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| DEL > SEC Filings for DEL > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Executive Overview
The Company recorded net income of $2.5 million for the third quarter of 2008 compared to income of $.2 million for the same period of 2007. The Woodlands segment continued its role as the established core operation of the Company during the third quarter, providing $5.1 million in operating income despite downward pressure on pine sawtimber stumpage prices compared to $4.9 million in the third quarter of 2007. The Company's Mills segment recorded operating income of $1.8 million in 2008's third quarter compared to a loss of $.8 million for the third quarter of 2007. The Real Estate segment recorded an operating loss for the 2008 third quarter of $.5 million, which compares to breakeven results for the same period of 2007. Deltic owns a 50 percent interest in Del-Tin Fiber L.L.C. and recorded equity in earnings of $.7 million for the third quarter of 2008, an increase from $.3 million for the same quarter of 2007. The Company had an income tax benefit of $.5 million for the third quarter of 2008 compared to expense of $.2 million for the same period of 2007 due primarily to the benefit of a lower effective income tax rate related to statutory changes with the enactment of the TREE Act that was part of the Food, Conservation, and Energy Act of 2008 that reduced the federal tax rate on qualified timber sale gains in 2008 and 2009 and benefits from other discrete tax items.
Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. This environment is affected by a number of factors including general economic conditions, interest rates, credit availability, imports, foreign exchange rates, housing starts, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. The difficult conditions affecting the U.S. economy, banking system, and housing markets continues to influence the Company's operating environment. Tightened credit markets, economic uncertainties, and the large inventories of homes continued through the third quarter. Housing starts in the U.S. have declined 31 percent from September 2007 to September 2008, to the lowest level in 17 years, and have impacted the Company's operating environment. There was some lumber price improvement in the third quarter of 2008 due to reduced supply, but the continued economic weakness exacerbated by the crisis in the financial markets is causing prices to soften. Given Deltic's size and the nature of the commodity market that it operates within, the Company has little or no control over pricing levels for its forest products. Deltic continues to benefit from increased sawmill efficiencies and timely management actions to take advantage of supply and demand situations.
For the third quarter of 2008, pine sawtimber harvest levels increased 43,371 tons, to 147,436 when compared to the third quarter of 2007. During the third quarter of 2007, the Company's fee timber harvest was curtailed because the Waldo Mill was shut down for approximately two months during that period for fire related repairs. The Company plans to consume the 2008 annual harvest in its sawmills and to keep the harvest level volume approximately the same as in 2007, and will continue to manage Company timberlands on a sustainable-yield basis. The average pine sawtimber price per ton decreased ten dollars, or 26 percent, to $29 per ton during the third quarter due to downward pressure from the higher-than-normal availability of privately owned pine sawtimber and reduced demand caused by the closure or curtailment of several sawmills in the Company's operating area. The Company harvested 84,138 tons of pine pulpwood during the third quarter of 2008, a decrease of 21,861 tons from the same period in 2007. The average sales price was $13 per ton, no change from the third quarter of 2007. The Company sold approximately 185 acres of non-strategic hardwood bottomland at an average sales price of $1,469 per acre during the third quarter of 2008 compared to sales of 360 acres at $1,964 for the same period of 2007. Recreational users of hardwood bottomland continue to provide a market for the non-strategic land sales. The Woodlands segment reported hunting lease income of $.4 million for the third quarters of 2008 and 2007.
Recent advances in technology and increased pricing levels for natural gas have resulted in the viability of expanded natural gas exploration within the state of Arkansas. One current area of activity known as the "Fayetteville Shale Play" is an unconventional natural gas reservoir ranging in depth from 1,300 feet to 6,500 feet, and is spread across multiple Arkansas counties. Deltic has leased
approximately 32,000 net mineral acres in this area to various exploration enterprises and received applicable lease bonus payments and the possibility of future royalty income should production be established. The Company continues to evaluate additional leasing requests within the currently defined boundary of the Fayetteville Shale Play, although future leasing will probably not be significant within the boundary currently defined by the Arkansas Oil and Gas Commission. The ultimate benefit to Deltic from these mineral leases remains speculative and unknown to the Company and is contingent on the successful extraction and sale of natural gas from this area. Deltic's gas royalties from the defined Fayetteville Shale Play area have averaged about $132,000 per month during the third quarter of 2008. Deltic has reported total oil and gas royalty income of $.5 million and $.1 million for the third quarter of 2008 and 2007, respectively. Oil and gas lease income was $.5 million for the third quarter of 2008 compared to $.3 million for the same period of 2007.
The Mills segment benefited from reduced lumber inventories and curtailed capacities, which have led to a slight increase in average sales price in the third quarter of 2008 of three dollars per MBF, to $307 per MBF compared to the third quarter of 2007's average of $304 per MBF. Lumber sales were 69.5 million board feet in the current period of 2008, an increase when compared to 45.6 million board feet for the same period of 2007 due to the fire related Waldo Mill shutdown in 2007. The Mills segment reported positive margins each month of the quarter due to increased productivity and lower log cost. As with any commodity market, the Company expects the historical volatility of lumber prices and demand to continue in the future. The Company continues to expect about half of the logs supplied to its sawmills will come from its strategically located fee timberlands.
The Real Estate segment closed the sale of 11 residential lots during the third quarter of 2008, versus 24 residential lots for the same quarter in 2007. The average sales price per lot declined $10,000 per lot when compared to the same quarter last year due to the mix of lots sold. Deltic's lot development plans provide for lot offerings that represent most real estate market segments for planned communities. The Company opened one new neighborhood, Accadia Court, within Chenal Valley in late September, consisting of 32 lots in the middle-tier of its three price levels, to maintain the planned lot inventory mix. The Company sold six lots within the Chenal Valley development in the third quarter of 2008 versus 22 during the same period of 2007. In Deltic's other two developments, Red Oak Ridge and Chenal Downs, five lots were sold during the third quarter of 2008 versus two during the same period of 2007. Chenal Downs is fully developed. Deltic does not plan to develop any additional residential lots in 2008 or 2009. Future annual development activity will be dependent upon the demand for the Company's residential lots. Commercial real estate sales activity is by nature less predictable than residential sales. The Company continues to see interest in commercially zoned acreage in and around the area of "The Promenade at Chenal", an upscale shopping center within Chenal Valley, but tightened credit caused by uncertainties in the credit markets have impacted the timing of potential sales transactions.
Operating results for Del-Tin Fiber are affected by the overall medium density fiberboard ("MDF") market and the plant's operating performance. Del-Tin has been able to operate at a profitable level during 2008 by passing through the higher raw materials costs, in the form of price increases, and improving production efficiencies. The demand for thin board, used in store fixtures and laminate flooring, remained strong through the third quarter, but is starting to soften due to the reduction in housing starts. Del-Tin produced 28 percent of its product mix as thin board in the third quarter. With regard to the Company's equity position in Del-Tin, Deltic continues to reduce depreciation expense related to the add-back per thousand square feet manufactured, which relates to the impairment taken by the Company in 2002, which was not recorded at the Del-Tin level. The difference in basis between the Company and Del-Tin is being adjusted to account for Del-Tin's operating results as if it were a consolidated subsidiary. (For further discussion, refer to Note 4 to the consolidated financial statements.)
On May 22, 2008, the Food, Conservation, and Energy Act of 2008 was enacted. Within this Act was the TREE Act which included a provision for a reduced federal tax rate on qualified timber gains for one year. Gains on qualified timber sales beginning May 23, 2008, through May 22, 2009, will be taxed at a 15 percent alternate tax rate for corporations. The effects of this act have been reported in the current period of 2008 and reduced the effective tax rate for the current period and year. Deltic has also benefited from various discrete items which when combined with a lower effective tax rate resulted in a $.5 million benefit in the third quarter.
Results of Operations
Three Months Ended September 30, 2008 Compared with Three Months Ended
September 30, 2007
In the following tables, Deltic's net sales and results of operations are
presented for the quarters ended September 30, 2008 and 2007. 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) 2008 2007
Net sales
Woodlands $ 8.9 8.6
Mills 27.3 16.8
Real Estate 3.0 4.1
Eliminations (4.3 ) (4.0 )
Net sales $ 34.9 25.5
Operating income/(loss) and net income/(loss)
Woodlands $ 5.1 4.9
Mills 1.8 (.8 )
Real Estate (.5 ) -
Corporate (4.4 ) (2.9 )
Eliminations .3 (.4 )
Operating income/(loss) 2.3 .8
Equity in earnings of Del-Tin Fiber .7 .3
Interest income - .3
Interest and other debt expense (1.2 ) (1.3 )
Interest capitalized .1 .2
Other income .1 .1
Income taxes .5 (.2 )
Net income/(loss) $ 2.5 .2
Earnings/(loss) per common share
Basic $ .21 .02
Diluted $ .21 .02
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Consolidated
The $2.3 million increase in net income is primarily due to the improved financial results in the Mills segment, benefits from reduced eliminations of intercompany profits in mill inventory caused by lower stumpage prices, and income tax benefits from a lower effective tax rate and discrete tax items, which were partially offset by increased Corporate operating expenses mainly associated with acquisition-related general and administrative expenses deferred from prior periods.
Operating income increased $1.5 million. The Mills segment increased $2.6 million due to improved sales price per MBF, lower manufacturing cost per MBF, and increased sales volume. The third quarter 2007 lumber sales volume was lower because the Waldo Mill was shut down for approximately two months during the period for fire related repairs. The eliminations benefit of $.7 million period-over- period and the increased Corporate operating expense of $1.5 million are due to same reasons affecting net income.
Woodlands
Selected financial and statistical data for the Woodlands segment is shown in
the following table.
Quarter Ended September 30,
2008 2007
Net sales (millions of dollars)
Pine sawtimber $ 4.2 4.0
Pine pulpwood 1.1 1.4
Hardwood sawtimber .1 .2
Hardwood pulpwood .3 .3
Oil and gas lease income .5 .3
Oil and gas royalties (net) .5 .1
Hunting leases .4 .4
Sales volume (thousands of tons)
Pine sawtimber 147.4 104.1
Pine pulpwood 84.1 106.0
Hardwood sawtimber 2.7 6.6
Hardwood pulpwood 26.6 27.6
Sales price (per ton)
Pine sawtimber $ 29 39
Pine pulpwood 13 13
Hardwood sawtimber 35 32
Hardwood pulpwood 10 10
Timberland
Net sales (in millions) $ .3 .7
Sales volume (acres) 185 360
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Net sales increased $.3 million. Sales of pine sawtimber increased $.2 million due to a 42 percent higher sales volume, offset by a $10 per ton, or 26 percent, lower average sales price. Sales of pine pulpwood decreased $.3 million due to a 21 percent lower harvest volume. The Company sold 185 acres of non-strategic hardwood bottomland at $1,469 per acre versus sales of 360 acres at $1,964 per acre in the third quarter of 2007. There was a $.2 million increase in lease income and $.4 million increase in royalty income in the current period of 2008 versus the third quarter of 2007. The increase in operating results was due primarily to the increase in net sales.
Mills
Selected financial and statistical data for the Mills segment is shown in the
following table.
Quarter Ended September 30,
2008 2007
Net sales (millions of dollars)
Lumber $ 21.3 13.8
Residual by-products 4.6 2.2
Lumber
Finished production (MMBF) 67.9 41.3
Sales volume (MMBF) 69.4 45.6
Sales price (per MBF) $ 307 304
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Net sales increased $10.5 million, or 62 percent, due to higher sales volume, and a slightly higher average sales price per MBF. The sales volume in 2007 was reduced due to the Waldo Mill being shutdown for two months due to fire related repairs. The Mills had reduced manufacturing costs per MBF primarily due to lower stumpage prices and improved operating efficiencies.
Real Estate
Selected financial and statistical data for the Real Estate segment is shown in
the following table.
Quarter Ended September 30,
2008 2007
Net sales (millions of dollars)
Residential lots $ .8 2.0
Commercial acreage - -
Undeveloped acreage - -
Chenal Country Club 2.0 2.0
Sales volume
Residential lots 11 24
Commercial acres - -
Undeveloped acres - -
Average sales price (thousands of dollars)
Residential lots $ 74 84
Commercial acres - -
Undeveloped acres - -
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Net sales decreased $1.1 million due to decreases in sales of residential lots combined with a lower average sales price per lot due to sales mix. The decrease in the segment's operating income was due primarily to the same factors impacting net sales.
Corporate
The increase in operating expense for Corporate functions was mainly due to previously deferred acquisition-related professional fees of $1 million, and increased incentive plan expenses.
Eliminations
Intersegment sales of timber from Deltic's Woodlands to the Mills segment increased $.3 million to $4.3 million. The increase reflects an increase in the volume of logs coming into Deltic sawmills from its fee timberlands but at a lower transfer price from the Woodlands segment. Transfer prices are approximately that of market which were higher in the same quarter last year.
Equity in Del-Tin Fiber
For the third quarter of 2008, Deltic's equity in Del-Tin Fiber was $.7 million, an increase of $.4 million from the same period of 2007 due to higher sales volume and a higher average sales price. The higher average sales price was due to passing along increases in wood fiber, resin glue, and wax cost to customers.
Additional selected financial and statistical data for Del-Tin Fiber is shown in the following table.
Quarter Ended September 30,
2008 2007
Net sales (millions of dollars) $ 16.6 13.0
Finished production (MMSF) 30.9 27.2
Board sales (MMSF) 29.7 26.6
Sales price (per MSF) $ 558 489
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Income Taxes
The effective income tax rate was a 27 percent benefit for the three months ended September 30, 2008, and a 42 percent expense for the same period of 2007. The decrease was due mainly to a lower effective tax rate related to the second quarter of 2008 enactment of lower federal tax rates on qualified timber gains, a discrete tax item related to the expiration of the statute of limitations on a state return, and other adjustments from the 2007 tax return true-up.
Nine Months Ended September 30, 2008 Compared with Nine Months Ended
September 30, 2007
In the following tables, Deltic's net sales and results of operations are
presented for the nine-month periods ended September 30, 2008 and 2007.
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) 2008 2007
Net sales
Woodlands $ 33.0 29.9
Mills 73.2 63.2
Real Estate 8.2 26.1
Eliminations (16.1 ) (15.4 )
Net sales $ 98.3 103.8
Operating income/(loss) and net income
Woodlands $ 20.9 18.9
Mills (3.2 ) (3.5 )
Real Estate (1.4 ) 12.6
Corporate (10.9 ) (10.6 )
Eliminations $ .1 (.6 )
Operating income 5.5 16.8
Equity in earnings of Del-Tin Fiber 2.1 1.3
Interest income .2 .7
Interest and other debt expense (3.8 ) (3.9 )
Interest capitalized .4 .5
Other income/(expense) .1 .3
Income taxes .1 (6.3 )
Net income $ 4.6 9.4
Earnings per common share
Basic $ .37 .76
Diluted $ .37 .74
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Consolidated
The $4.8 million decrease in net income was the result of decreased operating income from Deltic's Real Estate segment and increased Corporate general and administrative expense, partially offset by improved financial results for the Woodlands and Mills segments combined with an increase in equity in earnings of Del Tin Fiber. The 2008 period also benefited from a lower effective income tax rate and a discrete tax item.
Operating income decreased $11.3 million. The Woodlands segment increased $2 million due primarily to increased sales of non-strategic hardwood timberland, lease income, and royalty income, partially offset by lower pine sawtimber and pine pulpwood revenues. The Mills segment improved $.3 million due mainly to decreased cost per MBF of lumber sold, which was partially offset by a lower sales price per MBF of lumber sold. Real Estate operating income decreased $14 million, primarily the result of no sales of commercial real estate or undeveloped real estate acreage in 2008 and lower residential lot sales revenue. Corporate operating expense increased $.3 million due to higher general and administrative expenses.
Woodlands
Selected financial and statistical data for the Woodlands segment is shown in
the following table.
Nine Months Ended September 30,
2008 2007
Net sales (millions of dollars)
Pine sawtimber $ 15.9 17.8
Pine pulpwood 4.0 4.8
Hardwood sawtimber .2 .3
Hardwood pulpwood .8 .5
Oil and gas lease income 1.5 1.0
Oil and gas royalties (net) 1.1 .2
Hunting leases 1.3 1.3
Sales volume (thousands of tons)
Pine sawtimber 471.0 437.3
Pine pulpwood 273.5 367.7
Hardwood sawtimber 6.9 8.5
Hardwood pulpwood 74.6 55.1
Sales price (per ton)
Pine sawtimber $ 34 41
Pine pulpwood 15 13
Hardwood sawtimber 34 31
Hardwood pulpwood 11 9
Timberland
Net sales (millions of dollars) $ 4.0 .8
Sales volume (acres) 1,830 424
Sales price (per acre) $ 2,159 1,903
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Total net sales increased $3.1 million. Sales of pine sawtimber decreased by $1.9 million due primarily to a lower average sales price per ton of $34, a 17 percent decrease when compared to $41 per ton in 2007. Sales of pine pulpwood decreased $.8 million due to a 26 percent lower harvest volume, which was partially offset by a 15 percent increase in the average per ton sales price. Revenues for hardwood sawtimber and pulpwood increased $.3 million over the prior nine-month period. The Company sold approximately 1,830 acres of non-strategic hardwood bottomland at $2,159 per acre versus approximately 424 acres at $1,903 an acre in 2007. Lease income increased $.5 million and royalty income increased $.9 million for the nine-month period of 2008 versus the same period in 2007. The increase in operating results was due primarily to the increase in net sales.
Mills
Selected financial and statistical data for the Mills segment is shown in the
following table.
Nine Months Ended September 30,
2008 2007
. . .
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