UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the second quarter ended April 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 1-3013
WESTVACO CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1466285
(State of Incorporation) (I.R.S. Employer Identification No.)
299 Park Avenue, New York, New York 10171
(Address of principal executive offices)
Telephone Number 212-688-5000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months, and (2) has been subject to such filing requirements
for the past 90 days. YES X NO
At April 30, 1998, the latest practicable date, there were
101,313,702 shares outstanding of
Common Stock, $5 par value.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statement of Income for the three months
and six months ended April 30, 1998 and 1997
Consolidated Balance Sheet as of April 30, 1998
and October 31, 1997
Consolidated Statement of Cash Flows for the
six months ended April 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENT OF INCOME
[Unaudited]
In thousands, except per share data
Three Months Ended Six Months Ended
April 30 April 30
1998 1997 1998 1997
Sales $724,187 $724,593 $1,426,300 $1,460,948
Other income
(expense) 4,522 4,620 8,782 12,453
-------- -------- --------- ---------
728,709 729,213 1,435,082 1,473,401
Cost of products
sold (excludes
depreciation shown
below) 517,854 527,658 1,019,144 1,071,834
Selling, research
and administrative
expenses 60,218 56,059 117,525 114,599
Depreciation and
amortization 69,678 64,442 139,178 127,596
Interest expense 27,553 21,814 55,013 43,022
------- ------- --------- ---------
675,303 669,973 1,330,860 1,357,051
Income before taxes 53,406 59,240 104,222 116,350
Income taxes 18,800 21,300 37,100 42,900
------- ------- ------- -------
Net income $ 34,606 $ 37,940 $ 67,122 $ 73,450
======= ======= ======= =======
Net income per share:
Basic $.34 $.37 $.66 $.72
Diluted .34 .37 .66 .72
Shares used to compute net income per share:
Basic 101,387 101,952 101,552 101,931
Diluted 102,098 102,466 102,273 102,503
Cash dividends per share
of common stock $.22 $.22 $.44 $.44
The accompanying notes are an integral part of these financial
statements.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
CONSOLIDATED BALANCE SHEET
In thousands
April 30 October 31
1998 1997
[Unaudited]
ASSETS
Cash and marketable
securities $ 106,512 $ 175,354
Receivables 289,439 300,827
Inventories 289,162 270,519
Prepaid expenses 62,731 58,508
------- -------
Current assets 747,844 805,208
Plant and timberlands:
Machinery 4,815,868 4,739,179
Buildings 632,417 626,559
Other property, including
plant land 224,558 226,082
--------- ---------
5,672,843 5,591,820
Less: accumulated
depreciation 2,558,951 2,447,575
--------- ---------
3,113,892 3,144,245
Timberlands - net 265,265 269,216
Construction in progress 375,146 270,897
--------- ---------
3,754,303 3,684,358
Other assets 437,585 409,221
--------- ---------
$4,939,732 $4,898,787
LIABILITIES AND
SHAREHOLDERS' EQUITY
Accounts payable and
accrued expenses $ 344,690 $ 356,691
Notes payable and current
maturities of
long-term obligations 58,868 26,121
Income taxes 14,883 22,765
------- -------
Current liabilities 418,441 405,577
Long-term obligations 1,523,238 1,512,621
Deferred income taxes 743,162 702,021
Shareholders' equity:
Common stock, $5 par, at
stated value shares
authorized: 300,000,000
shares issued: 103,170,667
(1997-103,170,667) 761,702 761,522
Retained income 1,570,389 1,549,356
Cumulative translation
adjustment (25,781) -
Common stock in treasury,
at cost shares held:
1,856,965 (1997-1,240,644) (51,419) (32,310)
--------- ---------
2,254,891 2,278,568
--------- ---------
$4,939,732 $4,898,787
========= =========
The accompanying notes are an integral part of these
financial statements.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
[Unaudited]
In thousands
Six Months Ended
April 30
1998 1997
Cash flows from operating
activities:
Net income $ 67,122 $ 73,450
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for depreciation and
amortization 139,178 127,596
Provision for deferred income
taxes 27,946 16,903
(Gains) losses on sales of plant
and timberlands 221 (4,652)
Pension credits and other employee
benefits (22,107) (21,307)
Other, net 357 551
Changes in assets and liabilities:
(Increase) decrease in receivables 10,673 6,288
(Increase) decrease in inventories (19,604) (36,293)
(Increase) decrease in prepaid
expenses (3,348) (2,932)
(Decrease) increase in accounts
payable and accrued expenses (20,550) (11,643)
(Decrease) increase in income
taxes payable (7,626) (3,172)
Other, net 825 (24)
------- -------
Net cash provided by operating
activities 173,087 144,765
Cash flows from investing activities:
Additions to plant and timberlands (217,831) (317,185)
Proceeds from sales of plant and
timberlands 885 5,947
Other, net 149 2,069
Net cash used in investing ------- -------
activities (216,797) (309,169)
Cash flows from financing activities:
Proceeds from issuance of common
stock 2,761 1,188
Proceeds from issuance of debt 173,383 492,274
Treasury stock purchases (22,088) -0-
Dividends paid (44,743) (44,851)
Repayment of notes payable and
long-term obligations (132,482) (264,358)
Net cash (used in) provided by
financing activities (23,169) 184,253
Effect of exchange rate changes on
cash (1,963) (82)
------ ------
Increase (decrease) in cash and
marketable securities (68,842) 19,767
Cash and marketable securities:
At beginning of period 175,354 115,368
------- -------
At end of period $ 106,512 $ 135,135
======= =======
The accompanying notes are an integral part of these
financial statements.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
1. Statement of Information Furnished
The accompanying unaudited consolidated financial statements
have been prepared in accordance with Form 10-Q instructions
and in the opinion of management contain all adjustments
(consisting of only normal recurring accruals) necessary to
present fairly the financial position and results of
operations for the interim periods presented. These results
have been determined on the basis of generally accepted
accounting principles and practices applied consistently with
those used in the preparation of the company's 1997 Annual
Report on Form 10-K.
Certain information and footnote disclosures normally included
in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted.
It is suggested that the accompanying consolidated financial
statements be read in conjunction with the financial
statements and notes thereto incorporated by reference in the
company's 1997 Annual Report on Form 10-K.
2. Current Assets
Marketable securities of $10,319,000 ($82,647,000 at October
31, 1997) have maturities of three months or less and are
valued at cost, which approximates market.
Inventories included in the consolidated balance sheet consist
of the following:
April 30 October 31
In thousands 1998 1997
Raw materials $ 55,577 $ 62,025
Production materials, stores
and supplies 77,301 81,618
Finished and in process goods 156,284 126,876
------- -------
Total $289,162 $270,519
======= =======
3. Foreign Operations
Results of operations for Rigesa, Ltda., our Brazilian
operating subsidiary, were as follows:
Three Months Six Months
In thousands Ended April 30 Ended April 30
1998 1997 1998 1997
Sales $48,165 $53,631 $91,213 $110,961
Net income $ 8,012 $10,547 $13,591 $ 20,313
Rigesa's results for the second quarter of 1998 were
negatively affected by decreases in sales price and
product mix of 11.7%, partially offset by an increase in
volume of 1.5%. Year to date results were negatively
affected by decreases in price and product mix of 11.6%
and a decrease in volume of 6.2%.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
4. Net Income Per Common Share
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share," which replaced
Accounting Principles Board Opinion No. 15, "Earnings per
Share." For the periods ended April 30, 1998 and 1997,
the weighted average shares outstanding used to compute
basic and diluted earnings per share pursuant to SFAS No.
128 are as follows:
Three Months Six Months
In thousands Ended April 30 Ended April 30
1998 1997 1998 1997
Weighted average
shares outstanding
used to compute
basic earnings
per share 101,387 101,952 101,552 101,931
Incremental shares
issuable upon
the assumed exercise
of stock options 711 514 721 572
------ ------ ------ ------
Shares outstanding used
to compute diluted
earnings per share 102,098 102,466 102,273 102,503
======= ======= ======= =======
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Item 2. Management Discussion and Analysis of
Financial Condition and Results of Operations
[Unaudited]
Business Segment Information
Three Months Ended Six Months Ended
April 30 April 30
1998 1997 1998 1997
In millions
Sales
Bleached $493.4 $497.5 $ 972.1 $1,002.1
Unbleached 151.4 154.1 298.2 313.6
Chemicals 81.8 75.7 161.1 150.4
Corporate items (2.4) (2.8) (5.1) (5.2)
Consolidated ----- ----- ------- -------
sales $724.2 $724.5 $1,426.3 $1,460.9
===== ===== ======= =======
Operating profit
Bleached $ 60.5 $ 67.2 $ 127.1 $ 131.9
Unbleached 25.0 21.4 47.2 44.9
Chemicals 14.5 14.8 30.7 27.8
Corporate items (46.6) (44.1) (100.8) (88.2)
Consolidated ---- ---- ----- -----
income before
taxes $ 53.4 $ 59.3 $ 104.2 $ 116.4
==== ==== ===== =====
Results of Operations
Compared to the second quarter of 1997, the results for
the current quarter reflect the improving market
conditions for most of our products and the stabilization
of the Brazilian economy, offset by the effect of a 30-day
strike at six of our eight Envelope Division
locations. Second quarter 1998 earnings of $.34 per
share (basic and diluted) include the five cents per
share negative impact of the strike and compare to $.37
per share (basic and diluted) for the 1997 period.
Overall, sales of $724.2 million for the 1998 second
quarter remained virtually unchanged from the 1997 second
quarter. However, compared to the second quarter a year
ago, sales of coated fine printing papers, saturating
paper, paperboard for consumer and industrial packaging
and specialty chemicals all increased. Internationally,
second quarter market conditions were difficult but
better than we had expected in both Brazil and Asia.
Export sales from the United States increased
approximately 7% compared to the second quarter of 1997,
and accounted for 18% of the company's second quarter
sales. Total sales outside of the United States,
including sales of our foreign operating subsidiaries,
increased 2% from the prior year period, and accounted
for approximately 26% of consolidated sales. Gross
profit margin for the second quarter of 1998 remained
unchanged at 19%. The 1.9% decrease in cost of products
sold was attributable to decreases in cost and mix,
mainly as a result of cost improvement initiatives.
Depreciation and amortization expense for the second
quarter increased 8% from the prior year period due to
several important projects having been placed in service
in the latter part of 1997.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Management's Discussion and Analysis of
Financial Condition and Results of Operations
[Unaudited]
Bleached
Bleached segment sales for the second quarter decreased
less than one percent from the comparable 1997 period.
Bleached segment operating profit of $60.5 million was down
9.9% in the 1998 second quarter compared to the 1997 period.
Challenging conditions exist in our bleached board and
consumer packaging businesses which continue to face
very competitive markets, although, during the second
quarter, mill order backlogs for bleached board
products showed some improvement. Our Consumer
Packaging Division performed below its potential. We
have recently strengthened the division's management,
and we are developing new plans to improve performance.
Year to date, approximately 24% of bleached segment
sales were made to the tobacco industry for packaging
tobacco products; 62% of this paper and board was
exported or used to produce products for export.
Approximately 9% of bleached segment sales consisted of
packaging materials made for the domestic tobacco
industry for sale in the United States. The current
legal, regulatory and legislative pressures on the
tobacco industry, in particular legislation under
consideration in the Senate, 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 of this year, six of
the company's eight Envelope Division's locations went
out on strike. The strike, which was settled in early
March, reduced consolidated earnings by $.05 per share
(basic and diluted) for the second quarter of 1998.
During the third quarter of 1998 the company expects to
complete the rebuild of a large coated paper machine at
our Luke, MD, mill, to improve product quality and
facilitate development of new products. The rebuild is
expected to reduce fiscal third quarter earnings by
about five cents per share.
Unbleached
Sales for the unbleached segment decreased 1.8%
compared to the 1997 second quarter due to a decrease
in unit volume of 1.1% and a decrease in price and
product mix of .7%, although domestic pricing improved
during the second quarter of 1998 for several of our
unbleached products, compared with the prior year
period. Operating profit for the unbleached segment
increased to $25.0 million from the 1997 second quarter
profit of $21.4 million. The financial reforms
initiated by the Brazilian government appear to have
stabilized the country's economy, while enhancing
Brazil's longer term economic prospects. Rigesa's
unbleached operation accounted for approximately 25% of
segment operating profit in the second quarter of 1998,
compared to approximately 48% for the 1997 comparable
period, and we expect 1998 will likely be a year of
little or no economic growth 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.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Management's Discussion and Analysis of
Financial Condition and Results of Operations
[Unaudited]
Chemicals
Sales for the chemicals segment increased 8.0% from
the 1997 second quarter primarily due to an increase
in volume of 4.9% and improvements in price and
product mix of 3.1%. Operating profit for the
chemicals segment was $14.5 million for the 1998
second quarter compared to $14.8 for the 1997 period.
During the third quarter of 1997, operations began at
the company's new activated carbon plant in Wickliffe,
KY.
Other Items
Interest expense increased 26% for the second quarter
compared to the year earlier period due to the
issuance of sinking fund debentures in March and June
of 1997 and lower capitalization of interest in the
current quarter.
Westvaco is continuing to address the Year 2000 issue,
which may cause computer applications to fail or to
create erroneous results unless corrective measures
are taken. Based upon its continuing review of
existing systems and alternatives for bringing them
into compliance, the company expects that remediation
of its business information and manufacturing systems
required to address compliance with the Year 2000
issue will be accomplished in a timely manner. The
company's current estimate of the costs of remediation
is between $5 million and $15 million, which are being
expensed as incurred.
The American Institute of Certified Public Accountants
has issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, which provides
guidelines on the accounting for internally developed
computer software. Also issued was SOP 98-5,
Reporting on the Costs of Start-up Activities, which
requires that the costs of start-up activities be
expensed as incurred; unamortized costs are required
to be expensed at the time of adoption of the SOP.
The company believes that adoption of these SOPs,
which are effective for the company's fiscal year 2000,
will not have a material effect on its financial
position or results of operations.
Liquidity and Capital Resources
At April 30, 1998, the ratio of current assets to
current liabilities was 1.8 compared to 2.0 at October
31, 1997. Cash flows from operations totaled $173.1
million for the six months ended April 30, 1998,
compared to $144.8 million for the comparable 1997
period. Inventories increased from October 1997
levels, reflecting planned inventory levels and
increased competition in our major business areas.
New investment in plant and timberlands totaled $217.8
million for the first six months of 1998, compared to
$318.7 million for the same period of 1997. Cash
payments for these investments totaled $217.8 million
compared to $317.2 million in 1997. The decrease in
capital expenditures is related to the completion of
projects including paper machine improvements, the
construction of the Chemical Division's new carbon
plant in
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Management's Discussion and Analysis of
Financial Condition and Results of Operations
[Unaudited]
Liquidity and Capital Resources (cont'd)
Wickliffe, KY, and the removal of elemental chlorine
from all of our pulp bleaching processes, which were all
completed by the end of the prior year. At April 30,
1998, the amounts committed to complete all authorized
capital projects totaled approximately $296.8 million
and total capital expenditures in 1998 are expected to
approximate $450 million. The company may from time
to time use outside sources as needed to finance
future capital investments, as it has in the past.
The company had $40 million in commercial paper
outstanding at April 30, 1998. The company maintains
a $500 million revolving credit agreement, and there
was no borrowing under this arrangement during the
current period. The ratio of debt to total capital
employed was 34% at April 30, 1998, and October 31,
1997.
Environmental Matters
In 1995, the company authorized removal of elemental
chlorine from all of its pulp bleaching processes.
This important initiative, completed during 1997 at a
cost of approximately $110 million, represents a major
step already taken by Westvaco in addressing new EPA
regulations for the U.S. pulp and paper industry
regarding air and water quality. These regulations,
which have long been anticipated, were recently
published in the Federal Register. Implementation of
these new regulations will be required over the next
several years. In the next few months, as the
regulations are interpreted, the company expects to
reduce the upper end of the range of its previously
estimated compliance costs from $400 million to $200
million, including expenditures already incurred.
Downward revisions to its previously estimated
additional operating costs, which were in the range of
$25 to $50 million pretax annually, are also
anticipated.
The company is currently named as a potentially
responsible party with respect to the cleanup of a
number of hazardous waste sites under the Comprehensive
Environmental Response, Compensation, and Liability Act
(CERCLA) and similar state laws. While joint and
several liability is authorized under CERCLA, as a
practical matter, remediation costs will be allocated
among the waste generators and others involved. The
company has accrued approximately $5 million for
estimated potential cleanup costs based upon its close
monitoring of ongoing activities and its past
experience with these matters. The company has also
received notices of violation from the Kentucky
Division for Air Quality in connection with the
company's Wickliffe, KY, carbon plant (see Legal
Proceedings in Part II).
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Management's Discussion and Analysis of
Financial Condition and Results of Operations
[Unaudited]
Forward-looking Statements
Certain statements in this document and elsewhere by
management of the company that are neither reported
financial results nor other historical information
are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are not
guarantees of future performance and are subject to
known and unknown risks, uncertainties and other
factors which may cause or contribute to actual
results of company operations, or the performance or
achievements of the company, or industry results, to
differ materially from those expressed in or implied
by the forward-looking statements. In addition to
any such risks, uncertainties and other factors
discussed elsewhere herein, risks, uncertainties and
other factors that could cause or contribute to
actual results differing materially from those
expressed in or implied by the forward-looking
statements include, but are not limited to,
competitive pricing for the company's products;
changes in raw materials, energy and other costs;
fluctuations in demand and changes in production
capacities; changes to economic growth in the U.S.
and international economies, especially in Asia and
Brazil; governmental policies and regulations,
including but not limited to those affecting the
environment and the tobacco industry; and currency
movements.
Item 3. Quantitative And Qualitative Disclosures About
Market Risk
Not applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Part II, Other Information,
Item 1. Legal Proceedings in Westvaco's Quarterly
Report on Form 10-Q for the quarter ended January
31, 1998, regarding notices of violation from the
Kentucky Division for Air Quality in connection
with the company's alleged failure to demonstrate
compliance with a Prevention of Significant
Deterioration permit issued to the company's
Wickliffe, KY, carbon plant. On April 21, 1998,
Westvaco executed an Agreed Order and paid an
initial civil penalty of $150,000. Under the
provisions of the Agreed Order, an additional
$47,000 civil penalty was paid for the
noncompliance period of February through April
1998. The company is subject to continuing
monthly penalties until the plant meets all permit
requirements. Because of the progress already
made towards compliance these penalties will not
exceed $11,000 per month.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
PART II. OTHER INFORMATION
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
27. Financial data schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on March 6, 1998
and is incorporated herein by reference. The
contents of the report are summarized below:
Item 5. Other Events: - describing that the strike at six
of the company's eight envelope locations had been
settled.
A report on Form 8-K was filed on May 28, 1998
and is incorporated herein by reference. The
contents of the report are summarized below:
Item 5. Other Events: - describing the rebuilds of two
large coated paper machines at its mill in
Luke, MD, to improve product quality and
facilitate development of new products.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
WESTVACO CORPORATION
(Registrant)
June 11, 1998 /s/ James E. Stoveken, Jr.
James E. Stoveken, Jr.
Senior Vice President
(Principal Financial Officer)
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