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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended March 31, 2012

OR

 

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

Commission file number 1-12147

DELTIC TIMBER CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		71-0795870
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
210 East Elm Street, P. O. Box 7200, El Dorado, Arkansas		71731-7200
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (870) 881-9400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

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

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

 

 

Large accelerated filer		¨		Accelerated filer		x
Non-accelerated filer		¨  (Do not check if a small reporting company)		Smaller reporting company		¨

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

Number of shares of Common Stock, $.01 Par Value, outstanding at March 31, 2012, was 12,654,836.

 

 

 

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Table of Contents

TABLE OF CONTENTS – FIRST QUARTER 2012 FORM 10-Q REPORT

 

				Page Number
		PART I – Financial Information
Item 1.		Financial Statements			1
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			27
		PART II – Other Information
Item 1.		Legal Proceedings			28
Item 1A.		Risk Factors			28
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3.		Defaults Upon Senior Securities			28
Item 4.		Mine Safety Disclosures			28
Item 5.		Other Information			28
Item 6.		Exhibits			29
Signatures					30

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PART I – FINANCIAL INFORMATION

Item 1.    Financial Statements

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

    Consolidated Balance Sheets    

(Thousands of dollars)

 

		(Unaudited)
		March 31, 2012				December 31, 2011
Assets
Current assets
Cash and cash equivalents		$	3,074				3,291
Trade accounts receivable, net of allowance for doubtful accounts of $69 and $65, respectively			6,582				4,821
Other receivables			—				1
Inventories			4,792				4,353
Prepaid expenses and other current assets			4,766				3,862
Total current assets			19,214				16,328
Investment in real estate held for development and sale			57,063				57,408
Investment in Del-Tin Fiber			7,284				7,113
Other investments and noncurrent receivables			316				885
Timber and timberlands – net			229,866				228,274
Property, plant, and equipment – net			29,365				30,187
Deferred charges and other assets			1,589				1,675
Total assets		$	344,697				341,870
Liabilities and Stockholders’ Equity
Current liabilities
Trade accounts payable		$	2,928				1,867
Current maturities of long-term debt			1,111				1,111
Accrued taxes other than income taxes			2,413				1,971
Deferred revenues and other accrued liabilities			7,651				7,761
Total current liabilities			14,103				12,710
Long-term debt, excluding current maturities			65,000				64,000
Deferred tax liabilities – net			1,351				1,211
Other noncurrent liabilities			36,284				36,826
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			80,648				80,842
Retained earnings			162,318				163,170
Treasury stock			(5,595	)			(7,288	)
Accumulated other comprehensive loss			(9,540	)			(9,729	)
Total stockholders’ equity			227,959				227,123
Total liabilities and stockholders’ equity		$	344,697				341,870

See accompanying notes to consolidated financial statements.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income

                    (Unaudited)                     

(Thousands of dollars, except per share amounts)

 

		Three Months Ended
		March 31,
		2012				2011
Net sales		$	30,639				29,395
Costs and expenses
Cost of sales			22,001				21,337
Depreciation, amortization, and cost of fee timber harvested			2,908				3,162
General and administrative expenses			4,596				4,346
Total costs and expenses			29,505				28,845
Operating income			1,134				550
Equity in earnings of Del-Tin Fiber			71				537
Interest income			2				7
Interest and other debt expense, net of capitalized interest			(1,035	)			(942	)
Other income/(expense)			(25	)			3
Income before income taxes			147				155
Income tax expense			(50	)			(63	)
Net income		$	97				92
Income per common share
Basic		$	.01				.01
Diluted		$	.01				.01
Dividends declared per common share		$	.075				.075
Weighted average common shares outstanding (thousands)
Basic			12,501				12,409
Diluted			12,567				12,509

See accompanying notes to consolidated financial statements.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

                                             (Unaudited)                                             

(Thousands of dollars)

 

		Three Months Ended March 31,
		2012				2011
Net income		$	97				92
Other comprehensive income/(loss)
Items related to employee benefit plans:
Reclassification adjustment for gains/(losses) included in net income:
Amortization of prior service cost1			2				2
Amortization of actuarial loss2			359				39
Amortization of plan amendment3			(50	)			(50	)
Income tax benefit/(expense) related to items of other comprehensive income			(122	)			4
Other comprehensive income/(loss)			189				(5	)
Comprehensive income		$	286				87

 

1	Related tax effect (in thousands) is $(1) and $(1) for 2012 and 2011, respectively.

2	Related tax effect (in thousands) is $(141) and $(15) for 2012 and 2011, respectively.

3	Related tax effect (in thousands) is $20 and $20 for 2012 and 2011, respectively.

See accompanying notes to consolidated financial statements.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

                    (Unaudited)                     

(Thousands of dollars)

 

		Three Months Ended March 31,
		2012				2011
Operating activities
Net income		$	97				92
Adjustments to reconcile net income to net cash provided/(required) by operating activities
Depreciation, amortization, and cost of fee timber harvested			2,908				3,162
Deferred income taxes			17				39
Real estate development expenditures			(105	)			(298	)
Real estate costs recovered upon sale			232				130
Timberland costs recovered upon sale			127				142
Equity in earnings of Del-Tin Fiber			(71	)			(537	)
Stock-based compensation expense			558				507
Net increase in liabilities for pension and other postretirement benefits			450				147
Net decrease in deferred compensation for stock-based liabilities			(890	)			(694	)
Increase in operating working capital other than cash and cash equivalents			(1,375	)			(3,805	)
Other – changes in assets and liabilities			169				(120	)
Net cash provided/(required) by operating activities			2,117				(1,235	)
Investing activities
Capital expenditures requiring cash, excluding real estate development			(3,478	)			(2,822	)
Net change in purchased stumpage inventory			(346	)			(770	)
Advances to Del-Tin Fiber			(800	)			(597	)
Repayments from Del-Tin Fiber			700				875
Net change in funds held by trustee			568				—
Other – net			220				170
Net cash required by investing activities			(3,136	)			(3,144	)
Financing activities
Proceeds from borrowings			2,000				5,500
Repayments of notes payable and long-term debt			(1,000	)			(1,000	)
Treasury stock purchases			(19	)			(55	)
Common stock dividends paid			(949	)			(941	)
Proceeds from stock option exercises			409				646
Excess tax benefits from stock-based compensation expense			534				498
Deferred financing costs			—				(1,094	)
Other – net			(173	)			(130	)
Net cash provided by financing activities			802				3,424
Net decrease in cash and cash equivalents			(217	)			(955	)
Cash and cash equivalents at January 1			3,291				3,831
Cash and cash equivalents at March 31		$	3,074				2,876

See accompanying notes to consolidated financial statements.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

                    (Unaudited)                     

(Thousands of dollars)

 

		Three Months Ended March 31,
		2012				2011
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 2012 and 2011			128				128
Capital in excess of par value
Balance at beginning of period			80,842				79,081
Exercise of stock options			38				(24	)
Stock-based compensation expense			558				507
Restricted stock awards			(1,393	)			(1,456	)
Tax effect of stock awards			550				530
Restricted stock forfeitures			53				1
Balance at end of period			80,648				78,639
Retained earnings
Balance at beginning of period			163,170				164,286
Net income			97				92
Common stock dividends			(949	)			(941	)
Balance at end of period			162,318				163,437
Treasury stock
Balance at beginning of period – 208,296 and 308,846 shares, respectively			(7,288	)			(10,758	)
Shares purchased – 267 and 869 shares, respectively			(19	)			(55	)
Forfeited restricted stock – 785 and 34 shares, respectively			(53	)			(1	)
Shares issued for incentive plans – 50,305 and 60,917 shares, respectively			1,765				2,126
Balance at end of period – 159,043 and 248,832 shares, respectively			(5,595	)			(8,688	)
Accumulated other comprehensive loss
Balance at beginning of period			(9,729	)			(2,726	)
Change in other comprehensive income/(loss) net of tax			189				(5	)
Balance at end of period			(9,540	)			(2,731	)
Total stockholders’ equity		$	227,959				230,785

See accompanying notes to consolidated financial statements.

 

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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, 2011. Preparation of consolidated financial statements requires management to make estimates and assumptions. These estimates and assumptions affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Management believes the accompanying consolidated financial statements contain all adjustments, including normal recurring accruals and adjustments, which in the opinion of management are necessary to present fairly its financial position as of March 31, 2012, and the results of its operations and cash flows for the three months ended March 31, 2012 and 2011. 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

Financial Accounting Standards Update No. 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) (Topic 820),” became effective January 1, 2012, for the Company. The new guidance results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS standards. The adoption of this guidance has no impact on the Company’s consolidated financial statements.

Financial Accounting Standards Update No. 2011-05 as amended by ASU 2011-12, “Presentation of Comprehensive Income,” became effective for the Company January 1, 2012, and is intended to increase the prominence of other comprehensive income in the financial statements. The adoption of this guidance has had little impact on the Company’s consolidated financial statements.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 2 – Inventories

Inventories at the balance sheet dates consisted of the following:

 

(Thousands of dollars)		March 31, 2012				Dec. 31, 2011
Logs		$	1,229				1,100
Lumber			3,124				2,925
Materials and supplies			439				328
		$	4,792				4,353

Note 3 – Prepaid Expenses and Other Current Assets

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

 

(Thousands of dollars)		March 31, 2012				Dec. 31, 2011
Short-term deferred tax assets		$	2,180				2,180
Refundable income taxes			1,568				1,050
Prepaid expenses			479				196
Other current assets			539				436
		$	4,766				3,862

Note 4 – Investment in Del-Tin Fiber

The Company owns 50 percent of the membership of Del-Tin Fiber LLC (“Del-Tin Fiber”), which operates a medium density fiberboard (“MDF”) plant near El Dorado, Arkansas. The Company’s membership in Del-Tin Fiber is discussed in more detail in Note 4 – Investment in Del-Tin Fiber, in the Company’s 2011 annual report on Form 10-K.

On August 26, 2004, the Company executed a guarantee agreement in connection with the refinancing of the debt of Del-Tin Fiber, which included both a five-year term loan and a long-term bond obligation. In connection with the bond obligation, Del-Tin Fiber has issued a letter of credit in support of the bond obligation and both Deltic and the other joint venture partner agreed to guarantee Del-Tin Fiber’s performance under the letter of credit at inception. The Company’s guarantee under the letter of credit expires on August 31, 2016. In connection with the issuance of Deltic’s original guarantee of the letter of credit, the fair value of the guarantee of the bonds was determined to be de minimus. In reviewing the payment and performance risk associated with this guarantee, Deltic continues to consider the risk minimal based on Del-Tin Fiber’s balance sheet, past performance, and length of time remaining on the guarantee. On February 13, 2012, International Paper Company completed its acquisition of Temple-Inland, Inc., Deltic’s joint venture partner in Del-Tin Fiber. Temple-Inland, Inc. is now a wholly owned subsidiary of International Paper Company. The acquisition did not change the operating agreement of Del-Tin Fiber.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

At March 31, 2012, and December 31, 2011, the Company’s share of the underlying net assets of Del-Tin Fiber exceeded its investment by $14,761,000 and $14,958,000, respectively. The difference relates primarily to the Company’s write-off of its carrying amount for its investment in Del-Tin Fiber as of December 31, 2002, which was not recorded by Del-Tin Fiber. The equity in earnings of Del-Tin Fiber recognized by the Company exceeds its ownership percentage of Del-Tin Fiber’s earnings because the difference in basis between the Company and Del-Tin Fiber is being adjusted to account for Del-Tin Fiber’s operating results as if it were a consolidated subsidiary.

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

Condensed Balance Sheet Information

 

(Thousands of dollars)		March 31, 2012				Dec. 31, 2011
Current assets		$	8,088				7,362
Property, plant, and equipment – net			68,390				68,480
Other noncurrent assets			205				217
Total assets		$	76,683				76,059
Current liabilities		$	3,591				2,916
Long-term debt			29,000				29,000
Members’ capital			44,092				44,143
Total liabilities and members’ capital		$	76,683				76,059

Condensed Income Statement Information

 

		Three Months Ended March 31,
(Thousands of dollars)		2012				2011
Net sales		$	14,591				15,132
Costs and expenses
Cost of sales			12,760				12,313
Depreciation			1,358				1,356
General and administrative expenses			569				589
Total costs and expenses			14,687				14,258
Operating income/(loss)			(96	)			874
Interest income			50				53
Interest and other debt expense			(186	)			(251	)
Other loss			(19	)			—
Net income/(loss)		$	(251	)			676

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 5 – Timber and Timberlands

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

 

(Thousands of dollars)		March 31, 2012				Dec. 31, 2011
Purchased stumpage inventory		$	2,407				2,062
Timberlands			93,355				93,714
Fee timber			236,066				233,029
Logging facilities			2,602				2,601
			334,430				331,406
Less accumulated cost of fee timber harvested and facilities depreciation			(105,589	)			(104,284	)
Strategic timber and timberlands			228,841				227,122
Non-strategic timber and timberlands			1,025				1,152
		$	229,866				228,274

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 either smaller tracts of pine timberlands cannot be strategically managed or tracts of hardwood bottomland that cannot be converted into pine growing acreage, they will be sold. As of March 31, 2012, approximately 2,200 acres of these lands were available for sale. Included in the Woodlands operating income are gains from sales of non-strategic timberland of $259,000 and $225,000 for the three months ended March 31, 2012 and 2011, respectively.

Note 6 – Property, Plant, and Equipment

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

 

(Thousands of dollars)		March 31, 2012				Dec. 31, 2011
Land		$	357				357
Land improvements			6,139				6,141
Buildings and structures			13,876				13,876
Machinery and equipment			100,672				100,211
			121,044				120,585
Less accumulated depreciation			(91,679	)			(90,398	)
		$	29,365				30,187

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 7 – Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2012, was 34 percent. The Company’s policy is to recognize interest expense related to unrecognized tax benefits in interest expense and penalties in other expenses. During the three months ended March 31, 2012, the Company recognized $39,000 in interest expense from these items. The Company had approximately $264,000 accrued in deferred revenues and other accrued liabilities for interest and penalties at March 31, 2012. If the Company were to prevail on all unrecognized tax benefits recorded on the balance sheet, approximately $1,225,000 would benefit the effective rate.

The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2008.

Note 8 – Deferred Revenues and Other Accrued Liabilities

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

 

(Thousands of dollars)		March 31, 2012				Dec. 31, 2011
Deferred revenues – current		$	3,698				4,027
Vacation accrual			996				954
Deferred compensation			976				1,421
All other current liabilities			1,981				1,359
		$	7,651				7,761

Note 9 – Other Noncurrent Liabilities

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

 

(Thousands of dollars)		March 31, 2012				Dec. 31, 2011
Accumulated postretirement benefit obligation		$	11,038				10,904
Excess retirement plan			4,183				4,063
Accrued pension liability			14,233				14,443
Deferred revenue – long term portion			3,205				3,284
Uncertain tax positions liability			1,771				1,771
Other noncurrent liabilities			1,854				2,361
		$	36,284				36,826

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 10 – Employee and Retiree Benefit Plans

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

 

		Three Months Ended March 31,
(Thousands of dollars)		2012				2011
Funded qualified retirement plan
Service cost		$	408				256
Interest cost			405				368
Expected return on plan assets			(423	)			(414	)
Amortization of prior service cost			5				5
Recognized actuarial loss			245				34
Net retirement expense		$	640				249
Unfunded nonqualified retirement plan
Service cost		$	91				17
Interest cost			89				44
Amortization of prior service cost			(3	)			(3	)
Recognized actuarial loss			96				5
Net retirement expense		$	273				63
Other postretirement benefits
Service cost		$	114				88
Interest cost			117				113
Recognized actuarial loss			18				—
Amortization of plan amendment			(50	)			(50	)
Other postretirement benefits expense		$	199				151

The Company made contributions to its qualified plan of $600,000 during the first three months of 2012, and expects to continue to fund the plan at the same monthly level over the remainder of 2012. The expected long-term rate of return on pension plan assets is 7.50 percent.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 11 – Stock-Based Compensation

The Consolidated Statement of Income for the three months ended March 31, 2012 and 2011, included $558,000 and $507,000, respectively, of stock-based compensation expense reflected in general and administrative expenses.

Assumptions for the valuation of 2012 stock options and restricted stock performance units consisted of the following:

 

		2012
Expected term of options (in years)			6.27
Weighted expected volatility			38.78	%
Dividend yield			.61	%
Risk-free interest rate performance restricted shares			.60	%
Risk-free interest rate – options			2.00	%
Stock price as of valuation date		$	67.67
Restricted performance share valuation		$	90.61
Grant date fair value – stock options		$	24.92

Stock Options – A summary of stock options as of March 31, 2012, and changes during the three- month period then ended are presented below:

 

Options		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2012			128,095			$	49.39
Granted			26,527				67.67
Exercised			(10,586	)			38.66
Forfeited/expired			(784	)			50.44
Outstanding at March 31, 2012			143,252			$	53.56				7.3			$	1,516
Exercisable at March 31, 2012			74,569			$	49.61				5.9			$	1,022

The aggregate intrinsic value in the table above is the sum of the amounts by which the quoted market price of the Company’s common stock exceeded the exercise price of the options at March 31, 2012, for those options for which the quoted market price was in excess of the exercise price. This amount changes over time based on changes in the fair market value of the Company’s stock. As of March 31, 2012, there was $1,341,000 of unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 2.2 years.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11 – Stock-Based Compensation (cont.)

 

Restricted Stock and Restricted Stock Units – A summary of nonvested restricted stock as of March 31, 2012, and changes during the three-month period then ended are presented below:

 

Nonvested Restricted Stock		Shares				Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2012			75,395			$	48.18
Granted			18,172				67.67
Vested			(16,791	)			51.37
Forfeited			(368	)			49.42
Nonvested at March 31, 2012			76,408			$	52.10

As of March 31, 2012, there was $2,614,000 of unrecognized compensation cost related to nonvested restricted stock. That cost is expected to be recognized over a weighted-average period of 2.3 years.

Performance Units – A summary of nonvested restricted stock performance units as of March 31, 2012, and changes during the three months then ended are presented below:

 

Nonvested Restricted Stock Performance Units		Shares				Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2012			49,303			$	60.06
Granted			11,559				90.61
Vested			(9,988	)			53.49
Forfeited			(417	)			63.64
Nonvested at March 31, 2012			50,457			$	68.33

As of March 31, 2012, there was $2,289,000 of unrecognized compensation cost related to nonvested restricted stock performance units. That cost is expected to be recognized over a weighted-average period of 2.3 years.

Note 12 – Contingencies

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

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 13 – Fair Value of Financial Instruments

Fair Value Measurement Accounting establishes a fair value hierarchy based on the quality of inputs used to measure fair value, with level 1 being the highest quality and level 3 being the lowest quality. Level 1 inputs are quoted prices in active markets on identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included in Level 1. Level 3 inputs are unobservable inputs which reflect assumptions about pricing by market participants.

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

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

The fair value measurements for the Company’s financial liabilities accounted for at fair value on a recurring basis at March 31, 2012, are presented in the following table:

 

Fair Value Measurements at Reporting Date Using

March 31, 2012

Quoted Prices in Active Markets for Identical Liabilities Inputs

Significant Observable Inputs

Significant Unobservable Inputs

(Thousands of dollars)

Level 1

Level 2

Level 3

Liabilities

Nonqualified employee savings plan

$

923

923

—

—

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

The following table presents the carrying amounts and estimated fair values of financial instruments at March 31, 2012 and 2011. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The table excludes financial instruments included in current assets and liabilities, except current maturities of long-term debt, all of which have fair values approximating carrying values.

 

		March 31, 2012								March 31, 2011
(Thousands of dollars)		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Financial liabilities
Long-term debt, including current liabilities		$	66,111				69,370			$	71,222				75,003

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 14 – Earnings per Common Share

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

 

		Three Months Ended March 31,
(Thousands, except per share amounts)		2012				2011
Net earnings allocated to common stock		$	97				92
Net earnings allocated to participating securities			—				—
Net income allocated to common stock and participating securities		$	97				92
Weighted average number of common shares used in basic EPS			12,501				12,409
Effect of dilutive stock awards			66				100
Weighted average number of common shares and dilutive potential common stock used in EPS assuming dilution			12,567				12,509
Earnings per common share
Basic		$	.01				.01
Assuming dilution		$	.01				.01

Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method. Options to purchase shares, which were outstanding but not included in the computation of diluted earnings per share because the options were anti-dilutive, were 26,527 and 27,218 for the three months ended March 31, 2012 and 2011, respectively. Restricted performance shares, which were outstanding but not included in the computation of diluted earnings per share because they do not meet the metrics established for awarding, were 25,469 and 14,139 at March 31, 2012 and 2011, respectively.

Note 15 – Supplemental Cash Flow Disclosures

Additional information concerning cash flows is as follows:

 

		Three Months Ended March 31,
(Thousands of dollars)		2012				2011
Income taxes paid in cash		$	—				21
Interest paid			279				207
Interest capitalized			(10	)			(23	)

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 – Supplemental Cash Flow Disclosures (cont.)

 

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

 

		Three Months Ended March 31,
(Thousands of dollars)		2012				2011
Issuance of restricted stock		$	1,393				1,456
Land exchanges and capital expenditures accrued, not paid			132				865

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

 

		Three Months Ended March 31,
(Thousands of dollars)		2012				2011
Trade accounts receivable		$	(1,762	)			(991	)
Other receivables			—				38
Inventories			(438	)			(298	)
Prepaid expenses and other current assets			(913	)			(944	)
Trade accounts payable			929				39
Accrued taxes other than income taxes			442				419
Deferred revenues and other accrued liabilities			367				(2,068	)
		$	(1,375	)			(3,805	)

Cash flows provided by other operating activities included decreases in long-term mineral lease rental revenue of $182,000 in 2012 and $283,000 in 2011. Total cash payments received were $361,000 in 2012 and $409,000 in 2011. These payments will be recognized over the term of the lease.

 

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DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 16 – Business Segments

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

 

		Three Months Ended March 31,
(Thousands of dollars)		2012				2011
Net sales
Woodlands		$	10,020				9,958
Mills			22,573				21,656
Real Estate			1,892				1,723
Eliminations*			(3,846	)			(3,942	)
		$	30,639				29,395
Income before income taxes
Operating income
Woodlands		$	4,773				4,694
Mills			1,580				718
Real Estate			(754	)			(810	)
Corporate			(4,316	)			(4,081	)
Eliminations			(149	)			29
Operating income			1,134				550
Equity in earnings of Del-Tin Fiber			71				537
Interest income			2				7
Interest and other debt expense, net of capitalized interest			(1,035	)			(942	)
Other income/(expense)			(25	)			3
		$	147				155
Depreciation, amortization, and cost of fee timber harvested
Woodlands		$	1,360				1,458
Mills			1,421				1,575
Real Estate			99				106
Corporate			28				23
		$	2,908				3,162
Capital expenditures
Woodlands		$	2,679				2,351
Mills			850				1,232
Real Estate			182				323
Corporate			4				70
		$	3,715				3,976

^*Primarily intersegment sales of timber from Woodlands to Mills.

 

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

Executive Overview

The Company reported net income of $.1 million for the first quarter of 2012, the same as for the first quarter of 2011. The Woodlands segment provided $4.8 million in operating income, $.1 million more than in the same period a year ago. While good logging conditions allowed Deltic to increase the harvest level for both pine sawtimber and pulpwood, a lower average price received per ton for pine sawtimber partially offset that benefit. The Mills segment reported operating income of $1.6 million, an increase of $.9 million when compared to the first quarter of 2011. The improvement was due to a higher per-unit sales price; improved hourly productivity rates; increased sales volume; and a lower cost of logs used in manufacturing lumber, as reflected in the current-period lower average sales price for pine stumpage, as price increases for sawlogs lagged behind lumber market improvements. The Real Estate segment reported an operating loss of $.8 million for the first quarters of both 2012 and 2011. The Corporate segment expense was $4.3 million in the first quarter of 2012, which compares to $4 million for the same period of 2011. The increase was due primarily to higher general and administrative expenses associated with pension and post-retirement benefit obligations caused by lower interest rates. Deltic owns a 50 percent interest in Del-Tin Fiber and recorded equity in earnings of $.1 million in the current quarter, a decrease of $.4 million from a year ago, caused by increased manufacturing costs.

Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. The Company’s operating environments are affected by a number of factors including general economic conditions, employment levels, interest rates, credit availability and associated costs, imports, foreign exchange rates, housing starts, new and existing home inventories, residential and commercial real estate foreclosures, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw materials, and weather conditions. Though the U.S. economy shows some signs of improvement, the overall housing market recovery remains tepid. In addition, conflicting signals in employment rates, concerns over future home foreclosures, and uncertainties in global economic conditions have affected the confidence of the home buying public. The number of housing starts and new residential sales has improved over levels from a year ago, but is still below historical averages. Given its relative size and the nature of most commodity markets, the Company maintains little or no influence over the market’s pricing levels for its wood products. Because of this, Deltic’s management continues to focus its attention on increasing productivity while reducing controllable costs and expenses in its manufacturing processes.

The Woodlands segment continues to be the Company’s core operating segment. The pine sawtimber harvest in the first quarter of 2012 was 173,007 tons, an 18 percent increase from the 146,089 tons harvested in the first quarter of 2011. The harvest increase was due to favorable weather conditions for logging. The average per-ton price for pine sawtimber was $22, a 15 percent decrease from $26 per ton in 2011’s first quarter. The decrease in sales price was due to lower demand from sawmills in Deltic’s operating area, driven by reduced operating rates. The first quarter of 2012’s pine pulpwood harvest was 134,934 tons at an average sales price of $9 per ton, which compares to 125,467 tons harvested at $8 per ton for the same period of 2011. During the current quarter, the Company sold approximately 270 acres of timberland, primarily non-strategic recreational-use bottomland, at an average sales price of $1,448 per acre versus 307 acres at $1,358 per acre in 2011’s first quarter. The Woodlands segment reported hunting lease income of $.6 million in the first quarter of 2012 and $.5 million for the same period of 2011.

The Woodlands segment reports other benefits derived from land ownership such as revenues from mineral lease rentals, mineral royalties, and land easements. Oil and gas lease rental income was $.5 million, a $.2 million decrease from the same period of 2011 due primarily to leased properties now being held by production as the original lease periods end. Oil and gas royalty payments are received primarily from the Fayetteville Shale Play and were $1.1 million in the first quarters of both 2012 and 2011. Decade-low natural gas prices have offset the increased volume of producing wells. The ultimate benefit to Deltic from mineral leases remains speculative and unknown to the Company and is contingent on the successful completion of producing wells on Company lands and the prices received for crude oil and natural gas.

 

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The Mills segment sold 65 million board feet in the first quarter of 2012, an increase of 2.5 million board feet when compared to 62.5 million board feet sold in the same period of 2011. The Company experienced a year-over-year increase in demand for lumber used in construction due to milder weather across the mid-west and south. The average lumber sales price of $271 per thousand board feet received in the current quarter was a $5 per thousand board feet increase from the same period of 2011. The segment also benefited from lower raw material log costs and record hourly productivity rates in its sawmills. Because of the historical volatility in the lumber markets, especially during the past several years, Deltic plans to continue monitoring market conditions and plans to react quickly to adjust production levels to meet any market change in demand.

The Real Estate segment sold seven residential lots during the first quarter of 2012, with an average per-lot sales price of $67,100, compared to sales of three lots with an average per-lot sales price of $85,300 in 2011’s first quarter. The reduction in the per-lot sales price was due to the mix of lots sold. No commercial acreage sales occurred in either the first quarter of 2012 or 2011. Commercial real estate acreage within Chenal Valley continues to receive interest, especially multi-family tracts, property located near “The Promenade at Chenal,” an upscale shopping center that includes internationally branded retailers, and property located adjacent to St. Vincent West, a medical center that recently opened. However, due to the unpredictable nature of commercial real estate sales activity, the Company cannot predict the timing of closing for any commercial real estate transaction.

Operating results for Del-Tin Fiber are affected by the overall medium density fiberboard (“MDF”) market and the plant’s operating performance. Deltic’s equity in the earnings of Del-Tin Fiber was $.1 million for the current year quarter versus $.5 million for the same period of 2011 due to increased manufacturing costs, including higher resin glue expense in the current year. Regarding the Company’s equity position in Del-Tin Fiber, Deltic continues to reduce depreciation expense related to the add-back per thousand square feet manufactured, which relates to the impairment taken by the Company in 2002 that was not recorded at the Del-Tin Fiber level. The difference in basis between the Company and Del-Tin Fiber is being adjusted to account for Del-Tin Fiber’s operating results as if it were a consolidated subsidiary. (For further discussion, refer to Note 4 to the Consolidated Financial Statements.)

Results of Operations

In the following tables, Deltic’s net sales and results of operations are presented for the quarters ended March 31, 2012 and 2011. Explanations of significant variances and additional analyses for the Company’s consolidated and segment operations follow the tables.

 

		Quarter Ended March 31,
(Millions of dollars, except per share amounts)		2012				2011
Net sales
Woodlands		$	10.0				10.0
Mills			22.6				21.6
Real Estate			1.9				1.7
Eliminations			(3.9	)			(3.9	)
Net sales		$	30.6				29.4

 

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		Quarter Ended March 31,
(Millions of dollars, except per share amounts)		2012				2011
Operating income/(loss)
Woodlands		$	4.8				4.7
Mills			1.6				.7
Real Estate			(.8	)			(.8	)
Corporate			(4.3	)			(4.0	)
Eliminations			(.2	)			—
Operating income			1.1				.6
Equity in earnings of Del-Tin Fiber			.1				.5
Interest and other debt expense			(1.0	)			(.9	)
Income taxes			(.1	)			(.1	)
Net income		$	.1				.1
Income per common share
Basic and diluted		$	.01				.01

Consolidated

Net income in the first quarter of 2012 was unchanged from the first quarter of 2011. Improved results for the Woodlands and Mills segments were offset by increased Corporate general and administrative expenses and lower equity in earnings of Del-Tin Fiber.

Operating income increased $.5 million. The Woodlands segment increased $.1 million primarily due to a lower cost of fee timber harvested. The Mills segment increased $.9 million due to increased sales volumes, a higher average lumber sales price, improved hourly productivity rates, and lower log costs used in manufacturing lumber. While the Real Estate segment sold more residential lots in 2012, this benefit was offset by lower financial results at Chenal Country Club, resulting in similar results for the segment for both periods. Corporate expenses were higher due primarily to higher general and administrative expenses.

Woodlands

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

 

		Quarter Ended March 31,
		2012				2011
Gross sales (millions of dollars)
Pine sawtimber		$	3.7				3.8
Pine pulpwood			1.2				1.0
Hardwood sawtimber			—				.1
Hardwood pulpwood			.2				.2
Oil and gas lease rentals			.5				.7
Oil and gas royalties			1.1				1.1
Hunting leases			.6				.5
Sales volume (thousands of tons)
Pine sawtimber			173.0				146.1
Pine pulpwood			134.9				125.5
Hardwood sawtimber			1.2				2.3
Hardwood pulpwood			15.1				27.8

 

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		Quarter Ended March 31,
		2012				2011
Sales price (per ton)
Pine sawtimber		$	22				26
Pine pulpwood			9				8
Hardwood sawtimber			34				31
Hardwood pulpwood			10				6
Timberland
Net sales (millions of dollars)		$	.4				.4
Sales volume (acres)			270				307
Sales price (per acre)		$	1,448				1,358

There was no change in net sales in 2012 when compared to the 2011 first quarter. Pine sawtimber sales were lower by $.1 million in the first quarter of 2012, due to a decrease in stumpage prices which was partially offset by an increased harvest volume. Pine pulpwood sales were higher by $.2 million mainly due to higher harvest volumes. Oil and gas lease rental revenue was lower by $.2 million in the current period, as the lease period on some acreage has ended and the properties are now held by production. Revenues from hauling stumpage to other mills increased $.2 million compared to the first quarter of 2011. Operating income was $.1 million higher in 2012’s first quarter than in 2011. Year-over-year variances that affected operating income for the first quarter of 2012 were lower costs for fee timber harvested and for replanting fee timberlands. These benefits were offset by increased cull timber removal expense and cost of hauling stumpage to other mills.

Mills

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

 

		Quarter Ended March 31,
		2012				2011
Net sales (millions of dollars)
Lumber		$	17.6				16.6
Residual by-products			3.9				3.9
Lumber
Finished production (MMBF)			66.0				63.6
Sales volume (MMBF)			65.0				62.5
Sales price (per MBF)		$	271				266

Net sales increased $1 million over the first quarter of 2011 due to a four percent higher sales volume and a two percent higher average lumber sales price. Operating income for the Mills segment was $.9 million greater in 2012 due to the same items affecting net sales, combined with higher productivity rates and lower costs for logs used to manufacture lumber.

 

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Real Estate

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

 

		Quarter Ended March 31,
		2012				2011
Net sales (millions of dollars)
Residential lots		$	.5				.3
Chenal Country Club			1.3				1.4
Sales volume
Residential lots			7				3
Average sales price (thousands of dollars)
Residential lots		$	67				85

Net sales for the first quarter of 2012 were $.2 million higher due primarily to the increase in the number of residential lots sold. Increased operating income from the sales of lots in 2012 were offset by decreased operating income at Chenal Country Club, resulting in no change in operating income for the Real Estate segment.

Corporate

The year-over-year increase in operating expenses for Corporate functions was due to higher general and administrative expenses, primarily associated with pension and post retirement benefit expenses.

Eliminations

Intersegment sales of timber from Deltic’s Woodlands to the Mills segment stayed the same at $3.9 million for both 2012 and 2011 first quarters. During the first quarter of 2012, Deltic transferred an increased volume of fee timber to its sawmills, which was offset by a lower per-ton transfer price. Transfer prices approximate that of the market. Intercompany sales elimination exceeded the intercompany cost elimination by $.2 million as the percentage of intercompany fee timber in inventory increased during the current period.

Equity in Del-Tin Fiber

For the first quarter of 2012, Deltic’s equity in Del-Tin Fiber was $.1 million, a reduction of $.4 million from the first quarter of 2011, due to lower sales prices caused by a moderately softer MDF market and higher manufacturing costs. Additional selected financial and statistical data for Del-Tin Fiber is shown in the following table.

 

		Quarter Ended March 31,
		2012				2011
Net sales (millions of dollars)		$	14.6				15.1
Finished production (MMSF)			29.6				30.2
Sales volume (MMSF)			30.1				30.2
Sales price (per MSF)		$	485				501

 

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Income Taxes

The effective income tax rate was 34 percent for 2012 and 40 percent for the first quarter of 2011. The effective income tax rate was lower in 2012 because of the impact of permanent tax differences.

Liquidity and Capital Resources

Cash Flows and Capital Expenditures

Net cash provided by operating activities totaled $2.1 million for the first three months of 2012 compared to cash required of $1.2 million in 2011. Changes in operating working capital, other than cash and cash equivalents, required cash of $1.4 million and $3.8 million in 2012 and 2011, respectively. The Company’s accompanying Consolidated Statements of Cash Flows identifies other differences between net income and cash provided or required by operating activities for each reporting period.

Capital expenditures required cash of $3.6 million in the current-year period and $3.1 million a year ago. Capital expenditures by segment consisted of the following:

 

		Three Months Ended March 31,
(Thousands of dollars)		2012				2011
Woodlands, including land exchanges		$	2,679				2,351
Mills			850				1,232
Real Estate, including development expenditures			182				323
Corporate			4				70
Capital expenditures			3,715				3,976
Non-cash land exchange and accrued liabilities			(132	)			(856	)
Capital expenditures requiring cash		$	3,583				3,120

The net change in purchased stumpage inventory to be utilized in the Company’s sawmill operations used cash of $.3 million in 2012 and $.8 million in 2011. The Company advanced Del-Tin Fiber $.8 million in the first quarter of 2012, and received repayments of $.7 million. This compares to advances of $.6 million and repayments of $.9 million in the same period of 2011. Funds held by trustees to be used for acquisitions of timberland designated as “replacement property” for income tax purposes, as required for tax-deferred exchanges, decreased $.6 million in 2012 versus no change in 2011. Deltic received proceeds from other investing activities of $.2 million in both 2012 and 2011. Deltic had $1 million in net borrowings in 2012 versus $4.5 million in 2011. The Company incurred $1.1 million in fees to facilitate an amendment and extension of its unsecured and committed revolving credit facility in 2011, while there were no such costs in 2012. The Company had no purchases of treasury stock in 2012 and $.1 million in 2011. Deltic paid dividends on common stock of $.9 million during both 2012 and 2011. Proceeds from stock option exercises and related tax benefits in 2012 decreased $.2 million from 2011.

Financial Condition

Working capital totaled $5.1 million at March 31, 2012, and $3.6 million at December 31, 2011. Deltic’s working capital ratio at March 31, 2012 was 1.36 to 1, compared to 1.28 to 1 at the end of 2011. Cash and cash equivalents at the end of the first quarter of 2012 decreased $.2 million from December 31, 2011. Deltic’s long-term debt to stockholders’ equity ratio was .285 to 1 at March 31, 2012 and .282 to 1 at December 31, 2011.

 

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Liquidity

The primary sources of the Company’s liquidity are internally generated funds, access to outside financing, and working capital. The Company’s current strategy for growth continues to emphasize its timberland acquisition program, in addition to expanding lumber production as market conditions allow and developing residential and/or commercial properties at Chenal Valley and Red Oak Ridge.

To facilitate these growth plans, the Company has an agreement with a group of banks, which provides an unsecured and committed revolving credit facility totaling $297.5 million, inclusive of a $50 million letter of credit feature. The agreement was amended on February 4, 2011, and will expire on September 9, 2015. As of March 31, 2012, $272.5 million was available. The credit agreement contains restrictive covenants, including limitations on the incurrence of debt and requirements to maintain certain financial ratios. (For additional information about the Company’s current financing arrangements, refer to Note 7 to the consolidated financial statements and Note 9 to the consolidated financial statements included in the Company’s 2011 annual report on Form 10-K.)

The table below sets forth the most restrictive ratio of covenants in the credit facility and Senior Notes Payable and status with respect to these covenants as of March 31, 2012 and December 31, 2011.

 

Covenants Requirements

Actual Ratios at March 31, 2012

Actual Ratios at Dec. 31, 2011

Leverage ratio should be less than:1

.60 to 1

.264 to 1

.262 to 1

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

—

2

44.70

%

43.47

%

Fixed charge coverage ratio should be greater than:3

2.50 to 1

3.86 to 1

3.89 to 1

 

1

The leverage ratio is calculated as total debt divided by total capital. Total debt includes indebtedness for borrowed money, secured liabilities, obligations in respect of letters of credit, and guarantees. Total capital is the sum of total debt and net worth. Net worth is calculated as total assets minus total liabilities, as reflected on the balance sheet. This covenant is applied at the end of each quarter. The revolving credit facility requirement is for the leverage ratio to be less than .65 to 1.

 

2

Timber market value must be greater than 200 percent of total debt (as defined in (1) above.) The timber market value is calculated by multiplying the average price received for sales of timber for the preceding four quarters by the current quarter’s ending inventory of timber. This covenant is applied at the end of the quarter on a rolling four-quarter basis. The revolving credit facility requirement is for the timber market value to be greater than 175 percent of total debt (as defined in (1) above.)

 

3

The fixed charge coverage ratio is calculated as EBITDA (earnings before interest, taxes, depreciation, depletion, and amortization) increased by non-cash compensation expense and other non-cash expenses and decreased by dividends paid and income tax paid, divided by the sum of interest expense and scheduled principal payments made on debt during the period. This covenant is applied at the end of the quarter on a rolling four-quarter basis. This covenant only applies to the Senior Notes Payable.

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

 

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In December 2000, the Company’s Board of Directors authorized a stock repurchase program of up to $10 million of Deltic common stock. In December 2007, the Company’s Board of Directors expanded the program by $25 million. As of March 31, 2012, the Company had expended $14.6 million under this program, with the purchase of 370,530 shares at an average cost of $39.28 per share; no shares were purchased in 2012, 2011, or 2010, 35,571 shares were purchased in 2009, 129,996 shares were purchased in 2008, 101,914 shares were purchased under this program in 2007, and seven shares in 2006. In its two previous repurchase programs, Deltic purchased 479,601 shares at an average cost of $20.89 and 419,542 shares at a $24.68 per share average cost, respectively.

Off-Balance Sheet Arrangements, Contractual Obligations, and Commitments

On August 26, 2004, Del-Tin Fiber refinanced its existing long-term debt by entering into a credit agreement consisting of a letter of credit and term loan with multiple lending institutions. The funds provided from this credit agreement were used, together with the existing balance in Del-Tin Fiber’s debt service reserve and bond sinking fund accounts, to redeem $60 million of its $89 million industrial revenue bonds. Under the new credit agreement, the lenders, on September 1, 2004, issued on Del-Tin Fiber’s behalf, a letter of credit in the amount of $29.7 million to support the remaining industrial revenue bonds originally issued in 1998 by Union County, Arkansas. Concurrent with this event, on August 26, 2004, Deltic executed a guarantee agreement in connection with the refinancing of the debt of Del-Tin Fiber. Under Deltic’s guarantee agreement, Deltic unconditionally guarantees the due and punctual payment of 50 percent ($14.5 million at March 31, 2012) of Del-Tin’s obligation under its credit agreement. Deltic considers the current status of the payment/performance risk of this guarantee to be low based on the length of time remaining on the guarantee. On February 13, 2012, International Paper Company completed its acquisition of Temple-Inland, Inc., which is Deltic’s joint venture partner in Del-Tin Fiber, LLC. Temple-Inland, Inc. is now a wholly owned subsidiary of International Paper Company and the acquisition did not change the operating agreement of Del-Tin Fiber, LLC.

The Company has both funded and unfunded noncontributory defined benefit retirement plans that cover the majority of its employees. The plans provide defined benefits based on years of service and final average salary. Deltic also has other postretirement benefit plans covering substantially all of its employees. The health care plan is contributory with participants’ contributions adjusted as needed; the life insurance plan is noncontributory. With regards to all of the Company’s employee and retiree benefit plans, Deltic is unaware of any trends, demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the Company’s liquidity increasing or decreasing in any material way. (For information about material assumptions underlying the accounting for these plans and other components of the plans, refer to Note 15 to the consolidated financial statements included in the Company’s 2011 annual report on Form 10-K.)

 

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

 

(Millions of dollars)		Total				During 2012				2013 to 2014				2015 to 2016				After 2016
Contractual cash payment obligations
Real estate development committed capital costs		$	3.5				.1				2.8				.6				—
Woodlands land acquisition and committed capital costs			.1				.1				—				—				—
Mills committed capital costs			.8				.8				—				—				—
Long-term debt			66.1				1.1				—				65.0				—
Interest on debt*			13.7				2.8				5.8				5.1				—
Retirement plans			4.1				1.9				.4				.6				1.2
Other postretirement benefits			5.0				.3				.8				.9				3.0
Unrecognized tax benefits			1.8				.5				1.3				—				—
Other liabilities			3.1				2.2				.9				—				—
		$	98.2				9.8				12.0				72.2				4.2
Other commercial commitment expirations
Guarantee of indebtedness of Del-Tin Fiber		$	14.8				—				—				14.8				—
Timber cutting agreements			.2				.1				.1				—				—
Letters of credit			.7				.1				.2				.4				—
		$	15.7				.2				.3				15.2				—

 

*

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

Outlook

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

Critical Accounting Policies and Estimates

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. The Company has prepared its consolidated financial statements in conformity with accounting principles generally accepted in the United States, which requires management to make estimates and assumptions that affect the reported amounts in these financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. The Company has disclosed its critical accounting policies in its 2011 annual report on Form 10-K, and this disclosure should be read in conjunction with this Form 10-Q.

 

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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 150,000 to 170,000 tons in the second quarter of 2012 and 575,000 to 600,000 tons for the year. Finished lumber sales volume will continue to be subject to market conditions, and is estimated at 50 to 70 million board feet for the second quarter and 250 to 275 million board feet for the year. Residential lot sales are projected to be 5 to 10 lots and 25 to 35 lots for the second quarter and the year, respectively. Although commercial acreage within Chenal Valley continues to receive interest, because of its highly uncertain nature and the significant number of factors involved, the Company is unable to predict the closing of any commercial real estate transactions at this time.

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 2011 annual report on Form 10-K. Those disclosures should be read in conjunction with this Form 10-Q.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Based on their evaluation as of March 31, 2012, 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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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 2011 annual report on Form 10-K.

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

Issuer Purchase of Equity Securities

 

Period		Total Number  of Shares Purchased		Average Price  Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs1
Jan. 1 through Jan. 31, 2012		—		—		—		$20,434,011
Feb. 1 through Feb. 29, 2012		2672		$70.43		—		$20,434,011
Mar. 1 through Mar. 31, 2012		—		—		—		$20,434,011

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

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

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

None.

 

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Item 6.    Exhibits

Index to Exhibits

 

Exhibit Designation		Nature of Exhibit
31.1		Chief Executive Officer Certification Required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Chief Financial Officer Certification Required by Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification Required by Section 906 of the Sarbanes-Oxley Act of 2002.
101		Interactive Data: The following financial information from Deltic Timber Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012, formatted in Extensible Business Reporting Language (“XBRL”): (1) the Consolidated Balance Sheets; (2) the Consolidated Statements of Income; (3) the Consolidated Statements of Comprehensive Income: (4) the Consolidated Statements of Cash Flows; (5) the Consolidated Statements of Stockholders’ Equity; and (6) the Notes to Consolidated Financial Statements, tagged as blocks of text.

 

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SIGNATURES

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

DELTIC TIMBER CORPORATION

 

Date:		May 4, 2012				By:		/s/ Ray C. Dillon
								Ray C. Dillon, President
								(Principal Executive Officer)
Date:		May 4, 2012				By:		/s/ Kenneth D. Mann
								Kenneth D. Mann, Vice President,
								Finance and Administration
								(Principal Financial Officer)
Date:		May 4, 2012				By:		/s/ Byrom L. Walker
								Byrom L. Walker, Controller
								(Principal Accounting Officer)

 

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