<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
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 (I.R.S. Employer Identification Number)
of incorporation or organization)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 Par Value New York Stock Exchange, Inc.
Series A Participating Cumulative New York Stock Exchange, Inc.
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
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 .
--- ---
Number of shares of Common Stock, $.01 Par Value, outstanding at October 31,
1998, was 12,813,879.
================================================================================
<PAGE>
TABLE OF CONTENTS - THIRD QUARTER 1998 FORM 10-Q REPORT
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Change in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
---------------------------
(Thousands of dollars)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1998 1997
---------- --------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 6,696 31,045
Trade accounts receivable - net 5,364 3,772
Other receivables 794 297
Inventories 6,658 8,595
Prepaid expenses and other current assets 2,720 2,060
-------- -------
Total current assets 22,232 45,769
Investment in real estate held for development and sale 24,150 20,365
Investment in and advances to Del-Tin Fiber, L.L.C. 11,367 7,383
Timber and timberlands - net 169,371 108,206
Property, plant, and equipment - net 41,572 39,646
Deferred charges and other assets 3,275 4,006
-------- -------
Total assets $271,967 225,375
======== =======
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt $ 204 1,801
Notes payable 347 192
Trade accounts payable 3,053 2,542
Accrued taxes other than income taxes 1,113 979
Bank overdraft 1,437 1,479
Other accrued liabilities 961 805
Income taxes payable - -
-------- -------
Total current liabilities 7,115 7,798
Long-term debt 45,889 1,093
Deferred credits and other noncurrent liabilities 6,142 6,488
Redeemable preferred stock 30,000 30,000
Stockholders' equity
Preferred stock - -
Common stock 128 128
Capital in excess of par value 68,808 68,372
Retained earnings 114,208 111,496
Unamortized restricted stock awards (323) -
-------- -------
Total stockholders' equity 182,821 179,996
-------- -------
Total liabilities and stockholders' equity $271,967 225,375
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
------------------------------------------------
(Thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1998 1997 1998 1997
---------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $29,088 28,992 82,307 79,937
------- ------ ------ ------
Costs and expenses
Cost of sales 23,016 19,742 59,613 50,309
Depreciation, amortization, and
cost of fee timber harvested 1,817 1,162 5,281 3,584
General and administrative expenses 1,268 1,565 4,118 4,507
------- ------ ------ ------
Total costs and expenses 26,101 22,469 69,012 58,400
------- ------ ------ ------
Operating income 2,987 6,523 13,295 21,537
Equity in loss of Del-Tin Fiber, L.L.C. (1,491) - (2,956) -
Interest income 238 42 859 531
Interest expense (397) (90) (515) (258)
Other income/(expense) 285 28 372 124
------- ------ ------ ------
Income before income taxes 1,622 6,503 11,055 21,934
Income taxes (686) (2,622) (4,236) (8,644)
------- ------ ------ ------
Net income $ 936 3,881 6,819 13,290
======= ====== ====== ======
Earnings per Common share
Basic $ .03 .30 .40 1.04
======= ====== ====== ======
Assuming dilution $ .03 .30 .40 1.04
======= ====== ====== ======
Dividends declared per Common share $ .0625 .0625 .1875 .1875
======= ====== ====== ======
Average Common shares outstanding
(thousands) 12,814 12,798 12,811 12,798
======= ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30,
-------------------------------------------------
(Thousands of dollars)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Operating activities
Net income $ 6,819 13,290
Adjustments to reconcile above income to
net cash provided by operating activities
Depreciation, amortization, and cost of fee timber harvested 5,281 3,584
Deferred and noncurrent income taxes (492) (26)
(Gains)/losses from sales of assets (82) (247)
Real estate costs recovered upon sale 3,205 2,579
Equity in loss of Del-Tin Fiber, L.L.C. 2,956 -
(Increase)/decrease in operating working capital
other than cash and cash equivalents 479 547
Other 473 (55)
-------- -------
Net cash provided by operating activities 18,639 19,672
-------- -------
Investing activities
Capital expenditures requiring cash (69,926) (26,439)
Net change in purchased stumpage inventory (5,914) (3,533)
Proceeds from sales of assets 357 936
Investment in and advances to Del-Tin Fiber, L.L.C. - net (6,870) (4,522)
Other - net 500 309
-------- -------
Net cash provided/(required) by investing activities (81,853) (33,249)
-------- -------
Financing activities
Proceeds from long-term borrowings 45,000 3,000
Repayments of long-term debt (1,993) (1,794)
Bank overdraft (42) 1,250
Preferred Stock dividends paid (1,697) -
Common Stock dividends paid (2,403) (2,399)
-------- -------
Net cash provided/(required) by financing activities 38,865 57
-------- -------
Net increase/(decrease) in cash and cash equivalents (24,349) (13,520)
Cash and cash equivalents at January 1 31,045 18,162
-------- -------
Cash and cash equivalents at September 30 $ 6,696 4,642
======== =======
Supplemental disclosures
Income taxes paid, net of refunds $ 5,392 8,482
======== =======
Interest paid, net of amounts capitalized $ 562 363
======== =======
Additions to debt - owner financing $ 347 387
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
-----------------------------------------------
(Thousands of dollars)
Sept. 30, Dec. 31,
1998 1997
----------- ---------
(unaudited)
Cumulative Preferred Stock - $.01 par, authorized
20,000,000 shares, 600,000 shares issued as
Redeemable Preferred Stock $ - -
-------- -------
Common Stock - $.01 par, authorized 50,000,000
shares, 12,813,879 shares issued 128 128
-------- -------
Capital in excess of par value
Balance at beginning of year 68,372 68,372
Exercise of stock options 58 -
Restricted stock transactions 378 -
-------- -------
Balance at end of period 68,808 68,372
-------- -------
Retained earnings
Balance at beginning of year 111,496 98,208
Net income 6,819 16,574
Preferred Stock dividends accrued (1,704) (86)
Common Stock dividends declared (2,403) (3,200)
-------- -------
Balance at end of period 114,208 111,496
-------- -------
Unamortized restricted stock awards
Balance at beginning of year - -
Stock awards (378) -
Amortization to expense 55 -
-------- -------
Balance at end of period (323) -
-------- -------
Total stockholders' equity $182,821 179,996
======== =======
6
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
------------------------------------------
(Unaudited)
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The interim financial information included herein is unaudited; however, such
information reflects all adjustments which are, in the opinion of management,
necessary for a fair presentation of the Company's financial position, results
of operations, and cash flows for the interim periods. All such adjustments
are of a normal, recurring nature. The financial statements in Deltic's 1997
annual report on Form 10-K include a summary of significant accounting policies
of the Company and should be read in conjunction with this Form 10-Q. Certain
prior period amounts have been reclassified to conform with 1998 presentation
format.
NOTE 2 - EARNINGS PER COMMON SHARE
The amounts used in computing earnings per share under the provisions of SFAS
128 consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
(Thousands, except per share 1998 1997 1998 1997
amounts) -------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income $ 936 3,881 6,819 13,290
Less Preferred dividends (566) - (1,704) -
------- ------ ------- ------
Income available to Common
shareholders $ 370 3,881 5,115 13,290
======= ====== ======= ======
Weighted average number of
Common shares used in basic EPS 12,814 12,798 12,811 12,798
Effect of dilutive securities
Stock options 11 30 21 25
------- ------ ------- ------
Weighted average number of
Common shares and dilutive
potential Common Stock used
in EPS assuming dilution 12,825 12,828 12,832 12,823
======= ====== ======= ======
Earnings per Common share
Basic $.03 .30 .40 1.04
======= ====== ======= ======
Assuming dilution $.03 .30 .40 1.04
======= ====== ======= ======
</TABLE>
NOTE 3 - INVENTORIES
Inventories at the balance sheet dates consisted of the following:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
(Thousands of dollars) 1998 1997
------- ------
<S> <C> <C>
Logs $ 2,352 3,278
Finished products 4,022 5,058
Materials and supplies 284 259
------- ------
$ 6,658 8,595
======= ======
</TABLE>
7
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
------------------------------------------
(Unaudited)
NOTE 4 - INVESTMENT IN DEL-TIN FIBER, L.L.C.
The Company recorded its 50 percent equity in the $5,912,000 loss to-date of
Del-Tin Fiber, L.L.C. ("Del-Tin Fiber"), consisting of start-up costs incurred
and operating losses reported since initial production commenced April 29,
1998, in the amount of $2,956,000 net to Deltic. For the three months ended
September 30, 1998, this loss was $2,982,000, $1,491,000 net to the Company.
NOTE 5 - TIMBER AND TIMBERLANDS
Timber and timberlands at the balance sheet dates consisted of the following:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
(Thousands of dollars) 1998 1997
---------- -------
<S> <C> <C>
Purchased stumpage inventory $ 16,459 10,545
Timberlands 47,617 44,846
Fee timber 134,132 80,534
Logging facilities 1,606 1,592
-------- -------
199,814 137,517
Less accumulated costs of fee timber harvested
and facilities depreciation $(30,443) (29,311)
-------- -------
169,371 108,206
======== =======
</TABLE>
NOTE 6 - PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at the balance sheet dates consisted of the
following:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
(Thousands of dollars) 1998 1997
-------- -------
<S> <C> <C>
Land and land improvements $ 7,602 7,452
Buildings and structures 8,336 7,966
Machinery and equipment 60,675 58,138
-------- -------
76,613 73,556
Less accumulated depreciation (35,041) (33,910)
-------- -------
$ 41,572 39,646
======== =======
</TABLE>
NOTE 7 - INTEREST RATE DERIVATIVE CONTRACT
During the third quarter of 1998, Deltic entered into an interest rate hedge
contract in anticipation of issuance of approximately $40,000,000 of long-term,
fixed-interest rate debt for which the Company is negotiating, utilizing this
hedge contract to manage interest rate fluctuation exposure. This debt will
replace a portion of the current borrowings under the Company's revolving
credit facility. The hedge contract is treated as an "off-balance sheet"
financial instrument. Any differential realized on the hedge contract will be
deferred and amortized as either additional interest expense or a reduction to
interest expense over the life of the underlying debt issuance. Deltic does
not utilize derivative financial instruments for trading or other speculative
purposes.
8
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
-------------------------------------------
(Unaudited)
NOTE 8 - BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS 131
supersedes and/or amends the business segment disclosures required under
various preceding pronouncements, effective for fiscal years beginning after
December 15, 1997, with earlier application encouraged. This new standard
defines additional information to be disclosed for each reportable segment and
requires that each operating segment for which an enterprise's chief operating
decision maker regularly assesses performance be disclosed as a reportable
segment.
As a result, the Company divided its previous Forest Products segment into two
separate reporting segments, Woodlands and Mills. Deltic also elected to adopt
SFAS 131 effective for the first quarter of 1998. All 1997 business segment
information has been restated for comparative purposes.
Information about the Company's business segments consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
(Thousands of dollars) 1998 1997 1998 1997
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales
Woodlands $ 6,002 5,534 21,065 18,391
Mills 16,663 16,523 51,499 51,848
Real Estate 3,621 2,269 9,571 7,975
Agriculture 4,879 5,917 5,538 7,263
Eliminations* (2,077) (1,251) (5,366) (5,540)
------- ------ ------ ------
$29,088 28,992 82,307 79,937
======= ====== ====== ======
Income before income taxes
Woodlands $ 3,824 3,923 16,463 14,763
Mills (1,050) 2,338 (1,838) 6,586
Real Estate 996 224 1,944 2,278
Agriculture 457 1,682 472 2,195
Corporate (1,101) (1,414) (3,602) (4,055)
Eliminations (139) (230) (144) (230)
------- ------ ------ ------
Operating income 2,987 6,523 13,295 21,537
Equity in loss of Del-Tin Fiber, L.L.C. (1,491) - (2,956) -
Interest income 238 42 859 531
Interest expense (397) (90) (515) (258)
Other income/(expense) 285 28 372 124
------- ------ ------ ------
$ 1,622 6,503 11,055 21,934
======= ====== ====== ======
</TABLE>
*Intersegment sales of timber from Woodlands to Mills
9
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
------------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Thousands of dollars) 1998 1997 1998 1997
---------- ------ -------- -------
Depreciation, amortization, and
cost of fee timber harvested
Woodlands $ 574 341 1,695 1,239
Mills 945 569 2,718 1,678
Real Estate 107 105 308 262
Agriculture 129 111 379 350
Corporate 62 36 181 55
------- ----- ------ ------
$ 1,817 1,162 5,281 3,584
======= ===== ====== ======
Capital expenditures
Woodlands $48,844 2,801 58,582 12,944
Mills 1,318 3,523 4,592 8,579
Real Estate 2,280 1,689 6,222 3,394
Agriculture 79 590 561 989
Corporate 257 280 316 533
------- ----- ------ ------
$52,778 8,883 70,273 26,439
======= ===== ====== ======
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net income for the third quarter of 1998 was $.9 million, $.03 a share,
compared to $3.9 million, $.30 a share, for the third quarter of 1997. Operating
income for the current period was $3 million, compared to $6.5 million in the
same quarter of 1997. Net cash provided by operating activities was $8.5 million
compared to $8.2 million in the third quarter of 1997.
For the current three-month period, operating income decreased $3.5
million. The Woodlands segment was unchanged as a result of a 44 percent
increase in pine sawtimber harvest volumes, offset by a five percent decrease in
the average price for pine sawtimber sold and a decrease in hardwood sawtimber
sales. The Company's Mills segment operating results decreased $3.4 million due
to a 20 percent drop in the average finished lumber sales price, which resulted
in a negative profit margin, while sales volume of finished lumber increased 8
million board feet. Real Estate operations increased $.6 million as a result of
the sales of 85 acres of undeveloped real estate acreage and a .86 acre
commercial tract, combined with an increase in the number of residential lots
sold and a 12 percent increase in the average sales price per lot sold.
Agriculture segment results were $1.2 million lower due primarily to a 75
percent reduction in the gross profit margin for soybeans per bushel as a result
of a lower average sales price and increased production costs per bushel, in
addition to a six percent decrease in sales volume due to reduced average crop
yield per acre farmed. The cost of corporate functions decreased $.5 million
from the third quarter of 1997.
The Company's Woodlands operations produced net sales of $6 million in the
current year quarter compared to $5.5 million in the prior year period. Sales of
pine sawtimber increased $1.3 million as the result of a 4.2 million board feet
- - Doyle scale ("MMBF-DS") increase in harvest volume to 13.6 MMBF-DS, partially
offset by a $20 per thousand board feet - Doyle scale ("MBF-DS") drop in sales
price from $388 per MBF-DS. Sales of hardwood sawtimber decreased $1.1 million
due to the timing of harvest activity. Operating income was $3.9 million for
both periods due to the increase in sales of pine sawtimber, offset by the
decrease in hardwood sawtimber sales and a $.3 million increase in cull timber
release expense incurred due to timing and the acquisition of additional
timberland acreage.
Mills segment net sales totaled $16.7 million in the current quarter
compared to $16.5 million a year ago. Sales of residual by-products from the
lumber manufacturing process increased $.4 million due to a 15 percent increase
in finished lumber production. Finished lumber sales decreased $.2 million as
the result of an $81 per thousand board feet ("MBF") drop in sales price from
$412, with a 7.9 million board feet ("MMBF") increase in sales volume to 42.7
MMBF. Loss from operations of $1 million for the current period compared to
operating income of $2.4 million in 1997 due primarily to the decrease in net
sales from finished lumber and a $10 per MBF increase in the cost of lumber
produced as the result of increases in the average cost of logs used as raw
material by the Company's two mills and depreciation expense due to
upgrade/expansion projects at those mills.
11
<PAGE>
The Real Estate segment reported net sales of $3.7 million for the third
quarter of 1998 compared to $2.3 million for the third quarter of 1997. Sales
of 85 acres of undeveloped real estate acreage for $.6 million and a .86 acre
commercial tract for $.3 million were recorded in the current quarter compared
to no similar sales in the 1997 period. Residential lot sales increased by four
to 28 lots and the average sales price increased from $50,300 to $56,100 per lot
due primarily to the mix of lots sold. Operating income was $.8 million, an
increase of $.6 million from the three month period ended September 30, 1997,
due primarily to the same factors impacting net sales.
Agriculture operations recorded net sales of $4.8 million for the current
three-month period compared to $5.9 million a year ago, due primarily to a
reduction in the average sales price per bushel for soybeans, combined with a
six percent drop in the volume of soybeans sold. Operating income of $.5
million in the current quarter decreased from $1.7 million in the prior year as
the result of the decrease in soybean sales revenue and an increase in the
production costs per bushel for soybeans sold.
Corporate operating expense was $1.1 million in the third quarter of 1998
compared to $1.5 million in 1997, primarily due to a reduction of general and
administrative expenses for the current quarter.
Equity in the loss of Del-Tin Fiber, L.L.C. ("Del-Tin Fiber"), resulting
from plant start-up costs and operating losses during the initial months of
operations, of $1.5 million net to Deltic was recorded in the current quarter.
Due to increases in shipments from Del-Tin Fiber's plant facility in each of the
three months of the third quarter, Del-Tin Fiber expects to report cash provided
from operating activities during the fourth quarter, while continuing to record
operating losses through the end of 1998.
Income tax expense decreased $1.9 million to $.7 million for the current
quarter due to lower pretax earnings.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
For the first nine months of 1998, net income totaled $6.8 million, $.40 a
share, compared to net income for the nine months ended September 30, 1997, of
$13.3 million, $1.04 a share. The decrease was primarily the result of lower
operating income from the Company's Mills, Real Estate, and Agriculture
segments, combined with recording a $3 million loss for the Company's share of
equity in Del-Tin Fiber's plant start-up costs incurred to-date and operating
losses reported since initial production commenced in late April, partially
offset by an increase in operating income for the Woodlands segment and
decreased corporate operating expenses.
Operating income for the nine months ended September 30, 1998, was $13.3
million, a decrease of $8.2 million from a year ago. The Woodlands segment
increased $1.8 million due primarily to a 5.8 MMBF-DS increase in the volume of
pine sawtimber harvested. Mills operations decreased $8.4 million as the result
of a $52 per MBF drop in the average lumber sales price and a $33 higher cost of
production per MBF sold, which caused a negative margin per MBF, while finished
lumber sales volume increased 9.3 million board feet. The Company's Real Estate
segment decreased $.5 million due primarily to decreased commercial sales,
partially offset by increased sales of undeveloped acreage and residential lots
during 1998. Agriculture operations decreased $1.7 million as the result of
1997 benefiting from the timing of sales of crops grown during 1996, combined
with reduced sales price and volume for soybeans at a lower gross profit margin
per bushel in 1998.
12
<PAGE>
Woodlands segment net sales totaled $21.1 million during the first nine
months of 1998, a $2.7 million increase when compared to $18.4 million during
1997. Sales of pine sawtimber increased $2.4 million due to a 15 percent
increase in sales volume to 43.8 million board feet, combined with a $1 per MBF-
DS rise in average pine sawtimber sales price from $402 per MBF-DS. Pine
pulpwood sales increased $.5 million due to increased harvest levels as the
Company thinned its maturing pine plantations. Sales of hardwood sawtimber
decreased $.4 million from $1.4 million as the result of a decrease in sales
price. Operating income was $16.5 million for the 1998 period compared to $14.7
million a year ago due to the increase in net sales, partially offset by
increased cost of fee timber harvested and to an increase in cull timber release
expense due to the increases in timberland acres owned resulting from the
Company's acquisition program.
The Mills segment reported net sales of $51.5 million during the first nine
months of 1998 compared to $51.8 million during the same period in 1997. While
finished lumber sales volume increased nine percent to 111.6 MMBF, a $52 per MBF
decrease in average sales price from $444 per MBF caused a decrease in net
sales. A loss from operations of $1.8 million during 1998 compared to operating
income of $6.6 million for 1997. The decrease was primarily the result of the
drop in net sales combined with an increase in the production cost per MBF sold
to $413, partially offset by recording the settlement of the Company's business
interruption claim due to the July 1997 Ola planermill fire during the first
nine months of 1998. The increase in the cost of lumber produced resulted from
increases in log cost and depreciation expense.
Real Estate operations produced net sales of $9.6 million during 1998
compared to $8 million during 1997. Sales of 85 acres of undeveloped real estate
acreage for $.6 million in 1998 compared to the sale of 9.5 acres for $.2
million during 1997. Residential lot sales increased by 51 lots to 122 during
1998, but the average sales price of $45,100 was $16,700 lower per lot due to
the mix of lots sold. Commercial sales revenue decreased $1 million due to the
sale of a 13-acre commercial tract for $100,000 per acre during the first nine
months of 1997 compared to the sale of a .86 acre tract for $.3 million during
1998. Net sales from the Company's Chenal Country Club operations increased by
$.9 million to $2.4 million. While the net margin realized on sales of real
estate during 1998 was approximately the same as in 1997, operating income for
the Real Estate segment decreased $.5 million to $1.8 million in 1998 due to a
decrease in the operating margin of Chenal Country Club and an increase in
advertising expense for the Company's three real estate developments.
The Company's Agriculture segment recorded net sales of $5.5 million during
1998 compared to $7.2 million in 1997. The prior year benefited from the timing
of product sales, while the current year's net sales reflected a 25 percent
reduction in the sales volume for soybeans, combined with a decline in the
average sales price per bushel for soybeans sold. Operating income of $.5
million for the current year compared to $2.2 million in 1997. The decrease was
due primarily to the decrease in net sales and a significantly reduced gross
profit margin per bushel of soybeans sold as a result of the decreased average
sales price, combined with an increased production costs per bushel.
Corporate operating expense of $3.6 million during 1998 decreased $.5
million from 1997 due to reduced general and administrative expenses.
Equity in the loss of Del-Tin Fiber recorded by the Company in the first
nine months of 1998 was $3 million. Income tax expense decreased $4.3 million
from $8.6 million for the first nine months of 1997 due to lower pretax
earnings.
13
<PAGE>
FINANCIAL CONDITION
For the first nine months of 1998, net cash provided by operating
activities totaled $18.6 million compared to $19.7 million during the same
period in 1997. Changes in operating working capital, other than cash and cash
equivalents, provided cash of $.5 million for 1998 and 1997.
Capital expenditures required cash of $69.9 million for the first nine
months of 1998 and $26.4 million a year ago. The increase was primarily due to
$58 million spent in the Company's planned timberland acquisition program.
Total capital expenditures summarized by segment consisted of the following:
--------------------------------------------------
Nine Months
Ended Sept. 30,
--------------------------------------------------
(Thousands of dollars) 1998 1997
--------------------------------------------------
Woodlands $58,582 12,944
Mills 4,592 8,579
Real Estate 6,222 3,394
Agriculture 561 989
Corporate 316 533
--------------------------------------------------
Total capital expenditures 70,273 26,439
Owner-financed expenditures (347) -
--------------------------------------------------
Expenditures requiring cash $69,926 26,439
==================================================
The net change in purchased stumpage inventory to be utilized in the
Company's sawmill operations required cash of $5.9 million in 1998 and $3.5
million in 1997. During the first nine months of 1998, Deltic advanced $7
million to Del-Tin Fiber and paid dividends of $4.1 million, $2.4 million for
Common Stock and $1.7 million for Redeemable Preferred Stock. Borrowings under
the Company's credit facilities provided $45 million, while repayments of debt
utilized $2 million. These net uses of funds resulted in a $24.3 million
reduction in Deltic's cash and cash equivalents. This decrease in cash was the
primary factor in the $22.9 million decrease in the Company's working capital
from $38 million at December 31, 1997. Deltic's management believes that the
remaining amount available under its credit facility, and future debt or equity
financings will be sufficient to meet its expected cash needs and planned
capital expenditures, including those of the Company's continued timberland
acquisition program, for the foreseeable future.
Statements included herein that are not historical in nature are intended
to be, and are hereby identified as, "forward-looking statements" within the
meaning of the Federal Securities Laws. Such statements reflect the Company's
current expectations and involve certain risks and uncertainties. Actual
results could differ materially from those included in such forward-looking
statements. Factors that could cause such differences include the cyclical
nature of the industry, changes in interest rates and general economic
conditions, adverse weather, cost and availability of materials used to
manufacture the Company's products, and the risk factors described from time to
time in the reports and disclosure documents filed by the Company with the
Securities and Exchange Commission.
14
<PAGE>
YEAR 2000 ISSUE
DEFINITION
The Year 2000 issue is the known inability of a significant percentage of
the world's computers, application software, and embedded semiconductor chips to
cope with the change of the year from 1999 to 2000. As a result, some systems
could fail to operate or produce incorrect results at the start of the 21st
century.
ASSESSMENT
The Year 2000 problem, if not corrected, would affect computers, software,
and other equipment used by the Company, as well as those used by its suppliers,
customers, banks, etc. Accordingly, Deltic is currently assessing the potential
impact of, and the costs of remediating, the Year 2000 problem for its internal
systems and operational facilities' systems and equipment.
The Company's business is substantially dependent upon the operation of
computer systems, and as such, Deltic has established a Year 2000 Committee
which is made up of managers from both its corporate and operational areas. The
committee was created pursuant to the direction of the Company's Board of
Directors and has the involvement of top management with top priority given to
its objectives.
The Company is in the process of identifying the computers, application
software, and related equipment that must be modified, upgraded, or replaced to
minimize the possibility of a material disruption of its business. The Company
has already commenced the process of modifying or upgrading systems which have
been assessed as affected by the Year 2000 problem and expects to have all major
systems assessed and modified, if required, before the occurrence of any
material disruption of its business. Deltic has essentially achieved Year 2000
compliance for all of its critical internal systems and expects to complete this
process for its remaining systems, including operational facilities' systems and
equipment, no later than the third quarter of 1999. In addition to computers
and related equipment, the Year 2000 Committee is currently assessing the
potential impact and costs of remediating the Year 2000 problem for its
equipment such as fax machines, copiers, telephone and security systems, and
other common devices potentially impacted by the Year 2000 problem.
In addition, the Company has initiated communications with third-party
suppliers of the major computers, software, and other equipment used, operated,
or maintained by the Company, including those at its operational facilities, to
identify and, to the extent possible, resolve issues involving the Year 2000
problem. While the Company has limited or no control over the actions of these
suppliers, Deltic has not received notification by these suppliers of
significant unresolved Year 2000 problems and the Company expects that it will
be able to resolve any currently uncommunicated existing problems when, or if,
such notification is received. However, there can be no assurance that these
suppliers will resolve all Year 2000 problems, whether currently known or not,
before the occurrence of a material disruption to the business of the Company.
The Company has initiated written communication with all of its suppliers
and significant customers to attempt to obtain the status of their Year 2000
compliance. To-date, the majority of these customers have either not responded
to such communications or have indicated that the status of their Year 2000
compliance has yet to be determined. Therefore, the Company can give no
assurance that its suppliers or customers will not be materially impacted by the
Year 2000 issue. In addition, the Company can give no assurance that failure by
its suppliers and customers to
15
<PAGE>
achieve Year 2000 compliance will not have a significant impact on the Company's
business. However, Deltic intends to continue with follow-up communications
until all critical suppliers and customers have indicated their status and/or
compliance.
EXPECTED IMPACT OF THE YEAR 2000 ISSUE
While the Company's entire assessment of the Year 2000 problem is not
complete, Deltic has essentially assessed all areas initially determined to be
those most likely impacted by the Year 2000 problem and has determined that the
majority of the systems in these areas are currently Year 2000 compliant or are
being made compliant by the supplier at no or only minimal cost to the Company.
Therefore, the cost incurred by Deltic to obtain Year 2000 compliance for its
internal systems and facilities is not expected to be material.
CONTINGENCY PLAN
At this time, the Company has not developed a contingency plan to be
implemented if its efforts to identify and correct Year 2000 problems are not
effective. As the Company's assessment of its Year 2000 compliance is nearer to
completion, the Company's Year 2000 committee currently plans to develop
contingency plans for any systems or facilities for which Year 2000 compliance
is not reasonably certain.
DISCLAIMER
The discussion of the Company's efforts, and managements expectations,
relating to Year 2000 compliance are "forward-looking statements" within the
meaning of the Federal Securities Laws. Such statements reflect the Company's
current expectations and involve risks and uncertainties. Actual results could
differ materially from those included in such forward-looking statements. The
Company's ability to achieve Year 2000 compliance and the level of incremental
costs associated therewith, could be adversely impacted by, among other things,
the availability and cost of programming and testing resources, suppliers
ability to modify proprietary software, and unanticipated problems identified in
the ongoing compliance review.
16
<PAGE>
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 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following item was reported in the Form 8-K dated September 9, 1998:
Item 5. Other Events - Press release reporting acquisition of 16,300
acres of timberland.
17
<PAGE>
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
By: /s/Ron L. Pearce Date: November 10, 1998
--------------------------------- ------------------------------
Ron L. Pearce, President
(Principal Executive Officer)
/s/Clefton D. Vaughan Date: November 10, 1998
- ------------------------------------- --------------------------------
Clefton D. Vaughan, Vice President,
Finance and Administration
(Principal Financial Officer)
/s/Emily R. Evers Date: November 10, 1998
- ------------------------------------- --------------------------------
Emily R. Evers, Controller
(Principal Accounting Officer)
18
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<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
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