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Deltic Timber 10-Q 2016

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 June 30, 2016

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 July 22, 2016, was 12,149,002.

 

 

 


Table of Contents

TABLE OF CONTENTS – SECOND QUARTER 2016 FORM 10-Q REPORT

 

         Page
Number
 
  PART I – Financial Information   
Item 1.  

Financial Statements

     1   
Item 2.  

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

     21   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     35   
Item 4.  

Controls and Procedures

     35   
  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)

 

     June 30,
2016
    December 31,
2015
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 3,499        5,429   

Trade accounts receivable, net of allowance for doubtful accounts of $145 and $130, respectively

     12,068        6,995   

Inventories

     11,265        11,917   

Prepaid expenses and other current assets

     5,556        6,392   
  

 

 

   

 

 

 

Total current assets

     32,388        30,733   

Investment in real estate held for development and sale

     58,332        58,418   

Timber and timberlands – net

     362,718        361,856   

Property, plant, and equipment – net

     92,923        85,495   

Deferred charges and other assets

     2,754        2,665   
  

 

 

   

 

 

 

Total assets

   $ 549,115        539,167   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Current maturities of long-term debt

   $ 39,949        39,917   

Trade accounts payable

     9,385        8,837   

Accrued taxes other than income taxes

     3,098        2,118   

Deferred revenues and other accrued liabilities

     9,606        7,607   
  

 

 

   

 

 

 

Total current liabilities

     62,038        58,479   

Long-term debt

     200,846        183,836   

Deferred tax liabilities – net

     1,708        525   

Other noncurrent liabilities

     43,043        42,359   

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

     86,774        87,822   

Retained earnings

     202,930        201,959   

Treasury stock

     (37,039     (24,347

Accumulated other comprehensive loss

     (11,313     (11,594
  

 

 

   

 

 

 

Total stockholders’ equity

     241,480        253,968   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 549,115        539,167   
  

 

 

   

 

 

 

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
June 30,
    Six Months Ended
June 30,
 
     2016     2015     2016     2015  

Net sales

   $ 56,705        45,681        107,329        94,060   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

        

Cost of sales

     37,877        33,240        74,389        67,256   

Depreciation, amortization, and cost of fee timber harvested

     5,618        5,291        11,491        10,276   

General and administrative expenses

     4,982        5,437        10,004        10,299   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     48,477        43,968        95,884        87,831   

Other income – business interruption claim

     —          516        —          516   

Gain on involuntary conversion of assets

     —          704        —          704   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     8,228        2,933        11,445        7,449   

Interest income

     5        —          7        1   

Interest and other debt expense, net of capitalized interest

     (2,181     (1,646     (4,877     (3,274

Other income/(expense)

     81        (3     132        104   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     6,133        1,284        6,707        4,280   

Income tax expense

     (1,913     (453     (2,092     (1,536
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 4,220        831        4,615        2,744   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share

        

Basic

   $ .35        .07        .38        .22   

Assuming dilution

   $ .35        .07        .38        .22   

Dividends per common share

        

Paid

   $ .10        .10        .20        .20   

Declared

   $ .20        .20        .30        .30   

Weighted average common shares outstanding (thousands)

        

Basic

     11,974        12,471        12,013        12,462   

Assuming dilution

     12,032        12,521        12,078        12,518   

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)

 

     Six Months Ended
June 30,
 
     2016      2015  

Net income

   $ 4,615         2,744   
  

 

 

    

 

 

 

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

     —           1   

Amortization of actuarial loss

     281         464   

Amortization of plan amendment

     —           (14
  

 

 

    

 

 

 

Other comprehensive income

     281         451   
  

 

 

    

 

 

 

Comprehensive income

   $ 4,896         3,195   
  

 

 

    

 

 

 

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)

 

     Six Months Ended
June 30,
 
     2016     2015  

Operating activities

    

Net income

   $ 4,615        2,744   

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

    

Depreciation, amortization, and cost of fee timber harvested

     11,491        10,276   

Deferred income taxes

     614        (487

Real estate development expenditures

     (2,030     (1,293

Real estate costs recovered upon sale

     1,889        585   

Timberland costs recovered upon sale

     6        25   

Stock-based compensation expense

     1,689        1,678   

Net increase in liabilities for pension and other postretirement benefits

     1,170        1,802   

Net decrease in deferred compensation for stock-based liabilities

     (551     (543

Decrease in operating working capital other than cash and cash equivalents

     853        369   

Other changes in assets and liabilities

     279        (557
  

 

 

   

 

 

 

Net cash provided by operating activities

     20,025        14,599   
  

 

 

   

 

 

 

Investing activities

    

Capital expenditures requiring cash, excluding real estate development

     (18,160     (13,102

Timberland acquisition expenditures requiring cash

     (719     (581

Net change in purchased stumpage inventory

     (2,089     (574

Net change in funds held by trustee

     1        —     

Other – net

     221        308   
  

 

 

   

 

 

 

Net cash required by investing activities

     (20,746     (13,949
  

 

 

   

 

 

 

Financing activities

    

Proceeds from borrowings

     24,000        2,000   

Repayments of notes payable and long-term debt

     (7,000     (1,000

Treasury stock purchases

     (15,174     (16

Common stock dividends paid

     (2,429     (2,523

Proceeds from stock option exercises

     256        545   

Excess tax benefits/(provisions) from stock-based compensation expense

     (97     54   

Other – net

     (765     (373
  

 

 

   

 

 

 

Net cash required by financing activities

     (1,209     (1,313
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (1,930     (663

Cash and cash equivalents at January 1

     5,429        2,761   
  

 

 

   

 

 

 

Cash and cash equivalents at June 30

   $ 3,499        2,098   
  

 

 

   

 

 

 

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)

 

     Six Months Ended
June 30,
 
     2016     2015  

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 2016 and 2015

     128        128   
  

 

 

   

 

 

 

Capital in excess of par value

    

Balance at beginning of period

     87,822        86,575   

Exercise of stock options

     (15     (88

Stock-based compensation expense

     1,689        1,678   

Restricted stock awards

     (2,349     (1,677

Tax effect of stock awards

     (511     (353

Restricted stock forfeitures

     138        —     
  

 

 

   

 

 

 

Balance at end of period

     86,774        86,135   
  

 

 

   

 

 

 

Retained earnings

    

Balance at beginning of period

     201,959        204,327   

Net income

     4,615        2,744   

Common stock dividends declared

     (3,644     (3,786
  

 

 

   

 

 

 

Balance at end of period

     202,930        203,285   
  

 

 

   

 

 

 

Treasury stock

    

Balance at beginning of period – 430,240 and 231,790 shares, respectively

     (24,347     (11,978

Shares purchased – 277,670 and 249 shares, respectively

     (15,174     (16

Shares issued for incentive plans – 43,075 and 41,612 shares, respectively

     2,620        2,310   

Forfeited restricted stock – 2,212 shares and none, respectfully

     (138     —     
  

 

 

   

 

 

 

Balance at end of period – 667,047 and 190,427 shares, respectively

     (37,039     (9,684
  

 

 

   

 

 

 

Accumulated other comprehensive loss

    

Balance at beginning of period

     (11,594     (11,411

Change in other comprehensive income, net of tax

     281        451   
  

 

 

   

 

 

 

Balance at end of period

     (11,313     (10,960
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 241,480        268,904   
  

 

 

   

 

 

 

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, 2015. 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 June 30, 2016, and the results of its operations and cash flows for the three months and six months ended June 30, 2016 and 2015. 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

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, “Leases”, which supersedes Topic 840 and among other things, requires lessees to recognize most leases on-balance sheet. The new standard will be effective for the Company on January 1, 2019 and is not expected to have a material impact on its financial statements.

On March 30, 2016, FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”. This ASU changes several aspects of the accounting for share-based payments award transactions, including accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements, and the classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. This update will be effective for the Company on January 1, 2017. The Company is evaluating what effect ASU 2016-09 will have on its consolidated financial statements and related disclosures.

In June 2016, FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”. The ASU changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. This update will be effective for the Company on January 1, 2020 and is not expected to have a material 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:

 

          June 30,      Dec. 31,  
(Thousands of dollars)    2016      2015  

Raw materials

   - Logs    $ 2,768         1,975   
   - Del-Tin - wood fiber      274         615   

Finished goods

   - Lumber      3,778         4,142   
   - Medium density fiberboard (“MDF”)      2,359         2,516   
   - MDF consigned to others      685         1,031   

Supplies

        1,401         1,638   
     

 

 

    

 

 

 
      $ 11,265         11,917   
     

 

 

    

 

 

 

Note 3 – Prepaid Expenses and Other Current Assets

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

 

     June 30,      Dec. 31,  
(Thousands of dollars)    2016      2015  

Short-term deferred tax assets

   $ 2,105         2,131   

Refundable income taxes

     1,841         3,062   

Prepaid expenses

     771         687   

Other current assets

     839         512   
  

 

 

    

 

 

 
   $ 5,556         6,392   
  

 

 

    

 

 

 

Note 4 – Timber and Timberlands

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

 

     June 30,      Dec. 31,  
(Thousands of dollars)    2016      2015  

Purchased stumpage inventory

   $ 4,526         2,437   

Timberlands

     156,264         155,997   

Fee timber

     328,984         326,327   

Logging facilities

     1,229         1,221   
  

 

 

    

 

 

 
     491,003         485,982   

Less accumulated cost of fee timber harvested and facilities depreciation

     (128,445      (124,292
  

 

 

    

 

 

 

Strategic timber and timberlands

     362,558         361,690   

Non-strategic timber and timberlands

     160         166   
  

 

 

    

 

 

 
   $ 362,718         361,856   
  

 

 

    

 

 

 

 

7


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 4 – Timber and Timberlands (cont.)

 

During the three months ended June 30, 2016, Deltic acquired 324 acres of timberland for $528,000, and for the six months ended June 30, 2016, 403 acres of timberland were acquired for $719,000. During the three months ended June 30, 2015, Deltic acquired approximately 304 acres of timberlands for cash payments of approximately $580,000. The total number of timberland acres acquired in the first six months of 2015 was 344, inclusive of 40 acres acquired in an exchange transaction in the first quarter of 2015. The timberlands acquired in both 2016 and 2015 were located in the Company’s current operating area. 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 June 30, 2016, approximately 241 acres of these lands were available for sale.

Included in the Woodlands operating income were gains from sales of timberland of $33,000 and $70,000 for the three months ended June 30, 2016, and 2015, respectively, and $33,000 and $96,000 for the six months ended June 30, 2016 and 2015, respectively. Occasionally Deltic engages in land-for-land exchanges that are recorded as sales due to the nature of the land involved. For the six months ending June 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 2016.

Note 5 – Property, Plant, and Equipment

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

 

     June 30,      Dec. 31,  
(Thousands of dollars)    2016      2015  

Land

   $ 947         947   

Land improvements

     12,488         10,409   

Buildings and structures

     25,463         23,900   

Machinery and equipment

     169,369         158,385   
  

 

 

    

 

 

 
     208,267         193,641   

Less accumulated depreciation

     (115,344      (108,146
  

 

 

    

 

 

 
   $ 92,923         85,495   
  

 

 

    

 

 

 

 

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:

 

     June 30,      Dec. 31,  
(Thousands of dollars)    2016      2015  

Deferred revenues – current

   $ 3,477         2,877   

Dividend payable

     1,215         —     

Vacation accrual

     1,501         1,360   

Deferred compensation

     397         619   

All other current liabilities

     3,016         2,751   
  

 

 

    

 

 

 
   $ 9,606         7,607   
  

 

 

    

 

 

 

Note 7 – Other Noncurrent Liabilities

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

 

     June 30,      Dec. 31,  
(Thousands of dollars)    2016      2015  

Accumulated postretirement benefit obligation

   $ 12,623         12,295   

Supplemental pension plan

     12,893         12,764   

Accrued pension liability

     15,930         15,698   

Deferred revenue – long-term portion

     92         115   

Other noncurrent liabilities

     1,505         1,487   
  

 

 

    

 

 

 
   $ 43,043         42,359   
  

 

 

    

 

 

 

Note 8 – Credit Facilities

Effective January 6, 2016, Deltic entered into a second amendment to the Company’s Second Amended and Restated Revolving Credit Agreement with the consent of the lenders thereto, in which it exercised the first of its two options and extended the termination date by one year to November 17, 2020.

On February 4, 2016, and pursuant to its Second Amended and Restated Revolving Credit Agreement, Deltic elected to replace two lenders in the Credit Agreement. Accordingly the respective rights and obligations of Wells Fargo Bank, NA and Branch Banking and Trust Company were assigned to one new lender, Greenstone Farm Credit Services, ACA, and one existing lender, American AgCredit, PCA, in the amounts of $27,000,000 and $123,000,000, respectively.

 

9


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 9 – Income Taxes

The Company’s effective tax rate for the three months and six months ended June 30, 2016, was 31 percent due to the benefit of a lower income tax rate on sales of timber held 15 years or longer during the year of 2016. This compares to an effective income tax rate for the three and six months ended June 30, 2015 of 35 percent and 36 percent, respectively. At June 30, 2016, 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 10 – Employee and Retiree Benefit Plans

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Thousands of dollars)    2016      2015      2016      2015  

Defined benefit funded retirement plan

           

Service cost

   $ 410         490         821         979   

Interest cost

     524         505         1,048         1,010   

Expected return on plan assets

     (593      (602      (1,187      (1,205

Amortization of prior service cost

     —           1         —           2   

Recognized actuarial loss

     213         210         425         420   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net retirement expense

   $ 554         604         1,107         1,206   
  

 

 

    

 

 

    

 

 

    

 

 

 

Defined benefit unfunded retirement plan

           

Service cost

   $ 53         129         106         259   

Interest cost

     81         124         161         247   

Recognized actuarial loss

     19         152         38         304   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net retirement expense

   $ 153         405         305         810   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other postretirement benefit plan

           

Service cost

   $ 95         131         190         263   

Interest cost

     144         140         288         280   

Recognized actuarial loss

     —           19         —           39   

Amortization of plan amendment

     —           (11      —           (23
  

 

 

    

 

 

    

 

 

    

 

 

 

Net other postretirement benefits expense

   $ 239         279         478         559   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 10 – Employee and Retiree Benefit Plans (cont.)

 

The Company made contributions to its qualified plan of $450,000 during the first six months of 2016, and expects to fund the plan with an additional $600,000 over the remainder of 2016. 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.

Note 11 – Other Comprehensive Income Disclosures

The following tables detail the changes in accumulated other comprehensive loss (“AOCL”) by component for the six months ended June 30, 2016 and 2015:

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

 

     Defined
Benefit
Funded
Retirement
    

Defined
Benefit
Unfunded

Retirement

     Post
Retirement
Benefit
        
(Thousands of dollars)    Plan      Plan      Plan      Total  

AOCL at January 1, 2016

   $ (7,071      (4,309      (214      (11,594

Amounts reclassified from AOCL

     258         23         —           281   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income

     258         23         —           281   
  

 

 

    

 

 

    

 

 

    

 

 

 

AOCL at June 30, 2016

   $ (6,813      (4,286      (214      (11,313
  

 

 

    

 

 

    

 

 

    

 

 

 
     Defined
Benefit
Funded
Retirement
    

Defined
Benefit
Unfunded

Retirement

     Post
Retirement
Benefit
        
(Thousands of dollars)    Plan      Plan      Plan      Total  

AOCL at January 1, 2015

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

Amounts reclassified from AOCL

     256         185         10         451   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income

     256         185         10         451   
  

 

 

    

 

 

    

 

 

    

 

 

 

AOCL at June 30, 2015

   $ (7,359      (2,879      (722      (10,960
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 11 – Other Comprehensive Income Disclosures (cont.)

 

Reclassification Out of Accumulated Other Comprehensive Loss

Details about AOCL Components:

 

     Six Months Ended June 30, 2016  
     Defined
Benefit
Funded
Retirement
    

Defined
Benefit
Unfunded

Retirement

     Post
Retirement
Benefit
        
(Thousands of dollars)    Plan      Plan      Plan      Total  

Amortization of actuarial losses

   $ 425         38         —           463   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total before tax

     425         38         —           463   

Income tax benefit/(expense)

     (167      (15      —           (182
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reclassifications – net of tax

   $ 258         23         —           281   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Six Months Ended June 30, 2015  
     Defined
Benefit
Funded
Retirement
    

Defined
Benefit
Unfunded

Retirement

     Post
Retirement
Benefit
        
(Thousands of dollars)    Plan      Plan      Plan      Total  

Amortization of prior service costs

   $ 2         —           —           2   

Amortization of actuarial losses

     420         304         39         763   

Amortization of plan amendment

     —           —           (23      (23
  

 

 

    

 

 

    

 

 

    

 

 

 

Total before tax

     422         304         16         742   

Income tax benefit/(expense)

     (166      (119      (6      (291
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reclassifications – net of tax

   $ 256         185         10         451   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Six Months Ended June 30, 2016  
     Before
Tax
     Tax
(Expense)
     Net of
Tax
 
(Thousands of dollars)    Amount      or Benefit      Amount  

Amortization of actuarial losses

   $ 463         (182      281   
  

 

 

    

 

 

    

 

 

 

 

12


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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 11 – Other Comprehensive Income Disclosures (cont.)

 

     Six Months Ended June 30, 2015  
     Before
Tax
     Tax
(Expense)
     Net of
Tax
 
(Thousands of dollars)    Amount      or Benefit      Amount  

Amortization of prior service costs

   $ 2         (1      1   

Amortization of actuarial losses

     763         (299      464   

Amortization of plan amendment

     (23      9         (14
  

 

 

    

 

 

    

 

 

 
   $ 742         (291      451   
  

 

 

    

 

 

    

 

 

 

Note 12 – Stock-Based Compensation

The Consolidated Statements of Income for the three months ended June 30, 2016 and 2015, included $812,000 and $847,000, respectively, of stock-based compensation expense reflected in general and administrative expenses. For the six months ended June 30, 2016 and 2015, the amounts were $1,689,000 and $1,678,000, respectively.

Assumptions for the valuation of 2016 stock options and restricted stock performance units consisted of the following:

 

     2016  

Expected term of options (in years)

     6.27   

Weighted expected volatility

     38.16

Dividend yield

     .59

Risk-free interest rate – performance restricted shares

     1.34

Risk-free interest rate – options

     2.13

Stock price as of valuation date

   $ 55.94   

Restricted performance share valuation

   $ 68.88   

Grant date fair value – stock options

   $ 20.39   

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 12 – Stock-Based Compensation (cont.)

 

Stock Options – A summary of stock options as of June 30, 2016, and changes during the six 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, 2016

     147,870       $ 63.86         

Granted

     28,533         55.94         

Exercised

     (4,905      52.14         

Forfeited/expired

     (2,941      62.96         
  

 

 

          

Outstanding at June 30, 2016

     168,557       $ 62.87         6.5       $ 856   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2016

     105,704       $ 63.74         5.2       $ 472   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2016, 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 June 30, 2016, there was $1,194,000 of unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 2 years.

Restricted Stock and Restricted Stock Units – A summary of nonvested restricted stock as of June 30, 2016, and changes during the six months then ended are presented below:

 

Nonvested Restricted Stock

   Shares      Weighted
Average
Grant-Date
Fair Value
 

Nonvested at January 1, 2016

     87,105       $ 67.04   

Granted

     26,338         55.94   

Vested

     (17,912      67.67   

Forfeited

     (858      64.90   
  

 

 

    

Nonvested at June 30, 2016

     94,673       $ 63.85   
  

 

 

    

 

14


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 12 – Stock-Based Compensation (cont.)

 

As of June 30, 2016, there was $3,087,000 of unrecognized compensation cost related to nonvested restricted stock. That cost is expected to be recognized over a weighted-average period of 2.1 years.

Performance Units – A summary of nonvested restricted stock performance units as of June 30, 2016, and changes during the six months then ended are presented below:

 

Nonvested Restricted Stock Performance Units

   Shares      Weighted
Average
Grant-Date
Fair Value
 

Nonvested at January 1, 2016

     63,900       $ 83.24   

Granted

     23,095         68.88   

Units not meeting vesting conditions

     (11,263      90.61   

Forfeited

     (1,354      78.11   
  

 

 

    

Nonvested at June 30, 2016

     74,378       $ 77.76   
  

 

 

    

As of June 30, 2016, there was $3,142,000 of unrecognized compensation cost related to nonvested restricted stock performance units. That cost is expected to be recognized over a weighted-average period of 2.2 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.

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, $729,000 of which was recognized as expense in the first quarter of 2015 and $219,000 was recognized as expense in the second quarter 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

 

15


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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 14 – Business Interruption Claim and Gain on Involuntary Conversion of Assets (cont.)

 

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. At June 30, 2015, there was a balance of $6,473,000 in insurance receivables in the Company’s Consolidated Balance Sheet reflecting the amounts due from the insurers pursuant to the agreed upon settlement.

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.

The fair value measurements for the Company’s financial liabilities accounted for at fair value on a recurring basis at June 30, 2016, are presented in the following table:

 

            Fair Value Measurements at Reporting Date Using  
            Quoted Prices in
Active Markets
for Identical
Liabilities
     Significant
Observable
     Significant
Unobservable
 
     June 30,      Inputs      Inputs      Inputs  
(Thousands of dollars)    2016      Level 1      Level 2      Level 3  

Liabilities

           

Nonqualified employee savings plan

   $ 1,505         1,505         —           —     

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.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 15 – Fair Value of Financial Instruments (cont.)

 

The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at June 30, 2016 and 2015. 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.

 

     June 30, 2016      December 31, 2015  
(Thousands of dollars)    Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial liabilities

           

Long-term debt, including current maturities

   $ 240,795         248,093         223,753         225,123   

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:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Thousands, except per share amounts)    2016      2015      2016      2015  

Net earnings allocated to common stock

   $ 4,161         821         4,553         2,712   

Net earnings allocated to participating securities

     59         10         62         32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common stock and participating securities

   $ 4,220         831         4,615         2,744   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares used in basic EPS

     11,974         12,471         12,013         12,462   

Effect of dilutive stock awards

     58         50         65         56   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     12,032         12,521         12,078         12,518   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

           

Basic

   $ .35         .07         .38         .22   

Assuming dilution

   $ .35         .07         .38         .22   

 

17


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 16 – Earnings per Common Share (cont.)

 

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
June 30,
     Six Months Ended
June 30,
 
     2016      2015      2016      2015  

Options

     96,810         73,151         122,109         73,151   

Restricted performance shares

     16,244         31,266         16,244         64,748   

Note 17 – Supplemental Cash Flow Disclosures

Additional information concerning cash flows is as follows:

 

     Six Months Ended
June 30,
 
(Thousands of dollars)    2016      2015  

Income taxes paid in cash

   $ 354         329   

Interest paid

     4,561         3,045   

Interest capitalized

     (119      (18

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

 

     Six Months Ended
June 30,
 
(Thousands of dollars)    2016      2015  

Issuance of restricted stock

   $ 2,349         1,677   

Land exchanges

     —           39   

Capital expenditures accrued, not paid

     1,180         1,644   

Insurance recoveries accrued for equipment

     —           1,590   

 

18


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 17 – Supplemental Cash Flow Disclosures (cont.)

 

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

 

     Six Months Ended
June 30,
 
(Thousands of dollars)    2016      2015  

Trade accounts receivable

   $ (5,072      (1,376

Insurance receivables*

     —           (4,883

Inventories

     652         1,765   

Prepaid expenses and other current assets

     755         1,720   

Trade accounts payable

     1,728         923   

Accrued taxes other than income taxes

     980         992   

Deferred revenues and other accrued liabilities

     1,810         1,228   
  

 

 

    

 

 

 
   $ 853         369   
  

 

 

    

 

 

 

 

* Does not include capital items that are included in investing activities

Note 18 – Subsequent Event

On July 29, 2016, Deltic replaced the letter of credit that supports the Union County, Arkansas Taxable Industrial Revenue Bonds issued to finance a portion of the construction costs of the Del-Tin Fiber MDF plant, that was scheduled to expire on August 31, 2016. These bonds, due in 2027, total $29,000,000. The Company utilized a portion of the $50 million letter of credit component available under its revolving credit facility. With this, the borrowing capacity of the revolving credit facility was reduced by the amount of the letter of credit issued.

 

19


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 19 – Business Segments

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Thousands of dollars)    2016      2015      2016      2015  

Net sales

           

Woodlands

   $ 9,523         9,830         19,983         20,868   

Manufacturing2

     47,287         38,387         91,118         80,534   

Real Estate

     5,642         2,834         7,871         4,320   

Eliminations1

     (5,747      (5,370      (11,643      (11,662
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 56,705         45,681         107,329         94,060   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

           

Operating income/(loss)

           

Woodlands

   $ 4,365         4,951         9,682         11,437   

Manufacturing2

     7,030         3,465         10,312         7,002   

Real Estate

     1,743         (246      1,153         (1,075

Corporate

     (4,721      (5,155      (9,442      (9,720

Eliminations

     (189      (82      (260      (195
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     8,228         2,933         11,445         7,449   

Interest income

     5         —           7         1   

Interest and other debt expense, net of capitalized interest

     (2,181      (1,646      (4,877      (3,274

Other income/(expense)

     81         (3      132         104   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,133         1,284         6,707         4,280   
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation, amortization, and cost of fee timber harvested

           

Woodlands

   $ 2,008         1,967         4,228         3,674   

Manufacturing2

     3,488         3,222         7,017         6,398   

Real Estate

     87         93         179         184   

Corporate

     35         9         67         20   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,618         5,291         11,491         10,276   
  

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures

           

Woodlands

   $ 760         913         2,214         2,221   

Manufacturing2

     8,194         6,017         14,655         10,160   

Real Estate

     1,359         1,242         2,088         1,509   

Corporate

     40         138         65         140   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,353         8,310         19,022         14,030   
  

 

 

    

 

 

    

 

 

    

 

 

 

Timberland acquisition expenditures

   $ 598         563         719         619   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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)

 

20


Table of Contents

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

Executive Overview

The Company reported net income of $4.2 million for the second quarter of 2016, compared to $.8 million for the same period of 2015. The increase was primarily due to increased operating income for the Manufacturing and Real Estate segments, as a result of an improved lumber market combined with increased residential lot sales and the benefit of a commercial real estate acreage sale. The Woodlands segment reported $4.4 million in operating income for the second quarter of 2016, a decrease of $.5 million when compared to the second quarter of 2015, primarily due to reduced oil and gas-related income and to lower revenues from pine pulpwood sales, partially offset by increased revenues from pine sawtimber harvested. The Manufacturing segment reported $7 million in operating income, an improvement of $3.5 million from the $3.5 million of operating income reported a year ago, mainly due to both increased lumber sales volume and average sales price. Included in the financial results of the Manufacturing segment for the second quarter of 2015 was the benefit of a settlement of insurance claims, totaling $1.2 million, related to both property damage and business interruption claims that resulted from a fire that was incurred at the Company’s MDF plant on March 10, 2015. (Additional information about the financial impact of the fire can be found in the Manufacturing segment portion of the Results of Operations, and also in Note 14 to the Consolidated Financial Statements.) The Real Estate segment reported operating income of $1.8 million in the second quarter of 2016, compared to an operating loss of $.3 million in the same quarter of 2015, due to a sale of a 10.8-acre commercial real estate tract in the current-year second quarter and the sale of more residential lots than in the prior-year period. The Corporate segment’s operating expense was $.4 million lower in the current-year quarter than in the same period a year ago, mainly due to decreased general and administrative expense. Income tax expense increased $1.5 million, compared to 2015’s second quarter, primarily due to increased pretax income, partially offset by favorable capital gains tax rates applied to income from timber harvesting activity in 2016’s second quarter.

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 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 second quarter of 2016 there was improvement in the lumber market, as wet weather conditions abated in the Company’s market areas and led to increased construction activity. This resulted in increased demand and higher sales prices for lumber. During the second quarter, Deltic increased operating hours in its sawmills in order to increase production and sales and maintain its market share. The market for real estate in Chenal Valley continues to be active as general economic conditions maintain a gradual upward trend. 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 capture market-driven opportunities.

The Woodlands segment is the Company’s core operating segment, and its pine timberlands provide the foundation for Deltic’s vertically integrated structure. In the second quarter of 2016, the pine sawtimber harvest was 203,773 tons, an increase of 14,293 tons, or 8 percent, when compared to the 2015 second quarter harvest of 189,480 tons. The increase in the volume of pine sawtimber harvested was due to the timing of harvest activities for the Company’s 2016 planned annual harvest. The average sales price for the pine sawtimber harvested was $27 per ton in the second quarter of both 2016 and 2015. The pine pulpwood harvest in the current-year quarter was 103,128 tons, a decrease of 17,331 tons from the harvest in the second quarter of 2015, while the average sales price for the pine pulpwood harvested was $9 per ton for the second quarter of 2016, compared to $10 per ton in the prior-year second quarter. The decrease in harvest volume and the average per-ton sales price was due to weak markets for pine pulpwood in Deltic’s operating area during the second quarter of 2016. The Company sold 9 acres of non-strategic timberland for $4,400 per acre during the second quarter of 2016 versus sales of 38 acres of non-strategic recreational-use hardwood bottomland at an average sales price of $2,500 per acre in the same period of 2015.

 

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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 revenue was $.8 million for the second quarter of both 2016 and 2015. Oil and gas lease rental income was $.1 million in the second quarter of 2016, compared to $.2 million in the second quarter of 2015, as the amortization period of the prepaid lease rental payments received for the mineral leases for some acreage has expired and these mineral acres are now held by production. Oil and gas royalty income, primarily from gas wells in the Fayetteville Shale Play, was $.4 million in the second quarter of 2016, a $.3 million decrease from the second quarter of 2015, mainly due to a decrease in natural gas prices, to the impact of declining production from the aging of existing gas wells, and to there being no new drilling activity in the Fayetteville Shale to offset the decline in production. Deltic is currently receiving royalty income from 511 wells in the Fayetteville Shale Play, but 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 Company’s sawmill operations sold 69.9 million board feet of lumber in the second quarter of 2016, an increase of 8 million board feet, or 13 percent, when compared to the 61.9 million board feet sold in the second quarter a year ago. The average lumber sales price in the second quarter of 2016 was $371 per thousand board feet, a $24 per thousand board feet, or 7 percent, increase when compared to the same period in 2015, as a result of improved demand. MDF sales volume for the second quarter of 2016 was 27.7 million square feet, which was 7.2 million square feet, or 35 percent, more than the 20.5 million square feet sold in the same period of 2015. The MDF sales volume in the second quarter of 2015 reflected the impact of plant downtime as a result of the fire that occurred in the plant’s press area and of subsequent unplanned maintenance-related plant downtime. The average sales price for MDF sold during the current-year’s second quarter was $561 per thousand square feet, a decrease of $4 per thousand square feet from the average sales price of $565 per thousand square feet received in the second quarter of 2015. 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 22 residential lots during the second quarter of 2016, compared to 12 lots sold in the second quarter of 2015. The average per-lot sales price was $90,100 in 2016, compared to an average per-lot sales price of $69,500 in 2015’s second quarter, due to the mix of lots sold. There was a sale of 10.8 acres of commercial real estate acreage for $152,500 per acre in the second quarter of 2016, compared to no sales of commercial acreage in the second quarter of 2015. 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 June 30, 2016 Compared with Three Months Ended June 30, 2015

In the following tables, Deltic’s net sales and results of operations are presented for the quarters ended June 30, 2016 and 2015. Explanations of significant variances and additional analyses for the Company’s consolidated and segment operations follow the tables.

 

     Quarter Ended June 30,  
(Millions of dollars, except per share amounts)    2016      2015  

Net sales

     

Woodlands

   $ 9.5         9.9   

Manufacturing¹

     47.3         38.4   

Real Estate

     5.7         2.8   

Eliminations

     (5.7      (5.4
  

 

 

    

 

 

 

Net sales

   $ 56.8         45.7   
  

 

 

    

 

 

 

Cost of sales

     

Woodlands

   $ 3.0         2.8   

Manufacturing¹

     40.3         36.1   

Real Estate

     3.7         2.9   

Eliminations

     (9.1      (8.5
  

 

 

    

 

 

 

Total cost of sales

   $ 37.9         33.3   
  

 

 

    

 

 

 

Operating income

     

Woodlands

   $ 4.4         4.9   

Manufacturing¹

     7.0         3.5   

Real Estate

     1.8         (.3

Corporate

     (4.7      (5.1

Eliminations

     (.2      (.1
  

 

 

    

 

 

 

Operating income

     8.3         2.9   

Interest and other debt expense, net

     (2.2      (1.7

Income tax expense

     (1.9      (.4
  

 

 

    

 

 

 

Net income

   $ 4.2         .8   
  

 

 

    

 

 

 

Earnings per common share

     

Basic

   $ .35         .07   

Assuming dilution

     .35         .07   

 

¹ On March 10, 2015 the MDF plant incurred a fire that affected operations for the quarter. (For additional information refer to Note 14 – Business Interruption Claim and Gain on Involuntary Conversion of Assets)

Consolidated

Consolidated net income for the second quarter of 2016 was $4.2 million, an increase of $3.4 million from the second quarter of 2015. The increase was primarily due to improved financial results for the Manufacturing and Real Estate segments, partially offset by higher income tax expense and interest expense.

Consolidated cost of sales for the second quarter of 2016 increased $4.6 million from the second quarter of 2015, as manufacturing costs at both the MDF plant and the sawmills increased due to increased production volume, while the cost of residential lots sold increased due to the additional lots sold. This was combined with the cost of commercial acreage sold; and was partially offset by an increase in intercompany eliminations, caused by the Woodlands providing an increased volume of pine sawtimber stumpage to the sawmills.

 

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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 (such as operating salaries and benefits, cull timber removal, and line and road maintenance expenses), oil and gas royalty expenses, cost of hauling stumpage to other mills, and cost of timberland sold; Manufacturing – raw materials cost, direct manufacturing expenses (such as operating salaries and benefits, utilities, insurance, property and business interruption insurance deductibles, and repairs and maintenance), 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.

Consolidated operating income increased $5.4 million from the second quarter of 2015. The Woodlands segment’s operating income decreased $.5 million, primarily due to a lower volume of pine pulpwood harvested and to decreased oil and gas royalty revenues, partially offset by an increased pine sawtimber harvest volume. The Manufacturing segment’s operating income increased $3.5 million from the second quarter of 2015. This increase was due to a higher average lumber sales price and increased sales volume for lumber and MDF. Included in operating income for the second quarter of 2015, was income from the Company’s MDF plant’s business interruption insurance of $.5 million and from a gain on involuntary conversion of damaged assets of $.7 million that the Company recorded in 2015’s second quarter because the claims under the plant’s business interruption and property damage insurance policies were settled. There were no such gains recorded in the second quarter of 2016. The Real Estate segment’s operating income was $1.8 million, a $2.1 million increase from the prior-year second quarter, primarily due to a sale of commercial real estate acreage in the current-year second quarter and an increased income from residential lot sales due to additional lots sold. Corporate expense for the second quarter of 2016 was $.4 million lower when compared to the corresponding quarter of 2015 due to decreased general and administrative expense.

Woodlands

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

 

     Quarter Ended June 30,  
     2016      2015  

Net sales (millions of dollars)

     

Pine sawtimber

   $ 5.6         5.2   

Pine pulpwood

     .9         1.1   

Hardwood pulpwood

     .1         .2   

Timberland

     —           .1   

Oil and gas lease rentals

     .1         .2   

Oil and gas royalties

     .4         .7   

Hunting leases

     .8         .8   

Hauling to other mills

     1.4         1.4   

Cost of sales (millions of dollars)

     

Direct operating expenses

   $ 1.4         1.2   

Oil and gas royalty expenses

     .1         .1   

Cost of hauling stumpage to other mills

     1.4         1.4   

Cost of timberland sold

     —           —     

Cost of fee timber harvested (millions of dollars)

   $ 1.9         1.9   

Sales volume (thousands of tons)

     

Pine sawtimber

     203.8         189.5   

Pine pulpwood

     103.1         120.5   

Hardwood sawtimber

     .4         .6   

Hardwood pulpwood

     9.2         7.6   

Sales price (per ton)

     

Pine sawtimber

   $ 27         27   

Pine pulpwood

     9         10   

Hardwood sawtimber

     62         56   

Hardwood pulpwood

     13         21   

Timberland

     

Sales volume (acres)

     9         38   

Sales price (per acre)

   $ 4,426         2,526   

 

 

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Net sales for the Woodlands segment in the second quarter of 2016 decreased $.4 million when compared to the second quarter of 2015. While pine sawtimber sales were $.4 million higher in 2016’s second quarter due to an eight percent increase in harvest volume, pine pulpwood sales decreased $.2 million, due to a 14 percent decrease in harvest volume and a lower per-ton sales price. In addition, revenue from oil and gas lease rentals and royalties in the second quarter of 2015 decreased $.4 million, 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. The decrease in oil and gas royalties in the second quarter of 2016 was due to lower prices for natural gas and lower volumes of gas production caused by the aging of existing wells and to there being no new drilling activity in the second quarter 2016 when compared to the same period of 2015.

Cost of sales for the Woodlands segment in the second quarter of 2016 increased $.2 million when compared to the same period a year ago, due to higher direct operating expenses. Operating income for the Woodlands segment was $.5 million less than in the 2015 second quarter due to the same factors affecting net sales and cost of sales.

Manufacturing

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

 

     Quarter Ended June 30,  
     2016      2015  

Net sales (millions of dollars)

     

Lumber

   $ 26.0         21.5   

Residual by-products1

     2.9         2.7   

Medium density fiberboard (“MDF”)

     15.6         11.6   

Freight invoiced to customers

     2.9         2.7   

Cost of sales – sawmill operations (millions of dollars)

     

Raw materials

   $ 11.0         9.0   

Residual by-products1

     2.9         2.7   

Direct manufacturing expenses

     7.6         7.5   

Change in inventory

     (.6      .3   

Freight expense

     1.1         1.1   

Cost of sales – MDF operations (millions of dollars)

     

Raw materials2

   $ 6.3         5.3   

Direct manufacturing expenses2

     6.5         5.5   

Change in inventory2

     .3         —     

Freight expense

     1.8         1.6   

Depreciation (millions of dollars)

     

Sawmill operations

   $ 1.6         1.3   

MDF operations

     1.8         1.8   

Lumber

     

Finished production (MMBF)

     68.8         62.0   

Sales volume (MMBF)

     69.9         61.9   

Sales price (per MBF)

   $ 371         347   

MDF (3/4 inch basis)

     

Finished production (MMSF)

     26.8         20.1   

Sales volume (MMSF)

     27.7         20.5   

Sales price (per MSF)

   $ 561         565   

 

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

 

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Net sales in the second quarter of 2016 for the Manufacturing segment increased $8.9 million, or 23 percent, when compared to the second quarter of 2015. The volume of lumber sold increased 8 million board feet, or 13 percent, compared to the second quarter of 2015, and the average lumber sales price increased $24 per MBF, or 7 percent, from 2015’s second quarter average sales price. MDF sales volume in the second quarter of 2016 was 27.7 million square feet, or 35 percent, more than the same period a year ago, while the average sales price for MDF was $4 per MSF lower than in the second quarter of 2015. The sales volumes in the second quarter of 2015 were negatively impacted by plant downtime from a fire in March 2015.

Cost of sales for the Manufacturing segment was $4.2 million higher in the second quarter of 2016 than in the second quarter of 2015, due to an increase in production of lumber and MDF. For the reported cost of sales for sawmill and MDF operations, intersegment eliminations of residual sales by sawmill operations to MDF operations are not reflected. Elimination costs increased $.8 million period-over-period. The cost of sales for sawmill operations in the second quarter of 2016 were $2.2 million more than in the prior-year second quarter due primarily to a $2 million increase in cost of raw material used. Cost of sales for MDF operations were $2.5 million higher than in the second quarter of 2015. Raw material costs and direct operating expenses for the current-year quarter were higher by $1 million each as production in the second quarter of 2015 was negatively impacted by a fire-related production curtailment. Operating income for the Manufacturing segment was $3.5 million more than in the 2015 period, due to the same items affecting net sales and cost of sales. In the second quarter 2015, the Company recognized gains on involuntary conversion of damaged assets totaling $.7 million and income of $.5 million from business interruption insurance when the combined insurance claims were settled, while there were no such gains in 2016.

Real Estate

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

 

     Quarter Ended June 30,  
     2016      2015  

Net sales (millions of dollars)

     

Residential lots

   $ 2.0         .8   

Commercial acres

     1.6         —     

Chenal Country Club

     1.8         1.9   

Cost of sales (millions of dollars)

     

Residential lots

   $ 1.0         .5   

Commercial acres

     .3         —     

Chenal Country Club

     1.7         1.8   

Sales volume

     

Residential lots

     22         12   

Commercial acres

     10.8         —     

Average sales price (thousands of dollars)

     

Residential lots – per lot

   $ 90         69   

Commercial acres – per acre

     152         —     

Net sales for the Real Estate segment in the second quarter of 2016 increased $2.9 million compared to the second quarter of 2015. The increase was due to an increase in the number of residential lots sold at a higher average per-lot sales price combined with a sale of a 10.8-acre commercial real estate tract in the current-year second quarter. The average sales price per lot sold increase of $21,000 per lot sold was due to the mix of lots sold.

 

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Cost of sales for the Real Estate segment increased $.8 million due to the cost of the commercial acreage sold and to the increase in the number of residential lots sold in the current-year quarter. The increase in operating income for the Real Estate segment in the second quarter of 2016 was due to the margin from the commercial acreage sold and to the increase in the number of residential lots sold.

Corporate

The $.4 million decrease in Corporate operating expense during the second quarter of 2016 was primarily due to lower general and administrative expense when compared to the same period of 2015.

Eliminations

Intersegment sales of timber from Deltic’s Woodlands to the Manufacturing segment during the second quarter of 2016 increased $.3 million, to $5.7 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. Current period transfer prices are approximately that of market.

Interest Expense

Interest expense was $.5 million higher when compared to the prior-year second quarter, due to increased borrowings as a result of increased expenditures for purchases of treasury stock and capital projects. In addition, 2016’s interest expense was negatively impacted by a higher weighted-average interest rate on the debt outstanding. The Company received $.3 million in patronage refunds from one of its lenders, accounted for as a reduction in interest expense.

Income Taxes

The effective income tax rate was 31 percent for the second quarter of 2016 and 35 percent for the second quarter of 2015. The current year income tax rate is lower due to a lower capital gains tax rate that is applied to sales of timber in 2016.

Six Months Ended June 30, 2016 Compared with Six Months Ended June 30, 2015

In the following tables, Deltic’s net sales and results of operations are presented for the six months ended June 30, 2016 and 2015. Explanations of significant variances and additional analyses for the Company’s consolidated and segment operations follow the tables.

 

     Six Months Ended June 30,  
(Millions of dollars, except per share amounts)    2016      2015  

Net sales

     

Woodlands

   $ 20.0         20.9   

Manufacturing1

     91.1         80.6   

Real Estate

     7.9         4.3   

Eliminations

     (11.6      (11.7
  

 

 

    

 

 

 

Net sales

   $ 107.4         94.1   
  

 

 

    

 

 

 

Cost of sales

     

Woodlands

   $ 5.8         5.5   

Manufacturing

     80.8         74.7   

Real Estate

     6.3         5.0   

Eliminations

     (18.5      (17.9
  

 

 

    

 

 

 

Total cost of sales

   $ 74.4         67.3   
  

 

 

    

 

 

 

Operating income and net income

     

Woodlands

   $ 9.7         11.4   

Manufacturing1

     10.3         7.0   

Real Estate

     1.2         (1.1

Corporate

     (9.4      (9.7

Eliminations

     (.3      (.2
  

 

 

    

 

 

 

Operating income

     11.5         7.4   

 

 

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Table of Contents
     Six Months Ended June 30,  
(Millions of dollars, except per share amounts)    2016      2015  

Interest and other debt expense, net

     (4.9      (3.3

Other income

     .1         .1   

Income tax expense

     (2.1      (1.5
  

 

 

    

 

 

 

Net income

   $ 4.6         2.7   
  

 

 

    

 

 

 

Earnings per common share

     

Basic

   $ .38         .22   

Assuming dilution

     .38         .22   

 

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

Consolidated

Consolidated net income for the first six months of 2016 increased $1.9 million when compared to the first six months of 2015. The increase was primarily due to increased operating income from the Manufacturing and Real Estate segments and decreased Corporate expense, partially offset by decreased operating income for the Woodlands segment.

Consolidated cost of sales increased $7.1 million when compared to the first six months of 2015, primarily due to increased lumber and MDF production in the Manufacturing segment as a result of increased demand, a higher cost of sales for the Real Estate segment due to the cost recorded for a commercial real estate acreage sale and to selling more residential lots, and to an increase in intercompany eliminations caused by the Woodlands providing a higher volume of pine stumpage 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.

Consolidated operating income for the first six months of 2016 increased $4.1 million from the first half of 2015. The Woodlands segment’s operating income decreased $1.7 million, due to decreased oil and gas royalty income and to an increased cost of fee timber harvested, partially offset by increased sales of pine pulpwood. The Manufacturing segment’s operating income for the first half of 2016 increased $3.3 million from the prior-year period, due to increased sales volume for both lumber and MDF and to lower per-unit manufacturing costs. The Real Estate segment’s operating income increased $2.3 million, mainly due to the sale of a commercial real estate site and to increased residential lot sales in the first six months of 2016. Corporate operating expense was $.3 million lower due a decrease in general and administrative expense.

 

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Woodlands

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

 

     Six Months Ended June 30,  
     2016      2015  

Net sales (millions of dollars)

     

Pine sawtimber

   $ 11.3         11.3   

Pine pulpwood

     2.3         2.1   

Hardwood sawtimber

     —           .1   

Hardwood pulpwood

     .2         .3   

Timberland

     —           .1   

Oil and gas lease rentals

     .3         .4   

Oil and gas royalties

     .8         1.9   

Hunting leases

     1.5         1.5   

Hauling to other mills

     3.1         2.9   

Cost of sales (millions of dollars)

     

Direct operating expenses

   $ 2.4         2.3   

Oil and gas royalty expenses

     .3         .3   

Cost of hauling stumpage to other mills

     3.1         2.9   

Cost of timberland sold

     —           —     

Cost of fee timber harvested (millions of dollars)

   $ 4.1         3.6   

Sales volume (thousands of tons)

     

Pine sawtimber

     409.4         421.0   

Pine pulpwood

     263.4         212.1   

Hardwood sawtimber

     .8         .9   

Hardwood pulpwood

     17.2         15.0   

Sales price (per ton)

     

Pine sawtimber

   $ 28         27   

Pine pulpwood

     9         10   

Hardwood sawtimber

     61         59   

Hardwood pulpwood

     14         21   

Timberland

     

Sales volume (acres)

     9         58   

Sales price (per acre)

   $ 4,426         2,320   

In the Woodlands segment, net sales for the first six months of 2016 decreased $.9 million from the same period of 2015. While net sales from pine pulpwood harvested were $.2 million higher than in 2015, primarily due to an increased harvest volume, net sales from hardwood sawtimber and hardwood pulpwood harvest were $.2 million less, combined, in 2016 than in the same period of 2015. In addition, oil and gas royalties were $1.1 million less than in the same period of 2015, due to a decrease in natural gas prices received for the Company’s royalty share of gas production, and to a decrease in production volume caused by the aging of existing wells and to there being no new drilling activity. Revenues for hauling stumpage to other mills was $.2 million more in 2016’s second quarter compared to the same period of 2015.

Cost of sales for the Woodlands segment for the first six months of 2016 increased $.3 million compared to the same period a year ago. This increase was due to a $.1 million increase in direct operating expenses and a $.2 million increase of the cost of hauling stumpage to other mills. The Woodlands segment’s operating income of $9.7 million was $1.7 million higher than in the first six months of 2015, due to the same factors affecting net sales and cost of sales, partially offset by a $.5 million higher cost of fee timber harvested in 2016.

 

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Table of Contents

Manufacturing

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

 

     Six Months Ended June 30,  
     2016      2015  

Net sales (millions of dollars)

     

Lumber

   $ 50.1         43.4   

Residual by-products1

     5.8         5.0   

Medium density fiberboard (“MDF”)2

     29.8         26.7   

Freight invoiced to customers

     5.4         5.4   

Cost of sales – sawmill operations (millions of dollars)

     

Raw materials

   $ 21.5         18.3   

Residual by-products1

     5.8         5.0   

Direct manufacturing expenses

     15.4         14.7   

Change in inventory

     .3         —     

Freight expense

     1.9         1.9   

Cost of sales – MDF operations (millions of dollars)

     

Raw materials2

   $ 12.3         10.8   

Direct manufacturing expenses2

     13.0         12.6   

Change in inventory2

     .5         1.8   

Freight expense

     3.4         3.4   

Depreciation (millions of dollars)

     

Sawmill operations

   $ 3.1         2.6   

MDF operations

     3.7         3.6   

Lumber

     

Finished production (MMBF)

     138.3         121.6   

Sales volume (MMBF)

     141.5         123.2   

Sales price (per MBF)

   $ 354         352   

MDF (3/4 inch basis) 2

     

Finished production (MMSF)

     52.7         43.2   

Sales volume (MMSF)

     53.7         47.0   

Sales price (MSF)

   $ 554         569   

 

1  Intrasegment residual sales have been eliminated.
2  On March 10, 2015, the MDF plant incurred a fire that curtailed operations for the remainder of the quarter. (For additional information refer to Note14 – Business Interruption Claim and Gain on Involuntary Conversion of Assets.)

Net sales for the Manufacturing segment increased $10.5 million from the prior-year period, primarily due to the benefit of improved wood products markets, which led to a higher average lumber sales price and increased sales volumes for both lumber and MDF. Lumber sales increased $6.7 million when compared to the first six months of 2015, primarily due to a higher average lumber sales price combined with an increase in the lumber sales volume. MDF sales increased $3.1 million, due to an increase in MDF sales volume, partially offset by lower average MDF sales price.

 

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Cost of sales for the Manufacturing segment in the first six months of 2016 increased $6.1 million from the first six months of 2015. For the reported cost of sales for sawmill and MDF operations, intersegment eliminations of residual sales by sawmill operations to MDF operations are not reflected. Elimination costs increased $1.1 million period-over-period. The cost of sales for sawmill operations in the first six months of 2016 were $6.1 million more than the prior-year first six months, due to an increase in raw material costs of $3.2 million, a $.3 million reduction in benefit from the change in lumber inventory, combined with a $.7 million increase in direct operating expenses. Cost of sales for MDF operations in 2016’s first six months were $.5 million higher than in the first six months of 2015. The Company had insurance coverage for the property damage and business interruption caused by a fire in the first quarter of 2015 and recognized expenses associated with the deductibles for these policies which amounted to $1 million for the property policy and approximately $.9 million for the business interruption policy in the first six months of 2015. Gains of $.5 million from the settlement of the business interruption claim and $.7 million of involuntary gains on assets damaged beyond repair in the property damage claim were recognized in the first six months of 2015 on settlement of the claim while there were no such gains in 2016. Operating income for the Manufacturing segment was $3.3 million more 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.

 

     Six Months Ended June 30,  
     2016      2015  

Net sales (millions of dollars)

     

Residential lots

   $ 2.5         .9   

Commercial acres

     1.6         —     

Chenal Country Club

     3.1         3.2   

Cost of sales (millions of dollars)

     

Residential lots

   $ 1.3         .6   

Commercial acres

     .3         —     

Chenal Country Club

     3.1         3.2   

Sales volume

     

Residential lots

     28         14   

Commercial acres

     10.8         —     

Average sales price (thousands of dollars)

     

Residential lots – per lot

   $ 89         67   

Commercial acres – per acre

     152         —     

Net sales for the Real Estate segment in the first six months of 2016 increased $3.6 million when compared to the first six months of 2015, primarily due to more residential lots sold, a higher average per-lot sales price, and to a sale of commercial real estate acreage. The average sales price per lot increased $22,000 in the first six months of 2016 from the same period of 2015 due to the mix of lots sold.

Cost of sales for the Real Estate segment increased $1.3 million compared to the first six months of 2015, due to sales of more residential lots and to the sale of commercial real estate acreage. The increase in operating income for the Real Estate segment from the first six months of 2015 was due to the additional residential lots sold and the income from the commercial real estate acreage sale.

Corporate

Operating expenses for the Corporate segment were $.3 million lower versus the first six months of 2015, mainly due to decreased general and administrative expense.

 

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Eliminations

Intersegment sales of timber from Deltic’s Woodlands to the Manufacturing segment decreased $.1 million to $11.6 million for the first six months of 2016. The decrease was mainly due to a slight change in volume of the timber transferred to the sawmills. Logs supplied by the Woodlands segment to Company sawmills are transferred at prices that approximate market.

Interest Expense

Interest expense for the first six months of 2016 increased $1.6 million when compared to the same period of 2015, due to borrowings for capital projects and share repurchases, combined with the impact of a higher weighted-average interest rate on the debt outstanding. A patronage refund of $.3 million received from one of the Company’s lenders in the second quarter of 2016 was accounted for as a reduction of interest expense.

Income Taxes

The effective income tax rate was 31 percent for the six months ended June 30, 2016 and was 36 percent for the six months ended June 30, 2015. The current-year income tax rate is lower due to a beneficial capital gains tax rate that is applied to gains from timber harvesting activity for 2016.

Liquidity and Capital Resources

Cash Flows and Capital Expenditures

Net cash provided by operating activities totaled $20 million for the first six months of 2016, compared to $14.6 million for the same period of 2015. Cash from operations and borrowings under the Company’s revolving credit facility provided the cash needed for capital expenditures, common stock repurchases, timberland acquisition expenditures, and payment of dividends. Changes in operating working capital, other than cash and cash equivalents, provided cash of $.9 million in the first six months of 2016 and $.4 million in the same period of 2015. The Company’s accompanying Consolidated Statements of Cash Flows identifies other differences between net income and cash provided by operating activities for each reporting period.

Capital expenditures required cash of $20.2 million in the current-year period and $14.4 million a year ago. Capital expenditures by segment consisted of the following:

 

     Six Months Ended  
     June 30,  
(Thousands of dollars)    2016      2015  

Woodlands

   $ 2.2         2.2   

Manufacturing

     14.6         10.2   

Real Estate, including development expenditures

     2.1         1.5   

Corporate

     .1         .1   
  

 

 

    

 

 

 

Capital expenditures

     19.0         14.0   

Adjustment for non-cash accrued liabilities

     1.2         .4   
  

 

 

    

 

 

 

Capital expenditures requiring cash

   $ 20.2         14.4   
  

 

 

    

 

 

 

Timberland acquisition expenditures, including timberland acquired in exchanges, for the six months ended June 30, 2016 was $.7 million and $.6 million for the six months ended June 30, 2015. The net change in purchased stumpage inventory to be utilized in the Company’s sawmilling operations required cash of $2.1 million and $.6 million in the first six months of 2016 and 2015, respectively. The Company borrowed $24 million and repaid $7 million in the first six months of 2016 and borrowed $2 million and had repayments of $1 million in the first six months of 2015. Dividends of $2.4 million were paid in the first six months of 2016; and $2.5 million in dividends were paid in the first six months of 2015. Proceeds from exercises of stock options and the related tax benefits were $.2 million in the first six months of 2016 and were $.6 million in the first six months of 2015. The Company used $15.2 million in cash to repurchase stock in the first six months of 2016, with no stock repurchases in the same period of 2015. Other financing activities required cash of $.8 million in the first six months of 2016 and $.4 million for the same period of the prior year.

 

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Financial Condition

Adjusted working capital, defined by the Company as the net of current assets and current liabilities excluding current maturities of long-term debt, totaled $10.3 million at June 30, 2016, and $12.2 million at December 31, 2015. Deltic’s adjusted working capital ratio at June 30, 2016 was 1.47 to 1, compared to 1.66 to 1 at the end of 2015. Cash and cash equivalents at the end of the second quarter of 2016 were $3.5 million, a decrease of $1.9 million from the December 31, 2015 balance of $5.4 million. The total indebtedness of the Company at June 30, 2016 was $241 million, including current maturities of long-term debt of $39.9 million, compared to total indebtedness at December 31, 2015 of $224 million. Deltic’s total debt to stockholders’ equity ratio was 1 to 1 at June 30, 2016 and .881 to 1 at December 31, 2015.

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 June 30, 2016, there was $72 million outstanding in borrowings on the credit facility, leaving $358 million available. On July 29, 2016 the Company utilized a portion of the $50 million letter of credit component available under its revolving credit facility to replace the letter of credit that supports the Union County, Arkansas Taxable Industrial Revenue Bonds that total $29 million and was scheduled to expire on August 31, 2016. With this, the borrowing capacity of the revolving credit facility was reduced by the amount of the letter of credit issued. The credit agreement contains restrictive covenants, including limitations on the incurrence of debt and requirements to maintain certain financial ratios. (For additional information about the Company’s current financing arrangements, refer to Notes 10 and 11 to the consolidated financial statements included in the Company’s 2015 annual report on Form 10-K and see Note 18 of this second quarter report on Form 10-Q.)

The table below sets forth the covenants in the credit facility and senior notes payable and status with respect to these covenants as of June 30, 2016 and December 31, 2015.

 

     Covenants      Actual Ratios at     Actual Ratios at  
     Requirements      June 30, 2016     Dec. 31, 2015  

Leverage ratio should be less than:1

     .65 to 1         .5 to 1        .469 to 1   

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

     —   2       77.49     74.01

 

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.

 

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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. The Company’s Board of Directors expanded the program by $25 million in December 2007, by $25 million in December 2014, and by $20 million in February 2016. As of June 30, 2016, the Company had expended $55 million under this program, with the purchase of 1,066,745 shares at an average cost of $51.59 per share; inclusive of 277,430 shares purchased in 2016 at an average cost of $54.65 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 17 to the consolidated financial statements included in the Company’s 2015 annual report on Form 10-K.)

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

 

(Millions of dollars)           During      2017      2019      After  
     Total      2016      to 2018      to 2020      2020  

Contractual cash payment obligations

              

Real estate development committed capital costs

   $ 6.2         3.4         .5         2.3         —     

Manufacturing committed capital costs

     20.4         20.4         —           —           —     

Woodlands committed capital costs

     .9         .9         —           —           —     

Long-term debt

     241.0         40.0         —           72.0         129.0   

Interest on debt*

     46.8         4.0         11.6         11.4         19.8   

Retirement plans

     6.5         .7         .6         .5         4.7   

Other postretirement benefits

     5.4         .2         .9         1.1         3.2   

Other liabilities

     1.5         1.5         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 328.7         71.1         13.6         87.3         156.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other commercial commitment expirations

              

Timber cutting agreements

   $ 5.9         .6         .8         4.5         —     

Letters of credit

     .4         .1         .2         .1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6.3         .7         1.0         4.6         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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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 2015 annual report on Form 10-K, and this disclosure should be read in conjunction with this Form 10-Q.

Impact of Recently Effective Accounting Pronouncements

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

Outlook

Pine sawtimber harvest levels are expected to be 220,000 to 250,000 tons in the third quarter of 2016 and 725,000 to 765,000 tons for the year. Finished lumber sales volumes are estimated at 60 to 70 million board feet for the third quarter and 265 to 285 million board feet for the year. MDF sales volumes for the third quarter and year of 2016 are estimated to be 25 to 35 million square feet and 100 to 120 million square feet, respectively. Actual lumber and MDF sales volumes are subject to market conditions. Residential lot sales are projected to be 20 to 30 lots and 90 to 120 lots for the third 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 2015 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.

 

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Table of Contents

Based on their evaluation as of June 30, 2016, 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 2015 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
 

April 1 through

           

April 30, 2016

     —         $ —           —         $ 24,962,333   

May 1 through

           

May 31, 2016

     —         $ —           —         $ 24,962,333   

June 1 through

           

June 30, 2016

     —         $ —           —         $ 24,962,333   

 

1  In December 2000, the Company’s Board of Directors authorized a stock repurchase plan of up to $10 million of Deltic common stock. This plan was expanded in December 2007 by $25 million, by $25 million in December 2014, and by $20 million in February 2016. 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

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 June 30, 2016, 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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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:    August 5, 2016       By:   

/s/ Ray C. Dillon

            Ray C. Dillon, President
            (Principal Executive Officer)
Date:    August 5, 2016       By:   

/s/ Kenneth D. Mann

            Kenneth D. Mann, Vice President,
            Finance and Administration
            (Principal Financial Officer)
Date:    August 5, 2016       By:   

/s/ Byrom L. Walker

            Byrom L. Walker, Controller
            (Principal Accounting Officer)

 

39

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