UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the third quarter ended July 31, 2000
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)
212-688-5000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements
for the past 90 days. YES X NO
At July 31, 2000 the latest practicable date,
there were 100,661,490 shares outstanding of
Common Stock, $5 par value.
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statement of Income for the three months
and nine months ended July 31, 2000 and 1999 2
Consolidated Balance Sheet as of July 31, 2000
and October 31, 1999 3
Consolidated Statement of Cash Flows for the
nine months ended July 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENT OF INCOME
[Unaudited]
In thousands, except per share data
Three Months Ended Nine Months Ended
July 31 July 31
2000 1999 2000 1999
Sales $928,022 $700,202 $2,632,273 $2,030,398
Other income (expense) 12,628 5,819 28,680 19,135
940,650 706,021 2,660,953 2,049,533
Cost of products sold
(excludes depreciation
shown below) 633,737 493,177 1,805,414 1,443,373
Selling, research and
administrative expenses 66,749 56,990 193,933 168,228
Depreciation and amortization 81,319 69,831 232,128 207,948
Restructuring charges 24,261 - 13,100 -
Interest expense 48,032 31,037 138,733 92,481
854,098 651,035 2,383,308 1,912,030
Income before taxes and
extraordinary charge 86,552 54,986 277,645 137,503
Income taxes 33,000 20,000 103,700 50,000
Income before extraordinary
charge 53,552 34,986 173,945 87,503
Extraordinary charge -
extinguishment of debt,
net of taxes - - (8,803) -
Net income $53,552 $ 34,986 $165,142 $ 87,503
Net income per share:
Basic and Diluted:
Income before extraordinary
item $ .53 $ .35 $ 1.73 $ .87
Extraordinary item - - (.09) -
Net income $ .53 $ .35 $ 1.64 $ .87
Shares used to compute net
income per share:
Basic 100,669 100,252 100,553 100,215
Diluted 100,945 100,759 100,953 100,464
Cash dividends per share of
common stock $ 0.22 $ 0.22 $ 0.66 $ 0.66
The accompanying notes are an integral part of these financial statements.
2
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
CONSOLIDATED BALANCE SHEET
[Unaudited]
In thousands
July 31, 2000 October 31, 1999
ASSETS
Cash and marketable
securities $ 300,448 $ 108,792
Receivables, net 391,550 318,369
Inventories 342,263 248,963
Prepaid expenses 80,876 61,884
Current assets 1,115,137 738,008
Plant and timberlands:
Machinery 5,697,470 5,094,773
Buildings 762,218 672,744
Other property,
including plant land 243,288 226,977
6,702,976 5,994,494
Less: accumulated depreciation 2,898,217 2,779,199
3,804,759 3,215,295
Timberlands - net 262,576 266,386
Construction in progress 128,107 99,702
4,195,442 3,581,383
Other assets 1,243,507 577,301
$6,554,086 $4,896,692
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and
accrued expenses $ 499,366 $ 361,959
Notes payable and current
maturities of
long-term obligations 125,786 50,200
Income taxes 16,871 12,955
Current liabilities 642,023 425,114
Long-term debt 2,667,753 1,426,854
Other long-term
obligations 74,538 75,323
Deferred income taxes 877,608 798,113
Shareholders' equity:
Common stock, $5 par, at
stated value
shares authorized: 300,000,000
shares issued: 103,170,667
(1999 - 103,170,667) 766,787 765,810
Retained income 1,703,163 1,607,504
Accumulated other
comprehensive income (loss) (116,832) (129,981)
Common stock in treasury,
at cost shares held: 2,509,177
(1999-2,877,824) (60,954) (72,045)
2,292,164 2,171,288
$6,554,086 $4,896,692
The accompanying notes are an integral part of these financial statements.
3
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
[Unaudited]
In thousands Nine Months Ended
July 31
2000 1999
Cash flows from operating activities:
Net income $165,142 $ 87,503
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for depreciation and
amortization 232,128 207,948
Provision for deferred income
taxes 71,230 44,766
(Gains) losses on sales of
plant and timberlands (7,792) (9,192)
Pension credits and other
employee benefits (73,139) (59,243)
Foreign currency transaction
loss (gain) 447 3,414
Loss on extinguishment of debt 8,803 -
Restructuring charges 13,100 -
Changes in assets and liabilities:
(Increase) decrease in receivables 7,720 (7,677)
(Increase) decrease in inventories (11,775) 10,811
(Increase) decrease in prepaid expenses (1,457) (3,440)
(Decrease) increase in accounts
payable and accrued expenses 11,484 (7,017)
(Decrease) increase in income taxes payable 4,621 (3,489)
Other, net 9,111 3,201
Net cash provided by
operating activities 429,623 267,585
Cash flows from investing
activities:
Additions to plant and timberlands (138,642) (176,977)
Payments for acquisitions (1,147,558) (22,659)
Proceeds from sales of plant and timberlands 32,050 15,514
Other, net (2,549) (460)
Net cash used in investing activities (1,256,699) (184,582)
Cash flows from financing
activities:
Proceeds from issuance of common stock 8,760 9,039
Proceeds from issuance of debt 2,040,217 744,405
Treasury stock purchases (1,829) (10,223)
Dividends paid (66,340) (66,121)
Repayment of notes payable and
long-term obligations (963,248) (734,456)
Net cash (used in) provided
financing activities 1,017,560 (57,356)
Effect of exchange rate changes on
cash 1,172 (16,580)
Increase (decrease) in cash and
marketable securities 191,656 9,067
Cash and marketable securities:
At beginning of period
108,792 105,050
At end of period $300,448 $114,117
The accompanying notes are an integral part of these financial statements.
4
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
1. Statement of Information Furnished
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion of
management contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position and the
results of operations for the interim periods presented. These results
have been determined on the basis of generally accepted accounting
principles and practices applied consistently with those used in the
preparation of the company's 1999 Annual Report on Form 10K.
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 1999 Annual Report on Form 10-K. Certain
reclassifications have been made to conform prior
years' data to the current format.
2. Current Assets
Marketable securities of $30,048,000 ($39,349,000 at October 31, 1999)
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:
July 31 October 31
In thousands 2000 1999
Raw materials $ 70,257 $ 45,453
Production materials, stores
and supplies 83,211 66,191
Finished and in process goods 188,795 137,319
Total $342,263 $248,963
If inventories had been valued at current cost, they would have
been $469,405,000 in 2000 (1999-$368,105,000).
3. Net Income Per Common Share
Basic earnings per share for all the periods presented have been
calculated using the weighted average shares outstanding. In computing
diluted earnings per share, incremental shares issuable upon the assumed
exercise of stock options have been added to the weighted average shares
outstanding. For the three months ended July 31, 2000 and 1999, options
of 3.0 million and 1.0 million for the exercise of common stock,
respectively, were not included in the calculation of
weighted average shares for diluted EPS because their effects would have
been antidilutive. For the nine months ended July 31, 2000 and 1999,
antidilutive shares of 2.0 million and 2.9 million, respectively,
were not included.
4. Segment Information
In 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related
Information, which the company adopted at October 31, 1999. Adoption of
this standard had no impact on our reported net income.
Previously reported segment information has been restated to conform
to the new standard.
5
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
4. Segment Information (cont'd)
Sales
(In millions) Inter- Operating Segment
Trade segment Total Profit Assets
Quarter ended July 31, 2000
Packaging $504.2 $1.6 $505.8 $ 78.2 $3,484.1
Rigesa 42.1 - 42.1 9.6 288.2
Packaging total 546.3 1.6 547.9 87.8 3,772.3
Paper 281.1 3.9 285.0 34.6 1,396.8
Chemical 82.3 6.0 88.3 16.5 323.2
Corporate and other 18.3 9.6 27.9 (52.4) 1,061.8
Total 928.0 21.1 949.1 86.5 6,554.1
Intersegment eliminations - (21.1) (21.1) - -
Consolidated totals $928.0 $ - $928.0 $86.5 $6,554.1
Sales
(In millions) Inter- Operating Segment
Trade segment Total Profit Assets
Quarter ended July 31, 1999
Packaging $335.6 $ 1.0 $336.6 $41.4 $2,114.7
Rigesa 34.3 - 34.3 7.8 266.5
Packaging total 369.9 1.0 370.9 49.2 2,381.2
Paper 244.7 5.2 249.9 14.9 1,478.4
Chemical 74.7 5.4 80.1 13.8 315.0
Corporate and other 10.9 7.7 18.6 (22.9) 799.8
Total 700.2 19.3 719.5 55.0 4,974.4
Intersegment eliminations - (19.3) (19.3) - -
Consolidated totals $700.2 $ - $700.2 $55.0 $4,974.4
Sales
(In millions) Inter- Operating
Trade segment Total Profit
Nine months ended July 31, 2000
Packaging $1,384.5 $ 3.3 $1,387.8 $218.6
Rigesa 121.4 - 121.4 19.7
Packaging total 1,505.9 3.3 1,509.2 238.3
Paper 850.7 16.8 867.5 103.0
Chemical 234.7 19.0 253.7 47.5
Corporate and other 41.0 29.0 70.0 (111.2)
Total 2,632.3 68.1 2,700.4 277.6
Intersegment eliminations - (68.1) (68.1) -
Consolidated totals $2,632.3 $ - $2,632.3 $277.6
6
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
4. Segment Information (cont'd)
Sales
(In millions) Inter- Operating
Trade segment Total Profit
Nine months ended July 31, 1999
Packaging $ 961.4 $ 3.0 $964.4 $118.4
Rigesa 104.1 - 104.1 18.4
Packaging total 1,065.5 3.0 1068.5 136.8
Paper 720.0 13.1 733.1 33.5
Chemical 214.0 14.5 228.5 39.1
Corporate and other 30.9 27.6 58.5 (71.9)
Total 2,030.4 58.2 2,088.6 137.5
Intersegment eliminations - (58.2) (58.2) -
Consolidated totals $2,030.4 $ - $2,030.4 $137.5
Note: The Restructuring charges described in Footnotes 6 and 8,
are reflected in Corporate and other segment operating
profit.
5. Comprehensive Income
Comprehensive income reflects changes in equity that result from
transactions and economic events from non-owner sources.
Comprehensive income for the periods presented below included
foreign currency translation adjustments associated primarily with
the company's Brazilian and Czech Republic operations. There was no
tax expense or tax benefit associated with the foreign currency
translation items.
(In thousands)
Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
Net income $53,552 $34,986 $165,142 $87,503
Other comprehensive
income (loss):
Foreign currency
translation adjustments 2,954 (12,878) 13,149 (84,849)
Comprehensive income (loss) $56,506 $22,108 $178,291 $ 2,654
6. Acquisitions/Dispositions
On December 29, 1999, the company completed its acquisition of Temple
Inland's bleached paperboard mill in Evadale, TX ("Evadale"). The total
purchase price, net of $82 million of debt assumed, was $566 million.
The company used existing cash reserves, commercial paper and $400
million of debentures issued in November 1999 to fund the purchase.
On January 7, 2000, the company completed the purchase of Mebane
Packaging Group ("Mebane"), a leading supplier of packaging for
pharmaceutical products and personal care items, based in Mebane, NC.
7
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
6. Acquisitions/Dispositions (cont'd)
The company used existing cash reserves, commercial paper and a
portion of the debentures issued in January 2000 to fund the purchase.
On July 11, 2000 the company completed its acquisition of IMPAC Group,
Inc. (IMPAC), a leading North American and European supplier of
packaging for entertainment products, cosmetics and health and beauty
aids with 12 plants in Europe and 8 plants in the United States. The
company used existing cash reserves, commercial paper and $400 million
of notes issued in June 2000 to fund the purchase.
The company accounted for these transactions using the purchase method
of accounting. Accordingly, the assets and liabilities of the acquired
businesses are included in the consolidated balance sheet at July
31, 2000. The purchase price for these acquisitions, including
transaction costs, has been allocated to assets acquired and
liabilities assumed based on estimated market values at the date of
acquisition. The purchase price allocation for these acquisitions is
preliminary and further refinements are likely to be made upon
completion of final valuation studies. Related goodwill of
approximately $555 million, which represents the excess of purchase
price over fair value of net tangible and intangible assets acquired,
is amortized on a straight-line basis over 40 years, which is the
expected period to be benefited. Goodwill has been recorded in
the other assets line on the balance sheet. Results for the third
quarter of fiscal 2000 include a full three months of contributions
from both Evadale and Mebane and less than one month of contribution
from IMPAC. The following pro forma consolidated results of operations
are presented as if the Evadale, Mebane and IMPAC acquisitions had been
made at the beginning of the periods presented. The following pro forma
data for the first nine months of fiscal 2000 reflects 216 days, 207
days and less than one month of Westvaco's operation of the
Evadale mill, Mebane and IMPAC, respectively. The balance of the first
nine months of fiscal 2000 and all of the prior year reflect the
results of these operations under the management of the prior owners.
Three Months Nine Months
Ended Ended
(Pro forma-in thousands, July 31, July 31,
except per share) 2000 1999 2000 1999
Net sales $990,388 $905,975 $2,954,840 $2,638,204
Income before
extraordinary items $48,709 $26,815 $154,571 $51,505
Per share of common stock:
Basic $.48 $.27 $1.54 $.51
Diluted $.48 $.27 $1.53 $.51
Net Income $48,709 $26,815 $145,768 $51,505
Per share of common stock:
Basic $.48 $.27 $1.45 $.51
Diluted $.48 $.27 $1.44 $.51
8
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
6. Acquisitions/Dispositions (cont'd)
The pro forma consolidated results of operations include adjustments to
give effect to depreciation, amortization of goodwill on a straight-line
basis over 40 years and interest expense on acquisition debt, together
with related income tax effects. The pro forma information is not
necessarily indicative of the results of operations that would have
occurred had the purchases been made at the beginning of the periods
presented, nor is it necessarily indicative of the future results of the
combined operations.
During the fourth quarter of fiscal 1999, certain assets of the company's
liquid packaging plant were written down to reflect the plant's planned
shutdown. During the second quarter of fiscal 2000,
the liquid packaging plant was sold to Blue Ridge Paper Products, Inc,
resulting in a pretax gain of $11.2 million, which is included in the
restructuring charges line. The gain resulted from a change in facts
and circumstances existing during the fourth quarter of fiscal 1999.
7. Extraordinary Item
Earnings for the nine months of 2000 include an extraordinary
charge of $8.8 million after-tax, or $.09 per share, from the early
retirement of higher interest rate debt.
8. Provision for restructuring
During the third quarter of 2000, due to an expected decline in
sales of folding cartons to U.S. tobacco markets, the company
reviewed certain long-lived assets in its consumer packaging
business for impairment. As a result of the review, production
facilities were written down to their fair value using an assets-
held-for-use model and a pretax impairment charge of
$24.3 million, including $3.3 million of associated goodwill, was
recorded in the third quarter of 2000 on the restructuring charges
line. The impairment was recorded because undiscounted cash flows
were less than the carrying value of the assets prior to the
impairment charge.
9. Recently Issued Accounting Pronouncements:
During 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging
Activities." During 1999, the FASB delayed the effective date of
SFAS No. 133 to the company's 2001 fiscal year. SFAS No. 133
requires that all derivative financial instruments be recorded on
the consolidated balance sheets at their fair value. Changes in
the fair value of derivatives will be recorded each period in
earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if
it is, the type of hedge transaction. Gains and losses on
derivative instruments reported in other comprehensive income will
be reclassified as earnings in the periods in which earnings are
affected by the hedged item. Given the current level of its
derivative and hedging activities, the company believes the impact
of this new standard will not be material.
9
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
9. Recently Issued Accounting Pronouncements (cont'd)
During May 2000, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 00-14, "Accounting for Certain Sales Incentives."
EITF No. 00-14 addresses the recognition, measurement and statement of
earnings classification of various sales incentives and will be effective
for fiscal year 2001. The company has determined that the impact of adoption
or subsequent application of EITF Issue No. 00-14 will not have a
material effect on its financial position or results of operations.
However, certain items previously included in selling, research and
administrative expenses on the consolidated statement of income will
be recorded as a reduction of operating revenues. Upon adoption,
prior period amounts will be reclassified to conform with the new
requirements.
10. Subsequent event
On August 3, 2000, the company completed its tender offer and consent
solicitation with respect to IMPAC Group's outstanding 10 1/8% Senior
Subordinated Notes due 2008, which it had assumed as part of the
acquisition. Westvaco paid total consideration of $1,118.88 (plus
accrued interest) for each $1,000 principal amount of notes tendered
including a Consent Payment of $25.00 per $1,000 principal amount of
Notes. The redemption of this debt did not have any effect on the
company's earnings.
10
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Third quarter financial results benefited from company-wide
initiatives implemented in connection with a strategic review
initiated last year, including the Evadale, Mebane and IMPAC
acquisitions, cost containment steps and success in improving our
market positions. Sales in the third quarter of 2000 ended July 31
totaled $928 million, 32.5% more than the same period a year ago,
and reflect an increase in volume of 24.0% and an 8.5% increase in
price and product mix. Sales for the first nine months of 2000 totaled
$2.6 billion, a 29.6% increase compared to the first nine months of
fiscal 1999, reflecting a 24.0% increase in volume and a 5.6% increase
in price and product mix. Third quarter 2000 earnings were $.53 per
share (basic and diluted) compared to $.35 per share (basic and
diluted) for the 1999 period. Earnings for the third quarter of 2000
include an impairment charge of $24.3 million
(pretax), or $.16 per share resulting from a writedown of U.S. assets
due to an expected decline in sales of folding cartons to domestic
tobacco markets. Earnings for the first nine months of fiscal 2000
totaled $165.1 million, or $1.64 per share (basic and diluted) up from
the $87.5 million, or $.87 per share (basic and diluted), earned
during the first nine months of 1999. Earnings for the nine months of
2000 include the impairment charge previously discussed, as well as an
extraordinary charge of $8.8 million, or $.09 per share from the early
retirement of high interest rate debt and a gain of $11.2 million
(pretax), or $.07 per share from the sale of liquid packaging assets.
The third quarter of 2000 benefited from a full three months of
contributions by the acquisitions made in the first quarter of a
bleached paperboard mill in Evadale, TX, and of Mebane Packaging Group
and less than one month of results from the acquisition of IMPAC
Group, as well as stronger business conditions.
Export sales from the United States increased 19% compared to the
third quarter of 1999, and accounted for 17% of the company's third
quarter sales. Total sales outside of the United States, including
sales of our foreign operating subsidiaries accounted for
approximately 22% of consolidated sales.
Gross profit margin for the third quarter of 2000 was 23% compared
with 20% for the prior year period due principally to price and volume
increases as well as benefits of our cost reduction program. For the
third quarter and the nine months ended July 31, 2000,
operating expenses also benefited from an increase in the pretax non-
cash pension credits of $6 million and $20 million, respectively,
reflecting cumulative favorable investment returns on pension plan
assets.
Packaging
Sales for the packaging segment increased 47.7% compared to the 1999
third quarter reflecting the effects of higher shipment volume,
product mix improvement and very strong performance by the company's
recently acquired bleached paperboard mill in Evadale, TX; unit volume
increased 42.5% and price and product mix improved by 5.2%. Operating
profit for the packaging segment increased to $87.8 million from the
1999 third quarter profit of $49.2 million. Both the increase
in our operating profit and higher shipment volume reflect a
full three months of contributions by our bleached paperboard mill in
Evadale, TX, and Mebane Packaging Group as well as product mix
improvements and stronger business conditions. We acquired Evadale in
late December, Mebane in early January and
11
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Packaging (cont'd)
IMPAC in early July. Rigesa's operation accounted for approximately
11% of segment operating profit in the third quarter of 2000, compared
to approximately 16% for the 1999 comparable period; this decrease
is due to contributions by our current year acquisitions.
During the first nine months of 2000, approximately 20% of packaging
segment sales were made to the tobacco industry for packaging tobacco
products compared to approximately 27% for the 1999 comparable period.
Of these tobacco sales, approximately 14% (1999-19%) of the segment
sales were exported or used to produce products for export with the
remaining 6% (1999-8%) made for the domestic tobacco industry for sale
in the United States. Increasingly competitive conditions as well as
the current legal, regulatory and legislative pressures on the tobacco
industry may have an adverse effect on packaging segment profitability.
While we would expect to compensate for such an adverse effect by
continuing our 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.
Paper
Paper segment sales for the third quarter increased 14% from the
comparable 1999 period. This change reflects an increase in unit
volume of 2.5% and an increase in price and product mix of 11.5%. Sales
of coated printing papers increased sharply in the third quarter
compared to the same period in 1999 as new products led to increased
market share and higher prices. Operating profit for the paper segment
was $34.6 million for the 2000 third quarter compared to $14.9 million
for the 1999 period. Nearly all of the improvement resulted from our
coated papers business including price and product mix improvement,
manufacturing efficiencies and higher shipment volumes along with cost
reductions.
Chemicals
Sales for the chemicals segment increased 10.1% from the 1999 third
quarter. This change reflects an increase in volume of 6.0% and an
increase in price and product mix of 4.1%. Operating profit for the
chemicals segment was $16.5 million for the 2000 third quarter compared
to $13.8 million for the 1999 period. This increase was due to strong
U.S. demand for tall oil based ingredients for ink resins, paper
sizing, rubber emulsifiers and other products and cost savings
activities. Asphalt emulsifier sales increased sharply compared to the
prior year period, due in part to the acquisition of the asphalt
emulsion business of Raschig GmbH. During the quarter we experienced a
normal seasonal decline in activated carbon sales as automobile
manufacturers reduce production to prepare for the new model
changeover.
Corporate & other items
During the fourth quarter of fiscal 1999, the company recorded a
restructuring charge that included the writedown of certain assets of
the company's liquid packaging plant to reflect the plant's planned
shutdown. During the second quarter of fiscal 2000, the plant was sold
to Blue Ridge Paper Products, Inc, resulting in a pretax gain of $11.2
million, which is included in the restructuring charges line. The gain
resulted from a change in facts and circumstances existing during the
fourth quarter of fiscal 1999. As described in Footnote 8, the company
recorded an impairment charge in the third quarter and expects to
record an
12
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Corporate & other items (cont'd)
additional charge in the range of $1-$2 million in the fourth quarter
relating to severance and other employee benefits. Interest expense
increased $17 million from the 1999 third quarter due to the issuance
of long-term debt in the first and third quarters of 2000.
Acquisitions
On December 29, 1999, Westvaco completed its acquisition of Temple-
Inland Inc.'s bleached paperboard mill in Evadale, Texas. The total
purchase price, net of $82 million of debt assumed, was $566
million, including working capital. The transaction also included a
long-term contract with Temple-Inland for the supply of wood fiber to
the mill. The Evadale mill's annual production capacity of 670,000
tons increased Westvaco's total bleached paperboard production
capacity to 1.6 million tons. The Evadale mill has been accretive to
earnings and cash flow since its acquisition, reflecting the mill's
significant progress in improving productivity and product quality.
On January 7, 2000, Westvaco completed the acquisition of Mebane
Packaging Group, Inc., a leading supplier of packaging for
pharmaceutical products and personal care items, based in Mebane, NC.
Mebane has seven packaging plants located in Greenville, MS; Garner
and Mebane, NC; Chatham and Kearny, NJ; Memphis, TN and Caguas,
Puerto Rico. The integration of Mebane into Westvaco is proceeding
on schedule, and the acquisition is expected to be accretive to the
company's cash flow and earnings within two years. This acquisition
increases the company's presence in select packaging markets
particularly pharmaceutical, health care and personal care.
On July 11, 2000, Westvaco completed the acquisition of IMPAC Group,
Inc., a leading global supplier of high-value specialty packaging and
printing solutions for a wide variety of consumer product markets
including entertainment, cosmetics and health and personal care. The
purchase price for IMPAC, which has 12 plants in Europe and eight
plants in the United States, was approximately $530 million,
including the assumption of $294 million in net debt and preferred
stock. Westvaco redeemed all of the preferred stock shortly after
the time of closing. Subsequent to July 31, 2000, the company
retired substantially all of IMPAC's debt, which is discussed below.
All of the acquisitions completed during the current year were
accounted for using the purchase method. The operating results of
the acquisitions have been included in the consolidated statement of
earnings from the dates of acquisition. The accompanying consolidated
balance sheet as of July 31, 2000 reflects preliminary allocations of
the purchase prices of the Evadale mill, Mebane Packaging and IMPAC
to the fair value of the assets acquired and liabilities assumed.
Related goodwill of approximately $555 million, which represents the
excess of purchase price over fair value of net assets acquired, is
amortized on a straight-line basis over 40 years, which is the
expected period to be benefited.
13
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
At July 31, 2000 and October 31, 1999, the ratio of current assets to
current liabilities was 1.7.
Cash flows from operations totaled $429.6 million for the nine months
ended July 31, 2000, compared to $267.6 million for the comparable
1999 period. Excluding acquisitions, new investment in plant and
timberlands totaled $133.2 million for the first nine months of 2000,
compared to $182.3 million for the same period of 1999. Cash
payments for these investments totaled $138.6 million compared to
$177.0 million in 1999. As part of its program to improve
return on investment, Westvaco plans to continue to hold
annual capital spending below annual depreciation levels over the
next few years. Current estimates indicate that 2000 capital spending
will total approximately $250 million. At July 31, 2000, the amounts
committed to complete all authorized capital projects totaled
approximately $186 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 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 48% at July
31, 2000, and 34% at October 31, 1999. Short-term borrowings
amounting to $250 million, whose repayment terms can be extended
under the loan agreement and which are intended to be outstanding
more than one year, have been classified as long-term obligations. In
connection with the acquisitions of Temple-Inland's bleached
paperboard mill and Mebane Packaging Group discussed above, in
November 1999 the company issued $200 million of 6.85% five-year
notes and $200 million of 7.10% ten-year notes, and in January 2000,
the company issued $400 million of 8.20% thirty-year notes to fund
these purchases, with the remainder to be added to the company's
general corporate funds and available for repayment of existing debt,
future capital outlays and working capital purposes. In connection
with the acquisition of IMPAC Group discussed above, the company
issued $200 million of floating rate three-year notes, at LIBOR plus
.9% reset quarterly and $200 million of 8.40% seven-year notes on
June 5, 2000.
Also in connection with the acquisition of IMPAC, on August 3, 2000,
the company completed its tender offer and consent solicitation with
respect to IMPAC's outstanding 10 1/8% Senior Subordinated Notes due
2008. Westvaco paid total consideration of $1,118.88 (plus accrued
and unpaid interest) for each $1,000 principal amount of notes
tendered. The total consideration includes a Consent Payment of
$25.00 per $1,000 principal amount of Notes.
Accounting changes: In fiscal year 2001, the company is required to
adopt a new accounting standard issued by the Financial Accounting
Standards Board: Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The company does not believe that the adoption of this
statement will have a material effect on the company's financial
position or results of operations. During May 2000, the Emerging
Issues Task Force ("EITF") issued EITF Issue No. 00-14, "Accounting
for Certain Sales Incentives." EITF No. 00-14 addresses the
recognition, measurement and statement of income classification of
various sales incentives
14
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Accounting changes: (cont'd)
and will be effective for fiscal year 2001. The company
has determined that the impact of adoption or subsequent
application of EITF Issue No. 00-14 will not have a material effect
on its financial position or results of operations. However,
certain items previously included in marketing, administration and
research costs on the consolidated statements of earnings will be
recorded as a reduction of operating revenues. Upon adoption, prior
period amounts will be reclassified to conform with the new
requirements.
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, represented a
major step by Westvaco in anticipating 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
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 approximately $11
million for remediation of these sites.
With regard to environmental matters, an additional matter in which the
company disputes any liability for fines and the need to install
additional pollution controls is described hereafter under "Item 1.
Legal Proceedings."
15
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements
Certain statements in this document and elsewhere by management of
the company that are neither reported financial results nor other
historical or present 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, demand
and competitive pricing for the company's products; developments in
information technology as well as other technological developments;
the success of new businesses and facilities acquired; ongoing cost
reduction efforts; changes in the availability and cost of raw
materials and energy; unanticipated manufacturing and distribution
disruptions; changes in production capacities; changes in economic
growth in the U.S. and international economies, especially in Asia
and Brazil; stability of financial markets; governmental policies and
regulations, including but not limited to those affecting the
environment and the tobacco industry; restrictions on trade; interest
rates and currency movements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company's financial market risk arises from fluctuations in
interest rates and foreign currency exchange rates. No material
changes occurred during the quarter to information previously
provided in the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1999.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, in April 1999, EPA, Region III, issued Notices
of Violation to seven paper industry facilities, including the company's
Luke, Maryland, mill, alleging violation of EPA's Prevention of
Significant Deterioration (PSD) regulations under the Clean Air Act
requiring special permitting and emissions evaluation prior to
industrial expansion. On August 28, 2000, an enforcement action in
federal district court in Maryland was brought against the company which
charges these violations and addresses capital projects at the
mill carried out in the 1980s. The action alleges that the company did
not obtain PSD permits or install required pollution controls, and seeks
penalties of $27,500 per day for each claimed violation together with
the installation of control equipment. The company strongly disagrees
with EPA's allegations of Clean Air Act violations by the company and
expects to vigorously defend this action.
16
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
10(a). Employment Agreement dated as of April 20, 2000,
by and between Westvaco Corporation and Richard H.
Block, Chief Executive Officer, IMPAC Group, Inc.
27. Financial data schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on May 25, 2000, and is
incorporated herein by reference. The contents of the report
are summarized below:
Item 5. Other Events - News release dated May 25, 2000,
the Company reported its third quarter 2000
sales and earnings.
Item 7. Financial Statements and Exhibits.
A report on Form 8-K was filed on June 5, 2000, and is
incorporated herein by reference. The contents of the report
are summarized below:
Item 5. Other Events - News release dated June 5,
2000, the Company announced the issuance of $400 million
debt in notes comprised of $200 million aggregate
principal amount of Floating Rate Notes due June 5, 2003
and $200 million aggregate principal amount of
8.40% Notes due June 1, 2007 in an underwritten public
offering.
Item 7. Financial Statements and Exhibits.
A report on Form 8-K was filed on July 7, 2000, and is
incorporated herein by reference. The contents of the report
are summarized below:
Item 5. Other Events - News release dated July 6, 2000,
the Company issued a news release announcing that it has
begun a cash tender offer for all of the $100 million
aggregate principal amount of IMPAC Group, Inc.'s 10 1/8%
Senior Subordinated Notes due 2008, as well as a
related consent solicitation to amend the indenture
governing the notes.
Item 7. Financial Statements and Exhibits.
A report on Form 8-K was filed on July 12, 2000, and is
incorporated herein by reference. The contents of the report
are summarized below:
17
WESTVACO CORPORATION
and Consolidated Subsidiary Companies
(b) Reports on Form 8-K: (cont'd)
Item 5. Other Events -
News release dated July 11, 2000, the Company announced
that it completed its previously announced acquisition
of IMPAC Group, Inc., a leading global supplier of
innovative packaging and printing solutions to consumer
markets including entertainment, cosmetics and health
and beauty aids.
Item 7. Financial Statements and Exhibits
A report on Form 8-K was filed on July 28, 2000, and is
incorporated herein by reference. The contents of the report
are summarized below:
Item 5. Other Events - News release dated July 28, 2000,
the Company announced that Rigesa, Ltda., a wholly owned
subsidiary of Westvaco, has reached a definitive
agreement to acquire all assets of Agaprint Embalagens,
a leading supplier of consumer packaging in Brazil.
Item 7. Financial Statements and Exhibits
A report on Form 8-K was filed on September 5, 2000, and is
incorporated herein by reference. The contents of the report
are summarized below:
Item 5. Other Events - News release dated September 5,
2000, the Company announced that it has reached a
definitive agreement to acquire a majority interest in
Alfred Wall AG, a leading European supplier of consumer
packaging based in Graz, Austria.
Item 7. Financial Statements and Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
WESTVACO CORPORATION
(Registrant)
September 13, 2000 /s/ Karen R. Osar
Karen R. Osar
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
18
