)    2015      2014  

Trade accounts receivable

   $ (525      (3,399

Inventories

     (914      (969

Prepaid expenses and other current assets

     (360      (627

Trade accounts payable

     4,825         (310

Accrued taxes other than income taxes

     (470      (93

Income taxes payable

     —           (1,076

Deferred revenues and other accrued liabilities

     1,946         (397
  

 

 

    

 

 

 
   $ 4,502         (6,871
  

 

 

    

 

 

 

 

18


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 18 – Business Segments

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(Thousands of dollars)    2015      2014      2015      2014  

Net sales

           

Woodlands

   $ 8,973         9,488         29,841         29,987   

Manufacturing2

     42,189         49,415         122,723         145,158   

Real Estate

     3,869         3,196         8,189         10,284   

Eliminations1

     (4,881      (3,798      (16,543      (13,144
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 50,150         58,301         144,210         172,285   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

           

Operating income/(loss)

           

Woodlands

   $ 4,441         5,026         15,878         15,576   

Manufacturing2

     1,959         9,112         8,961         26,102   

Real Estate

     (233      (273      (1,308      146   

Corporate

     (3,674      (5,012      (13,394      (14,285

Eliminations

     (459      (71      (654      (216
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     2,034         8,782         9,483         27,323   

Interest income

     2         —           3         3   

Interest and other debt expense, net of capitalized interest

     (1,927      (1,081      (5,201      (3,816

Other income/(expense)

     5         238         109         281   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 114         7,939         4,394         23,791   
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation, amortization, and cost of fee timber harvested

           

Woodlands

   $ 1,968         1,561         5,642         4,846   

Manufacturing2

     3,446         3,041         9,844         9,011   

Real Estate

     91         94         275         263   

Corporate

     14         20         34         60   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,519         4,716         15,795         14,180   
  

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures

           

Woodlands

   $ 866         1,296         3,087         3,139   

Manufacturing2

     6,294         4,229         16,454         8,036   

Real Estate

     3,851         587         5,360         1,358   

Corporate

     16         5         156         40   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 11,027         6,117         25,057         12,573   
  

 

 

    

 

 

    

 

 

    

 

 

 

Timberland acquisition expenditures

   $ —           50         619         118,156   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1  Primarily intersegment sales of timber from Woodlands to Manufacturing.
2 During March 2015, the Company experienced a fire in the press area at its MDF plant in El Dorado that affected the operating results. (For additional information, see Note 14 – Business Interruption Claim and Gain on Involuntary Conversion of Assets.)

 

19


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 $.1 million for the third quarter of 2015, compared to $6 million for the same period of 2014. The decrease was primarily due to reduced operating income from the Manufacturing segment, mainly because of soft markets for both lumber and medium density fiberboard (“MDF”) during the third quarter of 2015. A prolonged weak housing market recovery combined with the impact of excess inventory of wood products in the United States resulted in the weak wood products market and led to decreased sales prices for both lumber and MDF. The Woodlands segment reported $4.5 million in operating income for the third quarter of 2015, a decrease of $.5 million when compared to the third quarter of 2014. Reduced income from timberland sales and decreased oil and gas related income, combined with an increased cost of fee timber harvested, was partially offset by increased revenues from pine sawtimber and pine pulpwood harvested. The Manufacturing segment reported $2 million in operating income, a decrease of $7.1 million from the $9.1 million reported a year ago, due primarily to lower average sales prices for both lumber and MDF. The Manufacturing segment also had increased average unit costs for the lumber sold because of increased cost for the logs used as the raw material for lumber manufactured, combined with increased MDF unit cost due to unscheduled maintenance downtime and expense at the Company’s MDF plant. The Real Estate segment had an operating loss of $.2 million in the third quarter of 2015, compared to a loss of $.3 million in the same quarter of 2014, primarily due to increased residential lot sales activity in the current-year third quarter compared to the prior-year third quarter. The Corporate segment’s operating expense was $1.3 million lower in the current-year quarter than in the same period a year ago, mainly due to decreased general and administrative expenses. Interest expense was $.8 million higher in the third quarter of 2015 compared to the same period of 2014 because of increased borrowings combined with a slightly higher weighted average interest rate for debt outstanding in the current-year quarter. Income tax expense decreased $1.8 million, when compared to 2014’s third quarter, because of lower pretax income.

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, housing starts, general economic conditions, United States employment levels, interest rates, credit availability and associated costs, imports and exports of lumber and MDF, foreign exchange rates, 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. During the third quarter of 2015, lower-than-expected residential home construction activity in the United States, combined with excess wood products inventory, led to lower sales prices for wood products. As with most commodity markets the Company has little or no influence over pricing or demand levels for its wood products. Deltic’s management will continue to manage the Company’s diverse asset base, maximize its vertical integration strategy, and use its size advantage to adjust production levels to meet demand.

The Woodlands segment is the Company’s core operating segment, and its strategic pine timberlands provide the foundation for Deltic’s vertical integration structure by supplying more than one-half of the raw material log needs of the Company’s sawmills. This vertical integration proved beneficial to the Company as it was able to increase the harvest of pine sawtimber from Company-owned timberlands to supply a larger portion of the raw material needs for its sawmills. The increase in the pine sawtimber harvest volume was the result of larger amounts of pine sawtimber available to harvest due to the acquisitions of timberland made by the Company in recent years. In the third quarter of 2015, the pine sawtimber harvest was 179,376 tons, an increase of 25,446 tons, or 17 percent, when compared to the 2014 third quarter harvest of 153,930 tons. The average sales price for the pine sawtimber harvested was $27 per ton in the third quarter of 2015 versus $24 per ton in the same quarter of 2014, a $3 per ton or 13 percent, increase. The pine pulpwood harvest in the current-year third quarter was 91,905 tons, an increase of 4,150 tons from the harvest in the third quarter of 2014, while the average sales price for the pine pulpwood harvested was $9 per ton for the third quarter of 2015 versus $8 per ton in the prior-year third quarter. During the third quarter of 2015, the Company sold 2 acres of non-strategic timberland at an average sales price of $4,300 per acre, compared to sales of 127 acres of timberland at an average price of $5,000 per acre for the same period of 2014.

 

 

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The Woodlands segment’s financial results include other benefits from land ownership, such as revenues from hunting leases, mineral lease rentals, mineral royalties, and land easements. Hunting lease revenues were $.8 million for the third quarter of 2015 versus $.7 million in the same period of 2014. Oil and gas lease rental income was $.2 million in the third quarter of 2015, compared to $.5 million in the third quarter of 2014, as the amortization period of the prepaid lease rental payments received for the mineral leases for some acreage expired and these mineral acres became held by production. Oil and gas royalty receipts, primarily from gas wells in the Fayetteville Shale Play, were $.7 million in the third quarter of 2015, a $.5 million decrease from the third quarter of 2014, mainly due to a decrease in natural gas prices, partially offset by an increase in production volume, as gas production from new wells drilled continued to offset the decline in gas production from older wells. Deltic is currently receiving royalty income from 501 wells in the Fayetteville Shale Play, however, the Company’s income from mineral ownership in future periods is contingent on natural gas and crude oil prices, successful completion of producing wells drilled on Company lands, and leasing additional acreage.

The Manufacturing segment produces both dimension lumber and MDF. The average lumber sales price in the third quarter of 2015 was $321 per thousand board feet, a $77 per thousand board feet or 19 percent, decrease when compared to the same period in 2014, due to a soft market for lumber during the current-year period. The Company’s sawmill operations sold 71.2 million board feet of lumber in the third quarter of 2015, an increase of .9 million board feet when compared to the 70.3 million board feet sold in the third quarter a year ago. The average sales price for MDF sold during the current-year’s third quarter was $557 per thousand square feet, a decrease of $26 per thousand square feet from the average sales price of $583 per thousand square feet received in the third quarter of 2014. MDF sales volume for the third quarter of 2015 was 25.5 million square feet, which was 1.6 million square feet less than the 27.1 million square feet sold in the same period of 2014. The decrease in MDF sales volume was due to the combination of soft market demand and the negative impact of unplanned maintenance-related plant downtime. As with any commodity market, the Company expects the historical volatility of the lumber and MDF markets to continue into the future. Deltic closely monitors market conditions and will adjust production levels to meet market demand as needed.

The Real Estate segment reported sales of 34 residential lots during the third quarter of 2015, compared to 15 lots sold in the third quarter of 2014. The average per-lot sales price was $62,700 in the third quarter of 2015, compared to an average per-lot sales price of $99,700 in 2014’s third quarter, due to the mix of lots sold. A second phase in the Company’s Wildwood Place development, consisting of 43 lots, was offered in the second quarter of 2015, with 33 of these lots closed by the end of the third quarter of 2015. New lots in the Company’s Chenal Valley development are currently being developed and are expected to be offered for sale later this year. There were no sales of commercial acreage in the third quarter of 2015 or 2014. The commercial real estate acreage within Chenal Valley continues to receive interest from potential buyers; however, due to the unpredictable nature of commercial real estate sales activity, the Company cannot predict the timing of closing of any commercial real estate transaction.

 

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Results of Operations

Three Months Ended September 30, 2015 Compared with Three Months Ended September 30, 2014

In the following tables, Deltic’s net sales and results of operations are presented for the quarters ended September 30, 2015 and 2014. Explanations of significant variances and additional analyses for the Company’s consolidated and segment operations follow the tables.

 

     Quarter Ended Sept. 30,  
(Millions of dollars, except per share amounts)    2015      2014  

Net sales

     

Woodlands

   $ 8.9         9.5   

Manufacturing

     42.1         49.4   

Real Estate

     3.9         3.2   

Eliminations

     (4.8      (3.8
  

 

 

    

 

 

 

Net sales

   $ 50.1         58.3   
  

 

 

    

 

 

 

Cost of sales

     

Woodlands

   $ 2.5         2.8   

Manufacturing

     40.2         40.3   

Real Estate

     3.8         3.3   

Eliminations

     (7.9      (6.8
  

 

 

    

 

 

 

Total cost of sales

   $ 38.6         39.6   
  

 

 

    

 

 

 

Operating income

     

Woodlands

   $ 4.5         5.0   

Manufacturing

     2.0         9.1   

Real Estate

     (.2      (.3

Corporate

     (3.7      (5.0

Eliminations

     (.5      (.1
  

 

 

    

 

 

 

Operating income

     2.1         8.7   

Interest and other debt expense

     (1.9      (1.1

Other income

     —           .3   

Income taxes

     (.1      (1.9
  

 

 

    

 

 

 

Net income

   $ .1         6.0   
  

 

 

    

 

 

 

Earnings per common share

     

Basic

   $ —           .47   

Assuming dilution

     —           .47   

Consolidated

Consolidated net income for the third quarter of 2015 was $.1 million, a decrease of $5.9 million from the third quarter of 2014. The decrease in net income was mostly due to a $8.2 million decrease in sales revenues for the third quarter of 2015, when compared to the same period of 2014. Residential home construction activity during the quarter was less than expected. As a result of this, combined with the impact of an excess inventory of wood products in the U.S., net sales for the Manufacturing segment decreased. In the Woodland’s segment, decreases in revenues from sales of timberland and in revenues from oil and gas lease rentals and royalties during the third quarter of 2015 were partially offset by increased revenues from the harvest of pine sawtimber and pine pulpwood, when compared to the prior-year third quarter. The number of residential lots sold increased in the third quarter of 2015, resulting in increased sales revenue for the Real Estate segment when compared to the third quarter of 2014. The Corporate segment had decreased general and administrative expenses in the third quarter of 2015 compared to the same period of 2014. Interest expense was $.8 million higher for the third quarter of

 

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2015 compared to the third quarter of 2014 due to increased borrowings and a slightly higher weighted-average interest rate for debt outstanding in the current-year period, as the Company entered into a new $100 million, fixed rate, ten-year term note during 2015’s third quarter.

Consolidated cost of sales for the third quarter of 2015 decreased $1 million from the third quarter of 2014, due primarily to an increase in intercompany cost eliminations caused by the increased volume of pine stumpage transferred from the Woodlands segment to the Company’s sawmills, at a higher average sales price per ton.

The main cost drivers affecting the Company’s cost of sales and impacting each segment’s operating income and thus consolidated operating income are as follows: Woodlands – direct operating expenses (operating salaries and benefits, cull timber removal, line and road maintenance expenses, etc.), oil and gas royalty expenses, cost of hauling stumpage to other mills, and cost of timberland sold; Manufacturing – raw materials cost, direct manufacturing expenses (operating salaries and benefits, utilities, insurance, property and business interruption insurance deductibles, repairs and maintenance, etc.), and freight expense; and Real Estate – cost of residential lots, commercial acreage, and speculative homes sold and the cost of sales of Chenal Country Club. There is generally little to no margin on either hauling stumpage to other mills in the Woodlands segment or freight activity in the Manufacturing segment, since the net sales recorded for these activities are essentially offset by the cost of hauling stumpage to other mills or freight expense. The Company expects pine sawtimber prices to gradually increase in the next quarter which will improve results for the Woodlands segment, but conversely will increase raw material stumpage prices for the sawmills.

Consolidated operating income decreased $6.6 million for 2015’s third quarter when compared to the third quarter of 2014. The Woodlands segment’s operating income decreased $.5 million primarily due to decreased oil and gas royalty revenue, fewer timberland acres sold, and an increased cost of fee timber harvested, partially offset by an increased pine timber harvest volume and a higher average sales price for pine sawtimber harvested. The Manufacturing segment’s operating income decreased $7.1 million from the third quarter of 2014. This decrease was due to lower average sales prices for both lumber and MDF, a lower volume of MDF sold, higher raw material log cost at the sawmills, increased direct manufacturing costs for the sawmills, and increased maintenance-related downtime at the MDF plant. The Real Estate segment’s operating loss was $.2 million, a $.1 million improvement from the prior-year third quarter, primarily due to increased sales of residential lots when compared to the third quarter of 2014. Corporate expense decreased $1.3 million in the third quarter of 2015 due to lower general and administrative expenses when compared to the corresponding quarter of 2014.

Woodlands

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

 

     Quarter Ended Sept. 30,  
     2015      2014  

Net sales (millions of dollars)

     

Pine sawtimber

   $ 4.8         3.8   

Pine pulpwood

     .8         .7   

Hardwood sawtimber

     —           .1   

Hardwood pulpwood

     .2         .3   

Timberland

     —           .6   

Oil and gas lease rentals

     .2         .5   

Oil and gas royalties

     .7         1.2   

Hunting leases

     .8         .7   

Hauling to other mills

     1.2         1.4   

 

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     Quarter Ended Sept. 30,  
     2015      2014  

Cost of sales (millions of dollars)

     

Direct operating expenses

   $ 1.2         1.1   

Oil and gas royalty expenses

     .1         .1   

Cost of hauling stumpage to other mills

     1.2         1.4   

Cost of timberland sold

     —           .1   

Cost of fee timber harvested (millions of dollars)

   $ 1.9         1.5   

Sales volume (thousands of tons)

     

Pine sawtimber

     179.4         153.9   

Pine pulpwood

     91.9         87.8   

Hardwood sawtimber

     .7         2.3   

Hardwood pulpwood

     10.5         14.9   

Sales price (per ton)

     

Pine sawtimber

   $ 27         24   

Pine pulpwood

     9         8   

Hardwood sawtimber

     62         59   

Hardwood pulpwood

     23         22   

Timberland

     

Sales volume (acres)

     2         127   

Sales price (per acre)

   $ 4,326         5,009   

Net sales for the Woodlands segment in the third quarter of 2015 decreased $.6 million when compared to the third quarter of 2014. Pine sawtimber sales revenue was $1 million higher in 2015’s third quarter due to an increase in harvest volume combined with a $3 per ton increase in the average per-ton sales price. Revenues from sales of timberland were $.6 million lower than in the third quarter of 2014, due to a decrease in the number of acres sold. Oil and gas lease rentals decreased $.3 million in the third quarter of 2015, as the amortization period ended for the previously received lease payments for which the original lease period expired and the leasehold became held by production. Oil and gas royalties decreased $.5 million from the third quarter of 2014 due primarily to lower prices received for the Company’s royalty-interest share of natural gas production in the third quarter 2015 when compared to the same period of 2014, partially offset by a higher production volume of gas due to an increase in the number of producing wells during 2015’s third quarter when compared to the same period of 2014. Revenue from hauling stumpage to other mills was $.2 million lower in the third quarter of 2015 versus the same period of 2014.

Cost of sales for the Woodlands segment in the third quarter of 2015 was $.3 million lower when compared to the same period a year ago. This was due to a $.1 million decrease in the cost of timberland sold associated with the fewer number of acres sold and a $.2 million reduction in the cost of hauling stumpage to other mills, partially offset by an increase in cull timber removal expense. Operating income for the Woodlands segment was $.5 million less than in the 2014 third quarter due to the same factors affecting net sales combined with a $.4 million higher cost of fee timber harvested, partially offset by the lower cost of sales.

 

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Manufacturing

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

 

     Quarter Ended Sept. 30,  
     2015      2014  

Net sales (millions of dollars)

     

Lumber

   $ 22.9         27.9   

Residual by-products1

     2.4         2.7   

Medium density fiberboard (“MDF”)

     14.2         15.8   

Freight invoiced to customers

     2.7         3.4   

Cost of sales – sawmill operations (millions of dollars)

     

Raw materials

   $ 10.9         10.4   

Residual by-products

     3.0         3.0   

Direct manufacturing expenses

     7.4         7.0   

Change in inventory

     —           (.1

Freight expense

     1.1         1.6   

Cost of sales – MDF operations (millions of dollars)

     

Raw materials

   $ 7.2         7.3   

Direct manufacturing expenses

     7.2         6.9   

Change in inventory

     (.8      (.2

Freight expense

     1.6         1.8   

Depreciation (millions of dollars)

     

Sawmill operations

   $ 1.4         1.2   

MDF operations

     1.9         1.7   

Lumber

     

Finished production (MMBF)

     69.6         70.1   

Sales volume (MMBF)

     71.2         70.3   

Sales price (per MBF)

   $ 321         398   

MDF (3/4 inch basis)

     

Finished production (MMSF)

     27.1         27.3   

Sales volume (MMSF)

     25.5         27.1   

Sales price (per MSF)

   $ 557         583   

 

1  Residual by-products sales are reported net of intercompany eliminations.

Net sales for the Manufacturing segment was $7.3 million less when compared to the third quarter of 2014. The decrease was due to lower average sales prices for lumber and MDF; a lower sales volume of MDF, which was largely due to weak demand for building products used for residential housing construction; and increased maintenance-related downtime at the Company’s MDF plant. The average lumber sales price decreased $77 per MBF, or 19 percent, from 2014’s third quarter price, while the volume of lumber sold increased .9 million board feet compared to the third quarter of 2014. MDF sales volume in the third quarter of 2015 was 1.6 million square feet less than the same period a year ago, and the average sales price for MDF was $26 per MSF lower than in the third quarter of 2014. During the third quarter of 2014, the Company wrote off certain assets at its MDF plant, which reduced revenues by $.4 million.

Cost of sales for the Manufacturing segment decreased $.1 million from the third quarter of 2014. The intersegment eliminations of residual sales by sawmill operations to MDF operations are not reflected in the cost of sales amounts reported above. This cost increased $.4 million period-over-period. The cost of sales for sawmill operations in the third quarter of 2015 were $.5 million more than in the prior-year

 

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third quarter due to a $.5 million increase in raw material log cost combined with a $.4 million increase in direct operating expenses, partially offset by lower freight expense. In addition, depreciation at the Company’s sawmills increased $.2 million period-over-period. Cost of sales for MDF operations were $.7 million lower than in the third quarter of 2014. Raw material costs for the current-year quarter were lower by $.1 million and the benefit from the change in inventory increased by $.6 million, while utilities and other direct operating expenses increased by $.3 million. Operating income for the Manufacturing segment was $7.1 million less than in the 2014 period, due to the same items affecting net sales and cost of sales.

Real Estate

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

 

     Quarter Ended Sept. 30,  
     2015      2014  

Net sales (millions of dollars)

     

Residential lots

   $ 2.1         1.5   

Chenal Country Club

     1.6         1.6   

Cost of sales (millions of dollars)

     

Residential lots

   $ 1.4         .8   

Chenal Country Club

     1.7         1.8   

Sales volume

     

Residential lots

     34         15   

Average sales price (thousands of dollars)

     

Residential lots – per lot

   $ 63         100   

Net sales for the Real Estate segment in the third quarter of 2015 increased $.7 million from the third quarter of 2014. The increase was due to additional residential lots sold in the current-year third quarter. A decrease in the average sales price per lot sold of $37,000 was due to the mix of lots sold.

Cost of sales for the Real Estate segment increased $.5 million primarily due to an increase in the cost of residential lots sold, partially offset by a lower cost of sales for Chenal Country Club. The improved financial results for the Real Estate segment in the third quarter of 2015 was due to the increase in in residential lot sales activity, partially offset by the lower average sales price received per lot.

Corporate

The Corporate operating expense during the third quarter of 2015 was $1.3 million lower when compared to the same period of 2014, due to reduced general and administrative expenses, primarily incentive plan expense.

Eliminations

Intersegment sales of timber from Deltic’s Woodlands to the Manufacturing segment during the third quarter of 2015 increased $1.0 million, to $4.8 million, when compared to the same quarter of last year. The increase was due to a larger harvest volume from the Woodlands segment’s fee timberlands that were transferred to the sawmills and the increase in the transfer price quarter to quarter. Current period transfer prices are approximately that of market.

 

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Income Taxes

The effective income tax rate was 66 percent for the third quarter of 2015 and 25 percent in 2014. The higher rate in the third quarter of 2015 was due to recording the impact of a true-up of the income taxes accrued for 2014 to the actual tax liability per the Company’s filed tax returns and to lower pretax income, while the prior-year period benefited from the recognition of changes in the balances of uncertain tax positions.

Nine Months Ended September 30, 2015 Compared with Nine Months Ended September 30, 2014

In the following tables, Deltic’s net sales and results of operations are presented for the nine months ended September 30, 2015 and 2014. Explanations of significant variances and additional analyses for the Company’s consolidated and segment operations follow the tables.

 

     Nine Months Ended
September 30,
 
(Millions of dollars, except per share amounts)    2015      2014  

Net sales

     

Woodlands

   $ 29.8         30.0   

Manufacturing1

     122.7         145.1   

Real Estate

     8.2         10.3   

Eliminations

     (16.5      (13.1
  

 

 

    

 

 

 

Net sales

   $ 144.2         172.3   
  

 

 

    

 

 

 

Cost of sales

     

Woodlands

   $ 8.0         9.2   

Manufacturing

     114.9         119.0   

Real Estate

     8.8         9.5   

Eliminations

     (25.8      (22.0
  

 

 

    

 

 

 

Total cost of sales

   $ 105.9         115.7   
  

 

 

    

 

 

 

Operating income and net income

     

Woodlands

   $ 15.9         15.6   

Manufacturing1

     9.0         26.1   

Real Estate

     (1.3      .1   

Corporate

     (13.4      (14.3

Eliminations

     (.7      (.2
  

 

 

    

 

 

 

Operating income

     9.5         27.3   

Interest and other debt expense

     (5.2      (3.8

Other income

     .1         .3   

Income taxes

     (1.6      (7.6
  

 

 

    

 

 

 

Net income

   $ 2.8         16.2   
  

 

 

    

 

 

 

Earnings per common share

     

Basic

   $ .22         1.28   

Assuming dilution

     .22         1.27   

 

1  On March 10, 2015 the MDF plant incurred a fire that curtailed operations for a portion of the first and second quarters. (For additional information refer to Note14 – Business Interruption Claim and Gain on Involuntary Conversion of Assets.)

 

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Consolidated

Consolidated net income for the first nine months of 2015 decreased $13.4 million from the same period of 2014. The decrease was primarily due to decreased operating income from the Manufacturing and Real Estate segments combined with increased interest expense, partially offset by increased operating income for the Woodlands segment and lower Corporate operating expense. Consolidated net sales decreased $28.1 million in the first nine months of 2015 when compared to net sales for the same period in 2014. In the Woodlands segment, net sales decreased by $.2 million, as lower revenues from oil and gas lease rentals and royalties and decreased revenues from the timberland sales were partially offset by increased revenues from pine sawtimber and pine pulpwood harvested. The Manufacturing segment sales were $22.4 million lower due to a decrease in average sales prices and sales volumes for both lumber and MDF. Real Estate sales were $2.1 million lower due to a lower average sales price for lots sold, due to sales mix, and no sales of commercial acreage in the first nine month of 2015.

Consolidated cost of sales decreased $9.8 million from the first nine months of 2014, primarily due to decreased cost related to the reduced lumber and MDF sales volume because of weak demand, lower cost of sales for commercial acreage due to the decrease in acreage sold, decreased cost for hauling stumpage to other mills, and an increase in intercompany cost eliminations caused by the Woodlands providing a higher volume of pine stumpage from fee timberlands to the Company’s sawmills.

The main cost drivers affecting the Company’s cost of sales and impacting each segment’s operating income and thus consolidated operating income are as follows: Woodlands – direct operating expenses (operating salaries and benefits, cull timber removal, line and road maintenance expenses, etc.), oil and gas royalty expenses, cost of hauling stumpage to other mills, and cost of timberland sold; Manufacturing – raw materials cost, direct manufacturing expenses (operating salaries and benefits, utilities, insurance, property and business interruption insurance deductibles, repairs and maintenance, etc.), and freight expense; and Real Estate – cost of residential lots, commercial acreage, and speculative homes sold and the cost of sales of Chenal Country Club. There is generally little to no margin on either hauling stumpage to other mills in the Woodlands segment or freight activity in the Manufacturing segment, since the net sales recorded for these activities are essentially offset by the cost of hauling stumpage to other mills or freight expense. The Company expects pine sawtimber prices to gradually increase in the next quarter which will improve results for the Woodlands segment, but conversely will increase raw material stumpage prices in the sawmills.

Consolidated operating income for the first nine months of 2015 decreased $17.8 million from the reported results for the first nine months of 2014. The Woodlands segment’s operating income increased $.3 million, due to increased timber harvest revenues, partially offset by reduced oil and gas royalties and lease rental revenues, fewer acres of timberland sold, and a higher cost of fee timber harvested. The Manufacturing segment’s operating income decreased $17.1 million, due to lower average sales prices and decreased sales volumes for lumber and MDF, combined with increased maintenance expense at the Company’s MDF plant. The Real Estate segment’s operating income decreased $1.4 million, mainly due to no sales of commercial acreage in 2015 and to a decreased margin from residential lot sales in the first nine months of 2015. Corporate operating expense was $.9 million lower due to decreased general and administrative expenses.

 

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Woodlands

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

 

     Nine Months Ended
September 30,
 
     2015      2014  

Net sales (millions of dollars)

     

Pine sawtimber

   $ 16.1         12.9   

Pine pulpwood

     2.9         2.5   

Hardwood sawtimber

     .1         .2   

Hardwood pulpwood

     .6         .9   

Timberland

     .1         1.1   

Oil and gas lease rentals

     .6         1.3   

Oil and gas royalties

     2.5         3.6   

Hunting leases

     2.3         1.9   

Hauling to other mills

     4.1         4.9   

Cost of sales (millions of dollars)

     

Direct operating expenses

   $ 3.4         3.5   

Oil and gas royalty expenses

     .4         .4   

Cost of hauling stumpage to other mills

     4.1         4.9   

Cost of timberland sold

     —           .3   

Cost of fee timber harvested (millions of dollars)

   $ 5.5         4.7   

Sales volume (thousands of tons)

     

Pine sawtimber

     600.4         534.2   

Pine pulpwood

     304.0         320.5   

Hardwood sawtimber

     1.6         4.4   

Hardwood pulpwood

     25.5         46.6   

Sales price (per ton)

     

Pine sawtimber

   $ 27         24   

Pine pulpwood

     10         8   

Hardwood sawtimber

     60         51   

Hardwood pulpwood

     22         18   

Timberland

     

Sales volume (acres)

     60         472   

Sales price (per acre)

   $ 2,379         2,344   

In the Woodlands segment, net sales for the first nine months of 2015 decreased $.2 million from the same period of 2014. Sales of timberland were $1 million less in 2015, due to fewer acres sold. Oil and gas lease rental income decreased $.7 million compared to the first nine months of 2014, as the amortization periods for some leases expired and the acreage became held by production. Oil and gas royalties were $1.1 million less than in the same period of 2014 due to a decrease in natural gas prices received for the Company’s royalty share of gas production, partially offset by an increase in gas production volume. Revenue from sales of pine sawtimber increased $3.2 million, due to a 66,175 ton increase in harvest volume combined with a $3 per ton, or 13 percent, higher average sales price when compared to the 2014 period. Net sales from pine pulpwood harvested were $.4 million higher than in 2014, due to an increase in average per-ton sales price, partially offset by a lower harvest volume. Net sales from hardwood pulpwood were $.3 million less in 2015 than in the same period of 2014 due to decreased harvest volumes. Revenues from hunting leases increased $.4 million in the first nine months of 2015 compared to the same period of 2014. Revenues from hauling stumpage to other mills were $.8 million less in 2015 when compared to 2014.

 

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Cost of sales for the Woodlands segment for the first nine months of 2015 decreased $1.2 million compared to the same period a year ago. This reduction was due to a $.1 million decrease in direct operating expenses, a $.2 million lower cost of timberland sold due to fewer acres sold, and a $.9 million reduction of the cost of hauling stumpage to other mills that was offset by the related decrease in hauling revenue. The Woodlands segment’s operating income of $15.9 million was $.3 million higher than in the first nine months of 2014, due to the same factors affecting net sales and cost of sales, partially offset by a $.8 million higher cost of fee timber harvested in 2015.

Manufacturing

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

 

     Nine Months Ended
September 30,
 
     2015      2014  

Net sales (millions of dollars)

     

Lumber

   $ 66.3         77.8   

Residual by-products1

     7.4         7.5   

Medium density fiberboard (“MDF”)2

     40.9         50.3   

Freight invoiced to customers

     8.1         10.0   

Cost of sales – sawmill operations (millions of dollars)

     

Raw materials

   $ 29.2         29.3   

Residual by-products

     8.4         8.7   

Direct manufacturing expenses

     22.1         20.7   

Change in inventory

     (.1      (1.0

Freight expense

     3.0         4.0   

Cost of sales – MDF operations (millions of dollars)

     

Raw materials2

   $ 18.0         23.9   

Direct manufacturing expenses2

     19.8         20.0   

Change in inventory2

     1.0         —     

Freight expense

     5.0         6.0   

Depreciation (millions of dollars)

     

Sawmill operations

   $ 4.0         3.6   

MDF operations

     5.5         5.0   

Lumber

     

Finished production (MMBF)

     191.2         200.2   

Sales volume (MMBF)

     194.4         199.6   

Sales price (per MBF)

   $ 341         390   

MDF (3/4 inch basis) 2

     

Finished production (MMSF)

     70.3         86.3   

Sales volume (MMSF)

     72.4         86.6   

Sales price (MSF)

   $ 565         581   

 

1  Residual by-product sales are reported net of intercompany eliminations.
2  On March 10, 2015, the MDF plant incurred a fire that curtailed operations for a portion of the first and second quarters. (For additional information refer to Note 14 – Business Interruption Claim and Gain on Involuntary Conversion of Assets.)

 

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Net sales for the Manufacturing segment decreased $22.4 million from the prior-year period, primarily due to soft demand for lumber and MDF products which led to lower average sales prices and decreased sales volumes. Lumber sales revenue decreased by $11.5 million, or 15 percent, when compared to the first nine months of 2014, primarily due to a lower average lumber sales price combined with a decrease in lumber sales volume. MDF sales revenue decreased $9.4 million, due to a lower average MDF sales price combined with a decrease in MDF sales volume. In addition, revenues from freight invoiced to customers decreased $1.9 million. Partially offsetting these decreases were other income from the settlement of a business interruption claim at the Company’s MDF plant in the 2015 period of $.5 million and gains on involuntary conversions of assets of $.7 million during 2015, while the Company had a loss on asset disposal of $.5 million in 2014.

Cost of sales for the Manufacturing segment in the first nine months of 2015 decreased $4.1 million from the first nine months of 2014. The intersegment elimination of residual sales by sawmill operations to MDF operations are not reflected in the cost of sales amounts reported above. This cost decreased $.4 million period-over-period. The cost of sales for sawmill operations in the first nine months of 2015 were $.7 million more than the prior-year first nine months, due to a $.9 million reduction in benefit from the change in lumber inventory, combined with a $1.4 million increase in direct operating expenses. These additional costs were partially offset by the reduction of cost resulting from the decreased volume of lumber produced, which resulted in a $.1 million reduction of raw material cost, and by lower freight expense. Cost of sales for MDF operations were $5.9 million lower than in the first nine months of 2014, primarily due to a fire-related curtailment of production which led to a $5.9 million reduction in raw material cost for the current-year period, while direct operating expenses were lower by $.2 million. These cost reductions were partially offset by an increased expense from the change in inventory of $1 million. The Company had insurance coverage for the property damage and business interruption caused by the fire and recognized expenses associated with the deductibles for these policies in the first half of 2015, which amounted to $1 million for the property policy and approximately $.9 million for the business interruption policy. Operating income for the Manufacturing segment was $17 million less than in the same period a year ago, due to the same items affecting net sales and cost of sales.

Real Estate

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

 

     Nine Months Ended
September 30,
 
     2015      2014  

Net sales (millions of dollars)

     

Residential lots

   $ 3.1         4.1   

Commercial acres

     —           .9   

Chenal Country Club

     4.8         4.8   

Cost of sales (millions of dollars)

     

Residential lots

   $ 2.0         2.1   

Commercial acres

     —           .4   

Chenal Country Club

     4.9         5.1   

Sales volume

     

Residential lots

     48         45   

Commercial acres

     —           1.72   

Average sales price (thousands of dollars)

     

Residential lots – per lot

   $ 64         93   

Commercial acres – per acre

     —           501   

 

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Net sales for the Real Estate segment for the first nine months of 2015 decreased $2.1 million when compared to the first nine months of 2014, primarily due to no sales of commercial acreage and a lower average per-lot sales price, partially offset by a higher number of residential lots sold in 2015. The average sales price per lot decreased $29,000 in the first nine months of 2015 from the same period of 2014 due to the mix of lots sold.

Cost of sales for the Real Estate segment decreased $.7 million compared to the first nine months of 2014, due to mix of residential lots sold and to no cost of sales of commercial acreage in 2015. The decrease in financial results for the Real Estate segment from the first nine months of 2014 was due to a lower margin from residential lots sold and a decrease in income from commercial acreage sold.

Corporate

Operating expenses for the Corporate segment were $.9 million lower versus the first nine months of 2014, mainly due to decreased general and administrative expenses, primarily incentive plan expense.

Eliminations

Intersegment sales of timber from Deltic’s Woodlands to the Manufacturing segment increased $3.4 million to $16.5 million for the first nine months of 2015. The increase was mainly due to a higher volume of the timber transferred from fee timberland to the sawmills combined with a higher per-ton transfer price. Logs supplied by the Woodlands segment to Company sawmills are transferred at prices that approximate market.

Income Taxes

The effective income tax rate was 37 percent for the nine months ended September 30, 2015 and 32 percent for 2014. The difference in income tax rate was primarily due to the benefit recognized in 2014 for changes in the balances of uncertain tax positions.

Liquidity and Capital Resources

Cash Flows and Capital Expenditures

Net cash provided by operating activities totaled $23.6 million for the first nine months of 2015 compared to $25.1 million for the same period of 2014. Cash from operations and borrowings from a new ten-year term loan have provided the cash needed for capital expenditures, purchases of Company stock, and timberland acquisition expenditures and the payment made to reduce the outstanding balance of revolving credit facility during the third quarter. Changes in operating working capital, other than cash and cash equivalents provided cash of $4.5 million and required cash of $6.8 million in 2014. 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 $24.4 million in the current-year period and $12.1 million a year ago. Capital expenditures by segment consisted of the following:

 

     Nine Months Ended
September 30,
 
(Thousands of dollars)    2015      2014  

Woodlands

   $ 3.1         3.2   

Manufacturing

     16.5         8.0   

Real Estate, including development expenditures

     5.4         1.4   

Corporate

     .1         —     
  

 

 

    

 

 

 

Capital expenditures

     25.1         12.6   

Adjustment for non-cash accrued liabilities

     (.7      (.5
  

 

 

    

 

 

 

Capital expenditures requiring cash

   $ 24.4         12.1   
  

 

 

    

 

 

 

Timberland acquisition expenditures, including timberland acquired in exchanges, for the nine months ended September 30, 2015, were $.6 million compared to $118.2 million for the nine months ended September 30, 2014. There were no timberland acquisition expenditures in the third quarter of 2015 while there where expenditures of $.1 million in the third quarter of 2014.

The net change in purchased stumpage inventory to be utilized in the Company’s sawmilling operations required cash of $.7 million in the first nine months of 2015 compared to providing cash of $.1 million in the same period of 2014. The Company had proceeds of $1.6 million from involuntary conversion of assets in 2015 and none in 2014. Other investing activities provided $.4 million in 2015 and $1.1 million during 2014. Dividends of $3.8 million were paid in the first nine months of both 2015 and 2014. Proceeds from exercises of stock options and the related tax benefits were $.8 million in the first nine months of 2015 and $.4 million in the same period of 2014. The Company used $9.6 million in cash to purchase treasury stock in the first nine months of 2015 compared to $7.9 million in the same period of 2014. The Company borrowed $100,000,000 in a ten-year term note in the third quarter of 2015 and used the proceeds to make payments to the revolving credit facility. In the first nine months of 2015, the Company had net repayments of $93 million under its revolving credit facility compared to net borrowings of $115 million in 2014 to finance the timberland acquisitions in the first nine months of 2014. Other financing activities required $.7 million during 2015 and $.4 million during 2014.

Financial Condition

Working capital totaled $5.8 million at September 30, 2015, and $13.1 million at December 31, 2014. Deltic’s working capital ratio at September 30, 2015 was 1.24 to 1, compared to 1.81 to 1 at the end of 2014. Cash and cash equivalents at the end of the third quarter of 2015 were $1.5 million, a decrease of $1.3 million from the December 31, 2014 balance of $2.8 million. Deltic’s long-term debt to stockholders’ equity ratio was .810 to 1 at September 30, 2015 and .758 to 1 at December 31, 2014.

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, Wildwood Place, 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 $430 million, and includes an option to request an increase in the amount of aggregate revolving commitments by $50 million. As of September 30, 2015, there was $41 million outstanding in borrowings on the credit facility, leaving $389 million available. The credit agreement contains restrictive covenants, including limitations on the

 

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incurrence of debt and requirements to maintain certain financial ratios. On August 25, 2015, Deltic entered into an agreement to amend the revolving credit facility and was permitted to expand its credit facilities so that the Company could enter into a new $100,000,000 term loan with American AgCredit, PCA. (For additional information about the Company’s current financing arrangements, refer to Note 9 to the consolidated financial statements included in the third quarter 2015 Form 10-Q and Notes 9 and 10 to the consolidated financial statements included in the Company’s 2014 annual report on Form 10-K.)

The table below sets forth the covenants in the credit facility and senior notes payable and status with respect to these covenants as of September 30, 2015 and December 31, 2014.

 

     Covenants
Requirements
     Actual Ratios at
Sept. 30, 2015
    Actual Ratios at
Dec. 31, 2014
 

Leverage ratio should be less than:1

     .65 to 1         .448 to 1        .432 to 1   

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

     —   2       68.77     74.94

 

1  The leverage ratio is calculated as total debt divided by total capital. Total debt includes indebtedness for borrowed money, secured liabilities, obligations in respect of letters of credit, and guarantees. Total capital is the sum of total debt and net worth. Net worth is calculated as total assets minus total liabilities, as reflected on the balance sheet. This covenant is applied at the end of each quarter.
2  Timber market value must be greater than 175 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.

Based on management’s current operating projections, the Company believes it will remain in compliance with the debt covenants and have sufficient liquidity to finance operations and pay all obligations. However, depending on market conditions and the possibility of the return of economic deterioration, the Company could 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. On December 18, 2014, Deltic announced another $25 million expansion of the program. As of September 30, 2015, the Company had expended $34.2 million under this program, with the purchase of 695,801 shares at an average cost of $49.21 per share; including 157,275 shares purchased to date in 2015 at an average cost of $61.13 per share. In its two previous repurchase programs, Deltic purchased 479,601 shares at an average cost of $20.89 per share and 419,542 shares at a $24.68 per share average cost, respectively.

Off-Balance Sheet Arrangements, Contractual Obligations, and Commitments

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 regard 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 2014 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
2015
     2016
to 2017
     2018
to 2019
     After
2019
 

Contractual cash payment obligations

              

Real estate development committed capital costs

   $ 9.1         6.3         2.8         —           —     

Manufacturing committed capital costs

     36.9         15.7         21.2         —           —     

Long-term debt

     210.0         —           40.0         41.0         129.0   

Interest on debt*

     47.6         2.8         12.1         9.2         23.5   

Retirement plans

     4.2         .3         .5         .6         2.8   

Other postretirement benefits

     5.0         .1         .8         .9         3.2   

Other liabilities

     2.3         2.3         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 315.1         27.5         77.4         51.7         158.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other commercial commitment expirations

              

Timber cutting agreements

   $ 1.0         .1         .9         —           —     

Letters of credit

     .5         .1         .2         .2         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1.5         .2         1.1         .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.

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 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 2014 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.)

 

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Table of Contents

Outlook

Pine sawtimber harvest levels are expected to be 125,000 to 165,000 tons in the fourth quarter of 2015 and 725,000 to 765,000 tons for the year. Finished lumber sales volumes are estimated at 60 to 80 million board feet for the fourth quarter and 255 to 275 million board feet for the year. MDF sales volumes for the fourth quarter and year of 2015 are estimated to be 20 to 30 million square feet and 90 to 100 million square feet, respectively. Actual lumber and MDF sales volumes are subject to market conditions. Residential lot sales are projected to be 27 to 52 lots and 75 to 100 lots for the fourth quarter 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,” “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 2014 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 September 30, 2015, 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 2014 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
 

July 1 through

           

July 31, 2015

     —         $ —           —         $ 35,372,403   

August 1 through

           

August 31, 2015

     31,300       $ 60.35         31,300       $ 33,483,427   

September 1 through

           

September 30, 2015

     125,975       $ 61.32         125,975       $ 25,758,640   

 

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. On December 18, 2014, Deltic announced another $25 million expansion of the program. There is no stated expiration date regarding this authorization.

 

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

  10.32    First Amendment to Second Amended and Restated Revolving Credit Agreement dated August 25, 2015 (incorporated by reference to Exhibit 10.32 to Registrant’s Current Report on Form 8-K dated August 15, 2015).
  10.33    Term Loan Credit Agreement dated August 27, 2015 (incorporated by reference to Exhibit 10.33 to Registrant’s Current Report on Form 8-K dated August 28, 2015).
  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 September 30, 2015, formatted in Extensible Business Reporting Language (“XBRL”): (1) the Consolidated Balance Sheets; (2) the Consolidated Statements of Income; (3) the Consolidated Statements of Other 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:  

November 2, 2015

    By:  

/s/    Ray C. Dillon        

        Ray C. Dillon, President
        (Principal Executive Officer)
Date:  

November 2, 2015

    By:  

/s/    Kenneth D. Mann        

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

November 2, 2015

    By:  

/s/    Byrom L. Walker        

        Byrom L. Walker, Controller
        (Principal Accounting Officer)

 

39

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