News Column

DELTIC TIMBER CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 1, 2014

Executive Overview

The Company reported net income of $5.3 million for the second quarter of 2014, compared to $11.2 million for the same period of 2013. The 2013 results included $5.2 million of non-recurring, after-tax gains resulting from the acquisition of the remaining ownership interest of Del-Tin Fiber L.L.C. ("Del-Tin Fiber"), completed in April 2013. The Woodlands segment reported $5.3 million in operating income during the second quarter of 2014, an increase of $.4 million when compared to the second quarter of 2013. The improvement was mainly due to increased revenues from pine sawtimber and pine pulpwood sales and increased oil and gas royalty income, partially offset by a lower margin on timberland sales. The Manufacturing segment reported $8.7 million in operating income, a decrease of $1.5 million from the $10.2 million reported a year ago, as increased raw material and manufacturing costs more than offset the benefit from increased sales volumes. In addition, the Manufacturing segment benefitted from a $.8 million gain from an involuntary conversion of an asset in 2013. The Real Estate segment had operating income of $.2 million in the second quarter of 2014, the same as in the second quarter of 2013. The Corporate segment's operating expenses were $.2 million higher in the current-year quarter than in the same period a year ago, due primarily to increased general and administrative expenses. Interest expense was $1.5 million in the second quarter of 2014, an increase of $.2 million when compared to the same period of 2013. The increase was the result of borrowings for timberland acquisitions in 2014. Income tax expense decreased $2.1 million in the second quarter of 2014 when compared to 2013's second quarter primarily because of lower pretax income. 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, general economic conditions, United States employment levels, interest rates, credit availability and associated costs, imports of lumber and MDF, foreign exchange rates, housing starts, new and existing home inventories, residential and commercial real estate foreclosures, residential and commercial repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw materials, natural gas pricing, and weather conditions. During the second quarter of 2014, harsh winter weather conditions that existed for much of the first quarter subsided, and Deltic benefitted from increased sales volumes for both lumber and MDF. As with most commodity markets, and Deltic's relative size, the Company has little or no influence over pricing or demand levels for its wood products. Deltic's management will continue to focus its attention on managing the Company's diverse asset base, maximize its vertical integration strategy, and at the same time using its size advantage to quickly adjust production levels to capture market-driven opportunities, while working to reduce controllable costs and expenses. The Woodlands segment is the Company's core operating segment, with its pine timberlands providing the foundation for Deltic's vertical integration structure by generally supplying more than half of the Manufacturing segment's raw material needs. In the second quarter of 2014, the pine sawtimber harvest was 170,737 tons, an increase of 10,840 tons when compared to the 2013 second quarter harvest of 159,897 tons. The average sales price for pine sawtimber was $25 per ton in the second quarter of 2014 versus $22 per ton in the same quarter of 2013. The second quarter of 2014's pine pulpwood harvest of 123,707 tons was an increase of 42,787 tons, or 53 percent, from the harvest in the second quarter of 2013. The volume increase was largely due to the composition of stumpage on the timberland tracts the Company harvested during the respective quarters and to thinning operations in pine plantations. The average sales price for pine pulpwood was $8 per ton for the second quarter of both years. During the second quarter of 2014, the Company sold 185 acres of non-strategic recreational-use hardwood bottomland at an average sales price of $1,700 per acre, compared to sales of 1,082 acres at an average price of $1,400 per acre for the same period of 2013. In the second quarter of 2014, Deltic acquired approximately 7,600 acres of pine timberland, for a total of approximately 71,800 acres of timberland acquired thus far in 2014. (For additional information, refer to Note 5 to the Consolidated Financial Statements.) 20



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The Woodlands segment's financial results include other benefits from land ownership, such as revenues from hunting leases, mineral lease rentals, mineral royalties, and land easements. Hunting lease revenues were $.6 million for the second quarters of both 2014 and 2013. In the second quarters of 2014 and 2013, oil and gas lease rental income was $.4 million. Oil and gas royalty receipts, primarily from gas wells in the Fayetteville Shale Play, were $1.3 million in the second quarter of 2014, a $.4 million increase from 2013, primarily due to an increase in natural gas prices. In addition, gas production from new wells drilled continued to offset the decline in production from older wells. The ultimate benefit to Deltic from mineral leases remains speculative and unknown since it is contingent on natural gas and crude oil prices and the successful completion of producing wells drilled on Company lands. The Manufacturing segment produces both lumber and MDF. The average lumber sales price in the second quarter of 2014 was $393 per thousand board feet, a $6 per thousand board feet lower price when compared to the same period in 2013. The Manufacturing segment sold 65 million board feet of lumber in the second quarter of 2014, an increase of 10 million board feet, or 18 percent, when compared to 55 million board feet sold in the second quarter a year ago. The average sales price for MDF during the current year's second quarter was $583 per thousand square feet, a slight increase from the average sales price of $582 per thousand square feet in 2013's second quarter. MDF sales volume for the second quarter of 2014 was 31.1 million square feet, compared to 27.8 million square feet in the same period of 2013. As with any commodity market, the Company expects the historical lumber market volatility to continue in the future. As such, Deltic will continue to adjust production levels to meet market demand. The Manufacturing segment recorded a $.8 million benefit during the second quarter of 2013 from a gain on the involuntary conversion of an asset. The Real Estate segment reported a sale of a commercial site of approximately 1.72 acres for $500,900 per acre in the current-year second quarter which compares to no sale in the same period of 2013. Other 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. There were 7 residential lots sold during the second quarter of 2014, compared to 22 lots sold in the second quarter of 2013, as the prior year quarter benefitted from the timing of new residential lot offerings. The average per-lot sales price was $92,300 in 2014 compared to an average per-lot sales price of $76,900 in 2013's second quarter, due to the mix of lots sold. 21



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Results of Operations

Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013

In the following tables, Deltic's net sales and results of operations are presented for the quarters ended June 30, 2014 and 2013. Explanations of significant variances and additional analyses for the Company's consolidated and segment operations follow the tables.

Quarter Ended June



30,

(Millions of dollars, except per share amounts) 2014 2013 Net sales Woodlands $ 10.1 9.5 Manufacturing 49.2 43.7 Real Estate 3.6 3.8 Eliminations (4.3 ) (3.7 ) Net sales $ 58.6 53.3 Operating income Woodlands $ 5.3 4.9 Manufacturing 8.7 10.2 Real Estate .2 .2 Corporate (4.5 ) (4.3 ) Eliminations .1 - Operating income 9.8 11.0 Interest and other debt expense (1.5 ) (1.3 ) Gain on bargain purchase - 3.3 Other income (.1 ) 3.2 Income taxes (2.9 ) (5.0 ) Net income $ 5.3 11.2 Earnings per common share Basic $ .42 .89 Assuming dilution .42 .88 Consolidated Net income decreased $5.9 million from the prior-year second quarter, as the second quarter of 2013 included non-recurring gains, consisting of $5.7 million in after-tax gains related to the acquisition of the remaining 50 percent ownership of Del-Tin Fiber and an involuntary conversion of assets. In the second quarter of 2014, the Manufacturing segment reported decreased operating income, and the Corporate segment had increased general and administrative expenses and interest expense. These unfavorable variances were partially offset by improved operating income for the Woodlands segment. Operating income decreased $1.2 million from the second quarter of 2013. The Woodlands segment's operating income increased $.4 million primarily due to increases in the harvest volumes of sawtimber and pulpwood along with increased oil and gas royalty revenues, partially offset by a decrease in the number of timberland acres sold. The Manufacturing segment's operating income decreased $1.5 million from the second quarter of 2013. In 2013, there was a $.8 million gain on an involuntary conversion of an asset, while there was none in 2014. Additionally, the 2014 cost of sales per unit of lumber sold increased due to a higher raw material log cost at the Company's sawmills and to the MDF plant experiencing maintenance-related downtime, resulting in increased per-unit manufacturing costs for MDF produced. The Real Estate segment's operating income was $.2 million, the same as reported in the prior-year second quarter, as the benefit of a sale of a commercial site in Chenal Valley offset a decrease in the number of residential lots sold when compared to the second quarter of 2013. 22



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Corporate expense increased $.2 million in the second quarter of 2014 due to higher general and administrative expenses when compared to the corresponding quarter of 2013. Woodlands Selected financial and statistical data for the Woodlands segment is shown in the following table. Quarter Ended June 30, 2014 2013 Net sales (millions of dollars) Pine sawtimber $ 4.2 3.6 Pine pulpwood .9 .6 Hardwood pulpwood .3 .1 Oil and gas lease rentals .4 .4 Oil and gas royalties 1.3 .9 Hunting leases .6 .6 Hauling to other mills 1.7 1.3 Sales volume (thousands of tons) Pine sawtimber 170.7 159.9 Pine pulpwood 123.7 80.9 Hardwood sawtimber .4 .5 Hardwood pulpwood 14.2 11.4 Sales price (per ton) Pine sawtimber $ 25 22 Pine pulpwood 8 8 Hardwood sawtimber 33 41 Hardwood pulpwood 19 11 Timberland Net sales (millions of dollars) $ .3 1.6 Sales volume (acres) 185 1,082 Sales price (per acre) $ 1,708 1,449 Net sales increased $.6 million in the second quarter of 2014 when compared to the second quarter of 2013. Pine sawtimber sales revenue was $.6 million higher in 2014's second quarter due to an increase in harvest volume combined with a $3 per ton increase in average per-ton sales price. Revenues from sales of pine pulpwood were $.3 million more due to a 53 percent increase in tons harvested in the current-year second quarter. The increase in pine pulpwood harvest volume was due to a combination of thinning operations on pine plantations and the composition of stumpage on the timberland tracts harvested in the current quarter. Revenues from hardwood pulpwood sales were $.2 million higher in the second quarter of 2014 versus 2013. Revenues from sales of timberland were $1.3 million lower in the second quarter of 2014, due to the decrease in the number of acres sold from the prior-year quarter, partially offset by an increase in the average sales price per acre sold. Net oil and gas royalties increased $.3 million from 2013's second quarter due primarily to higher prices for natural gas in 2014 when compared to 2013. Revenue from hauling stumpage to other mills was $.4 million higher in the second quarter of 2014 versus the same period of 2013. Operating income was $5.3 million in the second quarter of 2014 compared to $4.9 million in the second quarter of 2013. This was mainly due to the same factors that affected net sales, combined with increased cost for hauling timber to other mills and a higher cost of timber harvested. 23



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Manufacturing

Selected financial and statistical data for the Manufacturing segment is shown in the following table. Quarter Ended June 30, 2014 2013 Net sales (millions of dollars) Lumber $ 25.6 22.0 Residual by-products 2.2 1.9 Medium density fiberboard ("MDF") 18.1 16.2 Freight invoiced to customers 3.4 3.0 Lumber Finished production (MMBF) 63.5 55.9 Sales volume (MMBF) 65.0 55.0 Sales price (per MBF) $ 393 399 MDF (3/4 inch basis) Finished production (MMSF) 28.5 31.3 Sales volume (MMSF) 31.1 27.8 Sales price (per MSF) $ 583 582 Net sales increased $5.5 million in 2014's second quarter versus the same period of 2013. The volume of lumber sold increased 10 million board feet, or 18 percent, in the second quarter of 2014 compared to the second quarter of 2013, while the average lumber sales price decreased $6 per MBF from 2013's second quarter prices. MDF sales volume in the second quarter of 2014 was 3.3 million square feet more than the same period a year ago and the average sales price was $1 per MSF higher than in the second quarter of 2013. However, operating income decreased $1.5 million, due to higher raw material costs at the sawmills and to maintenance-related downtime at the MDF plant, which led to increased manufacturing costs per unit of both lumber and MDF produced. Additionally, 2013 second quarter results included a $.8 million gain on the involuntary conversion an of asset, while there were no such gains in 2014's second quarter. 24



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Real Estate

Selected financial and statistical data for the Real Estate segment is shown in the following table. Quarter Ended June 30, 2014 2013 Net sales (millions of dollars) Residential lots $ .7 1.7 Commercial acres .9 - Chenal Country Club 2.0 2.0 Sales volume Residential lots 7 22 Commercial acres 1.72 - Average sales price (thousands of dollars) Residential lots - per lot $ 92 77 Commercial acres - per acre 501 - Net sales for the second quarter of 2014 decreased $.2 million from the second quarter of 2013. The decrease was due to a reduced number of residential lots sold in 2014's second quarter, essentially offset by a sale of commercial acreage in the second quarter of 2014. The 2013 second quarter benefitted from the timing of new residential lot offerings. Current-period operating income was the same as in 2013 due primarily to the same factors affecting net sales.



Corporate

The $.2 million increase in Corporate operating expense during the second quarter of 2014 was primarily due to higher general and administrative expenses when compared to the same period of 2013.

Eliminations

Intersegment sales of timber from Deltic's Woodlands to the Manufacturing segment during the second quarter of 2014 increased $.6 million, to $4.3 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 and the increase in the transfer price quarter to quarter. Current period transfer prices are approximately that of market.



Income Taxes

The effective income tax rate was 35 percent for 2014's second quarter and 31 percent for the same period of 2013. The difference was due to the prior-year's second quarter having a discrete tax item related to the gain on bargain purchase that was properly reported as a reduction in the bargain purchase gain rather than an increase in income tax expense. 25



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Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013

In the following tables, Deltic's net sales and results of operations are presented for the six months ended June 30, 2014 and 2013. Explanations of significant variances and additional analyses for the Company's consolidated and segment operations follow the tables.

Six Months Ended June



30,

(Millions of dollars, except per share amounts) 2014 2013 Net sales Woodlands $ 20.5 18.8 Manufacturing1 95.7 77.8 Real Estate 7.1 6.1 Eliminations (9.3 ) (7.9 ) Net sales $ 114.0 94.8



Operating income and net income

Woodlands $ 10.6 9.5 Manufacturing1 17.0 21.5 Real Estate .4 (.5 ) Corporate (9.3 ) (8.9 ) Eliminations (.1 ) (.1 ) Operating income 18.6 21.5 Equity in earnings of Del-Tin Fiber1 -



1.1

Interest and other debt expense (2.7 ) (2.3 ) Gain on bargain purchase - 3.3 Other income - 3.2 Income taxes (5.7 ) (8.8 ) Net income $ 10.2 18.0 Earnings per common share Basic $ .80 1.42 Assuming dilution .80 1.42



1 Beginning April 1, 2013, Del-Tin Fiber's results were consolidated into the

Manufacturing segment, while during the first quarter of 2013, results from

Del-Tin Fiber were reported in equity in earnings of Del-Tin Fiber.

Consolidated

Net income for the first six months of 2014 decreased $7.8 million from the same period of 2013. The decrease, when compared to 2013, was primarily due to the prior-year period including $5.7 million of non-recurring Del-Tin acquisition-related gains, combined with decreased operating income from the Manufacturing segment and increased Corporate general and administrative expenses, in addition to no equity in earnings of Del-Tin Fiber for 2014. These decreases were partially offset by increased operating income for the Woodlands and Real Estate segments. Operating income decreased $2.9 million from 2013's reported results for the first six months. The Woodlands segment's operating income increased $1.1 million due to increased timber harvest revenues, and higher oil and gas royalties, partially offset by fewer acres of timberland sold. The Manufacturing segment's operating income decreased $4.5 million due to higher raw material costs in the 26



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sawmills, no gain on involuntary conversion of assets in 2014 as occurred in 2013, and higher manufacturing costs for MDF due to increased maintenance-related downtime. The Real Estate segment's operating income increased $.9 million, mainly due to the sale of a commercial site in Chenal Valley and to an increased margin on residential lot sales in 2014. Corporate expenses were $.4 million higher due to increased general and administrative expenses. Woodlands Selected financial and statistical data for the Woodlands segment is shown in the following table. Six Months Ended June 30, 2014 2013 Net sales (millions of dollars) Pine sawtimber $ 9.1 7.7 Pine pulpwood 1.8 1.5 Hardwood sawtimber .1 .1 Hardwood pulpwood .5 .3 Oil and gas lease rentals .8 .9 Oil and gas royalties 2.4 1.8 Hunting leases 1.3 1.2 Hauling to other mills 3.5 2.9 Sales volume (thousands of tons) Pine sawtimber 380.3 341.0 Pine pulpwood 232.7 177.9 Hardwood sawtimber 2.1 1.4 Hardwood pulpwood 31.7 25.9 Sales price (per ton) Pine sawtimber $ 24 23 Pine pulpwood 8 9 Hardwood sawtimber 41 40 Hardwood pulpwood 17 11 Timberland Net sales (millions of dollars) $ .5 2.1 Sales volume (acres) 345 1,370 Sales price (per acre) $ 1,362 1,524 Net sales for the first six months of 2014 increased $1.7 million from 2013. Revenue from sales of pine sawtimber increased $1.4 million due to an increased pine sawtimber harvest volume and a higher average pine sawtimber sales price in 2014 when compared to 2013. Net sales from pine pulpwood were $.3 million higher than in 2013 due to an increased harvest volume, partially offset by a lower per-ton average sales price. The increase in harvest volume of pine pulpwood was due to the composition of the timber on tracts being harvested and to thinning operations in pine plantations. Net sales from hardwood sawtimber and pulpwood were $.2 million more in 2014 than in the same period of 2013 due to higher harvest volumes and sales prices. Sales of timberland were $1.6 million less in 2014 due primarily to fewer acres sold. Net oil and gas royalties were $.6 million more than in the same period of 2013 due to increases in both natural gas production volume and the price received for natural gas. Revenues from hauling stumpage to other mills were $.6 million more in 2014 when compared to 2013. Operating income was $10.6 million, $1.1 million higher than in the first six months of 2013, due to the same factors affecting net sales, combined with lower replanting costs, increased hauling expenses, and a higher cost of fee timber harvested in 2014. 27



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Manufacturing

Selected financial and statistical data for the Manufacturing segment is shown in the following table. Six Months Ended June 30, 2014 2013 Net sales (millions of dollars) Lumber $ 49.9 50.5 Residual by-products1 4.9 6.2 Medium density fiberboard ("MDF")2 34.6 16.2 Freight invoiced to customers 6.5 4.2 Lumber Finished production (MMBF) 130.1 126.3 Sales volume (MMBF) 129.3 126.2 Sales price (per MBF) $ 386 400 MDF (3/4 inch basis)2 Finished production (MMSF) 59.1 31.3 Sales volume (MMSF) 59.6 27.8 Sales price (MSF) $ 580 582



1 Prior year amounts have been revised to conform to the 2014 presentation.

Intrasegment residual sales have been eliminated. 2 Deltic acquired the remaining ownership of Del-Tin Fiber from its joint venture partner on April 1, 2013 and the amounts for 2013 include only



activity from that date. Prior to the acquisition, Del-Tin Fiber was treated

as an equity investment.

Net sales increased $17.9 million from the prior-year period primarily due to the inclusion of the net sales of Del-Tin Fiber in the Manufacturing segment for six months of 2014 compared to only three months for 2013. Lumber sales revenue decreased by $.6 million from the first six months of 2013 due to a lower average sales price in 2014, which was partially offset by an increase in sales volume for the first six months of 2014. Total operating income decreased $4.5 million from the same period of 2013. The decrease in operating income was due to increased raw material and per-unit manufacturing costs at the sawmills, an increased manufacturing cost per-unit at the MDF plant due to maintenance-related downtime, and to no gain on involuntary conversion of assets in 2014 compared to gains of $.9 million in 2013. As a result of the acquisition of Del-Tin Fiber, selected information below has been included for comparative purposes, which represents six months results for Del-Tin Fiber for the prior year presented. Six Months Ended June 30, 2013 MDF (3/4 inch basis)* Net sales $ 32.8 Finished production (MMSF) 59.9 Sales volume (MMSF) 56.9 Sales price (per MSF) 577



* Information presented for 2013 represents the six months' totals for Del-Tin

Fiber of which the first three months were previously presented as information for the equity investment. 28



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Real Estate

Selected financial and statistical data for the Real Estate segment is shown in the following table. Six Months Ended June 30, 2014 2013



Net sales (millions of dollars)

Residential lots $ 2.7 2.6 Commercial acres .9 - Chenal Country Club 3.2 3.4 Sales volume Residential lots 30 34 Commercial acres 1.72 -



Average sales price (thousands of dollars)

Residential lots - per lot $ 90



76

Commercial acres - per acre 501



-

2014's net sales increased $1 million when compared to 2013 due primarily to a commercial acreage sale in 2014. Though the number of residential lots sold decreased in 2014, the average per-lot sales price increased $14,000 per lot due to the mix of lots sold. The $.9 million improvement in the Real Estate segment's operating results was due mainly to the same factors affecting net sales. Corporate



Operating expenses for the Corporate segment were $.4 million higher during the first six months of 2014 versus 2013, mainly due to increased general and administrative expenses.

Eliminations

Intersegment sales of timber from Deltic's Woodlands to the Manufacturing segment increased $1.4 million to $9.3 million for the first six months of 2014. The increase was mainly due to a higher volume of the timber transferred to the sawmills combined with a higher per-ton transfer price. Logs supplied by the Woodlands segment to Company sawmills are transferred at prices that approximate market. Income Taxes The effective income tax rate was 36 percent for the six months ended June 30, 2014, and 33 percent for the same period of 2013. The difference in the effective tax rate was due to the prior year having a discrete tax item related to the gain on bargain purchase that was properly reported as a reduction in the bargain purchase gain rather than an increase in income tax expense.



Liquidity and Capital Resources

Cash Flows and Capital Expenditures

Net cash provided by operating activities totaled $14.8 million for the first six months of 2014 compared to $20.3 million for the same period of 2013. Cash from operations and borrowings under the Company's revolving credit facility have provided the cash needed for capital expenditures and timberland acquisition expenditures. Changes in operating working capital, other than cash and cash 29



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equivalents required cash of $6.7 million in 2014 and $.4 million in 2013. 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 $6.7 million in the current-year period and $11.5 million a year ago. Capital expenditures by segment consisted of the following: Six Months Ended June 30, (Thousands of dollars) 2014

2013 Woodlands $ 1,843 2,164 Manufacturing 3,807 9,332

Real Estate, including development expenditures 771 538 Corporate 35 7 Capital expenditures 6,456



12,041

Adjustment for non-cash accrued liabilities 287



(546 )

Capital expenditures requiring cash $ 6,743



11,495

Timberland acquisition expenditures for the three months and six months ended June 30, 2014, were $11.5 million and $118.1 million, respectively, compared to $.1 million and $8.6 million for the three months and six months ended June 30, 2013, respectively. Funds for the current-year acquisitions were provided by the Company's revolving credit facility. Deltic acquired the other half of Del-Tin Fiber from its joint venture partner for $5.2 million in cash and the assumption of $14.5 million in debt on April 1, 2013. Del-Tin Fiber has been considered a consolidated subsidiary of Deltic since that date. In the first three months of 2013, prior to Deltic's acquisition of the other 50 percent ownership in Del-Tin Fiber, Deltic advanced $1 million to Del-Tin Fiber, and received repayments of $.8 million. The net change in purchased stumpage inventory to be utilized in the Company's sawmilling operations required cash of $.6 million in 2014 and $1.7 million in 2013. The Company borrowed $120 million and had no repayments in 2014 and had net borrowings of debt of $8 million in the first six months of 2013. The Company incurred $.8 million in fees to facilitate an amendment and extension of its unsecured and committed revolving credit facility in 2013, while there were no such costs in 2014. Dividends of $2.5 million were paid in the first six months of both 2014 and 2013. Proceeds from exercises of stock options and the related tax benefits were $.2 million in 2014 and $1.2 million in 2013. The Company used $3.8 million in cash to purchase treasury stock in 2014, with no stock purchases in 2013. Financial Condition Working capital totaled $15.1 million at June 30, 2014, and $5.5 million at December 31, 2013. Deltic's working capital ratio at June 30, 2014 was 1.75 to 1, compared to 1.25 to 1 at the end of 2013. Cash and cash equivalents at the end of the second quarter of 2014 were $8.1 million, an increase of $3.7 million from the December 31, 2013 balance of $4.4 million. Deltic's long-term debt to stockholders' equity ratio was .776 to 1 at June 30, 2014 and .338 to 1 at December 31, 2013.



Liquidity

The primary sources of the Company's liquidity are internally generated funds, access to outside financing, and working capital. The Company's current strategy for growth continues to emphasize its timberland acquisition program, in addition to expanding lumber production as market conditions allow and developing residential and/or commercial properties at Chenal Valley and Red Oak Ridge. 30



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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 $340 million, and includes an option to request an increase in the amount of aggregate revolving commitments by $50 million. As of June 30, 2014, there was $141 million outstanding in borrowings on the credit facility, leaving $199 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 9 and 10 to the consolidated financial statements included in the Company's 2013 annual report on Form 10-K.) The table below sets forth the covenants in the credit facility and senior notes payable and status with respect to these covenants as of June 30, 2014 and December 31, 2013. Covenants Actual Ratios at Actual Ratios at Requirements June 30, 2014 Dec. 31, 2013 Leverage ratio should be less than:1 .60 to 1 .438 to 1 .254 to 1 Total outstanding debt as a percentage of total debt allowed based on the minimum timber market value covenant:2 - 2 94.22 % 48.24 % Fixed charge coverage ratio should be greater than:3 2.50 to 1 8.20 to 1 10.04 to 1



1 The leverage ratio is calculated as total debt divided by total capital.

Total debt includes indebtedness for borrowed money, secured liabilities,

obligations in respect of letters of credit, and guarantees. Total capital is

the sum of total debt and net worth. Net worth is calculated as total assets

minus total liabilities, as reflected on the balance sheet. This covenant is

applied at the end of each quarter. The revolving credit facility requirement

is for the leverage ratio to be less than .65 to 1. 2 Timber market value must be greater than 200 percent of total debt (as



defined in (1) above.) The timber market value is calculated by multiplying

the average price received for sales of timber for the preceding four

quarters by the current quarter's ending inventory of timber. This covenant

is applied at the end of the quarter on a rolling four-quarter basis. The

revolving credit facility requirement is for the timber market value to be

greater than 175 percent of total debt (as defined in (1) above.)

3 The fixed charge coverage ratio is calculated as EBITDA (earnings before

interest, taxes, depreciation, depletion, and amortization) increased by non-cash compensation expense and other non-cash expenses and decreased by



dividends paid and income tax paid, divided by the sum of interest expense

and scheduled principal payments made on debt during the period. This covenant is applied at the end of the quarter on a rolling four-quarter basis. This covenant only applies to the Senior Notes Payable. Based on management's current operating projections, the Company believes it will remain in compliance with the debt covenants and have sufficient liquidity to finance operations and pay all obligations. However, depending on 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. 31



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In December 2000, the Company's Board of Directors authorized a stock repurchase program of up to $10 million of Deltic common stock. In December 2007, the Company's Board of Directors expanded the program by $25 million. As of June 30, 2014, the Company had expended $20.6 million under this program, with the purchase of 469,945, shares at an average cost of $43.73 per share; 63,251 shares, at an average cost of $59.80 per share, have been purchased to date in 2014, and 36,180 shares, at an average cost of $61.22 per share, were purchased in calendar year 2013. 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 regards to all of the Company's employee and retiree benefit plans, Deltic is unaware of any trends, demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the Company's liquidity increasing or decreasing in any material way. (For information about material assumptions underlying the accounting for these plans and other components of the plans, refer to Note 15 to the consolidated financial statements included in the Company's 2013 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. During 2015 2017 After (Millions of dollars) Total 2014 to 2016 to 2018 2018 Contractual cash payment obligations Real estate development committed capital costs $ 11.0 8.3 1.8 .9 - Manufacturing committed capital costs 10.3 7.7 2.6 - - Long-term debt 210.0 - 40.0 141.0 29.0 Interest on debt* 16.0 2.4 9.6 3.3 .7 Retirement plans 3.5 .9 .5 .5 1.6 Other postretirement benefits 4.9 .2 .8 .9 3.0 Unrecognized tax benefits 1.2 1.2 - - - Other liabilities 4.3 2.2 2.1 - - $ 261.2 22.9 57.4 146.6 34.3 Other commercial commitment expirations Timber cutting agreements $ 1.5 1.0 .5 - - Letters of credit .6 .1 .3 .2 - $ 2.1 1.1 .8 .2 -



* Interest commitments are estimated using the Company's current interest rates

for the respective debt agreements over their remaining terms to expiration.

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Outlook

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



Critical Accounting Policies and Estimates

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. The Company has prepared its consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts in these financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. The Company has disclosed its critical accounting policies in its 2013 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 160,000 to 170,000 tons in the third quarter of 2014 and 575,000 to 625,000 tons for the year. Finished lumber sales volumes are estimated at 65 to 75 million board feet for the third quarter and 260 to 280 million board feet for the year. MDF sales volumes for the third quarter and year of 2014 are estimated to be 25 to 35 million square feet and 110 to 130 million square feet, respectively. Actual lumber and MDF sales volumes are subject to market conditions. Residential lot sales are projected to be 5 to 10 lots and 60 to 80 lots for the third quarter and the year, respectively. Even though commercial acreage in Chenal Valley has received interest from potential buyers, it is difficult to anticipate future closings due to the volatile nature of commercial real estate transactions and the significant number of factors related to any sale. Certain statements contained in this report that are not historical in nature constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "expects," "anticipates," "intends," "plans," "estimates," or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements reflect the Company's current expectations and involve certain risks and uncertainties, including those disclosed elsewhere in this report. Therefore, actual results could differ materially from those included in such forward-looking statements.


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Source: Edgar Glimpses


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