DELTIC TIMBER CORP - FORM 10-Q

DELTIC TIMBER CORP - FORM 10-Q - November 4, 2016

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EX-32 - EX-32 - DELTIC TIMBER CORP	d232314dex32.htm
EX-31.2 - EX-31.2 - DELTIC TIMBER CORP	d232314dex312.htm
EX-31.1 - EX-31.1 - DELTIC TIMBER CORP	d232314dex311.htm

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

☐	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.

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 – 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

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.

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.

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.

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.

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.

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.

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

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

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.

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

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	)

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

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

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

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

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

Liabilities

Observable

Unobservable

Sept. 30,

Inputs

(Thousands of dollars)

2016

Level 1

Level 2

Level 3

Liabilities

Nonqualified employee savings plan

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.

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

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

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.

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)

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

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.

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.

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


	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


	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


	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.

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.

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


	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


	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.

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.

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

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%

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.

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


(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.

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.

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

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.

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.

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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