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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)

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

For the quarterly period ended September 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  ☒    No  ☐.

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

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

 

Large accelerated filer      Accelerated filer  
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  ☒.

Number of shares of Common Stock, $.01 Par Value, outstanding at October 24, 2016, was 12,157,339.

 

 

 


Table of Contents

TABLE OF CONTENTS – THIRD 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      37   
Item    4.    Controls and Procedures      37   
      PART II – Other Information   
Item    1.    Legal Proceedings      38   
Item    1A.    Risk Factors      38   
Item    2.    Unregistered Sales of Equity Securities and Use of Proceeds      38   
Item    3.    Defaults Upon Senior Securities      38   
Item    4.    Mine Safety Disclosures      38   
Item    5.    Other Information      38   
Item    6.    Exhibits      39   
Signatures      40   


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(Thousands of dollars)

 

     September 30,     December 31,  
     2016     2015  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 3,029        5,429   

Trade accounts receivable, net of allowance for doubtful accounts of $143 and $130, respectively

     11,720        6,995   

Inventories

     11,103        11,917   

Prepaid expenses and other current assets

     5,162        6,392   
  

 

 

   

 

 

 

Total current assets

     31,014        30,733   

Investment in real estate held for development and sale

     59,423        58,418   

Timber and timberlands – net

     360,866        361,856   

Property, plant, and equipment – net

     101,095        85,495   

Deferred charges and other assets

     2,577        2,665   
  

 

 

   

 

 

 

Total assets

   $ 554,975        539,167   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Current maturities of long-term debt

   $ 39,967        39,917   

Trade accounts payable

     10,648        8,837   

Accrued taxes other than income taxes

     3,586        2,118   

Deferred revenues and other accrued liabilities

     9,599        7,607   
  

 

 

   

 

 

 

Total current liabilities

     63,800        58,479   

Long-term debt

     201,850        183,836   

Deferred tax liabilities – net

     1,851        525   

Other noncurrent liabilities

     43,285        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

     87,534        87,822   

Retained earnings

     203,198        201,959   

Treasury stock

     (35,498     (24,347

Accumulated other comprehensive loss

     (11,173     (11,594
  

 

 

   

 

 

 

Total stockholders’ equity

     244,189        253,968   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 554,975        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     Nine Months Ended  
     September 30,     September 30,  
     2016     2015     2016     2015  

Net sales

   $ 53,541        50,150        160,870        144,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

        

Cost of sales

     37,506        38,642        111,895        105,898   

Depreciation, amortization, and cost of fee timber harvested

     5,911        5,519        17,402        15,795   

General and administrative expenses

     5,562        3,955        15,566        14,254   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     48,979        48,116        144,863        135,947   

Other income – business interruption claim

     —          —          —          516   

Gain on involuntary conversion of assets

     —          —          —          704   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     4,562        2,034        16,007        9,483   

Interest income

     3        2        10        3   

Interest and other debt expense, net of capitalized interest

     (2,256     (1,927     (7,133     (5,201

Other income

     88        5        220        109   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     2,397        114        9,104        4,394   

Income tax expense

     (910     (76     (3,002     (1,612
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,487        38        6,102        2,782   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share

        

Basic

   $ .12        —          .50        .22   

Assuming dilution

   $ .12        —          .50        .22   

Dividends per common share

        

Paid

   $ .10        .10        .30        .30   

Declared

   $ .10        .10        .40        .40   

Weighted average common shares outstanding (thousands)

        

Basic

     11,991        12,439        12,005        12,454   

Assuming dilution

     12,023        12,491        12,065        12,512   

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

(Thousands of dollars)

 

     Nine Months Ended  
     September 30,  
     2016      2015  

Net income

   $ 6,102         2,782   
  

 

 

    

 

 

 

Other comprehensive income

     

Items related to employee benefit plans:

     

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

     

Amortization of prior service cost

     —           2   

Amortization of actuarial loss

     421         695   

Amortization of plan amendment

     —           (21
  

 

 

    

 

 

 

Other comprehensive income

     421         676   
  

 

 

    

 

 

 

Comprehensive income

   $ 6,523         3,458   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Thousands of dollars)

 

     Nine Months Ended  
     September 30,  
     2016     2015  

Operating activities

    

Net income

   $ 6,102        2,782   

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

    

Depreciation, amortization, and cost of fee timber harvested

     17,402        15,795   

Deferred income taxes

     915        (650

Real estate development expenditures

     (4,204     (5,088

Real estate costs recovered upon sale

     2,896        2,022   

Timberland costs recovered upon sale

     6        25   

Stock-based compensation expense

     2,586        2,503   

Net increase in liabilities for pension and other postretirement benefits

     1,679        2,619   

Net decrease in deferred compensation for stock-based liabilities

     (551     (595

Decrease in operating working capital other than cash and cash equivalents

     961        4,502   

Other changes in assets and liabilities

     497        (266
  

 

 

   

 

 

 

Net cash provided by operating activities

     28,289        23,649   
  

 

 

   

 

 

 

Investing activities

    

Capital expenditures requiring cash, excluding real estate development

     (28,188     (19,334

Timberland acquisition expenditures requiring cash

     (1,207     (581

Net change in purchased stumpage inventory

     (1,324     (690

Proceeds from involuntary conversion

     5        1,590   

Net change in funds held by trustee

     1        —     

Other – net

     303        444   
  

 

 

   

 

 

 

Net cash required by investing activities

     (30,410     (18,571
  

 

 

   

 

 

 

Financing activities

    

Proceeds from borrowings

     26,000        115,000   

Repayments of notes payable and long-term debt

     (8,000     (108,000

Treasury stock purchases

     (15,174     (9,630

Common stock dividends paid

     (3,645     (3,782

Proceeds from stock option exercises

     1,719        728   

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

     (156     55   

Other – net

     (1,023     (731
  

 

 

   

 

 

 

Net cash required by financing activities

     (279     (6,360
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (2,400     (1,282

Cash and cash equivalents at January 1

     5,429        2,761   
  

 

 

   

 

 

 

Cash and cash equivalents at September 30

   $ 3,029        1,479   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Thousands of dollars)

 

     Nine Months Ended  
     September 30,  
     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

     28        (94

Stock-based compensation expense

     2,586        2,503   

Restricted stock awards

     (2,469     (1,677

Tax effect of stock awards

     (571     (355

Restricted stock forfeitures

     138        54   
  

 

 

   

 

 

 

Balance at end of period

     87,534        87,006   
  

 

 

   

 

 

 

Retained earnings

    

Balance at beginning of period

     201,959        204,327   

Net income

     6,102        2,782   

Common stock dividends declared

     (4,863     (5,030
  

 

 

   

 

 

 

Balance at end of period

     203,198        202,079   
  

 

 

   

 

 

 

Treasury stock

    

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

     (24,347     (11,978

Shares purchased – 277,670 and 157,524 shares, respectively

     (15,174     (9,630

Shares issued for incentive plans – 70,795 and 45,322 shares, respectively

     4,161        2,499   

Forfeited restricted stock – 2,212 shares and 835, respectfully

     (138     (54
  

 

 

   

 

 

 

Balance at end of period – 639,327 and 344,827 shares, respectively

     (35,498     (19,163
  

 

 

   

 

 

 

Accumulated other comprehensive loss

    

Balance at beginning of period

     (11,594     (11,411

Change in other comprehensive income, net of tax

     421        676   
  

 

 

   

 

 

 

Balance at end of period

     (11,173     (10,735
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 244,189        259,315   
  

 

 

   

 

 

 

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 September 30, 2016, and the results of its operations and cash flows for the three months and nine months ended September 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:

 

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

Raw materials

   - Logs    $ 2,408         1,975   
   - Del-Tin - wood fiber      360         615   

Finished goods

   - Lumber      4,205         4,142   
   - Medium density fiberboard (“MDF”)      1,818         2,516   
   - MDF consigned to others      792         1,031   

Supplies

        1,520         1,638   
     

 

 

    

 

 

 
      $ 11,103         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:

 

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

Short-term deferred tax assets

   $ 1,856         2,131   

Refundable income taxes

     1,168         3,062   

Prepaid expenses

     1,525         687   

Other current assets

     613         512   
  

 

 

    

 

 

 
   $ 5,162         6,392   
  

 

 

    

 

 

 

Note 4 – Timber and Timberlands

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

 

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

Purchased stumpage inventory

   $ 3,762         2,437   

Timberlands

     156,313         155,997   

Fee timber

     329,998         326,327   

Logging facilities

     1,232         1,221   
  

 

 

    

 

 

 
     491,305         485,982   

Less accumulated cost of fee timber harvested and facilities depreciation

     (130,599      (124,292
  

 

 

    

 

 

 

Strategic timber and timberlands

     360,706         361,690   

Non-strategic timber and timberlands

     160         166   
  

 

 

    

 

 

 
   $ 360,866         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 September 30, 2016, Deltic acquired 220 acres of timberland for $514,000, and for the nine months ended September 30, 2016, 623 acres of timberland were acquired for $1,207,000. During the three months ended September 30, 2015, Deltic had no acquisitions of timberlands. The total number of timberland acres acquired in the first nine months of 2015 was 344, inclusive of 304 acres acquired for cash payments of $581,000 and 40 acres acquired in a non-cash exchange transaction. 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 September 30, 2016, approximately 241 acres of these lands were available for sale.

There were no gains from sales of timberland included in the Woodlands operating income for the three months ended September 30, 2016 compared to $6,000 in the same period of 2015. For the nine months ended September 30, 2016 and 2015, there were timber gains included in the Woodlands operating income of $33,000 and $102,000, respectively. Occasionally Deltic engages in land-for-land exchanges that are recorded as sales due to the nature of the land involved. For the nine months ending September 30, 2015, $25,000 of gains was 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:

 

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

Land

   $ 947         947   

Land improvements

     12,488         10,409   

Buildings and structures

     25,477         23,900   

Machinery and equipment

     181,238         158,385   
  

 

 

    

 

 

 
     220,150         193,641   

Less accumulated depreciation

     (119,055      (108,146
  

 

 

    

 

 

 
   $ 101,095         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:

 

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

Deferred revenues – current

   $ 3,658         2,877   

Dividend payable

     1,217         —     

Vacation accrual

     1,572         1,360   

Deferred compensation

     667         619   

All other current liabilities

     2,485         2,751   
  

 

 

    

 

 

 
   $ 9,599         7,607   
  

 

 

    

 

 

 

Note 7 – Other Noncurrent Liabilities

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

 

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

Accumulated postretirement benefit obligation

   $ 12,706         12,295   

Supplemental pension plan

     12,958         12,764   

Accrued pension liability

     15,971         15,698   

Deferred revenue – long-term portion

     56         115   

Other noncurrent liabilities

     1,594         1,487   
  

 

 

    

 

 

 
   $ 43,285         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.

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 $29,000,000, 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.

 

9


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 – Income Taxes

The Company’s effective income tax rate for the three months and nine months ended September 30, 2016, was 38 percent and 33 percent, respectively. This compares to an effective income tax rate for the three and nine months ended September 30, 2015 of 66 percent and 37 percent, respectively. The lower rate was due to the benefit of a lower income tax rate on sales of timber held 15 years or longer during the year of 2016. At September 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 2013.

Note 10 – Employee and Retiree Benefit Plans

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(Thousands of dollars)    2016      2015      2016      2015  

Defined benefit funded retirement plan

           

Service cost

   $ 411         490         1,231         1,469   

Interest cost

     524         505         1,572         1,515   

Expected return on plan assets

     (593      (602      (1,780      (1,807

Amortization of prior service cost

     —           1         —           3   

Recognized actuarial loss

     213         209         637         629   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net retirement expense

   $ 555         603         1,660         1,809   
  

 

 

    

 

 

    

 

 

    

 

 

 

Defined benefit unfunded retirement plan

           

Service cost

   $ 54         130         160         389   

Interest cost

     80         123         242         370   

Recognized actuarial loss

     18         152         56         456   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net retirement expense

   $ 152         405         458         1,215   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other postretirement benefit plan

           

Service cost

   $ 95         132         285         395   

Interest cost

     144         139         432         419   

Recognized actuarial loss

     —           20         —           59   

Amortization of plan amendment

     —           (11      —           (34
  

 

 

    

 

 

    

 

 

    

 

 

 

Net other postretirement benefits expense

   $ 239         280         717         839   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 $750,000 during the first nine months of 2016, and expects to fund the plan with an additional $300,000 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 nine months ended September 30, 2016 and 2015:

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

 

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

AOCL at January 1, 2016

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

Amounts reclassified from AOCL - net current period other comprehensive income

     387         34         —           421   
  

 

 

    

 

 

    

 

 

    

 

 

 

AOCL at September 30, 2016

   $ (6,684      (4,274      (214      (11,173
  

 

 

    

 

 

    

 

 

    

 

 

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

AOCL at January 1, 2015

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

Amounts reclassified from AOCL - net current period other comprehensive income

     384         277         15         676   
  

 

 

    

 

 

    

 

 

    

 

 

 

AOCL at September 30, 2015

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

 

 

    

 

 

    

 

 

    

 

 

 

 

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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:

 

     Nine Months Ended September 30, 2016  
(Thousands of dollars)    Defined
Benefit
Funded
Retirement
Plan
     Defined
Benefit
Unfunded
Retirement
Plan
     Post
Retirement
Benefit
Plan
     Total  

Amortization of actuarial losses

   $ 637         56         —           693   

Income tax expense

     (250      (22      —           (272
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reclassifications – net of tax

   $ 387         34         —           421   
  

 

 

    

 

 

    

 

 

    

 

 

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

Amortization of prior service costs

   $ 3         —           —           3   

Amortization of actuarial losses

     629         456         59         1,144   

Amortization of plan amendment

     —           —           (34      (34
  

 

 

    

 

 

    

 

 

    

 

 

 

Total before tax

     632         456         25         1,113   

Income tax expense

     (248      (179      (10      (437
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reclassifications – net of tax

   $ 384         277         15         676   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Tax Effects by Component

 

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

Amortization of actuarial losses

   $ 693         (272      421   
  

 

 

    

 

 

    

 

 

 

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 11 – Other Comprehensive Income Disclosures (cont.)

 

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

Amortization of prior service costs

   $ 3         (1      2   

Amortization of actuarial losses

     1,144         (449      695   

Amortization of plan amendment

     (34      13         (21
  

 

 

    

 

 

    

 

 

 
   $ 1,113         (437      676   
  

 

 

    

 

 

    

 

 

 

Note 12 – Stock-Based Compensation

The Consolidated Statements of Income for the three months ended September 30, 2016 and 2015, included $897,000 and $825,000, respectively, of stock-based compensation expense reflected in general and administrative expenses. For the nine months ended September 30, 2016 and 2015, the amounts were $2,586,000 and $2,503,000, 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 September 30, 2016, and changes during the nine months then ended are presented below:

 

                  Weighted         

Options

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

Outstanding at January 1, 2016

     147,870      $ 63.86         

Granted

     28,533        55.94         

Exercised

     (30,455     56.43         

Forfeited/expired

     (2,941     62.96         
  

 

 

         

Outstanding at September 30, 2016

     143,007      $ 63.88         6.9       $ 637   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2016

     80,154      $ 65.80         5.7       $ 219   
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value in the table above is the sum of the amounts by which the quoted market price of the Company’s common stock exceeded the exercise price of the options at September 30, 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 September 30, 2016, there was $1,048,000 of unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 1.9 years.

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

 

Nonvested Restricted Stock

   Shares      Weighted
Average
Grant-Date
Fair Value
 

Nonvested at January 1, 2016

     87,105       $ 67.04   

Granted

     28,508         56.69   

Vested

     (17,912      67.67   

Forfeited

     (858      64.90   
  

 

 

    

Nonvested at September 30, 2016

     96,843       $ 63.89   
  

 

 

    

 

14


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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 12 – Stock-Based Compensation (cont.)

 

As of September 30, 2016, there was $2,834,000 of unrecognized compensation cost related to nonvested restricted stock. That cost is expected to be recognized over a weighted-average period of 1.9 years.

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

 

Nonvested Restricted Stock Performance Units

   Shares      Weighted
Average
Grant-Date
Fair Value
 

Nonvested at January 1, 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 September 30, 2016

     74,378       $ 77.76   
  

 

 

    

As of September 30, 2016, there was $2,799,000 of unrecognized compensation cost related to nonvested restricted stock performance units. That cost is expected to be recognized over a weighted-average period of 2 years.

Note 13 – Contingencies

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

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 September 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.

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 September 30, 2016, are presented in the following table:

 

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

Liabilities

           

Nonqualified employee savings plan

   $ 1,594         1,594         —           —     

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 September 30, 2016 and December 31, 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.

 

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

Financial liabilities

           

Long-term debt, including current maturities

   $ 241,817         248,499         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      Nine Months Ended  
     September 30,      September 30,  
(Thousands, except per share amounts)    2016      2015      2016      2015  

Net earnings allocated to common stock

   $ 1,466         38         6,019         2,749   

Net earnings allocated to participating securities

     21         —           83         33   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common stock and participating securities

   $ 1,487         38         6,102         2,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares used in basic EPS

     11,991         12,439         12,005         12,454   

Effect of dilutive stock awards

     32         52         60         58   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     12,023         12,491         12,065         12,512   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

           

Basic

   $ .12         —           .50         .22   

Assuming dilution

   $ .12         —           .50         .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      Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  

Options

     23,782         72,595         111,797         72,595   

Restricted performance shares

     74,378         64,271         74,378         64,271   

Note 17 – Supplemental Cash Flow Disclosures

Additional information concerning cash flows is as follows:

 

     Nine Months Ended  
     September 30,  
(Thousands of dollars)    2016      2015  

Income taxes paid in cash

   $ 1,168         2,116   

Interest paid

     7,464         3,385   

Interest capitalized

     (610      (45

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

 

     Nine Months Ended  
     September 30,  
(Thousands of dollars)    2016      2015  

Issuance of restricted stock

   $ 2,469         1,677   

Land exchanges

     —           39   

Capital expenditures accrued, not paid

     1,353         612   

 

 

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:

 

     Nine Months Ended  
     September 30,  
(Thousands of dollars)    2016      2015  

Trade accounts receivable

   $ (4,724      (525

Inventories

     814         (914

Prepaid expenses and other current assets

     888         (360

Trade accounts payable

     458         4,825   

Accrued taxes other than income taxes

     1,467         (470

Deferred revenues and other accrued liabilities

     2,058         1,946   
  

 

 

    

 

 

 
   $ 961         4,502   
  

 

 

    

 

 

 

Note 18 – Subsequent Event

On October 10, 2016, the Company announced the retirement of Ray C. Dillon as the Company’s President and CEO. The Company will incur a one-time, pretax expense of approximately $3 million during the fourth quarter of 2016 related to this retirement. This expense includes cash payments made upon retirement and the financial impact of vesting equity grants previously awarded.

 

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     Nine Months Ended  
     September 30,     September 30,  
(Thousands of dollars)    2016     2015     2016     2015  

Net sales

        

Woodlands

   $ 8,987        8,973        28,970        29,841   

Manufacturing2

     46,492        42,189        137,610        122,723   

Real Estate

     3,365        3,869        11,236        8,189   

Eliminations1

     (5,303     (4,881     (16,946     (16,543
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 53,541        50,150        160,870        144,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

        

Operating income/(loss)

        

Woodlands

   $ 4,101        4,441        13,783        15,878   

Manufacturing2

     5,660        1,959        15,972        8,961   

Real Estate

     (125     (233     1,028        (1,308

Corporate

     (5,330     (3,674     (14,772     (13,394

Eliminations

     256        (459     (4     (654
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     4,562        2,034        16,007        9,483   

Interest income

     3        2        10        3   

Interest and other debt expense, net of capitalized interest

     (2,256     (1,927     (7,133     (5,201

Other income/(expense)

     88        5        220        109   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,397        114        9,104        4,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation, amortization, and cost of fee timber harvested

        

Woodlands

   $ 2,191        1,968        6,419        5,642   

Manufacturing2

     3,599        3,446        10,616        9,844   

Real Estate

     84        91        263        275   

Corporate

     37        14        104        34   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 5,911        5,519        17,402        15,795   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

        

Woodlands

   $ 647        866        2,861        3,087   

Manufacturing2

     11,908        6,294        26,563        16,454   

Real Estate

     2,180        3,851        4,268        5,360   

Corporate

     —          16        65        156   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 14,735        11,027        33,757        25,057   
  

 

 

   

 

 

   

 

 

   

 

 

 

Timberland acquisition expenditures

   $ 488        —          1,207        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 $1.5 million for the third quarter of 2016, compared to $.1 million for the same period of 2015. The increase was primarily due to higher operating income for the Manufacturing segment, as a result of an improved lumber market, partially offset by increased Corporate general and administrative expense. The Woodlands segment reported $4.1 million in operating income for the third quarter of 2016, a decrease of $.4 million when compared to the third quarter of 2015, mainly as a result of reduced oil and gas-related income and a higher cost of fee timber harvested, partially offset by increased revenues from pine sawtimber harvested. The Manufacturing segment reported $5.7 million in operating income, an improvement of $3.7 million from the $2 million of operating income reported a year ago, due to an increased average sales price for lumber, combined with lower per-unit manufacturing cost for medium density fiberboard (“MDF”). The Real Estate segment reported an operating loss of $.2 million in the third quarter of both 2016 and 2015. Corporate segment operating expense was $1.7 million higher in the current-year quarter than in the same period a year ago, mainly due to increased general and administrative expenses related to incentive plan costs and professional fees. Income tax expense increased $.8 million, compared to 2015’s third quarter, primarily due to increased pretax income, partially offset by the benefit of favorable capital gains tax rates applied to income from timber harvesting activity in 2016’s third 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. Even though new housing starts slowed in September, the improvement in the lumber market and the real estate market in Chenal Valley continued during the third quarter due to improving economic conditions in the Little Rock area, Deltic has continued to close on sales of new residential lots developed in 2016. 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, supplying the majority of raw material logs to Company sawmills. In the third quarter of 2016, the pine sawtimber harvest was 188,643 tons, an increase of 9,267 tons, or 5 percent, when compared to the 2015 third quarter harvest of 179,376 tons. The average sales price for the pine sawtimber harvested was $28 per ton in the third quarter of 2016, a $1 increase when compared to prior-year third quarter. The pine pulpwood harvest in the current-year quarter was 129,122 tons, an increase of 37,217 tons from the harvest in the third quarter of 2015, while the average sales price for the pine pulpwood harvested was $7 per ton for the third quarter of 2016, compared to $9 per ton in the prior-year third quarter. While the pine pulpwood harvest increased 41 percent, prices have softened in markets within the Company’s operating area. The increase in the harvest volume for pine sawtimber and pulpwood was mainly due to the timing of Deltic’s annual harvest plan, the mix of timber on the tracts being harvested, ongoing pine pulpwood thinning activities, and good logging conditions in the Company’s operating region. The Company had no sales of non-strategic timberland during the third quarter of 2016 compared to sales of 2 acres of non-strategic recreational-use hardwood bottomland at an average sales price of $4,300 per acre in the same period of 2015.

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 third quarter of both 2016 and 2015. Oil and gas lease rental income was $.1 million in the third quarter of 2016, compared to $.2 million in the third quarter of 2015, as the amortization period of the prepaid lease rental payments received for the mineral leases for some

 

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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 third quarter of 2016, a $.3 million decrease from the third quarter of 2015, mainly due to 1) a decrease in natural gas prices, 2) the impact of declining production from the aging of existing gas wells, and 3) there being no new drilling activity in the Fayetteville Shale Play to offset the decline in production. Deltic is currently receiving royalty income from 510 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 69.6 million board feet of lumber in the third quarter of 2016, a decrease of 1.6 million board feet, when compared to the 71.2 million board feet sold in the third quarter a year ago. The average lumber sales price in the third quarter of 2016 was $376 per thousand board feet, a $55 per thousand board feet, or 17 percent, increase when compared to the same period in 2015, as a result of improved demand. MDF sales volume for the third quarter of 2016 was 26 million square feet, which was .5 million square feet more than the 25.5 million square feet sold in the same period of 2015. The average sales price for MDF sold during the current-year’s third quarter was $561 per thousand square feet, an increase of $4 per thousand square feet from the average sales price of $557 per thousand square feet received in the third 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 25 residential lots during the third quarter of 2016, compared to 34 lots sold in the third quarter of 2015. The average per-lot sales price was $70,000 in 2016, compared to $62,700 in 2015’s third quarter, due to the mix of lots sold. On October 19, 2016, Deltic offered 45 lots for sale in Chenal Valley and has put all of these lots under contract to builders. The sale of these lots are scheduled to close before year-end. There were no sales of commercial real estate acreage in the third quarter of 2016 or 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 September 30, 2016 Compared with Three Months Ended September 30, 2015

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

 

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

Net sales

     

Woodlands

   $ 9.0         8.9   

Manufacturing

     46.5         42.1   

Real Estate

     3.3         3.9   

Eliminations

     (5.3      (4.8
  

 

 

    

 

 

 

Net sales

   $ 53.5         50.1   
  

 

 

    

 

 

 

Cost of sales

     

Woodlands

   $ 2.6         2.5   

Manufacturing

     40.8         40.2   

Real Estate

     3.2         3.8   

Eliminations

     (9.1      (7.9
  

 

 

    

 

 

 

Total cost of sales

   $ 37.5         38.6   
  

 

 

    

 

 

 

Operating income

     

Woodlands

   $ 4.1         4.5   

Manufacturing

     5.7         2.0   

Real Estate

     (.2      (.2

Corporate

     (5.4      (3.7

Eliminations

     .3         (.5
  

 

 

    

 

 

 

Operating income

     4.5         2.1   

Interest and other debt expense, net

     (2.2      (1.9

Other income

     .1         —     

Income tax expense

     (.9      (.1
  

 

 

    

 

 

 

Net income

   $ 1.5         .1   
  

 

 

    

 

 

 

Earnings per common share

     

Basic

   $ .12         —     

Assuming dilution

     .12         —     

Consolidated

Consolidated net income for the third quarter of 2016 was $1.5 million, an increase of $1.4 million from the third quarter of 2015. The increase was primarily due to improved financial results for the Manufacturing segment, partially offset by higher Corporate general and administrative and interest expenses.

Consolidated cost of sales for the third quarter of 2016 decreased $1.1 million from the third quarter of 2015, primarily due to increased intercompany eliminations due to the Woodlands segment providing a higher volume of pine sawtimber stumpage to the sawmills, combined with a decrease in the cost of residential lots sold due to fewer lots being sold in the current-year third quarter.

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

 

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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 $2.4 million from the third quarter of 2015. The Woodlands segment’s operating income decreased $.4 million, primarily due to a lower average per-ton sales price for pine pulpwood combined with a decrease in oil and gas royalty revenue, partially offset by an increase in revenue from pine sawtimber harvested. The Manufacturing segment’s operating income increased $3.7 million from the third quarter of 2015. This increase was due mainly to a higher average sales price for lumber, combined with a lower average per-unit cost of MDF sold. The Real Estate segment’s operating loss for the third quarter was $.2 million in both 2016 and 2015. Corporate expense for the third quarter of 2016 was $1.7 million higher when compared to the corresponding quarter of 2015 due to increased general and administrative expense, related to incentive plan costs and professional fees.

Woodlands

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

 

     Quarter Ended September 30,  
     2016      2015  

Net sales (millions of dollars)

     

Pine sawtimber

   $ 5.2         4.8   

Pine pulpwood

     .9         .8   

Hardwood pulpwood

     .1         .2   

Timberland

     —           —     

Oil and gas lease rentals

     .1         .2   

Oil and gas royalties

     .4         .7   

Hunting leases

     .8         .8   

Hauling to other mills

     1.3         1.2   

Cost of sales (millions of dollars)

     

Direct operating expenses

   $ 1.2         1.2   

Oil and gas royalty expenses

     .1         .1   

Cost of hauling stumpage to other mills

     1.3         1.2   

Cost of timberland sold

     —           —     

Cost of fee timber harvested (millions of dollars)

   $ 2.1         1.9   

Sales volume (thousands of tons)

     

Pine sawtimber

     188.6         179.4   

Pine pulpwood

     129.1         91.9   

Hardwood sawtimber

     .7         .7   

Hardwood pulpwood

     10.1         10.5   

Sales price (per ton)

     

Pine sawtimber

   $ 28         27   

Pine pulpwood

     7         9   

Hardwood sawtimber

     59         62   

Hardwood pulpwood

     13         23   

 

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     Quarter Ended September 30,  
     2016      2015  

Timberland

     

Sales volume (acres)

     —           2   

Sales price (per acre)

   $ —           4,326   

Net sales for the Woodlands segment in the third quarter of 2016 increased $.1 million when compared to the third quarter of 2015. Pine sawtimber sales were $.4 million higher in 2016’s third quarter due to a five percent increase in harvest volume, combined with a four percent increase in the per-ton average sales price. Pine pulpwood sales increased $.1 million, as a 41 percent increase in harvest volume was partially offset by a 22 percent lower per-ton average sales price. Oil and gas royalties in the third quarter of 2016 decreased $.3 million due to lower prices for natural gas combined with lower volumes of gas production caused by the aging of existing wells and to there being no new drilling activity in the third quarter 2016 when compared to the same period of 2015.

Cost of sales for the Woodlands segment in the third quarter of 2016 increased $.1 million when compared to the same period a year ago, due to a higher cost of hauling stumpage to other mills. Operating income for the Woodlands segment was $.4 million less than in the 2015 third quarter due to the same factors affecting net sales and cost of sales and to a higher cost of fee timber harvested.

Manufacturing

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

 

     Quarter Ended September 30,  
     2016      2015  

Net sales (millions of dollars)

     

Lumber

   $ 26.2         22.9   

Residual by-products1

     2.9         2.4   

Medium density fiberboard (“MDF”)

     14.6         14.2   

Freight invoiced to customers

     2.8         2.7   

Cost of sales – sawmill operations (millions of dollars)

     

Raw materials

   $ 11.4         10.9   

Residual by-products1

     2.9         3.0   

Direct manufacturing expenses

     8.0         7.4   

Change in inventory

     (.5      —     

Freight expense

     1.0         1.1   

Cost of sales – MDF operations (millions of dollars)

     

Raw materials

   $ 5.5         7.2   

Direct manufacturing expenses

     6.7         7.2   

Change in inventory

     .5         (.8

Freight expense

     1.8         1.6   

Depreciation (millions of dollars)

     

Sawmill operations

   $ 1.6         1.4   

MDF operations

     1.9         1.9   

 

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     Quarter Ended September 30,  
     2016      2015  

Lumber

     

Finished production (MMBF)

     70.5         69.6   

Sales volume (MMBF)

     69.6         71.2   

Sales price (per MBF)

   $ 376         321   

MDF (3/4 inch basis)

     

Finished production (MMSF)

     24.8         27.1   

Sales volume (MMSF)

     26.0         25.5   

Sales price (per MSF)

   $ 561         557   

 

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

Net sales for the Manufacturing segment in the third quarter of 2016 increased $4.4 million, or 10 percent, when compared to the third quarter of 2015. The average lumber sales price increased $55 per MBF, or 17 percent, from 2015’s third quarter, partially offset by a 1.6 million board feet decrease in volume sold when compared to the third quarter of 2015. MDF sales volume in the third quarter of 2016 was 26 million square feet, 2 percent more than the same period a year ago, and the average sales price for MDF was $4 per MSF higher than in the third quarter of 2015.

Cost of sales for the Manufacturing segment was $.6 million higher in the third quarter of 2016 than in the third quarter of 2015, due to an increase in production volume of both 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 decreased $.3 million period-over-period. The cost of sales for sawmill operations in the third quarter of 2016 were $.9 million more than in the prior-year third quarter due to a $.5 million increase in cost of raw material used and to a $.6 million increase in direct manufacturing expense, partially offset by a $.1 million lower freight expense and a $.5 million beneficial inventory variance. Cost of sales for MDF operations were $.7 million lower than in the third quarter of 2015, as operating performance improved, with less unscheduled downtime and related unplanned maintenance expense. Raw material costs for the current-year quarter were lower by $1.7 million, and direct manufacturing expenses were $.5 million lower as a result of improved operating performance. These were offset by a $1.3 million increase in inventory variance and $.2 million of additional freight expense when compared to the third quarter of 2015. Operating income for the Manufacturing segment was $3.7 million more than in the 2015 period, due to the same items affecting net sales and cost of sales.

Real Estate

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

 

     Quarter Ended September 30,  
     2016      2015  

Net sales (millions of dollars)

     

Residential lots

   $ 1.7         2.1   

Chenal Country Club

     1.5         1.6   

Cost of sales (millions of dollars)

     

Residential lots

   $ 1.0         1.4   

Chenal Country Club

     1.6         1.7   

Sales volume

     

Residential lots

     25         34   

 

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     Quarter Ended September 30,  
     2016      2015  

Average sales price (thousands of dollars) Residential lots – per lot

   $ 70         63   

Net sales for the Real Estate segment in the third quarter of 2016 decreased $.6 million when compared to the third quarter of 2015. The decreased net sales were due to a reduction in the number of residential lots sold, partially offset by a higher average per-lot sales price. The average sales price per lot sold increased $7,300 per lot sold due to the mix of lots sold.

Cost of sales for the Real Estate segment was $.6 million lower due to the decrease in the number of residential lots sold in the current-year quarter. The operating loss for the Real Estate segment was $.2 million in the third quarter of both 2016 and 2015.

Corporate

Corporate operating expense increased $1.7 million during the third quarter of 2016 primarily due to increased incentive plan expense of $1.1 million, combined with a $.5 million increase in professional fees.

Eliminations

Intersegment sales of timber from Deltic’s Woodlands to the Manufacturing segment during the third quarter of 2016 increased $.5 million, to $5.3 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 $.3 million higher when compared to the prior-year third quarter, due to increased borrowings as a result of increased expenditures for purchases of treasury stock and investments in capital projects, combined with the impact of a higher weighted-average interest rate on debt outstanding.

Income Taxes

The effective income tax rate was 38 percent for the third quarter of 2016 and 66 percent for the third quarter of 2015, due to a reduced capital gains tax rate applied to sales of timber in 2016. In addition, the prior-year period included the impact of a true-up of accrued 2014 taxes to actual tax liabilities for that year per the Company’s filed tax returns which had a greater percentage impact due to the lower pretax income amount for the prior-year period.

 

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Nine Months Ended September 30, 2016 Compared with Nine Months Ended September 30, 2015

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

 

     Nine Months Ended September 30,  
(Millions of dollars, except per share amounts)    2016      2015  

Net sales

     

Woodlands

   $ 29.0         29.8   

Manufacturing1

     137.6         122.7   

Real Estate

     11.2         8.2   

Eliminations

     (16.9      (16.5
  

 

 

    

 

 

 

Net sales

   $ 160.9         144.2   
  

 

 

    

 

 

 

Cost of sales

     

Woodlands

   $ 8.4         8.0   

Manufacturing

     121.6         114.9   

Real Estate

     9.5         8.8   

Eliminations

     (27.6      (25.8
  

 

 

    

 

 

 

Total cost of sales

   $ 111.9         105.9   
  

 

 

    

 

 

 

Operating income and net income

     

Woodlands

   $ 13.8         15.9   

Manufacturing1

     16.0         9.0   

Real Estate

     1.0         (1.3

Corporate

     (14.8      (13.4

Eliminations

     —           (.7
  

 

 

    

 

 

 

Operating income

     16.0         9.5   

Interest and other debt expense, net

     (7.1      (5.2

Other income

     .2         .1   

Income tax expense

     (3.0      (1.6
  

 

 

    

 

 

 

Net income

   $ 6.1         2.8   
  

 

 

    

 

 

 

Earnings per common share

     

Basic

   $ .50         .22   

Assuming dilution

     .50         .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 nine months of 2016 increased $3.3 million when compared to the first nine months of 2015. The increase was primarily due to improved operating income by the Manufacturing and Real Estate segments, partially offset by decreased operating income for the Woodlands segment combined with increased Corporate expense.

Consolidated cost of sales increased $6 million when compared to the first nine months of 2015, primarily due to increased lumber and MDF production volume in the Manufacturing segment, as a result of improved market conditions; to a higher cost of sales for the Real Estate segment due to the cost of sales associated with a commercial real estate acreage sale; and to selling more residential lots; partially offset by an increase in intercompany eliminations caused by the Woodlands providing a higher volume of pine stumpage to the Company’s 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 (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 nine months of 2016 increased $6.5 million from the first nine months of 2015. The Woodlands segment’s operating income decreased $2.1 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 sawtimber and pulpwood. The Manufacturing segment’s operating income for the first nine months of 2016 increased $7 million from the prior-year period, due to an increased sales volume for both lumber and MDF and to a lower average per-unit manufacturing cost for MDF. The Real Estate segment’s operating income increased $2.3 million, mainly due to the sale of a commercial real estate site and increased residential lot sales in the first nine months of 2016. Corporate operating expense was $1.4 million higher due to an increase in general and administrative expense.

Woodlands

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

 

     Nine Months Ended September 30,  
     2016      2015  

Net sales (millions of dollars)

     

Pine sawtimber

   $ 16.5         16.1   

Pine pulpwood

     3.2         2.9   

Hardwood sawtimber

     .1         .1   

Hardwood pulpwood

     .4         .6   

Timberland

     —           .1   

Oil and gas lease rentals

     .3         .6   

Oil and gas royalties

     1.2         2.5   

Hunting leases

     2.3         2.3   

Hauling to other mills

     4.4         4.1   

Cost of sales (millions of dollars)

     

Direct operating expenses

   $ 3.6         3.4   

Oil and gas royalty expenses

     .4         .4   

Cost of hauling stumpage to other mills

     4.4         4.1   

Cost of timberland sold

     —           —     

Cost of fee timber harvested (millions of dollars)

   $ 6.2         5.5   

Sales volume (thousands of tons)

     

Pine sawtimber

     598.0         600.4   

Pine pulpwood

     392.5         304.0   

Hardwood sawtimber

     1.4         1.6   

Hardwood pulpwood

     27.3         25.5   

 

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Table of Contents
     Nine Months Ended September 30,  
     2016      2015  

Sales price (per ton)

     

Pine sawtimber

   $ 28         27   

Pine pulpwood

     8         10   

Hardwood sawtimber

     60         60   

Hardwood pulpwood

     14         22   

Timberland

     

Sales volume (acres)

     9         60   

Sales price (per acre)

   $ 4,426         2,379   

In the Woodlands segment, net sales for the first nine months of 2016 decreased $.8 million from the same period of 2015. Net sales of pine sawtimber increased $.4 million, due to an increase in average sales price, partially offset by a decrease in harvest volume. Additionally, pine pulpwood sales increased $.3 million, due to a 29 percent increase in harvest volume, partially offset by a 10 percent lower per-ton average sales price. Hardwood pulpwood sales decreased $.2 million, due to a 36 percent decrease in sales price. Revenues from oil and gas lease rentals decreased $.3 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. Oil and gas royalties were $1.3 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, 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 $.3 million more in 2016’s third quarter when compared to the same period of 2015.

Cost of sales for the Woodlands segment for the first nine months of 2016 increased $.4 million compared to the same period a year ago. This increase was due to a $.2 million increase in direct operating expenses and a $.3 million increase of the cost of hauling stumpage to other mills. The Woodlands segment’s operating income was $2.1 million lower than in the first nine months of 2015, due to the same factors affecting net sales and cost of sales along with a $.7 million increase in the cost of fee timber harvested.

Manufacturing

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

 

     Nine Months Ended September 30,  
     2016      2015  

Net sales (millions of dollars)

     

Lumber

   $ 76.3         66.3   

Residual by-products1

     8.7         7.4   

Medium density fiberboard (“MDF”)2

     44.4         40.9   

Freight invoiced to customers

     8.1         8.1   

Cost of sales – sawmill operations (millions of dollars)

     

Raw materials

   $ 32.8         29.2   

Residual by-products1

     9.8         8.4   

Direct manufacturing expenses

     23.4         22.1   

Change in inventory

     (.2      (.1

Freight expense

     2.9         3.0   

 

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     Nine Months Ended September 30,  
     2016      2015  

Cost of sales – MDF operations (millions of dollars)

     

Raw materials

   $ 17.8         18.0   

Direct manufacturing expenses2

     19.7         19.8   

Change in inventory

     .9         1.0   

Freight expense

     5.2         5.0   

Depreciation (millions of dollars)

     

Sawmill operations

   $ 4.7         4.0   

MDF operations

     5.6         5.5   

Lumber

     

Finished production (MMBF)

     208.8         191.2   

Sales volume (MMBF)

     211.1         194.4   

Sales price (per MBF)

   $ 362         341   

MDF (3/4 inch basis)

     

Finished production (MMSF)

     77.5         70.3   

Sales volume (MMSF)

     79.7         72.4   

Sales price (MSF)

   $ 556         565   

 

1  Intrasegment residual sales have been eliminated.
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)

Net sales for the Manufacturing segment increased $14.9 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. Sales of lumber increased $10 million, when compared to the first nine months of 2015, primarily due to a higher average lumber sales price combined with an increase in the lumber sales volume. MDF sales increased $3.4 million, due to an increase in MDF sales volume, partially offset by a lower average MDF sales price.

Cost of sales for the Manufacturing segment in the first nine months of 2016 increased $6.7 million from the first nine 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 $.9 million period-over-period. The cost of sales for sawmill operations in the first nine months of 2016 were $6.9 million more than the prior-year first nine months, due to an increase in raw material costs of $3.6 million combined with a $1.3 million increase in direct operating expenses. Cost of sales for MDF operations in 2016’s first nine months were $.2 million lower than in the first nine months of 2015 due to decreased raw material costs and reduced unplanned maintenance expense. Operating income for the Manufacturing segment was $7 million more than in the same period a year ago, due to the same items affecting net sales and cost of sales.

 

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Real Estate

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

 

     Nine Months Ended September 30,  
     2016      2015  

Net sales (millions of dollars)

     

Residential lots

   $ 4.2         3.1   

Speculative home

     .3         —     

Commercial acres

     1.6         —     

Chenal Country Club

     4.6         4.8   

Cost of sales (millions of dollars)

     

Residential lots

   $ 2.3         2.0   

Speculative home

     .3         —     

Commercial acres

     .3         —     

Chenal Country Club

     4.7         4.9   

Sales volume

     

Residential lots

     53         48   

Speculative home

     1         —     

Commercial acres

     10.8         —     

Average sales price (thousands of dollars)

     

Residential lots – per lot

   $ 80         64   

Speculative home

     291         —     

Commercial acres – per acre

     152         —     

Net sales for the Real Estate segment in the first nine months of 2016 increased $3 million when compared to the first nine months of 2015, primarily due to increased residential lots sold, to a higher average per-lot sales price, and to a sale of commercial real estate acreage. The average sales price per lot for the first nine months of 2016 increased $16,000 from the same period of 2015, due to the mix of lots sold.

Cost of sales for the Real Estate segment increased $.7 million compared to the first nine months of 2015, due to sales of increased residential lots and to a sale of commercial real estate acreage. The increase in operating income for the Real Estate segment from the first nine months of 2015 was due to the additional residential lots sold and the income from the commercial real estate acreage sale.

Corporate

The Corporate operating expense was $1.4 million higher than in the first nine months of 2015, mainly due to increased general and administrative expense, primarily incentive plan costs.

Eliminations

Intersegment sales of timber from Deltic’s Woodlands to the Manufacturing segment increased $.4 million to $16.9 million for the first nine months of 2016. The increase was mainly due to a small 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.

 

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Interest Expense

Interest expense for the first nine months of 2016 increased $1.9 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 33 percent for the nine months ended September 30, 2016, and 37 percent for the nine months ended September 30, 2015. The current-year income tax rate is lower due to a beneficial capital gains tax rate 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 $28.3 million for the first nine months of 2016, compared to $23.6 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 $1 million in the first nine months of 2016 and $4.5 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 $32.4 million in the current-year period and $24.4 million a year ago. Capital expenditures by segment consisted of the following:

 

     Nine Months Ended  
     September 30,  
(Thousands of dollars)    2016      2015  

Woodlands

   $ 2.8         3.1   

Manufacturing

     26.5         16.5   

Real Estate, including development expenditures

     4.2         5.4   

Corporate

     .1         .1   
  

 

 

    

 

 

 

Capital expenditures

     33.6         25.1   

Adjustment for non-cash accrued liabilities

     (1.2      (.7
  

 

 

    

 

 

 

Capital expenditures requiring cash

   $ 32.4         24.4   
  

 

 

    

 

 

 

Timberland acquisition expenditures, including timberland acquired in exchanges, for the nine months ended September 30, 2016 was $1.2 million and $.6 million for the nine months ended September 30, 2015. The net change in purchased stumpage inventory to be utilized in the Company’s sawmilling operations required cash of $1.3 million and $.7 million in the first nine months of 2016 and 2015, respectively. In 2015 the Company received $1.6 million in proceeds from an involuntary conversion of assets, while there was no such revenue in 2016. The Company borrowed $26 million and repaid $8 million in the first nine months of 2016, while it borrowed $115 million and repaid $108 million in the first nine months of 2015. Dividends of $3.6 million were paid in the first nine months of 2016, while $3.8 million in dividends were paid in the first nine months of 2015. Proceeds from exercises of stock options and the related tax benefits were $1.6 million in the first nine months of 2016 and $.8 million in the first nine months of 2015. The Company utilized $15.2 million to repurchase stock in the first nine months

 

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of 2016, with $9.6 million of share repurchases in the same period of 2015. Other financing activities required cash of $1 million in the first nine months of 2016 and $.7 million for the same period of the prior year.

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 $7.2 million at September 30, 2016, and $12.2 million at December 31, 2015. Deltic’s adjusted working capital ratio at September 30, 2016 was 1.30 to 1, compared to 1.66 to 1 at the end of 2015. Cash and cash equivalents at the end of the third quarter of 2016 were $3 million, a decrease of $2.4 million from the December 31, 2015 balance of $5.4 million. The total indebtedness of the Company at September 30, 2016 was $242 million, including current maturities of long-term debt of $40 million, compared to total indebtedness at December 31, 2015 of $224 million. Deltic’s total debt to stockholders’ equity ratio was .99 to 1 at September 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. 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. As of September 30, 2016, there was $103 million outstanding in combined borrowings and letters of credit against the credit facility, leaving $327 million available. The credit agreement contains restrictive covenants, including limitations on the incurrence of debt and requirements to maintain certain financial ratios. (For additional information about the Company’s current financing arrangements, refer to Notes 10 and 11 to the consolidated financial statements included in the Company’s 2015 annual report on Form 10-K and see Note 8 of this third 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 September 30, 2016 and December 31, 2015.

 

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

Leverage ratio should be less than:1

   .65 to 1   .498 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   79.87%   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.

 

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

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

In December 2000, the Company’s Board of Directors authorized a stock repurchase program of up to $10 million of Deltic common stock. 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 September 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)    Total      During
2016
     2017
to 2018
     2019
to 2020
     After
2020
 

Contractual cash payment obligations

              

Real estate development committed capital costs

   $ 6.6         3.8         .5         2.3         —     

Manufacturing committed capital costs

     10.2         10.2         —           —           —     

Woodlands committed capital costs

     .8         .8         —           —           —     

Long-term debt

     242.0         40.0         —           73.0         129.0   

Interest on debt*

     46.7         2.6         11.9         11.7         20.5   

Retirement plans

     6.1         .4         .5         .5         4.7   

Other postretirement benefits

     5.3         .1         .9         1.1         3.2   

Other liabilities

     1.6         1.6         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 319.3         59.5         13.8         88.6         157.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Other commercial commitment expirations

              

Timber cutting agreements

   $ 2.6         .2         .6         1.8         —     

Letters of credit

     .4         —           .3         .1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3.0         .2         .9         1.9         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Outlook

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

Critical Accounting Policies and Estimates

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. The Company has prepared its consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts in these financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. The Company has disclosed its critical accounting policies in its 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 135,000 to 165,000 tons in the fourth quarter of 2016 and 733,000 to 763,000 tons for the year. Finished lumber sales volumes are estimated at 65 to 75 million board feet for the fourth quarter and 276 to 286 million board feet for the year. MDF sales volumes for the fourth quarter and year of 2016 are estimated to be 20 to 30 million square feet and 100 to 110 million square feet, respectively. Actual lumber and MDF sales volumes are subject to market conditions. Residential lot sales are projected to be 50 to 70 lots and 103 to 123 lots for the fourth quarter and the year, respectively. Even though commercial acreage in Chenal Valley has received interest from potential buyers, it is difficult to anticipate future closings due to the volatile nature of commercial real estate transactions and the significant number of factors related to any sale. The Corporate segment will record a one-time, pretax expense of approximately $3 million during the fourth quarter of 2016. This expense is related to the retirement of the Company’s former President and CEO and is inclusive of a cash payment made upon his retirement and the financial impact of the vesting of equity grants previously awarded to him.

 

 

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Table of Contents

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

Item 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.

Based on their evaluation as of September 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
 

July 1 through

July 31, 2016

     —         $ —           —         $ 24,962,333   

August 1 through

August 31, 2016

     —         $ —           —         $ 24,962,333   

September 1 through

September 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

  10.1    Deltic Timber Corporation Retirement Agreement and General Release (incorporated by reference to the Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 10, 2016).
  31.1    Chief Executive Officer Certification Required by Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Chief Financial Officer Certification Required by Section 302 of the Sarbanes-Oxley Act of 2002.
  32    Certification Required by Section 906 of the Sarbanes-Oxley Act of 2002.
101    Interactive Data: The following financial information from Deltic Timber Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 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:  

            November 4, 2016

    By:   

/s/ D. Mark Leland

         D. Mark Leland, President
         (Principal Executive Officer)
Date:  

            November 4, 2016

    By:   

/s/ Kenneth D. Mann

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

            November 4, 2016

    By:   

/s/ Byrom L. Walker

         Byrom L. Walker, Controller
         (Principal Accounting Officer)

 

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