Deltic ekes out small 4Q profit, expects to close Potlatch merger by end of month

Deltic Timber eked out a small fourth quarter profit as the El Dorado timber manufacturer with Murphy Oil ties closed out its final chapter as a publicly held company ahead of its expected acquisition by rival Potlatch Corp. later this month.

For the period ended Dec. 31, Deltic reported fourth quarter earnings of $200,000, or two cents per share, compared to year ago earnings of $3.1 million or 26 cents per share. Net sales rose to $72.1 million, up 23% from $58.5 in the same period of 2016.

Company officials said fourth quarter earnings benefited from increased operating income from the company’s Woodlands and Manufacturing segments as demand for timber and wood products remained strong during the fourth quarter. However, quarterly expenses related to the Potlatch acquisition largely offset those results.

For the full year, Deltic earnings fell 29% to $6.5 million, or 53 cents per share, compared to $9.2 million or 76 cents a year ago. Yearly sales, however, rose 10.4% to $242.2 million, compared to $219.3 million in 2016.

SEGMENT INCOME
In its last quarter as an Arkansas-based publicly traded concern, Deltic’s woodlands segment operating income rose to $9.9 million, compared to $4.2 million in the fourth quarter of 2016. Net sales also rose slight to $18.8 million, up 102% from $9.5 million from a year ago. Company officials said the huge spike in quarterly earnings was largely due to company sales of timber through timber deeds as part of the company’s strategic initiatives.

Deltic’s largest division, the company’s manufacturing segment, saw operating income jump 62.5% to $5.2 million, compared to $3.2 million in the same period a year ago. Fourth quarter manufacturing sales also rose to $45.8 million, compared to $40.7 million in the second period of 2016.

In the company’s Little Rock-based real estate division, operating income was down 20.3% to $5.1 million, compared to $6.4 million a year ago. Net sales were slightly up to $13.9 million, compared to $13.6 million in the same period of 2016. Deltic officials said the increased revenue from residential lot sales was offset by a write-down to the basis of the company’s speculative homes in our Red Oak Ridge development.

Deltic said it sold 78 residential lots at $98,000 per lot in West Little Rock’s Chenal Valley, up 19% from year ago prices and 77 residential lots sold.  Commercial sales price averaged $1,068,000 per acre, up a whopping 360% from $232,000 per acre in the fourth quarter of 2016.

At the close of Wednesday trading, Deltic’s shares (NYSE: DEL) rose 4.3%, or $3.97 at $97.23. Over the past 52 weeks, the company’s stock has traded at a low of $65.65 and a high of $100.35 per share.

POTLATCH DEAL
At the end of the third quarter, Deltic announced an all-stock agreement to be acquired by Spokane, Wash.-based real estate investment trust (REIT) Potlatch Corp. Once the deal closes, Potlatch shareholders are set to own around 65% of the combined company, to be named PotlatchDeltic.

Based on the closing stock prices of Potlatch and Deltic on Oct. 20, 2017, the combined company is expected to have a pro forma equity market capitalization of approximately $3.3 billion and a total enterprise value of more than $4 billion, including approximately $700 million in net debt. The combined company, which will retain a satellite office in El Dorado, will have more than 1,500 employees and more than 200 customers through operations across its extensive timberland and lumber manufacturing portfolio.

Under the terms of the deal, which has been unanimously approved by the boards of both companies, Deltic stockholders will receive 1.8 common shares of Potlatch stock for each common share of Deltic that they own. Following the close of the transaction, Potlatch stockholders will own approximately 65% of the combined company, and Deltic stockholders will own approximately 35% on a fully diluted basis.

The agreement also provides for Deltic to convert to a REIT structure, effective at the closing date of the transaction, ensuring the combined company achieves the most efficient tax structure. As part of the REIT conversion process, Deltic’s accumulated earnings and profits, which are estimated to be approximately $250 million, will be distributed to stockholders of the combined company through a dividend consisting of 80% stock and 20% cash by the end of 2018.

Two weeks ago, Potlatch reported fourth earnings of $11.6 million on revenue of $175.2 million. For the year, Potlatch reported profit of $86.5 million, or $2.10 per share, on revenue of $678.6 million. At the time, Potlatch Chairman and CEO Mike Covey said he expects the company’s acquisition of Deltic to close by the end of the February.

“Deltic and Potlatch shareholder votes related to the merger are scheduled on Feb. 20, and we remain confident that the merger presents significant strategic and financial opportunities,” Covey said.

Deltic officials will not hold a fourth quarter conference call. Once the former Murphy Oil spin-off becomes a part of Potlatch, four company directors will join the 12-person board of the Spokane-based timberland REIT. John Enlow, Deltic’s president and CEO of Deltic, will serve as Potlatch’s vice chairman and lead the integration of the two companies once the acquisition is completed later this month.