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 third quarter ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number 1-3013
WESTVACO CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1466285
(State of Incorporation) (I.R.S. Employer Identification No.)
299 Park Avenue, New York, New York 10171
(Address of principal executive offices)
Telephone Number 212-688-5000
(Registrants's telephone number)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months, and (2) has been subject to such filing requirements
for the past 90 days. YES X NO
At July 31, 1997, the latest practicable date, there were
102,154,183 shares outstanding of Common Stock, $5 par value.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Consolidated Statement of Income for the three months
and nine months ended July 31, 1997 and 1996
Consolidated Balance Sheet as of July 31, 1997
and October 31, 1996
Consolidated Statement of Cash Flows for the
nine months ended July 31, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENT OF INCOME
[Unaudited]
In thousands, except per share data
Three Months Ended Nine Months Ended
July 31 July 31
1997 1996 1997 1996
Sales $738,227 $757,715 $2,199,175 $2,266,727
Other income (expense) 3,516 636 15,969 22,237
741,743 758,351 2,215,144 2,288,964
Cost of products sold (excludes
depreciation shown below) 535,780 550,478 1,607,614 1,618,570
Selling, research and
administrative expenses 60,079 58,066 174,678 173,501
Depreciation and amortization 67,344 60,145 194,940 178,516
Interest expense 23,402 21,443 66,424 66,017
686,605 690,132 2,043,656 2,036,604
Income before taxes 55,138 68,219 171,488 252,360
Income taxes 17,600 24,600 60,500 95,800
Net income $ 37,538 $ 43,619 $ 110,988 $ 156,560
Average number of common
shares outstanding 102,037 101,816 101,970 101,695
Net income per share of
common stock $.37 $.43 $1.09 $1.54
Cash dividends per share of
common stock $.22 $.22 $ .66 $ .66
The accompanying notes are an integral part of these financial
statements.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
CONSOLIDATED BALANCE SHEET
In thousands
July 31 October 31
1997 1996
[Unaudited]
ASSETS
Cash and marketable securities $ 230,224 $ 115,368
Receivables 273,583 277,135
Inventories 290,160 263,292
Prepaid expenses 60,064 60,300
Current assets 854,031 716,095
Plant and timberlands:
Machinery 4,638,865 4,249,814
Buildings 612,579 558,865
Other property, including plant land 212,399 204,098
5,463,843 5,012,777
Less: accumulated depreciation 2,413,992 2,245,338
3,049,851 2,767,439
Timberlands - net 247,699 248,299
Construction in progress 317,521 334,581
Construction funds held by trustee - 3,414
3,615,071 3,353,733
Other assets 400,167 367,670
$4,869,269 $4,437,498
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 345,628 $ 372,445
Notes payable and current maturities of
long-term obligations 26,718 27,883
Income taxes 28,684 18,609
Current liabilities 401,030 418,937
Long-term obligations 1,526,342 1,153,447
Deferred income taxes 683,158 655,377
Shareholders' equity:
Common stock, $5 par, at stated value
shares authorized: 300,000,000
(1996 - 200,000,000) shares issued:
103,115,318 (1996-102,761,119) 758,590 750,457
Retained income 1,522,722 1,479,025
Common stock in treasury, at cost
shares held: 961,135 (1996-870,075) [22,573] [19,745]
2,258,739 2,209,737
$4,869,269 $4,437,498
The accompanying notes are an integral part of these financial
statements.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
[Unaudited]
In thousands
Nine Months Ended
July 31
1997 1996
Cash flows from operating activities:
Net income $ 110,988 $ 156,560
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and amortization 194,940 178,516
Provision for deferred income taxes 24,744 32,494
Gains on sales of plant and timberlands [5,743] [7,509]
Pension credits and other employee benefits [29,729] [28,216]
Foreign currency translation losses 1,080 296
Changes in assets and liabilities:
Decrease in receivables 3,570 55,336
Increase in inventories [26,748] [4,312]
Decrease (increase) in prepaid expenses 3,274 [7,076]
Decrease (increase) in accounts payable and
accrued expenses [19,118] 15,115
Increase (decrease) in income taxes payable 2,119 [30,077]
Other, net 3,814 6,972
Net cash provided by operating activities 263,191 368,099
Cash flows from investing activities:
Additions to plant and timberlands [471,160] [346,821]
Proceeds from sales of plant and timberlands 7,329 64,604
Other, net 3,418 [4,226]
Net cash used in investing activities [460,413] [286,443]
Cash flows from financing activities:
Proceeds from issuance of common stock 4,595 4,857
Proceeds from issuance of debt 642,545 40,608
Dividends paid [67,292] [67,115]
Repayment of notes payable and long-term
obligations [267,619] [48,326]
Net cash provided by (used in)
financing activities 312,229 [69,976]
Effect of exchange rate changes on cash [151] [288]
Increase in cash and marketable securities 114,856 11,392
Cash and marketable securities:
At beginning of period 115,368 151,823
At end of period $ 230,224 $ 163,215
The accompanying notes are an integral part of these financial
statements.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
1. Statement of Information Furnished
The accompanying unaudited consolidated financial statements have
been prepared in accordance with Form 10-Q instructions and in the
opinion of management contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the
financial position of the company as of July 31, 1997 and the
results of operations and its cash flows for the three months and
nine months ended July 31, 1997 and 1996. These results have been
determined on the basis of generally accepted accounting principles
and practices applied consistently with those used in the
preparation of the company's 1996 Annual Report on Form 10-K.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted. It
is suggested that the accompanying consolidated financial
statements be read in conjunction with the financial statements and
notes thereto incorporated by reference in the company's 1996
Annual Report on Form 10-K.
2. Current Assets
Marketable securities of $147,232,000 ($53,233,000 at October 31, 1996)
are valued at cost, which approximates market.
Inventories included in the consolidated balance sheet consist of
the following:
July 31 October 31
In thousands 1997 1996
Raw materials $ 61,264 $ 61,094
Production materials, stores
and supplies 78,841 78,850
Finished and in process goods 150,055 123,348
Total $290,160 $263,292
3. Foreign Operations
Results of operations for Rigesa, Ltda., our Brazilian operating
subsidiary, were as follows:
Three Months Nine Months
In thousands Ended July 31 Ended July 31
1997 1996 1997 1996
Sales $ 54,371 $ 60,311 $165,332 $179,464
Net income $ 9,732 $ 7,314 $ 30,045 $ 34,473
Rigesa's results for the third quarter and nine months for 1997
were affected by a decrease in price and product mix of (12.6)%
and (13.0)%, respectively, and an increase in the volume of
shipments of 2.8% and 5.1%, respectively.
4. Supplemental Cash Flow Information
Cash payments for interest excluding amounts capitalized were
$62,872,000 and $62,185,000 for the nine months ended July 31,
1997 and July 31, 1996, respectively. Cash payments for income
taxes were $26,072,000 and $93,351,000 in the first nine months of
1997 and 1996, respectively.
5. Net Income Per Common Share
Net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding. Common
stock equivalents which would arise from the exercise of stock
options were not included in the weighted average due to
immateriality
The Company calculates earnings per share using methods prescribed
by Accounting Principles Board (APB) Opinion No. 15, "Earnings per
Share." In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," which replaces APB No. 15 and requires
adoption for periods ending after December 15, 1997. The Statement
will require dual presentation of basic and diluted earnings per
share on the face of the income statement. For the periods ended
July 31, 1997 and 1996, the basic and diluted earnings per share
calculated pursuant to SFAS No. 128 are not materially different
from primary earnings per share calculated under APB No. 15.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Segment Information
Three Months Ended Nine Months Ended
July 31 July 31
1997 1996 1997 1996
In millions
Sales
Bleached $493.4 $519.4 $1,495.5 $1,527.1
Unbleached 161.0 166.5 474.6 527.9
Chemicals 85.6 75.6 236.0 218.7
Corporate items [1.7] [3.8] [6.9] [7.0]
Consolidated sales $738.3 $757.7 $2,199.2 $2,266.7
Operating profit
Bleached $ 52.9 $ 74.2 $ 184.8 $ 231.4
Unbleached 35.3 26.8 80.2 110.5
Chemicals 13.3 15.8 41.1 35.0
Corporate items [46.4] [48.5] [134.6] [124.5]
Consolidated income
before taxes $ 55.1 $ 68.3 $ 171.5 $ 252.4
Results of Operations
Market conditions gradually improved during our third quarter,
extending a trend that began earlier in the fiscal year, specifically
in coated papers and linerboard. Sales of $738.3 million for the 1997
third quarter were down 2.6% from the 1996 third quarter, primarily
the result of a 2.3% decrease in price and product mix. Sales of
$2,199.2 million for the nine months were down 3.0% from the
comparative 1996 period due to a 6.2% decrease in price and product
mix partially offset by a 3.2% increase in the volume of shipments.
While sales volume has improved for products most affected by adverse
market conditions, pricing has not recovered as rapidly. Export sales
from the United States represented approximately 16% of the company's
consolidated sales for the third quarter and 17% for the first nine
months of 1997. Sales outside of the United States, including sales
of our foreign operating subsidiaries, accounted for approximately 25%
of consolidated third quarter and year to date sales. Gross profit
margin for the third quarter and nine months of 1997 was 19% and 18%,
respectively, compared with 20% and 21% for the prior year periods.
The reduction in the third quarter gross profit margin is primarily
the result of the market pressure on prices felt throughout our
industry. The decrease in cost of products sold for the third quarter
of 1997 was attributable to direct material cost decreases partially
offset by the impact of taking a large paper machine in Luke, MD out
of production for a rebuild and the start-up of production at a new
activated carbon plant in Wickliffe, KY. The decrease in cost of
products sold for the nine months of 1997 was primarily due to some
direct material cost decreases and lower conversion costs.
Depreciation and amortization expense for the nine months of 1997
increased 9.2% from the prior year period.
Earnings for the third quarter ended July 31, 1997 were $.37 per
share, compared to $.43 for the comparable 1996 period. Earnings per
share of $1.09 for the nine months compared to $1.54 for the 1996
period. Earnings in the third quarter were negatively impacted by
six cents per share due to the rebuilding of a fine papers machine
and the more modest effect of beginning production at a new activated
carbon plant.
Bleached
Bleached segment sales for the third quarter decreased 5.0% from the
comparable 1996 period, due to a decrease in price and product mix of
2.2%, and a decrease in unit volume of 2.8%. Sales for the nine
months decreased 2.1% from the comparable 1996 period, due to a
decrease in price and mix of 6.2%, partially offset by a favorable
change in volume of 4.1%. Bleached segment operating profit for the
third quarter and nine months decreased 28.7% and 20.1%,
respectively, from the comparable 1996 periods. Year to date,
approximately 26% of bleached segment sales were made to the tobacco
industry for packaging tobacco products. A majority of this paper
and board was exported or used to produce products for export.
Excluding that portion, approximately 9% of bleached segment sales
consisted of packaging materials made for the domestic tobacco
industry for sale in the United States.
Unbleached
Unbleached segment sales for the third quarter and the nine months
decreased 3.3% and 10.1%, respectively, due to decreases in price and
mix of 8.3% and 10.7%, respectively, partially offset by increases in
volume of 5.0% and .6%. Although the demand for linerboard has
improved during the third quarter, the unbleached segment pricing
continues to be adversely affected by the very competitive market
conditions. Operating profit for the unbleached segment for the
third quarter and nine months of 1997 was $35.3 million and $80.2
million, respectively, compared with $26.8 million and $110.5 million
for the prior year periods. Rigesa accounted for approximately 40%
of unbleached segment operating profit in the first nine months of
1997. The impact of Rigesa on the first nine months of 1997 sales
and earnings has been positive, but the company cannot predict the
continued strength of the Brazilian market.
Chemicals
Chemical segment sales for the third quarter increased 13.2% from the
comparable 1996 period due to volume increases of 5.4% and a
favorable change in price and mix of 7.8%. Sales for the nine months
increased 7.9% due to improvements in price and mix of 5.1% and a
volume increase of 2.8%. Operating profit for the chemicals segment
decreased 15.8% in the third quarter, and increased 17.4% for the
nine months, from the comparable 1996 periods.
Other Items
Other income (expense) for the 1997 nine months decreased from 1996
due primarily to lower interest income in the current year. Nearly
all stock appreciation rights, granted under employee stock option
plans, have been canceled. The effective tax rate decreased to 35.3%
for the first nine months of 1997 compared to 38.0% for the 1996
period, due principally to foreign earnings being taxed at lower
rates.
Liquidity and Capital Resources
At July 31, 1997, the ratio of current assets to current liabilities
was 2.1 compared to 1.7 at October 31, 1996. Cash flows from operations
totaled $263.2 million for the nine months ended July 31, 1997, compared
to $368.1 million for the comparable 1996 period. Inventories increased
from October 1996 levels, reflecting increased competition in our major
business areas and planned inventory levels. New investment in plant
and timberlands totaled $465.3 million for the nine months of 1997,
compared to $343.1 million for the same period of 1996. Cash
payments for these investments totaled $471.2 million compared to
$346.8 million in 1996. This increase is related to projects
including paper machine improvements, the construction of the
Chemical Division's new carbon plant in Wickliffe, KY, and the
removal of elemental chlorine from the pulp bleaching process. At
July 31, 1997, the amounts committed to complete all authorized
capital projects were approximately $514 million and total capital
expenditures in 1997 are expected to be approximately $600 million.
The company may from time to time use debt to supplement its
internal cash flows to support future levels of capital investments,
as it has in the past. In June 1997, the company issued $150
million of 7-1/2%, 30-year sinking fund debentures due June 15,
2027. The funds are to be used for capital spending and general
purposes. The company maintains a $400 million revolving credit
agreement, and there was no borrowing under this arrangement during
the current period. The ratio of debt to total capital employed was
34% at July 31, 1997, compared to 29% at October 31, 1996. During
the third quarter the Board of Directors authorized the periodic
repurchase of the company's common stock to satisfy issuances under
employee stock option plans.
Environmental Matters
The company operates in an industry subject to extensive
environmental regulations. Future capital expenditures for
pollution control facilities are expected to increase substantially
as a result of proposed EPA air and water quality regulations for
the United States paper industry. In 1995, the company authorized
the final step in a long-term program initiated in 1989 which will
result in the removal of elemental chlorine from all of our pulp
bleaching processes. We expect the program to be completed at a cost
of approximately $100 million by the end of 1997. This is an
initial step in addressing the anticipated regulations. Total
required expenditures related to EPA's proposals could fall in the
range of $175 to $400 million. Additional operating costs,
including depreciation, for these new facilities could fall in the
range of $25 to $50 million pretax annually. The company expects
final rules to be issued this year with implementation required over
several years thereafter. It is not possible to develop more
precise estimates until the proposed rules become final. The
company is currently named as a potentially responsible party with
respect to the cleanup of a number of hazardous waste sites under
the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA) and similar state laws. While joint and
several liability is authorized under CERCLA, as a practical matter,
remediation costs will be allocated among the waste generators and
others involved. The company has accrued approximately $5 million
for estimated potential cleanup costs based upon its close
monitoring of ongoing activities and its past experience with these
matters.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedules
(b) Reports on Form 8-K:
A report on Form 8-K was filed on June 25, 1997 and is
incorporated herein by reference. The contents of the report
are summarized below:
Item 5. Other Events - describing the issuance in an
underwritten public offering of $150,000,000 of the
company's 7 1/2% Sinking Fund Debentures due June 15,
2027 under a Registration Statement on Form S-3 for
an aggregate of $300,000,000 (Registration No. 333-22405),
and the related Prospectus dated March 5, 1997. The
issuance of $150,000,000 of debentures is covered by a
related Prospectus Supplement dated June 19, 1997.
Item 7. Financial Statements and Exhibits
A report on Form 8-K was filed on August 27, 1997 and is
incorporated herein by reference. The contents of the report
are summarized below:
Item 5. Other Events - describing that its Board of Directors
had authorized the periodic repurchase of the
company's common stock to satisfy issuances under
employee stock option plans.
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.
WESTVACO CORPORATION
(Registrant)
September 12, 1997 James E. Stoveken, Jr.
------------------------
Senior Vice President
(Principal Financial Officer)
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