Deltic Timber (DEL) 10-Q 2002 Q3 Quarterly report

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, 2002

OR

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

Commission file number 1-12147

DELTIC TIMBER CORPORATION

(Exact name of registrant as specified in its charter)

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

(870) 881-9400

Registrant’s telephone number, including area code:

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 Preferred Stock Purchase Rights	New York Stock Exchange, Inc.

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  xNo  ¨.

Number of shares of Common Stock, $.01 Par Value, outstanding at October 31, 2002, was 11,915,704.

TABLE OF CONTENTS—THIRD QUARTER 2002 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	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
PART II—Other Information
Item 1.	Legal Proceedings	20
Item 2.	Changes in Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 5.	Other Information	20
Item 6.	Exhibits and Reports on Form 8-K	20
Signatures		21
Certifications		22

2

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(Thousands of dollars)

	Sept. 30, 2002			Dec. 31, 2001
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	2,012		6,122
Trade accounts receivable—net		6,014		4,319
Other receivables		2,267		2,938
Inventories		5,692		5,565
Prepaid expenses and other current assets		1,967		1,428
Total current assets		17,952		20,372
Investment in real estate held for development and sale		42,047		36,698
Investment in Del-Tin Fiber		14,527		11,600
Other investments and noncurrent receivables		568		2,907
Timber and timberlands—net		206,350		211,754
Property, plant, and equipment—net		39,965		41,774
Deferred charges and other assets		2,677		3,275
Total assets	$	324,086		328,380
Liabilities and Stockholders’ Equity
Current liabilities
Current maturities of long-term debt	$	70		74
Trade accounts payable		3,938		3,524
Accrued taxes other than income taxes		1,076		1,190
Bank overdraft		952		—
Deferred revenues and other accrued liabilities		4,113		2,569
Total current liabilities		10,149		7,357
Long-term debt		80,136		84,190
Deferred tax liabilities—net		19,280		19,669
Other noncurrent liabilities		6,831		6,365
Redeemable preferred stock		30,000		30,000
Stockholders’ equity
Preferred stock		—		—
Common stock		128		128
Capital in excess of par value		69,075		68,766
Retained earnings		128,922		133,034
Unamortized restricted stock awards		(162	)	(264	)
Treasury stock		(20,273	)	(20,865	)
Total stockholders’ equity		177,690		180,799
Total liabilities and stockholders’ equity	$	324,086		328,380

See accompanying notes to consolidated financial statements.

3

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Thousands of dollars, except per share amounts)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2002			2001		2002		2001
Net sales	$	25,565		25,440		80,766		75,734
Costs and expenses
Cost of sales		19,154		18,742		51,927		47,607
Depreciation, amortization, and cost of fee timber harvested		2,910		3,308		12,412		12,187
General and administrative expenses		1,832		802		5,997		5,367
Total costs and expenses		23,896		22,852		70,336		65,161
Operating income		1,669		2,588		10,430		10,573
Equity in loss of Del-Tin Fiber		(1,827	)	(1,647	)	(7,153	)	(6,654	)
Interest income		117		11		180		918
Interest and other debt expense		(1,110	)	(1,372	)	(3,356	)	(4,439	)
Other income/(expense)		101		104		342		328
Income/(loss) from continuing operations before income taxes		(1,050	)	(316	)	443		726
Income taxes		58		202		(624	)	17
Income/(loss) from continuing operations		(992	)	(114	)	(181	)	743
Discontinued operations, net		—		51		—		8,382
Net income/(loss)	$	(992	)	(63	)	(181	)	9,125
Earnings per common share
Basic
Continuing operations	$	(.13	)	(.06	)	(.16	)	(.08	)
Discontinued operations		—		.01		—		.70
Net income/(loss)	$	(.13	)	(.05	)	(.16	)	.62
Assuming dilution
Continuing operations	$	(.13	)	(.06	)	(.16	)	(.08	)
Discontinued operations		—		.01		—		.70
Net income/(loss)	$	(.13	)	(.05	)	(.16	)	.62
Dividends declared per common share	$	.0625		.0625		.1875		.1875
Average common shares outstanding (thousands)		11,941		11,887		11,921		11,899

See accompanying notes to consolidated financial statements.

4

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30,

(Thousands of dollars)

	2002			2001
Operating activities
Net income/(loss)	$	(181	)	9,125
Adjustments to reconcile net income/(loss) to net cash provided/(required) by operating activities
Depreciation, amortization, and cost of fee timber harvested		12,412		12,187
Deferred income taxes		(390	)	5,997
Gain from disposal of agriculture segment assets		—		(14,454	)
Real estate costs recovered upon sale		3,119		3,622
Timberland costs recovered upon sale		534		566
Equity in loss of Del-Tin Fiber		7,154		6,654
Net increase/(decrease) in provisions for pension and other postretirement benefits		1,020		653
(Increase)/decrease in operating working capital other than cash and cash equivalents		716		(18	)
Other—net		538		979
Net cash provided/(required) by operating activities, including discontinued operations		24,922		25,311
Investing activities
Capital expenditures requiring cash		(15,816	)	(55,286	)
Net change in purchased stumpage inventory		969		2,786
Advances to Del-Tin Fiber		(9,953	)	(11,846	)
Proceeds from disposal of agriculture segment assets		—		18,079
Increase/(decrease) in farmland sale contract deposits		—		(1,455	)
(Increase)/decrease in funds held by trustee		1,730		16,317
Receipts of/(additions to) noncurrent receivables		—		17,699
Other—net		662		822
Net cash provided/(required) by investing activities, including discontinued operations		(22,408	)	(12,884	)
Financing activities
Proceeds from borrowings		7,500		10,533
Repayments of notes payable and long-term debt		(11,558	)	(18,799	)
Treasury stock purchases		(746	)	(1,026	)
Increase/(decrease) in bank overdraft		953		(575	)
Preferred stock dividends paid		(1,697	)	(1,697	)
Common stock dividends paid		(2,237	)	(2,233	)
Proceeds from stock option exercises		1,161		—
Other—net		—		(509	)
Net cash provided/(required) by financing activities, including discontinued operations		(6,624	)	(14,306	)
Net increase/(decrease) in cash and cash equivalents		(4,110	)	(1,879	)
Cash and cash equivalents at January 1		6,122		2,712
Cash and cash equivalents at September 30	$	2,012		833

See accompanying notes to consolidated financial statements.

5

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

Nine Months Ended September 30,

(Thousands of dollars)

	2002			2001
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 in 2002 and 2001		128		128
Capital in excess of par value
Balance at beginning of year		68,766		68,757
Exercise of stock options		165		9
Tax benefits on stock options		144		—
Balance at end of period		69,075		68,766
Retained earnings
Balance at beginning of year		133,034		128,290
Net income/(loss)		(181	)	9,125
Preferred stock dividends accrued		(1,697	)	(1,697	)
Common stock dividends declared		(2,234	)	(2,232	)
Balance at end of period		128,922		133,486
Unamortized restricted stock awards
Balance at beginning of year		(264	)	(472	)
Stock awards		—		—
Amortization to expense		102		156
Balance at end of period		(162	)	(316	)
Treasury stock
Balance at beginning of year—925,725 and 878,556 shares, respectively		(20,865	)	(19,869	)
Shares purchased—31,800 shares in 2002 and 48,500 shares in 2001		(746	)	(1,026	)
Shares issued for incentive plans—59,350 shares in 2002 and 1,331 shares in 2001		1,338		30
Balance at end of period—898,175 and 925,725 shares, respectively		(20,273	)	(20,865	)
Total stockholders’ equity	$	177,690		181,199

See accompanying notes to consolidated financial statements.

6

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2002

(Unaudited, except for December 31, 2001)

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 results of operations for the first nine months of the year are not necessarily indicative of the results of operations which might be expected for the entire year.

The financial statements in Deltic‘s 2001 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 2002 presentation format.

Note 2—Earnings per Common Share

The amounts used in computing earnings per share consisted of the following:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2002			2001		2002		2001
	(Thousands, except per share amounts)
Income/(loss) from continuing operations	$	(992	)	(114	)	(181	)	743
Discontinued operations, net		—		51		—		8,382
Less preferred dividends		(566	)	(566	)	(1,697	)	(1,697	)
Income/(loss) available to common shareholders	$	(1,558	)	(629	)	(1,878	)	7,428
Weighted average number of common shares used in basic EPS		11,941		11,887		11,921		11,899
Effect of dilutive stock options*		—		—		—		—
Weighted average number of common shares and dilutive potential common stock used in EPS assuming dilution		11,941		11,887		11,921		11,899

7

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2002

(Unaudited, except for December 31, 2001)

Note 2—Earnings per Common Share (cont.)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2002			2001		2002		2001
	(Thousands, except per share amounts)
Earnings per common share
Basic
Continuing operations	$	(.13	)	(.06	)	(.16	)	(.08	)
Discontinued operations		—		.01		—		.70
Net income/(loss)	$	(.13	)	(.05	)	(.16	)	.62
Assuming dilution
Continuing operations	$	(.13	)	(.06	)	(.16	)	(.08	)
Discontinued operations		—		.01		—		.70
Net income/(loss)	$	(.13	)	(.05	)	(.16	)	.62

* Additional potential common shares from stock options outstanding for the third quarter and first nine months of 2002 and 2001 amounting to 30,000 and 45,000 shares and 54,000 and 28,000 shares, respectively, are excluded from the calculation of diluted earnings per share since they would result in antidilution due to the loss from continuing operations.

Note 3—Inventories

Inventories at the balance sheet dates consisted of the following:

	Sept. 30, 2002		Dec. 31, 2001
	(Thousands of dollars)
Logs	$	1,492	1,246
Lumber		3,737	3,859
Materials and supplies		463	460
	$	5,692	5,565

Note 4—Investment in Del-Tin Fiber

The Company owns 50 percent of the membership interest of Del-Tin Fiber. The Company’s investment in Del-Tin Fiber is carried at cost, adjusted for the Company’s proportionate share of undistributed earnings or losses.

8

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2002

(Unaudited, except for December 31, 2001)

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

The financial position for Del-Tin Fiber as of the balance sheet dates and results of operations for the periods ended September 30 consisted of the following:

	Sept. 30, 2002		Dec. 31, 2001
	(Thousands of dollars)
Condensed Balance Sheet Information
Current assets	$	7,296	5,218
Debt service reserve funds		3,472	3,543
Bond sinking funds		11,751	6,072
Property, plant, and equipment—net		98,505	100,907
Other noncurrent assets		798	982
Total assets	$	121,822	116,722
Current liabilities	$	3,562	4,419
Long-term debt		89,000	89,000
Other noncurrent liabilities		5	6
Members’ capital/(deficit)		29,255	23,657
Accumulated other comprehensive income		—	(360	)
Total liabilities and members’ capital/(deficit)	$	121,822	116,722

	Three Months Ended September 30,					Nine Months Ended September 30,
	2002			2001		2002		2001
	(Thousands of dollars)
Condensed Income Statement Information
Net sales	$	9,221		8,092		23,392		10,697
Costs and expenses
Cost of sales		10,251		8,846		29,788		16,932
Depreciation		1,102		790		2,916		1,632
General and administrative expenses		410		415		1,210		809
Total costs and expenses		11,763		10,051		33,914		19,373
Operating income/(loss)		(2,542	)	(1,959	)	(10,522	)	(8,676	)
Interest income		43		47		105		145
Interest and other debt expense		(928	)	(1,382	)	(3,210	)	(4,309	)
Gain/(loss) on disposal of assets		(228	)	—		(679	)	(468	)
Net income/(loss)		(3,655	)	(3,294	)	(14,306	)	(13,308	)
Other comprehensive income		—		—		360		—
Comprehensive income/(loss)	$	(3,655	)	(3,294	)	(13,946	)	(13,308	)

9

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2002

(Unaudited, except for December 31, 2001)

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

The Del-Tin facility was shut down from late January to early June 2001 to modify its heat energy system. Direct operating costs during the shutdown period were expensed as incurred and are included in Cost of Sales. Deltic Timber Corporation has retained a financial advisor to assist in the evaluation of strategic alternatives for the Company’s investment in Del-Tin Fiber with all options being considered.

Note 5—Timber and Timberlands

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

	Sept. 30, 2002			Dec. 31, 2001
	(Thousands of dollars )
Purchased stumpage inventory	$	4,696		5,665
Timberlands		76,637		76,468
Fee timber		182,004		179,424
Logging facilities		1,714		1,692
		265,051		263,249
Less accumulated costs of fee timber harvested and facilities depreciation		(58,701	)	(51,495	)
	$	206,350		211,754

Note 6—Property, Plant, and Equipment

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

	Sept. 30, 2002			Dec. 31, 2001
	(Thousands of dollars)
Land	$	125		125
Land improvements		4,029		3,265
Buildings and structures		4,626		4,469
Machinery and equipment		75,749		74,168
		84,529		82,027
Less accumulated depreciation		(44,564	)	(40,253	)
	$	39,965		41,774

10

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2002

(Unaudited, except for December 31, 2001)

Note 7—Supplemental Cash Flow Disclosures

Income taxes paid, net of refunds, were $47,000 in the 2002 period, while a net income tax refund of $2,043,000 was received in the 2001 period. Interest paid, net of amounts capitalized, was $2,452,000 and $3,620,000 in the first nine months of 2002 and 2001, respectively.

(Increases)/decreases in operating working capital, other than cash and cash equivalents, for the nine months ended September 30 consisted of the following:

	2002			2001
	(Thousands of dollars)
Trade accounts receivable—net	$	(1,695	)	(917	)
Other receivables		1,424		(1,111	)
Inventories		(128	)	(387	)
Prepaid expenses and other current assets		(540	)	(824	)
Trade accounts payable		415		1,484
Deferred revenues and other accrued liabilities		1,240		1,737
	$	716		(18	)

11

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2002

(Unaudited, except for December 31, 2001)

Note 8—Business Segments

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2002			2001		2002		2001
	(Thousands of dollars)
Net sales
Woodlands	$	8,624		7,290		30,236		29,762
Mills		18,343		15,320		55,079		44,013
Real Estate		3,018		5,798		9,773		12,202
Eliminations*		(4,420	)	(2,968	)	(14,322	)	(10,243	)
	$	25,565		25,440		80,766		75,734
Income/(loss) from continuing operations before income tax
Operating income
Woodlands	$	5,051		3,101		18,142		16,693
Mills		(1,600	)	(1,664	)	(3,055	)	(3,968	)
Real Estate		25		2,010		1,078		2,962
Corporate		(1,631	)	(629	)	(5,398	)	(4,843	)
Eliminations		(176	)	(230	)	(337	)	(271	)
Operating income		1,669		2,588		10,430		10,573
Equity in loss of Del-Tin Fiber		(1,827	)	(1,647	)	(7,153	)	(6,654	)
Interest income		117		11		180		918
Interest and other debt expense		(1,110	)	(1,372	)	(3,356	)	(4,439	)
Other income/(expense)		101		104		342		328
	$	(1,050	)	(316	)	443		726
Depreciation, amortization, and cost of fee timber harvested
Woodlands	$	1,249		1,795		7,624		7,753
Mills		1,504		1,378		4,338		4,059
Real Estate		121		99		326		266
Corporate		36		36		124		109
	$	2,910		3,308		12,412		12,187
Capital expenditures
Woodlands		1,620		1,461		3,447		43,629
Mills		859		1,570		2,411		3,709
Real Estate		3,972		4,190		9,889		8,068
Corporate		21		19		69		56
	$	6,472		7,240		15,816		55,462

*Intersegment sales of timber from Woodlands to Mills

12

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

Results of Operations

Three Months Ended September 30, 2002 Compared with Three Months Ended September 30, 2001

The results of operations for the third quarter of 2002 was a loss of $1 million, $.13 a share after preferred dividends, compared to a third quarter 2001 loss of $.1 million, $.05 a share. Prior-year results included income from discontinued agricultural operations, net of income taxes, of $.1 million, $.01 a share. A loss from continuing operations for the third quarter of 2002 of $1 million compared to a loss of $.2 million a year ago, losses of $.13 and $.06 per share, respectively, after preferred dividends. Net sales for the current quarter totaled $25.6 million, an increase of $.2 million when compared to the prior-year quarter. Operating income for the current reporting period was $1.7 million compared to $2.6 million for the corresponding quarter of 2001. Net cash provided by operating activities decreased $2.6 million, from $8.7 million in 2001 to $6.1 million for the 2002 period.

Operating income for the third quarter of 2002 decreased $.9 million when compared to the third quarter of 2001. The Woodlands segment increased $1.9 million due primarily to increases in sales of timberland and revenues from pine sawtimber combined with a reduction in the cost of fee timber harvested. Mills segment operating results improved $.1 million from the same period of 2001 as the Company increased its sales volume by 28 percent and lowered its lumber production cost per thousand board feet (“MBF”) by eight percent, while the average lumber sales price dropped seven percent. Operating income for Real Estate segment operations decreased $2.1 million from a year ago because of decreased commercial acreage, residential lot, and undeveloped acreage sales. Corporate operating expense was $1 million unfavorable due primarily to the prior-year period benefiting from lower-than-normal general and administrative expenses.

The Woodlands segment reported net sales of $8.6 million for the current quarter compared to $7.3 million a year ago. Sales of 1,198 acres of timberland produced revenues of $1.5 million in the current period, while sales of 321 acres generated $.5 million in the prior-year period. Sales of pine sawtimber increased $.6 million due to an increase in average sales price of $3 per ton to $42 while the harvest volume increased 4,432 tons to 143,592 tons. Sales of hardwood pulpwood decreased $.2 million due primarily to reduced harvest levels. Operating income was $5 million in 2002, an increase of $1.9 million when compared to $3.1 million for the three months ended September 30, 2001. The favorable variance resulted primarily from the increase in net sales combined with a $.6 million reduction in the cost of fee timber harvested due to a lower average cost per ton of timber harvested resulting from the harvest mix by company. (Refer to the description of critical accounting policies in the Management’s Discussion and Analysis section of the Company’s 2001 annual report on Form 10-K.)

Mills operation’s net sales for the three months ended September 30, 2002, were $18.4 million compared to $15.3 million for the same period of 2001. Finished lumber sales increased $2.5 million due mainly to a 28 percent increase in sales volume to 53 million board feet (“MMBF”) which was facilitated by increased production volume as a result of improved mill efficiencies during 2002, while the average lumber sales price dropped seven percent to $293 per MBF. As a result of the rise in lumber production levels, sales of residual by-products of the manufacturing process increased by $.3 million. An operating loss of $1.6 million was reported for the third quarter of 2002, which compares to a loss of $1.7 million for the 2001 period. The $.1 million improvement in results was primarily due to a $30 per MBF decrease in the manufacturing cost per MBF of lumber sold because of the improved mill efficiencies, partially offset by the $22 reduction in sales price per MBF.

13

The Real Estate segment recorded net sales of $3 million in 2002 compared to $5.7 million in 2001. The third quarter of 2001 benefited from a 12-acre commercial site sale for $144,700 per acre and from sales of 35 acres of undeveloped acreage which generated revenues of $.3 million. Residential lot sales decreased by 13 lots to 30 in the current quarter, and the average sales price per lot decreased $800 to $56,200 due to the mix of lot closings. Operating income decreased $2.1 million, to break-even results, due primarily to the reduction in net sales.

Corporate operating expense was $1.6 million in the third quarter of 2002, which compares to $.6 million for the same quarter of 2001. The increase was primarily due to higher general and administrative expenses. Included in the Corporate segment’s general and administrative expenses are the costs related to the Company’s stock incentive plan. Previously, certain stock option exercise procedures resulted in variable-plan accounting treatment for all options outstanding, which required adjustment of the cost of options granted for changes in the market value per share of the Company’s common stock. (During the third quarter of 2001, a 12 percent decrease in such stock price resulted in a net benefit for incentive plan expense of $.7 million.) These exercise provisions were amended during the fourth quarter of 2001, allowing Deltic to change to fixed-plan accounting treatment for all outstanding options, thus eliminating the previous volatility in periodic incentive plan expense.

Equity in the loss of Del-Tin Fiber recorded by the Company was $1.8 million in 2002 compared to $1.7 million a year ago. (For additional information about Del-Tin Fiber’s operating results, refer to Note 4 to the consolidated financial statements.) Interest income increased $.1 million as the current period benefited from interest earned in connection with an income tax refund resulting from the settlement by Murphy Oil Corporation, the Company’s former parent, of an audit related to years prior to Deltic’s 1996 spin-off. Interest expense was $.1 million lower than in the 2001 period due mainly to a $4.1 million reduction in long-term debt during the first nine months of 2002. Income tax benefit relating to the $1 million loss from continuing operations for the third quarter of 2002 was $.1 million. The income tax benefit was the result of recording adjustments to increase state income tax expense by $.6 million to reduce estimated income tax receivables, principally related to years prior to the Company’s 1996 spin-off from Murphy Oil Corporation, that were settled during this period, partially offset by the benefit of an adjustment to record the impact of an election to file consolidated state income tax returns for 2001 and 2002. Income taxes related to continuing operations for the 2001 period were also a benefit of $.1 million.

Nine Months Ended September 30, 2002 Compared with Nine Months Ended September 30, 2001

For the first nine months of 2002, operating results were a loss of $.2 million, $.16 a share after preferred dividends, compared to net income for the nine months ended September 30, 2001, of $9.1 million, $.62 a share, including income from discontinued operations of $8.4 million, $.70 a share. For the 2002 period, the loss from continuing operations was $.2 million, $.16 a share after preferred dividends, which compares to income from continuing operations of $.7 million, a loss of $.08 a share, in the corresponding period of 2001. Operating income for the nine months ended September 30, 2002, was $10.4 million, a decrease of $.2 million from 2001. The Company’s Woodlands segment increased $1.4 million as a result of a 16 percent increase in the pine sawtimber harvest level, partially offset by a drop in margin realized from timberland sales. The Mills segment improved $.9 million due primarily to a six percent decrease in the manufacturing cost per MBF of lumber, partially offset by a three percent drop in average lumber sales price. Real Estate segment operations decreased $1.9 million, resulting mainly from the prior year benefiting from a commercial site sale. Corporate segment operating expense rose $.6 million.

The Woodlands segment produced net sales of $30.2 million during the nine months ended September 30, 2002, an increase of $.4 million when compared to $29.8 million during 2001. Pine sawtimber sales increased $3.7 million as a result of a 16 percent increase in sales volume to 600,089 tons combined with a $1 per ton rise in the average sales price received for pine sawtimber to $42 per ton.

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Net sales generated from the sale of non-strategic or higher and better use timberland decreased by $3 million to $2.3 million during the 2002 period. Sales of hardwood pulpwood dropped $.3 million due to lower harvest volumes and a 29 percent decrease in average sales price per ton. Operating income was $18.1 million for the first nine months of 2002, compared to $16.7 million in 2001. This increase was due mainly to the increase in net sales combined with a $.3 million decrease in commission expense related totimberland acreage sale transactions and a $.3 million decrease in timber replanting expenses. (The higher-than-normal level of such replanting expenses incurred during the 2001 period resulted from the extreme heat and drought conditions experienced in the Company’s operating area during the summer of 2000.)

Mills operations recorded net sales of $55.1 million during the first nine months of 2002 compared to $44 million for the corresponding period of 2001. The 25 percent increase was due primarily to a $9.5 million increase in sales of finished lumber resulting from a 30 percent rise in sales volume to 152.6 MMBF since the Company improved its mill operation efficiencies during 2002 which has facilitated increased production volumes and made temporary reductions in lumber production during the early portion of the 2001 period due to market conditions, partially offset by a $10 decrease in average sales price per MBF sold to $307. As a result of the increase in production levels, sales of residual by-products of the lumber manufacturing process rose by $1.1 million. A loss from operations of $3.1 million in 2002 compared to 2001’s loss of $4 million. The improvement of $.9 million was due primarily to a $22 per MBF reduction in lumber manufacturing expenses, including a $7 per MBF drop in raw material cost for logs used in the Company’s sawmills, partially offset by the three percent reduction in average sales price per MBF sold.

Real Estate operations reported net sales of $9.8 million in 2002 compared to $12.1 million during 2001. Included in the first nine months of 2001 was a 12-acre commercial site sale for $144,700 per acre, while the 2002 period had no such commercial sales. There were no sales of undeveloped acreage in the current period, while 2001 included sales of 40 acres for $.3 million. Residential lot sales in 2002 totaled 82 lots, a decrease of 12 lots from the 2001 period, while the average sales price of $69,900 increased $6,100 per lot due to the mix of lots sold. The 2001 period also benefited from an intercompany sales commission related to timberland sales near the Company’s Chenal Valley development. Operating income of $1.1 million in 2002 decreased $1.9 million from a year ago as the result of the decrease in net sales.

Corporate operating expense was $5.4 million in 2002 compared to $4.8 million in 2001. The increase of $.6 million was due to lower general and administrative expenses related to the Company’s incentive plan in 2001. Equity in loss of Del-Tin Fiber recorded by the Company was $7.1 million in the current year, which compares to $6.7 million a year ago. Interest income decreased $.7 million as 2001 benefited from interest earned from agricultural asset and timberland sales proceeds deposited with trustees, while interest expense was $1 million lower due to decreased average borrowings for the first nine months of 2002. Income tax expense related to continuing operations increased $.6 million, to $.6 million for the current year, due to adjusting state income tax expense during 2002 for a reduction in estimated income tax receivables related to years prior to 1996 that were settled in the current period, partially offset by the benefit of an adjustment to reflect an election to file consolidated state tax returns for 2001 and 2002, and to 2001 benefiting from recording deferred tax assets arising from state tax loss carryforwards.

Included in the first nine months of 2001 was income from discontinued agriculture operations, net of income taxes, which totaled $8.4 million. The sale of approximately 18,400 acres of farmland was recorded at a pretax gain of $13.4 million. Income from agriculture operating activities during 2001 was $.2 million. Income tax expense for discontinued operations was $5.3 million for the period.

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Financial Condition

For the nine months ended September 30, 2002, net cash provided by operating activities totaled $24.9 million compared to $25.3 million for the same period in 2001. Changes in operating working capital, other than cash and cash equivalents, provided cash of $.7 million for the first nine months of 2002, but neither provided nor required cash for the same period of 2001.

Capital expenditures required cash of $15.8 million in the current-year period and $55.3 million a year ago, of which $38.3 million was for the purchase of replacement timberland properties. Capital expenditures by segment consisted of the following:

	Nine Months Ended September 30,
	2002		2001
	(Thousands of dollars)
Woodlands	$	3,447	43,629
Mills		2,411	3,709
Real Estate		9,889	8,068
Corporate		69	56
Total capital expenditures		15,816	55,462
Owner-financed expenditures		—	(176	)
Capital expenditures requiring cash	$	15,816	55,286

The net change in purchased stumpage inventory to be utilized in the Company’s sawmill operations provided cash of $1 million in 2002, and $2.8 million in 2001. The Company advanced Del-Tin Fiber $10 million during the current period and $11.8 million during the corresponding period of 2001. During 2001, receipts of income tax refunds classified as noncurrent receivables at year-end 2000 provided $1.3 million.

During the prior-year period, disposal of agriculture segment assets generated proceeds of $18.1 million, $1.5 million of which had previously been received as farmland sale contract deposits, that were deposited with a trustee as required for a tax-deferred exchange. These proceeds, combined with $7.7 million already held by a trustee from similar transactions recorded in prior periods, were utilized to purchase designated replacement timberland properties and are included in capital expenditures of the Woodlands segment. Upon completion of the two reverse land exchanges in which Deltic was involved, $16.4 million previously advanced to the accommodating title holders required in such exchange was repaid to the Company.

The Company borrowed $7.5 million and made debt repayments of $11.6 million during the first nine months of 2002 compared to borrowings of $10.5 million and debt repayments, utilizing the funds received from reverse exchange accommodators, of $18.8 during the 2001 period. Purchase of treasury stock utilized $.7 million and $1 million in 2002 and 2001, respectively. The increase in bank overdraft in 2002 provided $1 million, while the decrease in such overdraft during the prior-year period required $.6 million. Deltic paid dividends totaling $3.9 million in both 2002 and 2001, consisting of $2.2 million for common stock and $1.7 million for redeemable preferred stock. Proceeds from the exercise of stock options provided cash of $1.2 million during the current period, and fees paid in 2001 associated with the renewal of the Company’s revolving credit facility were $.5 million.

These net uses of funds during the first nine months of 2002 resulted in a $4.1 million decrease in the Company’s cash and cash equivalents since December 31, 2001.

During December 2000, the Company’s Board of Directors authorized a stock repurchase program of up to $10 million of its common stock. Under this program, the Company can purchase shares

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through the open market and privately negotiated transactions at prices deemed appropriate by Deltic’s management. As of September 30, 2002, the Company had expended $1.8 million under this program, with the purchase of 80,300 shares at an average cost of $22.06 per share, of which 31,800 shares at an average cost of $23.44 were purchased during 2002.

The Company has agreed to a contingent equity contribution agreement with Del-Tin Fiber and the group of banks from whom Del-Tin Fiber has obtained its $89 million credit facility. Under this agreement, Deltic and the other 50 percent owner of the joint venture have agreed to fund any deficiency in contributions to either Del-Tin Fiber’s required sinking fund or debt service reserve, up to a cumulative total of $17.5 million for each owner. In addition, each owner has committed to a production support agreement, under which each owner has agreed to make support obligation payments to Del-Tin Fiber to provide, on the occurrence of certain events, additional funds for payment of debt service until the plant is able to successfully complete a minimum production test. In addition, both owners have agreed to fund any operating working capital needs until the facility is able to consistently generate sufficient funds to meet its cash requirements.

On April 25, 2002, Deltic announced that Banc One Capital Markets, Inc. had been retained as financial advisor to assist in the evaluation of strategic alternatives for the Company’s investment in Del-Tin Fiber. This evaluation process has progressed and is expected to continue for several more months.

Redemption of the Company’s currently outstanding redeemable preferred stock is mandatory on December 31, 2002, at a price of $30 million. Deltic’s management currently anticipates either utilizing amounts available under its revolving credit facility, borrowing long term, or a combination of both to fulfill this obligation.

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 and stock repurchase programs, additional advances to Del-Tin Fiber, preferred stock redemption, and capital expenditures, 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 risks and uncertainties. Actual results could differ materially from those included in such forward-looking statements. Factors that could cause such differences include, but are not limited to, 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.

Critical Accounting Policies and Estimates

Critical accounting policies are defined as those that are reflective of significant judgements 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 2001 annual report on Form 10-K, and this disclosure should be read in conjunction with this Form 10-Q. There have been no changes in these identified critical policies, nor have there been any initially adopted accounting policies having a material impact on reported financial results.

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Outlook

Pine sawtimber harvest levels are expected to be 100,000 to 150,000 tons in the fourth quarter of 2002 and 700,000 to 750,000 tons for the year. The Company’s program to consider sales of timberland identified to be non-strategic or have a higher and better use will continue, with sales for the year anticipated to be 3,000 to 3,500 acres. Finished lumber production and sales volume will continue to be subject to market conditions, and is estimated at 50 to 55 million board feet for the fourth quarter and 205 to 215 million board feet for the year. Residential lot sales are projected to be 150 to 175 lots for the year. Deltic’s share of equity in Del-Tin Fiber’s financial results is estimated to be a pretax loss of $1.7 to $1.9 million for the fourth quarter.

Despite a strong housing market, lumber supply continues to outpace demand due to over-production in North America and increased imports from overseas, resulting in weak prices. The recent implementation of duties on Canadian lumber imports exacerbated the imbalance, as a number of Canadian producers initially responded by increasing production. The situation is unlikely to improve significantly until supply is reduced or the Canadian trade issue is satisfactorily resolved. However, any additional price declines are likely to be modest, as current prices are below cash costs for many manufacturers and a number of producers have recently announced plans to curtail production. The weak lumber market may be beginning to impact timber prices. After remaining relatively stable for most of the year, prices for Company timber sold to third parties have recently declined to levels more consistent with current lumber prices. The strong regional housing market has benefited the Company’s residential lot sales. However, a decline in regional housing starts would likely cause lot sales to fall below projected levels.

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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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risk has not changed significantly from that set forth under the caption “Quantitative and Qualitative Disclosures About Market Risk”, in Item 7A of Part II of its 2001 annual report on Form 10-K. Those disclosures should be read in conjunction with this Form 10-Q.

Item 4.    Controls and Procedures

Within the 90-day period prior to the filing of this report, Deltic Timber Corporation (“the Company”) carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. Such evaluation was under the supervision, and with the participation, of the Company’s senior management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”). Based on this evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in any reports that the Company files or submits under the Securities Exchange Act of 1934, as amended. In addition, such controls have been deemed to be effective in ensuring that the required information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no significant changes in internal controls or in any other factors that could significantly affect those internal controls subsequent to the date of their last evaluation.

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PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

From time to time, the Company is involved in litigation incidental to its business. Currently, there are no material legal proceedings.

Item 2.    Changes in Securities and Use of Proceeds

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

(a) Exhibits

99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

None.

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SIGNATURES

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

DELTIC TIMBER CORPORATION
By:	/s/    Ron L. Pearce	Date:	November 7, 2002
	Ron L. Pearce, President (Principal Executive Officer)
By:	/s/    Clefton D. Vaughan	Date:	November 7, 2002
	Clefton D. Vaughan, Vice President, Finance and Administration (Principal Financial Officer)
By:	/s/    Emily R. Evers	Date:	November 7, 2002
	Emily R. Evers, Controller (Principal Accounting Officer)

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CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Ron L. Pearce, Chief Executive Officer of Deltic Timber Corporation (“the Company”), certify that:

1. I have reviewed this quarterly report on Form 10-Q of Deltic Timber Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

4. The Company’s Chief Financial Officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The Company’s Chief Financial Officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of Company’s board of directors:

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

6. The Company’s Chief Financial Officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/Ron L. Pearce

Ron L. Pearce

Chief Executive Officer

November 7, 2002

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CHIEF FINANCIAL OFFICER CERTIFICATION

I, Clefton D. Vaughan, Chief Financial Officer of Deltic Timber Corporation (“the Company”), certify that:

1. I have reviewed this quarterly report on Form 10-Q of Deltic Timber Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

4. The Company’s Chief Executive Officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The Company’s Chief Executive Officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of Company’s board of directors:

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

6. The Company’s Chief Executive Officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/Clefton D. Vaughan

Clefton D. Vaughan

Chief Financial Officer

November 7, 2002

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