UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
COMMISSION FILE NUMBER 1-3013
WESTVACO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 299 Park Avenue
(State of incorporation) New York, New York 10171
Telephone 212-688-5000
13-1466285 (Address and telephone number of
(I.R.S. Employer Identification No.) registrant's principal
executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
Common Stock- $5 par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Sinking Fund Debentures:
8 1/8%, due 1999-2007 New York Stock Exchange
10 1/4%, due 1999-2018 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
At October 31, 1998, the latest practicable date, the number of
shares of common stock outstanding and aggregate market value of
voting common stock held by nonaffiliates were 100,326,367 and
$2,445,455,196, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the
fiscal year ended October 31, 1998 (the "1998 Westvaco Annual
Report") are incorporated by reference into Parts I, II and IV of
this Form 10-K.
Portions of the registrant's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held February 23, 1999
("Westvaco's 1999 Proxy Statement") are incorporated by reference
into Part III of this Form 10-K.
Part I
Item 1. Business
General
Westvaco Corporation, a Delaware Corporation incorporated in 1899 as
West Virginia Pulp and Paper Company, is one of the major producers
of paper and paperboard in the United States. The company converts
paper and paperboard into a variety of end-products, manufactures a
variety of specialty chemicals, produces lumber, sells timber from
its timberlands and is engaged in land development. In Brazil, it
is a major producer of paperboard and corrugated packaging for the
markets of that country and also operates a folding carton plant.
Westvaco also has a folding carton plant in the Czech Republic.
Westvaco exports products from the United States, Brazil and the
Czech Republic to other countries throughout the world. The term
"Westvaco" or "the company" includes Westvaco Corporation and its
consolidated subsidiaries unless otherwise noted.
Business segments
The company's principal business segments are the manufacture of (i)
bleached paper, paperboard and packaging products, (ii) unbleached
paper, paperboard and packaging products, and (iii) specialty
chemicals. Financial information about the company's business
segments is contained in Note O to the consolidated financial
statements, included in the 1998 Westvaco Annual Report on pages 31
to 32, and is incorporated herein by reference.
Marketing and distribution
The principal markets for Westvaco's products are in the United
States. Sales to customers outside the United States made up
approximately 25% of Westvaco's total sales in 1998 (1997-25%, 1996-23%).
Substantially all products are sold through the company's own sales
force. Westvaco maintains 30 sales offices located throughout the
United States and 29 in foreign countries.
Forest resources
The principal raw material used in the manufacture of paper,
paperboard and pulp is wood. Westvaco owns 1,465,000 acres of
forest land in the United States and southern Brazil (more than
1,000 miles from the Amazon rainforests). Westvaco's Cooperative
Forest Management Program, established in the 1950s, provides an
additional source of wood fiber from the 1,387,000 acres owned by
participating landowners and managed with assistance from Westvaco
foresters.
Westvaco's strategy, based on the location of its mills and the
composition of surrounding forest land ownership, is to provide a
portion of its wood fiber from company-owned land and to rely on
private woodland owners and residues from independent solid wood
products plants for substantial quantities of wood. During 1998,
Westvaco furnished 36% (1997 and 1996-39%) of its wood requirements
from company-owned land, and an additional 7% (1997-8%, 1996-7%) was
purchased from landowners in the Cooperative Forest Management
Program. The remainder was purchased from other private landowners
and sawmills by mill wood procurement organizations. The wood
procurement system includes 28 pulpwood concentration and processing
yards that are strategically located to store and ship wood to the
mills as needed. The Cooperative Forest Management Program, private
landowners and sawmills continue to provide adequate volumes of
timber to meet our external fiber needs. The company has no reason
to expect that these sources will be unable to furnish adequate wood
supply in the future. Westvaco supplied 97% of the wood for its
Brazilian mill from company plantations.
Westvaco forests include plantations, natural stands and fiber
farms. The inventory of growing trees, the basis for volume
production, has increased steadily over the last decade in spite of
a steady rise in the volume of wood harvested. Most of the pine
stands harvested are plantations that are regenerated by
establishing new pine plantations. Most hardwood stands that are
harvested are re-established by planned natural regeneration from
seeds and sprouts. Westvaco's hardwood plantation and fiber farm
programs are expanding and involve several domestic species. The
quantity of wood harvested by Westvaco from its lands in any year is
primarily controlled by long-range forest management programs based on
integrated wood supply plans.
Patents
Westvaco has obtained a number of foreign and domestic patents as a
result of its research and product development efforts. Westvaco is the
owner of many registered trademarks for its products. Although in the
aggregate, its patents and trademarks are of material importance to
Westvaco's business, the loss of any one or any related group of such
intellectual property rights would not have a material adverse effect on
the business of the company.
Dependence upon a single customer
Westvaco's largest single customer is Philip Morris Companies, Inc., a
global consumer products company, which purchases packaging materials
from the bleached segment.
Competition
Westvaco competes in domestic and foreign markets which are very
competitive. Westvaco's strategy is to develop distinctive and innovative
products and services for its customers in the United States and world
markets. There are many large, well established and highly competitive
sellers competing in these markets as well. The company competes
principally through quality, value-added products and services, customer
service, innovation, technology, product design and price. The company's
business is affected by a range of macroeconomic conditions, such as
industry capacity, economic growth in the U.S. and abroad, and currency
exchange rates.
Research
Westvaco operates major research facilities at Laurel, MD, North
Charleston, SC, and Covington, VA, and a forest science laboratory at
Summerville, SC. Forest research conducted there, and at satellite
centers at Wickliffe, KY, Rupert, WV, and Tres Barras, State of Santa
Catarina, Brazil, is focused on biotechnology, genetics, tree nutrition,
regeneration, stand management, environmental protection and forest
measurements. The goal is increased timber and fiber production on a
sustainable basis. The company's larger divisions and subsidiaries also
have product development staffs which work on product-related projects
directed toward specific opportunities of the individual units.
In 1998, the company incurred $45.1 million (1997-$42.9 million,
1996-$38.3 million) of research and development costs. Substantially
all of the research projects are company sponsored. Approximately 239
scientists were employed in research and development activities.
Environmental protection
Westvaco is subject to federal and state environmental laws and
regulations in all jurisdictions in which it has operating facilities.
Compliance with these requirements involves the diversion of capital from
production facilities and increases operating costs. In the opinion of
Westvaco's management, environmental protection requirements are not
likely to adversely affect the company's competitive industry position
since other domestic companies are subject to similar requirements. 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 by Westvaco in addressing subsequent 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.
The company anticipates 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 the EPA regarding certain aspects of the
Cluster Rule in the U. S. Court of Appeals. Westvaco and other companies
are participating in that litigation. 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. See Part I, Item 3, "Legal Proceedings," "Other Matters."
Employees
At October 31, 1998, Westvaco employed approximately 13,070 persons, of
whom 6,220 domestic employees are represented by various labor unions
under collective bargaining agreements. Approximately 2,070 employees of
Rigesa, Ltda. ("Rigesa"), Westvaco's Brazilian subsidiary, are
represented under collective bargaining arrangements. Westvaco believes
its labor relations are good.
International operations
In Brazil, Rigesa operates a paperboard mill, a corrugated box plant and
a consumer packaging plant in Valinhos, State of Sao Paulo; a paperboard
mill in Tres Barras, State of Santa Catarina; and corrugated box plants
in Blumenau, State of Santa Catarina; Manaus, State of Amazonia; and
Pacajus, State of Ceara. Rigesa is one of the few paper companies in
Brazil which is integrated from the forests to the markets. This fact,
combined with technology drawn from Westvaco's U.S. experience, has
provided Rigesa with a history of high-quality products and strong
growth. Rigesa accounted for approximately 20% of unbleached segment
operating profit in 1998. The international economic crisis has
adversely impacted economic growth in Brazil and negatively impacted the
operating results of Rigesa.
Westvaco's Czech Republic subsidiary, Westvaco Svitavy, spol. s r.o.
("Svitavy"), operates a consumer packaging plant in that country.
Svitavy supplies consumer packaging to the markets of Eastern, Central
and Western Europe. The packaging is made primarily from distinctive
paper and paperboard produced by Westvaco in the United States.
In October 1998, the company entered into a contract to acquire a 45%
interest in a new consumer packaging business with a plant in
Guangzhou, China. The plant is owned by a subsidiary of Shorewood
Packaging Corporation. The transaction, subject to closing conditions,
is expected to be completed during the first quarter of fiscal 1999.
Export sales from Westvaco's U.S. operations made up approximately 17% of
Westvaco's 1998 sales (1997-16%, 1996-15%). Sales of our foreign
operating subsidiaries, including exports, were 8% of Westvaco's total
sales (1997-9%, 1996-8%). For information concerning the income of
Westvaco's foreign subsidiaries for the three years ended October 31,
1998, and the assets for the two years then ended, see Note J to the
consolidated financial statements, incorporated by reference in Part II
of this report. While there are risks inherent in foreign investments,
Westvaco does not believe at this time that such risks are material to
its overall business prospects.
Item 2. Properties
The location of Westvaco's production facilities and their principal
products in each business segment as of October 31, 1998, were as
follows:
Bleached paper, paperboard and packaging products
Location Product
Covington, Virginia Bleached paperboard
Luke, Maryland White printing and converting papers
Wickliffe, Kentucky White printing and converting papers,
and market pulp
Tyrone, Pennsylvania White printing and converting papers
Low Moor, Virginia Extrusion coated bleached paperboard
Cleveland, Tennessee Folding cartons
Newark, Delaware Folding cartons
Richmond, Virginia Folding cartons
Svitavy, Czech Republic Folding cartons
Valinhos, Sao Paulo, Brazil Folding cartons
Richmond, Virginia Cartons for liquid products
Atlanta, Georgia Envelopes
Dallas, Texas Envelopes
Enfield, Connecticut Envelopes
Indianapolis, Indiana Envelopes
Kenosha, Wisconsin Envelopes
Los Angeles, California Envelopes
Springfield, Massachusetts Envelopes
Williamsburg, Pennsylvania Envelopes
Springfield, Massachusetts Flexible packaging and paper cups
Unbleached paper, paperboard and packaging products
Location Product
North Charleston, South Carolina Saturating kraft, containerboard and
folding carton stock
Tres Barras, Santa Catarina, Brazil Containerboard and kraft papers
Valinhos, Sao Paulo, Brazil Corrugating medium (principally
from recycled papers)
Blumenau, Santa Catarina, Brazil Corrugated boxes
Manaus, Amazonia, Brazil Corrugated boxes
Pacajus, Ceara, Brazil Corrugated boxes
Valinhos, Sao Paulo, Brazil Corrugated boxes
Cameron, South Carolina Building products
Summerville, South Carolina Building products
Chemicals
Location Product
Covington, Virginia Activated carbon products and services
DeRidder, Louisiana Printing ink resins and tall oil
derivatives
North Charleston, South Carolina Lignin-based surfactants and tall oil
derivatives
Wickliffe, Kentucky Activated carbon products and services
Other
Location Product
Summerville, South Carolina Land development
Capacity and production
Capacity estimates are based on the expected operations and product
mix of each of the locations. Whether these estimates can in practice
be attained or exceeded is dependent upon a variety of factors such as
actual product mix, quantity and timing of production runs, required
maintenance time and labor conditions.
The approximate annual productive capacity is 3,148,000 tons for the
paper and paperboard mills and 756,000 tons for the converting plants.
The 1998 production from these facilities was 3,028,000 and 547,000
tons, respectively. The mills supplied 72% of the paper and
paperboard needs of the converting plants. The annual productive
capacity for the chemical plants is 459,000 tons. In 1998, 390,000
tons of specialty chemicals were produced.
Leases
See Note H to the consolidated financial statements, incorporated by
reference in Part II of this report, for financial data on leases.
Substantially all of the leases of production facilities contain
options to purchase or renew for future periods.
Forest resources
Westvaco owns 1,465,000 acres of forest land. There are 1,098,000 acres
in the South and Middle Atlantic United States, 248,000 acres in the
Central United States and 119,000 acres in southern Brazil.
Other information
Certain Westvaco facilities are owned, in whole or in part, by municipal
or other public authorities pursuant to standard industrial revenue bond
financing arrangements and are accounted for as property owned by
Westvaco. Westvaco holds options under which it may purchase each of
these facilities from such authorities by paying a nominal purchase price
and assuming the indebtedness owing on the industrial revenue bonds at
the time of the purchase.
The company owns in fee all of the mills, plants and timberlands listed
in Item 2, except leased facilities and those described above.
Westvaco's mills, plants and related machinery and equipment are
considered by the company to be well maintained and in good operating
condition.
Item 3. Legal proceedings
The company is involved in contractual disputes, administrative and legal
proceedings and investigations of various types, generally incidental to
its business. In addition, the company is currently named as a
potentially responsible party with respect to the cleanup of several
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, as of October 31, 1998, accrued
approximately $5 million for estimated potential cleanup costs based upon
its close monitoring of ongoing activities and its past experience with
these matters. In addition, the company is involved in the remediation
of certain other than CERCLA sites and has accrued $8.5 million for
remediation of these sites. The company periodically reviews the status
of the hazardous waste sites and adjusts its accrual as appropriate. As
of October 31, 1998, Westvaco has paid civil penalties totaling $216,000
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. As disclosed in Westvaco's Form
10-Q for the quarter ended July 31, 1998, the company executed an Agreed
Order with respect to this matter on April 21, 1998. Westvaco is
awaiting the issuance of an amended permit. Until such permit is issued,
the company remains liable for additional fines which are not to exceed
a total of $8,000.
Other matters
Within the last year, the company has received extensive information
requests from EPA concerning its mill in Luke, MD. Other companies in
the pulp and paper industry have received similar requests. EPA has
advised that their inquiry relates to whether the mill obtained proper
permits under New Source Review requirements governing expansion and new
projects in the context of numerous capital projects undertaken since
1979. The company has provided voluminous information to EPA and
continues to gather additional information to complete its response.
While any litigation, proceeding or investigation has an element of
uncertainty, the company does not believe that the outcome of any
proceeding, lawsuit or claim that is pending or threatened, or all of
them combined, will have a material adverse effect on its consolidated
financial position, liquidity or long-term results of operations. In any
given quarter or quarters, however, it is possible such proceedings or
matters could have a material effect on results of operations.
Item 4. Submission of matters to a vote of security holders
There were no matters submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth quarter ended
October 31, 1998.
Executive officers of the registrant
The following table sets forth certain information concerning the
executive officers of Westvaco Corporation:
Year in which
service in present
Name Age Present position position began
John A. Luke, Jr.* 50 Chairman, 1996
President and
Chief Executive Officer 1992
Rudolph G. Johnstone, Jr.* 62 Executive Vice
President 1995
Richard N. Burton 50 Senior Vice President 1998
Philip H. Emery, Jr. 64 Senior Vice President 1995
Jack A. Hammond 60 Senior Vice President 1992
David E. McIntyre 58 Senior Vice President 1998
James E. Stoveken, Jr. 59 Senior Vice President 1996
Brantley D. Thomas, Jr. 65 Senior Vice President 1987
Samuel L. Torrence 58 Senior Vice President 1996
R. Scott Wallinger 59 Senior Vice President 1987
Wendell L. Willkie, II 47 Senior Vice President
and General Counsel 1996
William S. Beaver 47 Vice President 1996
and Treasurer 1987
John W. Hetherington 60 Vice President, 1987
Assistant General Counsel
and Secretary 1978
Ned W. Massee 48 Vice President 1991
John E. Banu 51 Comptroller 1995
* Director of Westvaco
Westvaco's officers are elected by the Board of Directors annually for
one-year terms. Westvaco's executive officers have served in their
present capacities for the past five years or longer with the following
exceptions:
Rudolph G. Johnstone, Jr., Senior Vice President, 1990-1995; Richard N.
Burton, Vice President, 1994-1998, Director of Virginia's Department of
Environmental Quality, 1993-1994; Philip H. Emery, Jr., Vice President,
1987-1995; David E. McIntyre, Vice President, 1996-1998, an Officer of
Bowater Incorporated, 1986-1995; James E. Stoveken, Jr., Vice President,
1986-1996, Comptroller, 1979-1995; Samuel L. Torrence, Vice President,
1991-1996; Wendell L. Willkie, II, Vice President and Associate General
Counsel, 1995-1996, served as a Fellow in legal policy and international
trade at the American Enterprise Institute, 1993-1995; John E. Banu,
Assistant Comptroller, 1980-1995.
Information required by Item 405 of Regulation S-K will be included
in Westvaco's 1999 Proxy Statement, pursuant to Regulation 14A, to
be filed with the Securities and Exchange Commission by January 29,
1999, and is incorporated herein by reference.
Part II
Item 5. Market for the registrant's common stock and related
security holder matters
(a) Market and price range of common stock
The company's common stock is traded on the New York, Chicago
and Pacific Stock Exchanges under the symbol W. The New York
Stock Exchange is the principal market on which the common
stock is traded.
The quarterly price range of common stock for 1998 and 1997 is
included on the inside front cover of the 1998 Westvaco Annual
Report under the caption "Quarterly stock price ranges," and
is incorporated herein by reference.
(b) Approximate number of common shareholders
At October 31, 1998, the number of shareholders of record of
Westvaco common stock was approximately 7,790. In addition,
there were 12,350 current or former employees of the company
who were Westvaco shareholders by virtue of their participation
in the company's savings and investment plans.
(c) Dividends
The company's record of uninterrupted quarterly cash dividends
extends 103 years. Information concerning quarterly dividends
per share for 1998 and 1997 is included on the inside front cover
of the 1998 Westvaco Annual Report under the caption "Quarterly
dividends per share," and is incorporated herein by reference.
There were no restrictions on dividends at October 31, 1998.
Item 6. Selected financial data
Information required by this item is included on page 35 of the 1998
Westvaco Annual Report under the caption "Eleven-year comparison,"
and is incorporated herein by reference.
Item 7. Management's discussion and analysis of financial condition
and results of operations
Information required by this item is included on pages 14-20 of the
1998 Westvaco Annual Report under the captions "Analysis of operations,"
"Fiscal year 1997," "Fiscal year 1996," "Liquidity and capital resources,"
"Year 2000" and "Forward-looking statements" and is incorporated herein
by reference.
Item 7A. Quantitative and qualitative disclosures about market risk
Not applicable.
Item 8. Financial statements and supplementary data
Information required by this item is included on pages 21-34 of the
1998 Westvaco Annual Report under the captions "Consolidated
statement of income," "Consolidated balance sheet," "Consolidated
statement of cash flows," "Notes to financial statements" and
"Report of independent accountants" and is incorporated herein by
reference.
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure
Not applicable.
Part III
Item 10. Directors and executive officers of the registrant
Information required by this item for the company's directors will
be contained in Westvaco's 1999 Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange
Commission by January 29, 1999, and is incorporated herein by
reference. Information required by this item for the company's
executive officers is contained in Part I of this report under the
caption "Executive officers of the registrant."
Item 11. Executive compensation
Information required by this item will be contained in Westvaco's
1999 Proxy Statement, pursuant to Regulation 14A, to be filed with
the Securities and Exchange Commission by January 29, 1999, and is
incorporated herein by reference.
Item 12. Security ownership of certain beneficial owners and management
Information required by this item will be contained in Westvaco's
1999 Proxy Statement, pursuant to Regulation 14A, to be filed with
the Securities and Exchange Commission by January 29, 1999, and is
incorporated herein by reference.
Item 13. Certain relationships and related transactions
Information required by this item will be contained in Westvaco's
1999 Proxy Statement, pursuant to Regulation 14A, to be filed with
the Securities and Exchange Commission by January 29, 1999, and is
incorporated herein by reference.
Part IV
Item 14. Exhibits, financial statement schedules and reports on Form 8-K
(a) Documents filed as part of this report:
1. Consolidated financial statements
The consolidated financial statements of Westvaco Corporation
and consolidated subsidiaries listed below are incorporated
herein by reference to the following pages of the 1998
Westvaco Annual Report:
Page
----
Consolidated statement of income for fiscal years
ended October 31, 1998, 1997 and 1996 21
Consolidated balance sheet at October 31, 1998 and 1997 22
Consolidated statement of cash flows for fiscal years
ended October 31, 1998, 1997 and 1996 23
Notes to financial statements 24-33
Report of independent accountants 34
2. Consolidated financial statement schedules
All financial statement schedules have been omitted because
they are inapplicable, not required, or shown in the
consolidated financial statements and notes thereto contained
in the 1998 Westvaco Annual Report and incorporated herein by
reference.
3. Exhibits
3.i Restated Certificate of Incorporation, previously filed
as Exhibit 3(i) to the company's Annual Report on Form
10-K for the fiscal year ended October 31, 1997,
incorporated herein by reference.
3.ii Bylaws of Westvaco Corporation, previously filed as
Exhibit 3a to the company's Quarterly Report on Form 10-Q/A
for the third quarter ended July 31, 1996, File No. 1-3013,
and incorporated herein by reference.
4.a Credit Agreement dated June 21, 1993, as amended
September 19, 1997, previously filed as Exhibit 4(a) to
the company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1997, incorporated herein by
reference.
4.b Form of Indenture, dated as of March 1, 1983, between
Westvaco Corporation and The Bank of New York (formerly
Irving Trust Company), as trustee, previously filed as
Exhibit 2 to the company's Registration Statement on Form
8-A, File No. 1-3013, dated January 24, 1984.
4.c The company agrees to furnish copies of other instruments
defining the rights of holders of long-term debt to the
Commission upon its request.
4.d Rights Agreement dated as of September 23, 1997 between
Westvaco Corporation and The Bank of New York, previously
filed as Exhibit 1 to the company's Form 8-A dated
October 31, 1997, File No. 1-3013, incorporated herein by
reference.
10.a The 1983 Stock Option and Stock Appreciation Rights Plan,
as amended, previously filed as Exhibit 28(b) to Post-Effective
Amendment No. 1 to Registration Statement on Form S-8, File
No. 2-94699, incorporated herein by reference.
10.b The 1988 Stock Option and Stock Appreciation Rights
Plan, as amended, previously filed as Exhibit 28(c) to
Registration Statement on Form S-8, File No. 33-26823,
incorporated herein by reference.
10.c Copies of Westvaco Corporation Savings and Investment
Restoration Plan, as amended, effective January 1, 1990,
and Retirement Income Restoration Plan and Excess
Benefit Plan, as amended, effective January 1, 1990,
previously filed as Exhibit 10(d) to the company's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1989, incorporated herein by reference.
10.d Amendment to the Savings and Investment Restoration
Plan, effective January 1, 1991, previously filed as
Exhibit 10(e) to the company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1991, incorporated
herein by reference.
10.e Amendment to the Savings and Investment Restoration
Plan, effective October 1, 1995, previously filed as
Exhibit 10(e) to the company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1996, incorporated
herein by reference.
10.f The 1995 Salaried Employee Stock Incentive Plan,
effective February 28, 1995, previously filed as Exhibit
99 to Registration Statement on Form S-8, File No. 33-57879,
incorporated herein by reference.
10.g The Westvaco Corporation Annual Incentive Compensation
Plan, effective November 1, 1995, previously filed as
Appendix A to the company's Notice of 1996 Annual Meeting
of Shareholders and Proxy Statement dated December 29, 1995,
File No. 1-3013, incorporated herein by reference.
10.h The 1995 Non-Employee Director Stock Incentive Plan,
effective February 28, 1995, previously filed as Exhibit
99 to Registration Statement on Form S-8, File No. 33-57881,
incorporated herein by reference.
10.i Westvaco Corporation Deferred Compensation Plan for
Outside Directors dated December 1986, previously filed as
Exhibit 10(j) to the company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1996, incorporated
herein by reference.
10.j Form of Indemnification Contract between the company and
each of its officers and directors as listed in the
Westvaco Corporation 1998 Annual Report to Shareholders,
incorporated herein by reference.
13 The inside front cover and pages 14 through 35 of the
Westvaco Corporation 1998 Annual Report to Shareholders.
Except for the information that is expressly incorporated
by reference, the Annual Report to Shareholders is furnished
for the information of the Securities and Exchange Commission
and is not deemed to be filed as part of this report.
21 Subsidiaries of the registrant.
23 Consent of independent accountants.
27 Financial data schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fiscal quarter
ended October 31,1998.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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)
November 24, 1998 By ____________________________
John A. Luke, Jr.
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
John A. Luke, Jr. Chairman, President,
Chief Executive Officer
and Director November 24, 1998
Rudolph G. Johnstone, Jr. Executive Vice President
and Director November 24, 1998
James E. Stoveken, Jr. Senior Vice President November 24, 1998
(Principal Financial Officer)
John E. Banu Comptroller November 24, 1998
(Principal Accounting Officer)
Samuel W. Bodman III Director November 24, 1998
W. L. Lyons Brown, Jr. Director November 24, 1998
Michael E. Campbell Director November 24, 1998
Dr. Thomas W. Cole, Jr. Director November 24, 1998
Douglas S. Luke Director November 24, 1998
William R. Miller Director November 24, 1998
Jane L. Warner Director November 24, 1998
Richard A. Zimmerman Director November 24, 1998
Highlights of the year
1998 1997
SALES $2,885,917,000 $2,982,288,000
NET INCOME $132,013,000 $162,700,000
NET INCOME PER COMMON SHARE - BASIC $1.30 $1.60
NET INCOME PER COMMON SHARE - DILUTED $1.30 $1.58
COMMON STOCK DIVIDENDS $89,300,000 $89,778,000
DIVIDENDS PER COMMON SHARE $0.88 $0.88
CAPITAL EXPENDITURES $419,705,000 $613,896,000
SALES BY QUARTER, in millions
First $702 $736
Second 724 725
Third 728 738
Fourth 732 783
Year $2,886 $2,982
EARNINGS BY QUARTER In millions, except per share
Per share Per share
Basic Diluted Basic Diluted
First $32.5 $0.32 $0.32 $35.5 $0.35 $0.35
Second 34.6 0.34 0.34 38.0 0.37 0.37
Third 31.7 0.31 0.31 37.5 0.37 0.37
Fourth 33.2 0.33 0.33 51.7 0.51 0.50
Year $132.0 $1.30 $1.30 $162.7 $1.60 $1.58
QUARTERLY DIVIDENDS PER SHARE
First $0.22 $0.22
Second 0.22 0.22
Third 0.22 0.22
Fourth 0.22 0.22
Year $0.88 $0.88
QUARTERLY STOCK PRICE RANGES*
High Low High Low
First $34.19 $29.44 $30.50 $27.13
Second 34.13 29.56 29.88 25.00
Third 31.63 29.94 33.75 27.88
Fourth 27.38 21.00 37.50 31.19
*This table reflects the range of market prices of Westvaco common stock
as quoted in the New York Stock Exchange - Composite Transactions. The
New York Stock Exchange is the principal market in which the securities
are traded.
Westvaco Corporation and consolidated subsidiary companies
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Analysis of operations
Extremely challenging global business conditions throughout our industry
increased during our 1998 fiscal year. Asian markets were particularly
challenging as a result of currency devaluations and reduced economic
activity in the region. Sales of $2.9 billion for the fiscal year were
down 3.2% from 1997, the result of a 1.8% decrease in the volume of
shipments and a decrease in price and product mix of 1.4%. Net income in
1998 was $132.0 million, or $1.30 per share, basic and diluted, a decline
of 18.9% from $162.7 million, or $1.60 per share basic and $1.58 per share
diluted, earned in 1997. Other principal factors contributing to our
decline in earnings included a strike within our Envelope Division and
difficult circumstances within our Consumer Packaging Division, which are
discussed in the bleached segment analysis. Despite stiff challenges
resulting from turmoil in international markets and adverse currency
valuations, export sales from the United States increased slightly
compared to 1997 and represented approximately 17% of the company's
consolidated sales for 1998. Sales outside of the United States, including
sales of our foreign operating subsidiaries, accounted for approximately
25% of consolidated sales and were slightly below prior year levels.
The marginal improvements in most international markets were more than
offset by 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. We anticipate that
the unsettled global economic conditions will continue to pose special
challenges for our industry. Gross profit margin for the year was 19%
in both 1998 and 1997. As discussed further below, the effect of
weakened product pricing was largely offset by our cost improvement
initiatives. Depreciation and amortization expense for the year
increased 4.4% from the prior year due to several important projects
having been placed in service and the effect of acceleration of lives
on replaced assets.
Bleached segment: Increased capacity in Europe and declining
consumption in Asia, coupled with a strong U.S. dollar, have contributed to
lower prices from year ago levels and have made the domestic market very
competitive. Bleached segment sales decreased 3.0% from the prior year to
$1.96 billion, due to decreases in price and product mix of 1.9% and volume
of 1.1%. Operating profit for the year decreased 4.9% from 1997 primarily
due to product pricing pressures, the effect of the Envelope Division
strike and both manufacturing difficulties and marketing challenges in our
Consumer Packaging Division. Together these combined to offset the
company's progress in cost improvement initiatives. During 1998,
approximately 24% of bleached segment sales were made to the tobacco
industry for packaging. Approximately 15% of the segment sales were
exported or used to produce products for export with the remaining 9% 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. In February 1998, six of the company's eight Envelope
Division locations went on strike. The strike, which was settled in early
March, reduced second quarter consolidated earnings by approximately $.05
per share and continued to adversely impact earnings for the balance of the
year. The division is working diligently to regain lost business while
seeking new sales with an expanded product line and improved printing
capabilities. During the year, 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 fiscal year earnings by approximately $.05 per share. In
the fourth quarter of 1998 a pretax charge of $5 million, or $.03 per
share, was recorded, which was the result of operational changes to
strengthen the Consumer Packaging Division. The charge reflects costs
associated with announced terminations for approximately 240 employees and
the writedown of certain assets.
Unbleached segment: Unbleached segment sales for the year decreased
6.9% to $594.2 million, due to decreases in volume of 5.5% and in price and
product mix of 1.4%. Lower shipments of domestic commodity grade
containerboard products and Brazilian corrugated boxes were marginally
offset by improvements in our differentiated saturating kraft paper.
Operating profit for the unbleached segment for the year was $95.6 million
which decreased from $102.4 million for the prior year period due mainly to
pricing pressures faced by Rigesa, Ltda., our Brazilian subsidiary, which
accounted for 20% of unbleached segment operating profit compared to
approximately 37% for the 1997 comparable period. The Brazilian
government's financial reforms enacted in the fall of 1997 have sharply
curtailed economic growth, which has reduced business for our packaging
operations. While optimistic that the Brazilian government's initiatives
will ultimately lead to long-term growth and stability, the company
expects that difficult market conditions will persist for sometime. At
this time, the company is not in a position to determine what impact the
Brazilian government's recently proposed fiscal reform package will have
on our operations in Brazil. 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 segment: Chemicals segment sales for the year increased 2.7%
from 1997 to $335.2 million, due to favorable changes in price and product
mix of 1.5% and volume of 1.2%. Operating profit for the chemicals segment
increased to a record level of $70.3 million.
Other items: Other income (expense) decreased from the prior year due
to losses on the sales of plant and equipment reported in 1998 compared to
gains in 1997. Interest expense increased 18.1% for the year compared to
the prior year period due to the issuance of sinking fund debentures in
March and June 1997 and lower levels of capitalized interest in the current
year. The effective tax rate for 1998 increased to 35.4% compared to 34.0%
in the prior year principally due to the decline in foreign earnings which
are generally subject to lower tax rates.
Fiscal year 1997
The results for the fiscal year ended 1997 reflected the very competitive
market conditions felt throughout our industry. Sales of $2.98 billion for
the fiscal year were down 2.1% from 1996, the result of a 4.4% decrease in
price and product mix, partially offset by an increase in the volume of
shipments of 2.3%. Net income in 1997 was $162.7 million, or $1.60 per
share basic and $1.58 per share diluted, a decline of 23.3% from $212.2
million, or $2.09 per share basic and $2.07 per share diluted, earned in
1996. While pricing remained a significant challenge, orders for
linerboard and coated printing papers increased, and orders for our
bleached board showed improvement during the latter part of the year.
Export sales from the United States represented 16% of the company's
consolidated sales for 1997, and increased 10% from last year despite
slower economic growth in some markets. Sales outside of the United
States, including sales of our foreign operating subsidiaries, accounted
for approximately 25% of consolidated sales. Gross profit margin for the
year was 19%, compared with 21% in 1996. The reduction in the gross profit
margin was primarily the result of the market pressure on prices felt
throughout our industry and some temporary machine downtime for paper
machine improvements. The decrease in cost of products sold for the year
was attributable to decreases in some direct materials and conversion
costs. Depreciation and amortization expense for the year increased 12%
from the prior year.
Bleached segment sales decreased 1.7% from the prior year to $2.02
billion, due to a decrease in price and product mix, partially offset by
volume increases. Operating profit for the year decreased 17% from 1996
due to lower printing paper prices and the impact of taking downtime for
paper machine improvements. During the 1997 fiscal year, 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 10%
of bleached segment sales consisted of packaging materials made for the
domestic tobacco industry for sale in the United States.
Unbleached segment sales for the year decreased 8% to $638 million, due
to decreases in price and product mix of 8.9%, partially offset by an
increase in volume. Although the demand for linerboard, saturating kraft
paper and folding carton board strengthened, the unbleached segment pricing
was adversely affected by the very competitive conditions in those markets.
In Brazil, similar conditions impacted the Brazilian corrugated box
markets. Operating profit for the unbleached segment for the year was
$102.4 million which decreased from $134.7 million for the prior year
period due mainly to pricing pressures and some temporary machine downtime
taken in the fourth quarter. Rigesa, Ltda., our Brazilian subsidiary,
accounted for 37% of unbleached segment operating profit in 1997.
Chemicals segment sales for the year increased 8.6% from 1996 to $326.3
million, due to favorable changes in price and product mix of 6.3% and
volume of 2.3% and included the addition of the new carbon plant which
began operations in the third quarter of 1997. Operating profit for the
chemicals segment increased 15.1%.
The effective tax rate was 34.0% for 1997 compared to 36.9% for the 1996
period. The decline was principally due to foreign earnings taxed at lower
rates.
Fiscal year 1996
Sales and earnings for the fiscal year ended 1996 reflected the very
competitive market conditions that began late in 1995 causing prices and
shipments of key paper and paperboard grades to decline from 1995's
record-setting levels. Sales of $3 billion for the fiscal year were down
6.9% from the record levels set during 1995, the result of a 4.4% decrease
in the volume of shipments and a 2.5% decrease in price and product mix.
Net income in 1996 was $212 million, or $2.09 per share basic and $2.07 per
share diluted, a decline of 24% from $281 million, or $2.78 per share basic
and $2.76 per share diluted, earned in 1995. The decline in sales
reflected market softness which developed in the fall of 1995 when our
markets were affected by relatively high customer inventories and capacity
additions in certain sectors of our industry. While pricing remained under
pressure, orders for coated printing papers increased, and our bleached
board markets, which remained reasonably stable throughout the year,
improved as well. Export sales from the United States represented
approximately 15% of the company's consolidated sales for 1996 and equaled
the prior year's level despite slower economic growth in some markets.
Sales outside of the United States, including sales of our foreign
operating subsidiaries, accounted for approximately 23% of consolidated
sales. Gross profit margin for the year was 21%, compared with 24% in 1995.
The reduction in the gross profit margin was primarily the result of the
market pressure on prices felt throughout our industry and some temporary
machine downtime. The decrease in cost of products sold for the year was
attributable to volume declines, partially offset by some direct materials
and labor cost increases. Depreciation and amortization expense for the
year increased 4.4% from the prior year.
Bleached segment sales decreased 1.7% from the prior year, principally
due to a decrease in price and product mix. Operating profit for the year
decreased 20% from 1995 due to lower printing paper prices and the
temporary downtime taken for planned manufacturing improvements during the
third quarter at our Covington, VA, mill. During the 1996 fiscal year,
approximately 23% 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 segment sales for the year decreased 23.1% due to decreases
in volume of 15.3% as a result of the sale of the domestic corrugated box
business in November 1995 and decreases in price and product mix of 7.8%.
During 1996, the unbleached segment pricing was adversely affected by the
very competitive conditions in U. S. containerboard markets. In Brazil,
similar conditions, as well as concerns about reduced economic growth
rates, impacted the Brazilian corrugated box markets. Operating profit
for the unbleached segment for the year was $134.7 million, compared to
$221.2 million for the prior year period. This decrease was due to lower
prices as well as downtime for machine upgrades at our Tres Barras, Brazil,
mill. Rigesa accounted for nearly half of unbleached segment operating
profit in 1996.
Chemicals segment sales for the year increased 4.5% from 1995 due to
favorable changes in price and product mix of 5%, partially offset by
decreases in volume of .5%. Operating profit for the chemicals segment
increased 25.1%.
Interest expense decreased by 10.1% for the year due to the repayment of
certain sinking fund debentures in the 1995 fiscal year. The effective tax
rate was 36.9% for 1996 compared to 39.7% for the 1995 period. The decline
was due to foreign earnings being taxed at lower rates.
Liquidity and capital resources
At October 31, 1998, the ratio of current assets to current liabilities was
1.6, compared to 2.0 and 1.7 in 1997 and 1996, respectively. The twelve-
month average collection period for trade receivables was 35 days in 1998
compared to 32 days in both 1997 and 1996. Finished goods inventories
increased from prior year levels, reflecting normal production levels in
a period of increased competition in our major business areas. Cash flows
from operations were $407 million for 1998, compared to $391 million in
1997 and $522 million in 1996. Management believes that the company's
ability to generate cash from operations and its capacity to issue
short-term and long-term debt are adequate to fund working capital,
capital spending and other needs in the foreseeable future.
New investment in plant and timberlands was $420 million for 1998,
compared to $614 million in 1997 and $511 million in 1996. Cash payments
for these investments totaled $423 million in 1998, $621 million in 1997
and $522 million in 1996. The decrease in capital expenditures resulted
from completion by the end of fiscal 1997 of several important
capital projects, including major 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.
At October 31, 1998, the funds required to complete all authorized capital
projects were approximately $250 million. Capital expenditures for 1999
are expected to be approximately $275 million and will be used to support
our current production capacity levels. 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 $80 million in commercial paper
outstanding at October 31, 1998, compared to none at October 31, 1997
and 1996. 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 October 31,
1998, compared to 34% in 1997 and 29% in 1996. In 1997, the Board of
Directors authorized the periodic repurchase of the company's common stock
to satisfy issuances under its stock option plans. During 1998, 1,800,000
shares were purchased at a cost of $49 million and 218,159 shares were
issued out of treasury to satisfy stock option exercises.
In October 1998, the company announced that it had entered into a
definitive agreement to acquire a substantial equity interest in a new
consumer packaging business with a plant in Guangzhou, China. The plant,
is owned by a subsidiary of Shorewood Packaging Corporation, a United
States company. Upon closing, Westvaco will pay approximately $25 million
for a 45% interest in the Chinese operations. The investment will be
financed from operating cash flows.
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 by Westvaco in addressing subsequent 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
the Federal Register in April 1998. The company anticipates 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 the EPA regarding
certain aspects of the Cluster Rule in the U. S. Court of Appeals. Westvaco
and other companies are participating in that litigation. 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. In addition, the company is involved in the
remediation of certain other than CERCLA sites and has accrued $8.5 million
for remediation of these sites.
Year 2000
Westvaco has implemented a structured program encompassing both information
and noninformation technology systems to identify and eliminate all Year
2000 problems. Domestically and abroad, the program consists of six phases
(inventory, assessment of business criticality, technical assessment of
potential Year 2000 failures, remediation, testing and contingency
planning) and includes a review of all computer hardware and software,
whether used directly to support business and manufacturing processes or
embedded in components of machinery and other equipment. The first two
phases have been completed as planned. The remaining phases are planned,
staffed and scheduled to be completed by June 30, 1999. Remediation and
testing of business systems are scheduled for completion by January 31,
1999, except for testing of new accounts receivable software which is
scheduled to be completed by April 30, 1999. Remediation and testing of
process control systems are currently scheduled to be completed by April
30, 1999. The percentages of this work completed vary across the company's
operations, with business systems closer to completion than process control
systems, as the latter are by necessity more heavily relying for assessment
and remediation upon the manufacturers of the company's major process
control equipment. At this point, the company remains confident it will
meet its ultimate target dates.
Westvaco has contacted all vendors whose noncompliance, either individually
or cumulatively, it believes could materially impact the company's business.
As of October 31, 1998, 47% of vendors contacted have responded,
substantially all indicating they expect to address their Year 2000 issues
in a timely manner. The company is following up with vendors yet to respond
satisfactorily or at all to its inquiries. Separately, the company is also
actively seeking information and assurances of a more technical nature from
certain vendors regarding the compliance status of specific equipment. The
Year 2000 disclosures of customers having similar significance to the
company's business are reviewed on an ongoing basis. Westvaco cannot
provide assurance that the Year 2000 compliance plans of its vendors and
customers, particularly those in international markets, will be successfully
completed in a timely manner.
Program costs, are currently estimated to be between $9 and $12 million.
The estimate includes internal costs (i.e., related payroll and required
downtime) and external costs (i.e., hiring consultants to assist in
compliance efforts). Program costs do not include the cost of major new
business system implementations scheduled prior to the company's specific
Year 2000 compliance efforts described herein and completed during the
last two years. Estimated costs would have been substantially greater but
for the fact that recent modernization of many of the company's business
systems involved the replacement of software with new software that is
Year 2000 compliant at a cost of approximately $30 million. As of
October 31, 1998, approximately $3.5 million in program costs have been
funded by operating cash flows and expensed as incurred except for newly
installed systems which were capitalized in accordance with the company's
accounting policies. Although such costs may be significant to the
company's results of operations in one or more fiscal quarters, Westvaco
does not expect a material adverse impact on its long-term results of
operations, liquidity or financial position. Cost estimates may be refined
as technical assessment, remediation and testing continue and as compliance
status information becomes available from third-party business partners.
If Westvaco were not taking any of the remedial steps detailed above, Year
2000 issues would possibly cause significant technological problems for the
company, disrupting business and resulting in a decline in earnings. At
this time, however, management does not believe that this will happen.
The most reasonably likely worst case scenario should Westvaco, its
customers or vendors be unable to adequately resolve Year 2000 issues,
would include a temporary slowdown or abrupt stoppage of operations at one
or more of the company's facilities due to the failure of one or more
critical process control elements or business systems. Such failures could
result in interruptions in manufacturing, safety and/or environmental
systems; and/or a temporary inability to receive raw materials, ship
finished products and process orders and invoices. Although not
anticipated at this time, if such or similar scenarios were to occur, they
could, depending on their duration, have a material impact on the company's
results of operations and financial position. Such theoretical
consequences are of a kind and magnitude generally shared with other
manufacturing companies. Assuming the successful completion of its Year
2000 program in a timely manner, the company expects that any Year 2000
disruptions which occur, should there be any, will be minor and not
material to its business.
Contingency planning for business and process control systems will begin
by January 1, 1999. Such plans will, as appropriate, include the
identification of alternate suppliers, vendors and service providers; the
accumulation of inventory; the identification of manual alternatives and
the arranging for rapid access to qualified vendor technical support. Once
developed, contingency plans will continue to be reassessed and refined as
additional information becomes available.
Estimates and conclusions herein contain forward-looking statements and
are based on management's best estimates of future events.
Accounting changes: In 1999, the company will adopt two new accounting
standards issued by the Financial Accounting Standards Board, Statement of
Financial Accounting Standards (SFAS) 130, Reporting Comprehensive Income,
and SFAS 131, Disclosures about Segments of an Enterprise and Related
Information. Also, the company is required to adopt a new accounting
standard in fiscal year 2000, SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. For further discussion, see the
summary of significant accounting policies in the notes to the financial
statements.
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 information
includes, without limitation, the business outlook, assessment of market
conditions,anticipated financial and operating results, strategies, future
plans, contingencies and contemplated transactions of the company. 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.
Fourth quarter results
Sales were $732 million for the fourth quarter of 1998, compared to
sales of $783 million for the fourth quarter of 1997. In the fourth
quarter of 1998, the company recorded net income of $33.2 million,
or $.33 per share basic and diluted, compared to net income of $51.7
million, or $.51 per share basic and $.50 per share diluted, for the
prior year period.
Investor services plan
At year end, 15,310 shareholders, including members of the company's
savings and investment plans for salaried and hourly employees,
representing 14,425,934 shares of Westvaco common stock, were
participants in the company's Investor Services Plan.
Number of shareholders
At year end, the number of individuals and institutions owning
Westvaco common shares was about 20,140. This number includes
12,350 members of the company's salaried and hourly savings and
investment plans. The plans, established in 1968 and 1995,
respectively, hold 13,104,053 shares of Westvaco common stock for
the accounts of participants. This represents 13% of the
100,326,367 shares of common stock outstanding at year end.
Payroll and benefit costs
The total cost of payroll and benefits was $671 million, compared
with $680 million in 1997. This includes $47.4 million in Social
Security taxes in 1998 and $49.2 million in 1997. Payroll and
benefit costs were 23% of sales in 1998 and 1997. Sales per
employee have increased 36% in the last five years. In 1993, they
stood at $162,366, rising to $220,805 in 1998.
FINANCIAL STATEMENTS
Consolidated statement of income
- --------------------------------
In thousands, except per share
Year ended October 31 1998 1997 1996
Sales $2,885,917 $2,982,288 $3,045,450
Other income [expense] 18,747 28,743 29,065
2,904,664 3,011,031 3,074,515
Cost of products sold [excludes
depreciation shown separately below] 2,071,011 2,161,194 2,173,719
Selling, research and administrative
expenses 238,097 240,814 234,366
Depreciation and amortization 280,981 269,151 240,411
Interest expense 110,162 93,272 90,063
2,700,251 2,764,431 2,738,559
Income before taxes 204,413 246,600 335,956
Income taxes 72,400 83,900 123,800
Net income $ 132,013 $ 162,700 $ 212,156
Net income per share:
Basic $1.30 $1.60 $2.09
Diluted 1.30 1.58 2.07
Shares used to compute net income per share:
Basic 101,311 101,978 101,737
Diluted 101,788 102,704 102,412
The accompanying notes are an integral part of these financial statements.
Consolidated balance sheet
- --------------------------
In thousands
At October 31 1998 1997
ASSETS
Cash and marketable securities $ 105,050 $ 175,354
Receivables 286,423 300,827
Inventories 285,783 270,519
Prepaid expenses and other current assets 61,936 58,508
Current assets 739,192 805,208
Plant and timberlands:
Machinery 5,079,177 4,739,179
Buildings 655,020 626,559
Other property, including plant land 224,229 226,082
5,958,426 5,591,820
Less: accumulated depreciation 2,634,702 2,447,575
3,323,724 3,144,245
Timberlands-net 273,975 269,216
Construction in progress 204,732 270,897
3,802,431 3,684,358
Other assets 467,045 409,221
$5,008,668 $4,898,787
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 346,552 $ 356,691
Notes payable and current maturities of
long-term obligations 99,072 26,121
Income taxes 21,501 22,765
Current liabilities 467,125 405,577
Long-term obligations 1,526,343 1,512,621
Deferred income taxes 768,752 702,021
Shareholders' equity:
Common stock, $5 par, at stated value
Shares authorized: 300,000,000
Shares issued: 103,170,667
[1997-103,170,667] 764,574 761,522
Retained income 1,588,932 1,549,356
Cumulative translation adjustment [32,167] -
Common stock in treasury, at cost
Shares held: 2,844,300
[1997-1,240,644] [74,891] [32,310]
2,246,448 2,278,568
$5,008,668 $4,898,787
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------
In thousands
Year ended October 31 1998 1997 1996
Cash flows from operating activities:
Net income $ 132,013 $ 162,700 $ 212,156
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for depreciation and
amortization 280,981 269,151 240,411
Provision for deferred income taxes 57,244 46,798 49,243
[Gains] losses on sales of plant
and timberlands 894 [10,537] [6,546]
Pension credit and other employee
benefits [50,869] [39,296] [43,716]
Foreign currency translation
[gains] losses 130 1,690 477
Net changes in assets and liabilities [17,063] [43,380] 61,924
Other, net 3,376 3,557 7,869
Net cash provided by
operating activities 406,706 390,683 521,818
Cash flows from investing activities:
Additions to plant and timberlands [422,984] [621,172] [521,598]
Proceeds from sales of plant
and timberlands 6,905 22,292 67,793
Other, net 50 5,912 [4,377]
Net cash used in investing
activities [416,029] [592,968] [458,182]
Cash flows from financing activities:
Proceeds from issuance of common stock 3,766 10,901 5,585
Proceeds from issuance of debt 548,194 649,186 46,357
Dividends paid [89,300] [89,778] [89,539]
Treasury stock purchases [49,484] [17,374] -
Repayment of notes payable and
long-term obligations [470,146] [290,018] [62,125]
Net cash provided by [used in]
financing activities [56,970] 262,917 [99,722]
Effect of exchange rate changes on cash [4,011] [646] [369]
Increase [decrease] in cash and
marketable securities [70,304] 59,986 [36,455]
Cash and marketable securities:
At beginning of period 175,354 115,368 151,823
At end of period $ 105,050 $ 175,354 $ 115,368
The accompanying notes are an integral part of these financial statements.
Summary of significant accounting policies
Basis of consolidation and preparation of financial statements: The
consolidated financial statements include the accounts of all
subsidiaries more than 50% owned. In accordance with generally
accepted accounting principles, the preparation of financial
statements requires management to make estimates and assumptions that
affect the reported amounts of some assets and liabilities and, in
some instances, the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these
estimates.
Accounting standards changes: Effective November 1, 1997, the company
adopted The American Institute of Certified Public Accountants'
Statement of Position (SOP) 96-1, Environmental Remediation
Liabilities, which provides guidance concerning the recognition,
measurement and disclosure of environmental remediation liabilities.
The adoption did not have a material effect on the company's
consolidated financial position or results of operations. On
November 1, 1997, the company adopted Statement of Financial
Accounting Standards (SFAS) 128, Earnings Per Share, which requires
dual presentation of basic and diluted earnings per share on the face
of the income statement.
In 1997, the Financial Accounting Standards Board (FASB) issued
SFAS 130, Reporting Comprehensive Income, which establishes standards
for the reporting and displaying of comprehensive income, and SFAS
131, Disclosures about Segments of an Enterprise and Related
Information, which establishes standards for the way public companies
report information about operating segments in both interim and
annual financial statements and related disclosures. The company has
not determined what, if any, impact SFAS 131 will have on the
operating segments reported nor the related disclosures. In February
1998, the FASB issued SFAS 132, Employer's Disclosures about Pensions
and Other Postretirement Benefits, which standardizes the disclosure
requirements for pensions and other postretirement benefits. These
three standards will be effective for the 1999 fiscal year. Also
issued in 1998, SFAS 133, Accounting for Derivative Instruments and
Hedging Activities requires derivative instruments to be recorded in
the balance sheet at their fair value with changes in their 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 of this new
standard will not be material. This standard will be effective for
the company's 2000 fiscal year.
Environmental matters: Environmental expenditures that increase
useful lives are capitalized, while other environmental expenditures
are expensed. Liabilities are recorded when remedial efforts are
probable and the costs can be reasonably estimated. The estimated
closure costs for existing landfills based on current environmental
requirements and technologies are accrued over the expected useful
lives of the landfills.
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. At October 31, 1998, 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. In addition, the company is involved
in the remediation of certain sites other than CERCLA sites and also
operates landfills for its own use. At October 31, 1998, the company
had accrued $8.5 million for remediation and closure costs.
Translation of foreign currencies: 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. The assets and liabilities of the company's
Brazilian subsidiary are translated into U.S. dollars using year-end
exchange rates and adjustments resulting from financial statement
translations are included in the cumulative translation adjustment in
the shareholders' equity section of the balance sheet. Revenues and
expenses are translated at average rates prevailing during the year.
Prior to the current fiscal year, the functional currency for
these operations was the U.S. dollar due to the high inflation rate
which previously existed in that country. Foreign currency asset and
liability accounts were remeasured into U.S. dollars at fiscal year-end
rates except for inventories, properties and accumulated depreciation,
which were translated at historical rates; revenues and expenses (other
than those relating to assets translated at historical rates) were
translated at average rates prevailing during the year. Translation
gains and losses were included in other income (expense).
Marketable securities: For financial statement purposes, highly
liquid securities purchased three months or less from maturity are
considered to be cash equivalents.
Inventories: Inventories are valued at the lower of cost or market.
Cost is determined using the last-in, first-out (LIFO) method for raw
materials, finished goods and certain production materials, where
allowed for U.S. federal income tax purposes. Cost of all other
inventories is determined by the first-in, first-out (FIFO) or
average cost method.
Plant and timberlands: Owned assets are recorded at cost. Also
included in the cost of these assets is interest on funds borrowed
during the construction period. When assets are sold, retired or
disposed of, their cost and related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is reflected in other
income (expense). Costs of renewals and betterments of properties are
capitalized; costs of maintenance and repairs are charged to income.
Costs of reforestation of timberlands are capitalized.
Depreciation and amortization: The cost of plant and equipment is
depreciated, generally by the straight-line method, over the estimated
useful lives of the respective assets, which range from 20 to 40 years
for buildings and 5 to 30 years for machinery and equipment. The cost
of standing timber is amortized as timber is cut, at rates determined
annually based on the relationship of unamortized timber costs to the
estimated volume of recoverable timber.
Revenue recognition: The company recognizes revenues at the point of
passage of title, which is at the time of shipment.
Income taxes: Deferred income taxes are recorded for temporary
differences between financial statement carrying amounts and the tax
basis of assets and liabilities. Deferred tax assets and liabilities
reflect the enacted tax rates in effect for the years the differences
are expected to reverse.
Income per share: Basic net income per share for all the periods
presented has been calculated using the weighted average shares
outstanding. In computing diluted net income per share, incremental
shares issuable upon the assumed exercise of stock options have been
added to the weighted average shares outstanding.
A. Other income (expense)
Components of other income (expense) are as follows:
In thousands 1998 1997 1996
Gains [losses] on sales of plant,
equipment and timberlands $ [894] $10,537 $ 6,546
Interest income 18,010 15,089 22,172
Foreign currency translation
gains [losses] [130] [1,690] [477]
Other, net 1,761 4,807 824
$18,747 $28,743 $29,065
B. Research and development
Expenditures of $45,139,000 (1997-$42,944,000, 1996-$38,262,000)
were expensed as incurred.
C. Income taxes
Income before provision for income taxes consisted of:
In thousands 1998 1997 1996
Domestic $157,075 $177,323 $257,582
Foreign 47,338 69,277 78,374
$204,413 $246,600 $335,956
The provision for income taxes is composed of:
In thousands 1998 1997 1996
Current:
Federal $ 9,254 $ 23,982 $ 47,136
State [3,243] 3,503 12,610
Foreign 9,145 9,617 14,811
15,156 37,102 74,557
Deferred:
Federal 45,871 35,949 39,668
State 11,792 9,375 8,977
Foreign [419] 1,474 598
57,244 46,798 49,243
$ 72,400 $ 83,900 $123,800
The net deferred income tax liability at October 31, 1998 and 1997
includes the following components:
In thousands 1998 1997
Current deferred tax assets:
Employee benefits $ 15,430 $ 16,423
Other 25,288 25,596
40,718 42,019
Noncurrent deferred tax assets:
Alternative minimum tax carryforward 143,581 133,034
Noncurrent deferred tax liabilities:
Depreciation 643,834 600,491
Pension and other employee benefits 133,351 116,977
State and local taxes 99,487 90,877
Other 35,661 26,710
912,333 835,055
Total net deferred tax liability $728,034 $660,002
The differences (expressed as a percentage of pretax income) between
the U.S. statutory federal income tax rate and the effective income
tax rate as reflected in the accompanying consolidated statement of
income are:
1998 1997 1996
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local taxes 2.7 3.4 4.2
Foreign income at other than U.S. rates [2.6] [4.0] [2.5]
Other, net .3 [.4] .2
Effective tax rate 35.4% 34.0% 36.9%
At October 31, 1998, for tax purposes, the company had available
$144 million of alternative minimum tax credit carryforwards, which
do not expire under current laws. At October 31, 1998, the company
had available $3.6 million of foreign tax credit carryforwards,
which, if unused, will expire in fiscal years 2000 to 2002.
Provision has not been made for income taxes which would become
payable upon remittance of $283 million of the October 31, 1998
undistributed earnings of certain foreign subsidiaries representing
that portion of such earnings which the company considers to have
been indefinitely reinvested in the subsidiaries, principally in
Brazil. Computation of the potential deferred tax liability
associated with these undistributed earnings is not practicable.
D. Current assets
Marketable securities of $12,032,000 (1997-$82,647,000) are valued at
cost, which approximates market value. Receivables include
$5,731,000 from sources other than trade (1997-$6,989,000) and have
been reduced by allowances for discounts and doubtful accounts of
$12,748,000 (1997-$11,341,000). Inventories at October 31 are
composed of:
In thousands 1998 1997
Raw materials $ 55,580 $ 62,025
Production materials, stores and supplies 74,338 81,618
Finished and in process goods 155,865 126,876
$285,783 $270,519
If inventories had been valued at current cost, they would have been
$409,043,000 in 1998 (1997-$390,950,000).
E. Accounts payable and accrued expenses
Accounts payable and accrued expenses at October 31 consist of:
In thousands 1998 1997
Accounts payable:
Trade $117,306 $130,425
Other 24,258 29,108
Accrued expenses:
Taxes, other than income 17,239 18,590
Interest 32,996 33,588
Payroll and employee benefit costs 83,652 82,976
Other 71,101 62,004
$346,552 $356,691
F. Interest capitalization
In 1998, $130,914,000 of interest cost was incurred (1997-$119,234,000,
1996-$105,312,000) of which $20,752,000 was capitalized (1997-$25,962,000,
1996-$15,249,000).
G. Cash flows
Changes in assets and liabilities are as follows:
In thousands 1998 1997 1996
[Increase] decrease in:
Receivables $ 12,765 $[23,674] $ 36,679
Inventories [17,249] [7,577] 11,155
Prepaid expenses
and other current assets [5,905] 1,633 [943]
Increase [decrease] in:
Accounts payable and
accrued expenses [5,597] [9,957] 45,764
Income taxes payable [1,077] [3,805] [30,731]
$[17,063] $[43,380] $ 61,924
Reconciliation of capital expenditures on a cash basis:
In thousands 1998 1997 1996
New investment in plant and timberlands $419,705 $613,896 $510,902
Less: debt assumed [4] [21] [62]
net change in related current
liabilities 3,283 7,297 10,758
Cash additions to plant and timberlands $422,984 $621,172 $521,598
Cash payments for interest, excluding amounts capitalized, were
$108,082,000 in 1998 (1997-$84,503,000,1996-$87,060,000). Cash
payments for income taxes were $13,744,000 in 1998 (1997-$39,331,000,
1996-$105,220,000).
H. Leasing activities and other commitments
The company leases a variety of assets for use in its operations.
Leases for administrative offices, converting plants and storage
facilities generally contain options which allow the company to extend
lease terms for periods up to 25 years, or to purchase the properties.
Certain leases provide for escalation of the lease payments as
maintenance costs and taxes increase.
The company has no significant capital lease liabilities. Minimum
rental payments under operating leases that have noncancellable lease
terms in excess of 12 months are as follows:
Operating
In thousands leases
1999 $ 22,213
2000 17,077
2001 14,141
2002 11,726
2003 9,698
Later years 47,459
Minimum lease payments $122,314
Rental expense under operating leases was $40,179,000 in 1998
(1997-$38,031,000, 1996-$36,629,000).
At October 31, 1998, commitments required to complete currently
authorized capital projects are $250 million.
I. Notes payable and long-term obligations
At October 31, 1998, notes payable and long-term obligations
include:
In thousands Current Noncurrent
Debentures:
9.65%, due 2002 $ 100,000
9 3/4%, due 2020 100,000
Sinking Fund Debentures:
7%, due 2004-2023 150,000
7 1/2%, due 2008-2027 150,000
7.65%, due 2008-2027 150,000
7.75%, due 2004-2023 150,000
8 1/8%, due 1999-2007 $ 2,350 21,800
8.30%, due 2003-2022 125,000
10 1/8%, due 2000-2019 100,000
10 1/4%, due 1999-2018 5,000 95,000
10.30%, due 2000-2019 100,000
Pollution Control Revenue Bonds:
5.85-6.65%, due 2004-2018 26,620
5 7/8-5.9%, due 1999-2003 1,865 8,605
5 7/8-6.2%, due 1999-2007 550 12,030
5.9-6.2%, due 2004-2008 5,900
6 3/8%, due 2026 5,740
7 1/8-7 1/2%, due 1999-2001 500 3,500
8 1/4%, due 2000-2010 4,100
9 1/8-9.6%, due 2006-2015 10,100
10 1/2%, due 2004 1,500
Industrial Revenue Bonds:
7-7.67%, due 1999-2027 385 94,915
Economic Development Bonds:
8 3/4%, due 2000-2010 4,300
Notes payable and other 88,422 107,233
$99,072 $1,526,343
Outstanding noncurrent obligations maturing in the four years after
1999 are (in millions): 2000-$36.1; 2001-$36.4; 2002-$132.1; 2003-$34.1.
An amended revolving credit agreement for $500 million became
effective in September 1997, replacing the previous facility dated
June 21, 1993. Borrowings under the agreement may be in unsecured
domestic or Eurodollar notes and may be at rates approximating prime
or the London Interbank Offered Rate, at the company's option. There
is a nominal commitment fee on the unused funds. There were no
borrowings under this facility during 1998 or 1997.
The company issued $80 million of 7.67% thirty-year revenue bonds in
January 1997. Also, the company issued $150 million of 7.65% thirty-year
sinking fund debentures in March 1997 and $150 million of 7 1/2%
thirty-year sinking fund debentures in June 1997.
At October 31, 1998, the book value of financial instruments
included in notes payable and long-term obligations was $1,557,477,000
(1997-$1,478,706,000), and the fair value was estimated to be
$1,636,093,000 (1997-$1,577,559,000). The company has estimated the
fair value of financial instruments based upon quoted market prices
for the same or similar issues or on the current interest rates
available to the company for debt of similar terms and maturities.
J. Foreign subsidiaries
Income of foreign subsidiaries included in consolidated net income
amounted to $38,612,000 in 1998
(1997-$58,186,000, 1996-$62,965,000).
Results of unbleached operations for Rigesa, Ltda., our Brazilian
subsidiary, were as follows:
In thousands 1998 1997 1996
Sales $184,011 $220,502 $237,303
Net income $ 27,140 $ 40,858 $ 48,613
Dividends received from foreign subsidiaries amounted to $8,640,000
in 1998 (1997-$13,389,000, 1996-$6,434,000). Assets of these
subsidiaries, principally Rigesa, included in the consolidated
balance sheet are $408,902,000 (1997-$373,205,000).
K. Shareholders' equity
In 1997, the company's shareholders approved an amendment to the
corporation's Restated Certificate of Incorporation which resulted in
an increase in the number of authorized shares of common stock from
200 million to 300 million. Changes in shareholders' equity for 1996,
1997 and 1998 are summarized below:
<TABLE>
<CAPTION>
Retained Cumulative
Common stock Treasury stock income translation
Dollars in thousands Shares Amount Shares Amount Amount adjustment
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1995 102,334,244 $741,193 [783,033] $[17,050] $1,356,408 -
Net income - - - - 212,156 -
Cash dividends - - - - [89,539] -
Issuances 426,875 9,264 - - - -
Repurchases of common stock - - [87,042] [2,695] - -
Balance at October 31, 1996 102,761,119 750,457 [870,075] [19,745] 1,479,025 -
Net income - - - - 162,700 -
Cash dividends - - - - [89,778] -
Issuances 409,548 11,065 - - - -
Repurchases of common stock - - [610,111] [20,880] - -
Issuance of treasury stock - - 239,542 8,315 [2,591] -
Balance at October 31, 1997 103,170,667 761,522 [1,240,644] [32,310] 1,549,356 -
Net income - - - - 132,013 -
Cash dividends - - - - [89,300] -
Foreign currency translation - - - - - $[32,167]
Issuances - 3,052 - - - -
Repurchases of common stock - - [1,821,815] [50,176] - -
Issuance of treasury stock - - 218,159 7,595 [3,137] -
Balance at October 31, 1998 103,170,667 $764,574 [2,844,300] $[74,891] $1,588,932 $[32,167]
</TABLE>
During 1998, the company repurchased 1,800,000 shares (1997-500,000) of
company stock under a new repurchase program authorized in 1997 by the
Board of Directors. The program was initiated to satisfy issuances under
the company's stock option plans. There were no purchases in 1996, 1997
or 1998 under the stock repurchase program authorized in 1987 by the
Board of Directors.
At October 31, 1998, there were 44,170 shares of nonvoting $100
par value cumulative preferred stock authorized and 10 million
shares of preferred stock without par value authorized and
available for issue.
Pursuant to a Rights Agreement approved by the company's Board of
Directors in 1997, in the event a person or group were to acquire a
15% or greater position in Westvaco, each right would entitle its
holder (other than the acquiror) to buy that number of shares of
common stock of Westvaco which at the time of the 15% acquisition, had
a market value of two times the exercise price of the rights. If,
after the rights have been triggered, an acquiring company were to
merge or otherwise combine with Westvaco, or Westvaco were to sell 50%
or more of its assets or earning power, each right would entitle its
holder (other than the acquiror) to buy that number of shares of common
stock of the acquiring company which, at the time of such transaction,
would have a market value of two times the exercise price of the rights.
The rights have no effect on earnings per share until they become
exercisable. The rights expire in December 2007.
L. Stock option plans
At October 31, 1998, the company had four stock option plans.
The 1983 and 1988 Stock Option and Stock Appreciation Rights
Plans and the 1995 Salaried Employee Stock Incentive Plan
provide for the granting of up to 4,725,000, 4,500,000 and
4,837,500, respectively, of stock options and stock appreciation
rights to key employees. The 1995 Non-Employee Director Stock
Incentive Plan provides for the granting of up to 112,500 stock
options and stock appreciation rights to outside directors. For
the employee plans, stock options may be granted with or without
stock appreciation rights and are granted at market value. They
are exercisable after a period of six months to one year and
expire not later than ten years from the date of grant. Under
each employee plan, stock options may be granted with or without
limited stock appreciation rights, which are exercisable upon
the occurrence of certain events related to changes in corporate
control. In 1997, nearly all outstanding stock appreciation
rights, which had previously been granted to employees and
nonemployee directors, were cancelled or surrendered. Subject
to limited exceptions, no new grants for stock appreciation rights
were awarded during 1998.
The company applies APB Opinion 25, Accounting for Stock Issued
to Employees, in accounting for its plans and, accordingly, no
compensation cost has been recognized. If compensation cost for
the company's stock options had been determined based on the
fair value method of SFAS 123, the company's net income, income
per share basic, and income per share diluted would have been
reduced to the pro forma amounts as follows:
In thousands, except per share
Net income 1998 1997 1996
As reported $132,013 $162,700 $212,156
Pro forma 127,470 159,089 209,104
Income per share - basic
As reported $1.30 $1.60 $2.09
Pro forma 1.26 1.56 2.06
Income per share - diluted
As reported $1.30 $1.58 $2.07
Pro forma 1.25 1.55 2.04
In determining the fair value of options for pro forma purposes,
the company used the Black-Scholes option pricing model and
assumed the following for options granted in 1998, 1997 and
1996, respectively: risk-free interest rate of 5.80%, 6.14% and
5.57%; dividend yield of 2.71%, 3.21% and 3.51%; an expected
option life of six years for each year; and an expected
volatility of 20% for each year. The weighted average fair
values of the options granted during 1998, 1997 and 1996 were
$7.61, $6.16 and $5.10 per share, respectively. The following
table summarizes activity in the plans for 1998, 1997 and 1996.
Weighted
average
exercise
Options price
Outstanding at October 31, 1995 4,210,968 $22.59
Granted 984,392 25.06
Exercised [756,911] 19.86
Cancelled [225] 23.08
Outstanding at October 31, 1996 4,438,224 23.61
Granted 964,015 27.44
Exercised [1,022,792] 21.92
Cancelled [3,235] 24.55
Outstanding at October 31, 1997 4,376,212 24.84
Granted 981,780 32.53
Exercised [218,159] 20.44
Cancelled [992] 18.75
Outstanding at October 31, 1998 5,138,841 26.49
The following table shows various information about stock options
outstanding at October 31, 1998.
Range of exercise prices
$18.29- $23.08- $27.44- $18.29-
$19.13 $26.50 $32.53 $32.53
------ ------ ------ ------
Number outstanding 281,191 2,921,105 1,936,545 5,138,841
Weighted average price $18.59 $25.05 $30.02 $26.49
Weighted average remaining
life (in years) 1.48 5.67 8.61 6.55
Number exercisable 281,191 2,921,105 969,765 4,172,061
Weighted average price $18.59 $25.05 $27.52 $25.10
There were 1,470,495 shares available for grant as of October 31, 1998
(1997-2,468,055, 1996-3,428,835). At October 31, 1998, 3,630,946
outstanding options had related limited stock appreciation rights.
M. Employee retirement, postretirement and postemployment benefits
Pension and retirement plans
The company provides retirement benefits for substantially all
domestic employees under several noncontributory trusteed plans and
also provides benefits to employees whose retirement benefits
exceed maximum amounts permitted by current tax law under an
unfunded benefit plan. Benefits are based on a final average pay
formula for the salaried plans and a unit benefit formula for the
hourly paid plans. Prior service costs are amortized on a
straight-line basis over the average remaining service period for
active employees. Contributions are made to the funded plans in
accordance with ERISA requirements.
The 1998 net pension credit relating to employee pension and
retirement benefits was $55,337,000 (1997-$42,058,000, 1996-$37,834,000).
The net pension credits reflect cumulative favorable investment returns
on plan assets. The components of the net pension credit for 1998,
1997 and 1996 are as follows:
In thousands 1998 1997 1996
Service cost-benefits earned
during the period $ 26,934 $ 23,369 $ 22,168
Interest cost on projected
benefit obligation 71,293 65,947 61,890
Actual return on plan assets [291,895] [674,619] [216,244]
Net amortization and deferrals 138,331 543,245 94,352
Net pension credit $ [55,337] $ [42,058] $ [37,834]
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected
benefit obligation were 6.75% and 5.00% in 1998, 7.25% and 5.5% in
1997 and 7.75% and 5.5% 1996, respectively. The expected long-term
rate of return on plan assets used in determining net pension cost was
9.75% for 1998, 1997 and 1996. The net prepaid pension cost, from the
following table, is included in other assets except for an obligation
of $21.8 million for an unfunded excess benefit plan which is recorded
as a long-term liability. The following table sets forth the funded
status of the plans and amounts recognized in the consolidated balance
sheet at October 31, based on a valuation date of July 31.
In thousands 1998 1997
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits of $[915,445]
(1997-$[836,073]) $ [950,394] $ [870,071]
Projected benefit obligation $[1,084,468] $[1,003,647]
Plan assets at fair value:
Mainly listed stocks, including $63 million
of company stock, and money market and
fixed income investments 2,337,713 2,088,419
Plan assets in excess of projected
benefit obligation 1,253,245 1,084,772
Unrecognized net gain from past experience
different from that assumed [860,223] [744,469]
Unrecognized prior service cost 52,111 54,954
Unrecognized net transition asset [22,906] [29,846]
Net prepaid pension cost included in
consolidated balance sheet $ 422,227 $ 365,411
Postretirement benefits
The company provides life insurance for substantially all retirees
and medical benefits to certain retirees in the form of cost
subsidies until medicare eligibility is reached and to certain
other retirees, medical benefits up to a maximum lifetime amount.
None of these benefits is funded.
The components of net periodic postretirement benefits cost for
the fiscal years ended October 31, 1998, 1997 and 1996 are as
follows:
In thousands 1998 1997 1996
Service cost-benefits earned
during the period $1,400 $1,300 $1,200
Interest cost 1,500 1,500 1,600
Net amortization [800] [900] [400]
Net periodic postretirement benefits cost $2,100 $1,900 $2,400
The accumulated postretirement benefit obligation as of July 31, the
valuation date, was as follows:
In thousands 1998 1997
Retirees $16,900 $15,800
Fully eligible active employees 4,100 3,900
Other active participants 2,200 2,000
23,200 21,700
Unrecognized prior service cost 200 300
Unrecognized net gain 5,300 7,100
Accrued postretirement benefits cost included
in consolidated balance sheet $28,700 $29,100
The discount rate used in determining the accumulated benefit
obligation was 6.75% for 1998 and 7.25% for 1997. The annual rate
of increase in health care costs was assumed at 7% for 1997, 6%
for 1998 and decreasing to a 5% annual rate in 1999 and remaining
at that level thereafter. The effect of a 1% increase in the
assumed health care cost trend rate would increase the July 31,
1998 accumulated postretirement benefit obligation by $400,000 and
the net postretirement benefits cost for 1998 by $100,000.
Postemployment benefits
The company provides limited postemployment benefits to former or
inactive employees, including short-term disability, workers'
compensation and severance.
N. Legal and environmental matters
The company is involved in various legal proceedings and
environmental actions, generally arising in the normal course of
its business. Although the ultimate outcome of such matters
cannot be predicted with certainty, the company does not believe
that the outcome of any proceeding, lawsuit or claim that is
pending or threatened, or all of them combined, will have a
material adverse effect on its consolidated financial position,
liquidity or long-term results of operations. In any given
quarter or quarters, however, it is possible such proceedings or
matters could have a material effect on results of operations.
O. Business segment information
The company's principal business segments are the manufacture of
bleached and unbleached paper, paperboard and packaging products
and specialty chemicals. Westvaco is a leading manufacturer of
paper for high-quality graphic reproduction, it converts paper and
paperboard into a variety of endproducts, manufactures specialty
chemicals, produces lumber, sells timber from its timberlands and
is engaged in land development. The markets in which the company
sells its products are affected by several factors, including
industry capacities and the level of economic growth in domestic
and international markets. The principal markets for Westvaco's
products are in the United States. The company owns 1.5 million
acres of timberland in the United States and Brazil. Westvaco's
Cooperative Forest Management Program provides an additional
source of wood fiber for its mills from the 1.4 million acres
covered by the program. In Brazil, the company is a major
producer of paperboard and corrugated packaging for the markets of
that country. Rigesa, a wholly owned Brazilian subsidiary, has in
the past been subject to Brazil's inflation and currency
fluctuations. Westvaco also exports products from both the United
States and Brazil to other countries throughout the world.
Information about the company's operations and policies in
different lines of business are as follows:
Bleached paper, paperboard and packaging products: The company
manufactures bleached products at four domestic mills and markets
those products as pulp, printing grade papers and board,
envelopes, food containers, folding cartons and cartons for liquid
products. Company woodlands provide significant volumes of wood
fiber to these mills. Sales of printing grade papers and board
accounted for 44% of consolidated sales for 1998 (1997-43%, 1996-42%).
Folding carton sales accounted for 10% of consolidated sales in 1998
(1997-11%, 1996-11%). Sales of envelopes accounted for 10% of
consolidated sales in 1998 (1997-10%, 1996-11%).
Unbleached paper, paperboard and packaging products: The
company manufactures unbleached products at three mills, including
two in Brazil, and markets those products as kraft paper and board
and corrugated shipping containers. Company woodlands provide
significant volumes of wood fiber to these mills. Sales of kraft
paper and board accounted for 13% of consolidated sales for 1998
(1997-13%, 1996-14%).
Chemicals: The company manufactures specialty chemical products
at four domestic locations. Major product groups are: activated
carbon products and services; printing ink resins and lignin-based
surfactants; tall oil fatty acid, rosin and derivative products.
The company's land development activities have been included in
corporate items.
Segment sales include intersegment sales valued at market
prices.
Segment operating profit is revenue less allocable operating
expenses. General net corporate expense includes nonoperating
overhead, research and development expenditures, interest expense
and interest and other income (expense).
Segment identifiable assets are those which are directly used
in segment operations. Corporate assets are principally
marketable securities, certain nontrade receivables, prepaid items
and other assets.
In 1998, 1997 and 1996, sales to a single customer accounted
for approximately 11% of consolidated sales primarily from the
company's bleached segment.
Export sales from the United States amounted to $499,792,000 in
1998 (1997-$487,698,000, 1996-$444,663,000).
Financial information by business segment follows:
In millions 1998 1997 1996
Sales
Bleached
Sales to unaffiliated companies $1,962.5 $2,020.8 $2,054.9
Intersegment sales 1.0 2.4 3.9
Total 1,963.5 2,023.2 2,058.8
Unbleached
Sales to unaffiliated companies 594.1 638.1 692.9
Intersegment sales 0.1 0.2 1.1
Total 594.2 638.3 694.0
Chemicals
Sales to unaffiliated companies 322.3 306.9 281.8
Intersegment sales 12.9 19.4 18.6
Total 335.2 326.3 300.4
Corporate items
Sales to unaffiliated companies 7.0 16.5 15.9
Eliminations [14.0] [22.0] [23.6]
Total [7.0] [5.5] [7.7]
Consolidated sales $2,885.9 $2,982.3 $3,045.5
Operating profit
Bleached $ 249.1 $ 261.9 $ 315.5
Unbleached 95.6 102.4 134.7
Chemicals 70.3 63.2 54.9
Corporate items [210.6] [180.9] [169.1]
Consolidated income before taxes $ 204.4 $ 246.6 $ 336.0
Depreciation and amortization
Bleached $ 191.8 $ 185.3 $ 170.1
Unbleached 59.6 59.4 50.2
Chemicals 22.6 17.1 13.7
Corporate items 7.0 7.4 6.4
Consolidated depreciation and
amortization $ 281.0 $ 269.2 $ 240.4
Capital expenditures
Bleached $ 283.9 $ 413.7 $ 314.3
Unbleached 94.3 98.5 123.2
Chemicals 38.0 97.6 57.4
Corporate items 3.5 4.1 16.0
Consolidated capital expenditures $ 419.7 $ 613.9 $ 510.9
Identifiable assets
Bleached $3,298.0 $3,200.9 $2,936.0
Unbleached 1,129.9 1,121.7 1,056.8
Chemicals 362.0 327.5 246.6
Corporate items 218.8 248.7 198.1
Consolidated assets $5,008.7 $4,898.8 $4,437.5
P. Selected quarterly information [unaudited]
In thousands, except per share data
Quarter 1998 1997 1996
Sales
First $ 702,113 $ 736,355 $ 748,728
Second 724,187 724,593 760,284
Third 727,826 738,227 757,715
Fourth 731,791 783,113 778,723
Year $2,885,917 $2,982,288 $3,045,450
Gross profit
First $ 133,682 $ 131,145 $ 170,463
Second 139,135 134,929 155,370
Third 130,835 137,467 149,498
Fourth 139,644 157,545 163,705
Year $ 543,296 $ 561,086 $ 639,036
Net income
First $ 32,516 $ 35,510 $ 62,387
Second 34,606 37,940 50,554
Third 31,674 37,538 43,619
Fourth 33,217 51,712 55,596
Year $ 132,013 $ 162,700 $ 212,156
Net income per common share-basic
First $ .32 $ .35 $ .61
Second .34 .37 .50
Third .31 .37 .43
Fourth .33 .51 .55
Year $1.30 $1.60 $2.09
Net income per common share-diluted
First $ .32 $ .35 $ .61
Second .34 .37 .49
Third .31 .37 .43
Fourth .33 .50 .54
Year $1.30 $1.58 $2.07
Responsibility for financial statements
Management is responsible for the information and representations
in the consolidated financial statements and related notes which
appear on pages 21 through 32 as well as all other financial
information contained in this report. These financial statements
were prepared in accordance with generally accepted accounting
principles and by necessity include some amounts determined using
informed estimates and judgments.
Management is responsible for establishing and maintaining a
system of internal control. The company's accounting systems
include internal controls which management believes provide
reasonable assurance of the reliability of its financial records
and the proper safeguarding and use of its assets. In
establishing the basis for reasonable assurance, management
balances the cost of the internal controls with the benefits they
provide. Additionally, it has long been the policy of the company
to conduct its business affairs in accordance with high ethical
standards, as set forth in the Westvaco Code of Conduct.
PricewaterhouseCoopers LLP, the company's independent accountants,
were engaged to audit the consolidated financial statements and were
responsible for conducting their audit in accordance with generally
accepted auditing standards. The appointment of PricewaterhouseCoopers
LLP as the company's independent accountants by the Board of Directors,
on the recommendation of the Audit Committee, has been ratified each
year by the shareholders. Their report immediately follows this statement.
The Audit Committee of the Board of Directors, composed solely of
nonmanagement directors, meets regularly with the company's
management, the internal audit manager and the independent
accountants to discuss accounting and financial reporting matters
and the nature, scope and results of audits. The Audit Committee
meets with the independent accountants both with and without the
presence of management. The committee also meets with the
company's general counsel to review the company's legal compliance
program as well as significant litigation issues. The independent
accountants and the internal audit manager have full and free
access to the Audit Committee.
John A. Luke, Jr.
Chairman, President and
Chief Executive Officer
James E. Stoveken, Jr.
Senior Vice President
November 16, 1998
Report of independent accountants
To the Board of Directors and Shareholders of
Westvaco Corporation
In our opinion, the consolidated financial statements
appearing on pages 21 through 32 of this report present
fairly, in all material respects, the financial position
of Westvaco Corporation and its subsidiaries at
October 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three
years in the period ended October 31, 1998, in conformity
with generally accepted accounting principles. These
financial statements are the responsibility of the
company's management; our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance
with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made
by management, and evaluating the overall financial
statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
11 Madison Avenue, New York, New York
November 16, 1998
ELEVEN - YEAR COMPARISON
Year ended October 31 1998 1997 1996 1995 1994 1993
EARNINGS, in millions
Sales $2,886 $2,982 $3,045 $3,272 $2,607 $2,345
Net income before
extraordinary charge
and cumulative effect of
accounting changes 132 163 212 283 104 57
Extraordinary charge-
extinguishment of debt,
net of taxes - - - (2) - (8)
Cumulative effect of
accounting changes,
net of taxes - - - - - 55
Net income 132 163 212 281 104 104
Depreciation and amortization 281 269 240 230 219 195
COMMON STOCK
Number of common
shareholders 20,140 20,240 20,760 20,490 13,890 14,570
Weighted average number of
shares outstanding
[in millions]
Basic 101 102 102 101 101 100
Diluted 102 103 102 102 101 101
Cash dividends [in millions] $89 $90 $90 $78 $74 $73
*Per share:
Net income - basic $1.30 $1.60 $2.09 $2.78 $1.03 $1.04
Net income - diluted 1.30 1.58 2.07 2.76 1.03 1.04
Dividends .88 .88 .88 .77 .73 1/3 .73 1/3
Book value 22.39 22.35 21.69 20.49 18.48 18.18
* Basic and diluted earnings per share for 1995 include an extraordinary
charge of ($.02) per share for the extinguishment of debt. Basic and
diluted earnings per share for 1993 include income for the cumulative
effect of accounting changes of $.55 and an extraordinary charge of ($.07)
per share for the extinguishment of debt.
FINANCIAL POSITION, in millions
Working capital $272 $400 $297 $358 $269 $244
Current ratio 1.6 2.0 1.7 1.8 1.7 1.7
Plant and timberlands, net $3,802 $3,684 $3,354 $3,140 $3,063 $3,078
Total assets 5,009 4,899 4,437 4,253 3,983 3,928
Long-term obligations 1,526 1,513 1,153 1,147 1,234 1,258
Shareholders' equity 2,246 2,279 2,210 2,081 1,862 1,824
Debt to total capital 34% 34% 29% 30% 34% 35%
OPERATIONS
Primary production of paper,
paperboard and market pulp
[tons, in thousands] 3,028 3,058 3,001 3,105 2,848 2,626
New investment in plant and
timberlands [in millions] $420 $614 $511 $309 $207 $442
Acres of timberlands
owned [in thousands] 1,465 1,461 1,452 1,453 1,453 1,462
Employees 13,070 13,370 13,430 14,300 14,170 14,440
Westvaco Corporation and consolidated subsidiary companies
ELEVEN - YEAR COMPARISON (continued)
Year ended October 31 1992 1991 1990 1989 1988
EARNINGS, in millions
Sales $2,336 $2,301 $2,411 $2,284 $2,134
Net income before extraordinary
charge and cumulative effect of
accounting changes 136 137 188 223 200
Extraordinary charge - extinguishment
of debt, net of taxes - - - - -
Cumulative effect of accounting
changes, net of taxes - - - - -
Net income 136 137 188 223 200
Depreciation and amortization 183 179 169 156 140
COMMON STOCK
Number of common shareholders 14,970 15,020 15,630 15,530 15,730
Weighted average number of shares
outstanding [in millions]
Basic 99 98 98 97 97
Diluted 100 99 98 98 98
Cash dividends, in millions $73 $70 $66 $61 $54
*Per share:
Net income - basic $1.37 $1.40 $1.93 $2.30 $2.07
Net income - diluted 1.36 1.39 1.92 2.28 2.05
Dividends .73 1/3 .70 5/6 .67 1/2 .62 2/3 .55 1/3
Book value 17.84 17.21 16.53 15.27 13.59
FINANCIAL POSITION, dollars in millions
Working capital $319 $310 $370 $328 $318
Current ratio 1.9 2.0 2.2 2.1 2.2
Plant and timberlands, net $2,838 $2,675 $2,539 $2,240 $1,871
Total assets 3,704 3,462 3,332 2,961 2,513
Long-term obligations 1,055 970 961 768 577
Shareholders' equity 1,777 1,699 1,619 1,488 1,318
Debt to total capital 31% 31% 32% 29% 26%
OPERATIONS
Primary production of paper,
paperboard and market pulp
[tons, in thousands] 2,595 2,587 2,512 2,499 2,488
New investment in plant and
timberlands [in millions] $352 $322 $472 $537 $393
Acres of timberlands owned
[in thousands] 1,468 1,483 1,487 1,467 1,462
Employees 14,520 14,440 15,040 14,960 14,750
Westvaco Corporation and consolidated subsidiary companies
Exhibit No. 21
SUBSIDIARIES OF THE REGISTRANT
Domestic Subsidiary Foreign Subsidiaries
Westvaco Development Corporation Rigesa, Ltda.
Summerville, South Carolina Valinhos, Sao Paulo, Brazil
Westvaco Asia, K.K.
Tokyo, Japan
Westvaco Europe, S.A.
Brussels, Belgium
Westvaco Canada, Ltd.
Toronto, Canada
Westvaco Foreign Sales Corporation
Brussels, Belgium
Westvaco Hong Kong, Ltd.
Hong Kong
Westvaco Korea, Ltd.
Seoul, South Korea
Westvaco de Mexico, S.A. de C.V.
Mexico City, Mexico
Westvaco Pacific Pty. Limited
Sydney, Australia
Westvaco Singapore Pte., Ltd.
Singapore
Westvaco Specialty Products, S.A.
Brussels, Belgium
Westvaco South Africa (Pty) Ltd.
Cape Town, South Africa
Westvaco Svitavy, SPOL. S R.O.
Svitavy, Czech Republic
Westvaco Taiwan, Ltd.
Taipei, Taiwan
Westvaco Worldwide Distribution, S.A.
Neuchatel, Switzerland
Exhibit No. 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-94699, 33-26823, 33-57879, 33-57881, 333-50703
and 333-50711) and in the Prospectus constituting part of the
Registration Statement on Form S-3 (No. 333-51423) of Westvaco Corporation
of our report dated November 16, 1998 appearing on page 34 of the Westvaco
Corporation 1998 Annual Report to Shareholders which is incorporated by
reference in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
New York, NY
November 24, 1998
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