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, 1998
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
(Registrant'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, 1998, the latest practicable date, there were 101,226,367
shares outstanding of Common Stock, $5 par value.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statement of Income for the three months
and nine months ended July 31, 1998 and 1997
Consolidated Balance Sheet as of July 31, 1998
and October 31, 1997
Consolidated Statement of Cash Flows for the
nine months ended July 31, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Items
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
1998 1997 1998 1997
Sales $727,826 $738,227 $2,154,126 $2,199,175
Other income (expense) 3,416 3,516 12,198 15,969
731,242 741,743 2,166,324 2,215,144
Cost of products sold
(excludes depreciation
shown below) 528,512 535,780 1,547,656 1,607,614
Selling, research
and administrative
expenses 57,317 60,079 174,842 174,678
Depreciation and
amortization 70,772 67,344 209,950 194,940
Interest expense 25,867 23,402 80,880 66,424
682,468 686,605 2,013,328 2,043,656
Income before taxes 48,774 55,138 152,996 171,488
Income taxes 17,100 17,600 54,200 60,500
Net income $ 31,674 $ 37,538 $ 98,796 $ 110,988
Net income per share:
Basic $.31 $.37 $.97 $1.09
Diluted .31 .37 .97 1.08
Shares used to compute net income per share:
Basic 101,297 102,037 101,474 101,970
Diluted 101,699 102,821 102,088 102,613
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
1998 1997
----------- -----------
[Unaudited]
ASSETS
Cash and marketable securities $ 112,710 $ 175,354
Receivables 277,524 300,827
Inventories 284,030 270,519
Prepaid expenses 64,072 58,508
Current assets 738,336 805,208
Plant and timberlands:
Machinery 5,004,875 4,739,179
Buildings 637,051 626,559
Other property,
including plant land 218,912 226,082
5,860,838 5,591,820
Less: accumulated depreciation 2,609,089 2,447,575
3,251,749 3,144,245
Timberlands - net 263,453 269,216
Construction in progress 281,568 270,897
3,796,770 3,684,358
Other assets 452,848 409,221
$4,987,954 $4,898,787
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued
expenses $ 329,924 $ 356,691
Notes payable and current maturities
of long-term obligations 93,734 26,121
Income taxes 21,873 22,765
Current liabilities 445,531 405,577
Long-term obligations 1,526,850 1,512,621
Deferred income taxes 758,216 702,021
Shareholders' equity:
Common stock, $5 par, at stated
value shares authorized:
300,000,000 shares issued:
103,170,667 (1997 - 103,170,667) 762,266 761,522
Retained income 1,577,974 1,549,356
Cumulative translation adjustment (29,526) -
Common stock in treasury, at
cost shares held: 1,944,300
(1997 - 1,240,644) (53,357) (32,310)
2,257,357 2,278,568
$4,987,954 $4,898,787
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
1998 1997
Cash flows from operating activities:
Net income $ 98,796 $ 110,988
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for depreciation and
amortization 209,950 194,940
Provision for deferred
income taxes 41,935 24,744
(Gains) losses on sales of
plant and timberlands 399 (5,743)
Pension credits and other
employee benefits (38,155) (29,729)
Other, net 436 1,080
Changes in assets and liabilities:
(Increase) decrease in receivables 22,239 3,570
(Increase) decrease in inventories (14,953) (26,748)
(Increase) decrease in prepaid
expenses (3,480) 3,274
(Decrease) increase in accounts
payable and accrued expenses (27,537) (19,118)
(Decrease) increase in income
taxes payable (750) 2,119
Other, net 2,010 3,814
Net cash provided by operating
activities 290,890 263,191
Cash flows from investing activities:
Additions to plant and timberlands (340,770) (471,160)
Proceeds from sales of plant
and timberlands 4,025 7,329
Other, net (157) 3,418
Net cash used in investing
activities (336,902) (460,413)
Cash flows from financing activities:
Proceeds from issuance of common stock 3,767 4,595
Proceeds from issuance of debt 331,581 642,545
Treasury stock purchases (27,950) -0-
Dividends paid (67,042) (67,292)
Repayment of notes payable and
long-term obligations (254,081) (267,619)
Net cash (used in) provided by
financing activities (13,725) 312,229
Effect of exchange rate changes on cash (2,907) (151)
Increase (decrease) in cash and
marketable securities (62,644) 114,856
Cash and marketable securities:
At beginning of period 175,354 115,368
At end of period $ 112,710 $ 230,224
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 and the results of operations for the interim
periods presented. 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 1997 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 1997
Annual Report on Form 10-K.
2. Current Assets
Marketable securities of $10,623,000 ($82,647,000 at October 31,
1997) are valued at cost, which approximates market.
Inventories included in the consolidated balance sheet consist of
the following:
July 31 October 31
In thousands 1998 1997
Raw materials $ 54,060 $ 62,025
Production materials, stores
and supplies 75,415 81,618
Finished and in process goods 154,555 126,876
Total $ 284,030 $ 270,519
3. Foreign Operations
Results of unbleached operations for Rigesa, Ltda., our Brazilian
subsidiary, were as follows:
Three Months Nine Months
In thousands Ended July 31 Ended July 31
1998 1997 1998 1997
Sales $47,724 $54,371 $138,937 $165,332
Net income $ 6,427 $ 9,732 $ 20,018 $ 30,045
Rigesa's results for the third quarter and nine months of 1998
were negatively affected by decreases in price and product mix of
11.9% and 11.7%, respectively, and decreases in the volume of
shipments of .3% and 4.3%, respectively.
4. Net Income Per Common Share
Basic earnings per share for all the periods presented have been
calculated using the weighted average shares outstanding. In
computing diluted earnings per share incremental shares issuable upon
the assumed exercise of stock options have been added to the weighted
average shares outstanding.
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
In millions 1998 1997 1998 1997
Sales
Bleached $492.5 $493.4 $1,464.6 $1,495.5
Unbleached 149.9 161.0 448.1 474.6
Chemicals 84.9 85.6 246.0 236.0
Corporate and
other items .5 (1.7) (4.6) (6.9)
Consolidated sales $727.8 $738.3 $2,154.1 $2,199.2
Operating profit
Bleached $ 59.3 $ 52.9 $ 186.4 $ 184.8
Unbleached 26.9 35.3 74.1 80.2
Chemicals 20.3 13.3 51.0 41.1
Corporate and
other items (57.7) (46.4) (158.5) (134.6)
Consolidated income
before taxes $ 48.8 $ 55.1 $ 153.0 $ 171.5
RESULTS OF OPERATIONS
Sales of $727.8 million for the 1998 third quarter were down 1.4%
from the 1997 third quarter, the result of a 1.6% decrease in the
volume of shipments offset by slight improvement in price and
product mix. The press of extremely challenging global business
conditions increased during our 1998 fiscal third quarter. Asian
markets were particularly challenging as a result of earlier
currency devaluations and reduced economic activity in the region.
Earnings for the third quarter ended July 31, 1998 were $.31 per
share (basic and diluted), compared to $.37 per share (basic and
diluted) for the 1997 period. Despite stiff challenges resulting
from turmoil in international markets and adverse currency
valuations, export sales from the United States increased
approximately 3% compared to the third quarter of 1997, and
accounted for 17% of the company's third quarter sales. Total
sales outside of the United States, including sales of our foreign
operating subsidiaries and which accounted for approximately 25%
of consolidated sales, decreased 2% from the prior year period.
This decrease was primarily a result of reduced business for our
packaging operations in Brazil, where the government's austerity
measures enacted last fall in response to the Asian crisis have
sharply curtailed economic growth. Gross profit margin for the
third quarter and nine months of 1998 was 18% and 19%,
respectively, compared with 19% and 18% for the prior year
periods. Depreciation and amortization expense for the third
quarter increased 5.1% from the prior year period due to several
important projects having been placed in service in the latter
part of 1997.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Management's Discussion and Analysis of
Financial Condition and Results of Operations
[Unaudited]
Bleached
In the United States, increasing coated paper imports which have
grown from year ago levels because of offshore capacity
increases, especially in Europe, as well as declining consumption
in Asia, have made that market very competitive. Bleached
segment sales for the third quarter decreased less than one
percent from the comparable 1997 period. Bleached segment
operating profit of $59.3 million was up 11.8% in the 1998 third
quarter compared to the 1997 period due primarily to cost
improvement initiatives. Year to date, approximately 24% of
bleached segment sales were made to the tobacco industry for
packaging tobacco products; the majority of this paper and board
was exported or used to produce products for export.
Approximately 9% of bleached segment sales consisted of packaging
materials made for the domestic tobacco industry for sale in the
United States. The current legal, regulatory and legislative
pressures on the tobacco industry may have an adverse effect on
bleached segment profitability. While we would expect to
compensate for such an adverse effect by continuing growth in
other consumer product markets, these alternatives may not, in
the short run, fully offset any decline in profitability related
to sales to the tobacco industry. While our Envelope Division
has continued to recover from a strike during the second quarter,
our envelope business has faced profitability pressures due to
unexpected inventory adjustments by major customers. In the
third quarter, we completed the second major coated paper machine
rebuild in two years at our mill in Luke, MD. The rebuilds
reduced both 1997 and 1998 third quarter earnings by
approximately $.05 per share.
Unbleached
Sales for the unbleached segment decreased 6.9% compared to the
1997 third quarter due to a decrease in unit volume of 7.1%,
partially offset by an increase in price and product mix.
Operating profit for the unbleached segment decreased to $26.9
million from the 1997 third quarter profit of $35.3 million.
Rigesa's unbleached operation accounted for approximately 19%
of segment operating profit in the third quarter of 1998,
compared to approximately 31% for the 1997 comparable period.
The government's financial reforms enacted last fall sharply
curtailed economic growth, which reduced business for our
packaging operations. Due to the decline in the rate of
inflation in Brazil in recent years, effective November 1,
1997, the Brazilian Real became the functional currency for the
company's Brazilian operations and adjustments resulting from
financial statement translations are now included in the
shareholders' equity section of the balance sheet. The effect
of this change did not have a significant impact on earnings
for the period.
Chemicals
Sales for the chemicals segment decreased marginally from the
1997 third quarter primarily due to a decrease in price and
product mix of 4.3%, partially offset by an increase in volume
of 3.5%. Operating profit for the chemicals segment was $20.3
million for the 1998 third quarter compared to $13.3 for the
1997 period.
Other Items
Interest expense increased 10.5% for the third quarter compared
to the year earlier period due to the issuance of sinking fund
debentures in June of 1997 and lower capitalization of interest
in the current quarter.
Westvaco is addressing Year 2000 technology issues in its
business systems, manufacturing process control systems and
microprocessors purchased as an intrinsic part of manufacturing
or support equipment. This project is being conducted in
multiple phases including inventory, assessment of business
criticality, technical assessment of potential Year 2000
failures, remediation, testing and contingency planning. The
first two phases, inventory and assessment of business
criticality, have been completed as planned. The remaining
phases are planned and staffed and are scheduled for completion
by June 30, 1999. The percentages of this work completed, vary
across the company's operations, with business systems generally
closer to completion than operating systems which involve more
reliance upon outside vendors. The entire project is estimated to
cost between $8 and $12 million. The cost would have been
substantially greater but for the fact that recent modernization
of many of the company's business systems involved replacement of
software with new software that is Year 2000 compliant. Costs
associated with these efforts are not included here.
All vendors whose relationship is believed to be material to
the company's business have been identified and contacted, with
additional contact beginning for those who have not responded. The
public disclosures of significant customers regarding their
Year 2000 compliance are being reviewed. If Year 2000 issues were
not addressed as Westvaco is doing, they could conceivably cause
widespread technological failures throughout the company, disrupting
its business and resulting in a decline in earnings. These
theoretical consequences are of a kind and magnitude not unique to
Westvaco, but are generally shared with other manufacturing companies.
At this time management does not believe that Westvaco's business
will be materially affected by Year 2000 issues. Nevertheless, the
company expects to have contingency plans in place which fully
utilize traditional alternatives to its technology.
New Accounting Pronouncements
In August 1998, the Securities and Exchange Commission issued an
Interpretation of Year 2000 disclosure, Statement of the
Commission Regarding Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisers,
Investment Companies, and Municipal Securities Issuers. This
Interpretation supersedes the current staff guidance in revised
Staff Legal Bulletin No. 5 and provides guidance to public
companies so they can determine whether their Year 2000 issues
are known material events, trends, or uncertainties that should
be disclosed in the Management's Discussion and Analysis of
Financial Condition and Results of Operations section of their
disclosure documents. Public companies should apply this
interpretive guidance for all quarters ending after August 4, 1998.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities. The
Statement, which will be effective for the company's fiscal year
2000, requires derivative instruments to be recorded in the
balance sheet at their fair value with changes in fair value
being recognized in earnings unless specific hedge accounting
criteria are met. Given the current level of its derivative and
hedging activities, the company believes the impact will not be
material.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, the ratio of current assets to current
liabilities was 1.7 compared to 2.0 at October 31, 1997. Cash
flows from operations totaled $290.9 million for the nine
months ended July 31, 1998, compared to $263.2 million for the
comparable 1997 period. Inventories increased from October
1997 levels, reflecting planned inventory levels and increased
competition in our major business areas. New investment in
plant and timberlands totaled $336.9 million for the first nine
months of 1998, compared to $465.3 million for the same period
of 1997. Cash payments for these investments totaled $340.8
million compared to $471.2 million in 1997. The decrease in
capital expenditures is related to the completion of 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 all of our pulp bleaching
processes, which were completed by the end of the prior year.
At July 31, 1998, the amounts committed to complete all
authorized capital projects totaled approximately $245.5
million and total capital expenditures in 1998 are expected to
approximate $450 million. The company may from time to time
use outside sources as needed to finance future capital
investments, as it has in the past. The company had $70
million in commercial paper outstanding at July 31, 1998. The
company maintains a $500 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, 1998 and October 31, 1997.
Subsequent Event
On September 9, 1998 the company announced its intent to
acquire a substantial equity interest in a new consumer
packaging plant in Guangzhou, China. The plant, located in
southeast China, is owned by a Chinese subsidiary of Shorewood
Packaging Corporation. Upon closing, Westvaco will acquire 45
percent of Shorewood's Chinese operations for approximately $25
million. Shorewood, a leading non-integrated folding carton
company, plans to open its state-of-the-art package printing
and package converting facility within 30 days. Shorewood will
have day-to-day management responsibility for the new plant and
will work closely with Westvaco on marketing programs and new
product development.
Environmental Matters
In 1995, the company authorized removal of elemental chlorine
from all of its pulp bleaching processes. This important
initiative, completed during 1997 at a cost of approximately
$110 million, represents a major step already taken by Westvaco
in addressing new EPA regulations for the U.S. pulp and paper
industry regarding air and water quality. These regulations,
known as the Cluster Rule, were published in April 1998. Pulp
bleaching costs, which had been estimated to increase
significantly, have now been substantially offset through new
cost control initiatives. We anticipate additional capital
costs to comply with other parts of these new regulations over
the next several years to be in the range of $100 million to
$150 million which will also increase operating costs in the
range of $3 million to $7 million annually. Environmental
organizations are challenging certain aspects of the Cluster
Rule in the U. S. Court of Appeals. Westvaco and other
companies have also joined that litigation as appellants. If
the legal challenge by environmental organizations to the
regulations is successful, the company could face additional
compliance costs of up to $150 million over the next several
years.
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. The notices of
violation from the Kentucky Division for Air Quality in
connection with the company's Wickliffe, KY, carbon plant
reported in the Quarterly Reports on Form 10-Q for the periods
ended January 31 and April 30, 1998, have been resolved by an
Agreed Order (see Legal Proceedings in Part II).
Forward-looking Statements
Certain statements in this document and elsewhere by
management of the company that are neither reported financial
results nor other historical information are "forward-looking
statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking
statements are not guarantees of future performance and are
subject to known and unknown risks, uncertainties and other
factors which may cause or contribute to actual results of
company operations, or the performance or achievements of the
company, or industry results, to differ materially from
those expressed in or implied by the forward-looking
statements. In addition to any such risks, uncertainties
and other factors discussed elsewhere herein, risks,
uncertainties and other factors that could cause or
contribute to actual results differing materially from
those expressed in or implied by the forward-looking
statements include, but are not limited to, competitive
pricing for the company's products; changes in raw
materials, energy and other costs;impact of Year 2000 issues;
fluctuations in demand and changes in production capacities;
changes to economic growth in the U.S. and international
economies, especially in Asia and Brazil; governmental
policies and regulations, including but not limited to those
affecting the environment and the tobacco industry; and
currency movements.
Item 3. Quantitative And Qualitative Disclosures About Market
Risk
Not applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Part II, Other Information, Item 1.
Legal Proceedings in Westvaco's Quarterly Reports on Form
10-Q for the quarters ended January 31, 1998, and April
30, 1998 regarding notices of violations from the
Kentucky Division for Air Quality in connection with the
company's alleged failure to demonstrate compliance with
a Prevention of Significant Deterioration permit issued
to the company's Wickliffe, KY, carbon plant. Under the
terms of an Agreed Order signed April 21, 1998, Westvaco
paid a total fine of $212,000 through July 1998. The
company will be liable for additional fines of up to
$10,000 through January 1999.
Item 5. Other Items
Pursuant to the corporation's bylaws, proposals which
shareholders intend to present at the 1999 Annual Meeting
of Shareholders, other than items set forth in the notice
of meeting, must be received by the corporation by
November 30, 1998.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
27. Financial data schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on May 28, 1998 and is
incorporated herein by reference. The contents of the
report are summarized below:
Item 5. Other Events: - describing the rebuilds of two large
coated paper machines at its mill in Luke, MD, to
improve product quality and facilitate development
of new products.
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 14, 1998
James E. Stoveken, Jr.
Senior Vice President
(Principal Financial Officer)
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