FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1998
Commission file number 0-1051
CONSOLIDATED PAPERS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-0223100
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Wisconsin Rapids, WI 54495
(Address of principal executive offices)
(Zip Code)
715 422-3111
(Registrant's telephone number, including area code)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock par value $1.00 outstanding April 30, 1998
45,119,541 shares
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED PAPERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<CAPTION>
As Of
March 31 March 31
1998 1997 December 31
(Unaudited) (Unaudited) 1997
ASSETS
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 9,860 $ 22,431 $ 13,169
Receivables (net of reserves of
$6,508 as of March 31, 1998,
$5,546 as of March 31, 1997,
and $6,374 as of December 31,
1997) 159,658 120,605 160,874
Inventories
Finished stock 86,036 49,056 81,858
Unfinished stock 10,689 6,246 10,387
Raw materials and supplies 115,566 88,505 112,801
Total inventories 212,291 143,807 205,046
Prepaid expenses 34,801 32,113 26,506
Total current assets 416,610 318,956 405,595
Investments and other assets 57,914 77,525 61,065
Restricted cash related to leases 432,163 412,375 427,026
Goodwill 145,806 57,941 148,049
Plant and Equipment
Buildings, machinery and equipment 3,327,493 2,206,433 2,929,362
Less: Accumulated depreciation 926,482 802,450 883,265
2,401,011 1,403,983 2,046,097
Land and timberlands 39,847 36,927 39,774
Capital additions in process 141,908 229,902 219,904
Total plant and equipment 2,582,766 1,670,812 2,305,775
$ 3,635,259 $ 2,537,609 $ 3,347,510
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<S> <C> <C> <C>
Current Liabilities
Accounts payable $ 100,839 $ 71,322 $ 92,330
Other 148,940 102,223 117,031
Total current liabilities 249,779 173,545 209,361
Long-term debt 1,074,315 267,553 868,665
Capital lease obligations 461,987 442,507 456,321
Deferred income taxes 317,396 256,104 309,875
Postretirement benefits 156,239 101,068 152,470
Other noncurrent liabilities 30,011 15,137 33,151
Shareholders' Investment
Preferred stock, authorized and
unissued 15,000,000 shares - - -
Common stock, shares issued
45,194,461 as of March 31, 1998,
44,817,098 as of March 31, 1997,
and 45,004,949 as of December 31,
1997 45,194 44,817 45,005
Capital in excess of par value 98,467 82,821 91,405
Accumulated other comprehensive
income (2,508) (2,507) (2,610)
Treasury stock, at cost, 132,851
shares as of March 31, 1998,
25,608 shares as of March 31, 1997,
and 139,408 shares as of
December 31, 1997 (7,038) (1,250) (7,370)
Reinvested earnings 1,211,417 1,157,814 1,191,237
Total shareholders' investment 1,345,532 1,281,695 1,317,667
$ 3,635,259 $ 2,537,609 $ 3,347,510
CONSOLIDATED PAPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA - UNAUDITED)
Three Months Ended
March 31 December 31
1998 1997 1997
<S> <C> <C> <C>
Net sales $ 517,009 $ 379,841 $ 509,700
Cost of goods sold 412,882 315,396 411,892
Gross profit 104,127 64,445 97,808
Selling, general
and administrative expenses 23,107 19,119 23,503
Income from operations 81,020 45,326 74,305
Interest expense (24,044) (7,828) (22,526)
Interest income 7,633 6,150 7,718
Miscellaneous, net 463 1,604 ( 1,697)
Total other income
(expense), net (15,948) ( 74) (16,505)
Income before provision for
income taxes 65,072 45,252 57,800
Provision for income taxes 26,029 17,196 21,964
Net income $ 39,043 $ 28,056 $ 35,836
Net income per share - basic $ 0.87 $ 0.63 $ 0.80
Net income per share - diluted $ 0.86 $ 0.62 $ 0.79
Average number of
common shares outstanding 44,919,192 44,750,789 44,890,836
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
(DOLLARS IN THOUSANDS - UNAUDITED)
Three Months Ended
March 31 December 31
1998 1997 1997
<S> <C> <C> <C>
Balance beginning of period $ 1,191,237 $ 1,148,546 $ 1,174,266
Add: Net income 39,043 28,056 35,836
Deduct: Cash dividends (18,863) (18,788) (18,865)
Balance end of period $ 1,211,417 $ 1,157,814 $ 1,191,237
CONSOLIDATED PAPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS - UNAUDITED)
Three Months Ended
March 31
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 39,043 $ 28,056
Depreciation and depletion 44,403 28,904
Amortization of goodwill and intangibles 2,581 1,485
Debt premium amortization ( 1,773) -
Deferred income taxes 7,521 4,149
Earnings of affiliates ( 874) ( 868)
(Increase) decrease in current assets,
other than cash and cash equivalents ( 14,324) 14,444
Increase (decrease) in current
liabilities other than current
maturities of long-term debt 40,418 9,789
Increase (decrease) in postretirement
benefits 3,769 2,454
Increase (decrease) in other noncurrent
liabilities ( 3,140) 1,593
Net cash provided by operating activities 117,624 90,006
Cash Flows from Investing Activities:
Capital expenditures (200,972) (51,360)
Other 4,318 ( 8,263)
Net cash (used in) investing activities (196,654) (59,623)
Cash Flows From Financing Activities:
Cash dividends ( 18,863) (18,788)
Increase (decrease) in long-term debt 87,001 ( 4,914)
Other 7,583 2,822
Net cash provided by (used in) financing
activities 75,721 (20,880)
Net increase (decrease) in cash and cash
equivalents ( 3,309) 9,503
Cash and cash equivalents-beginning of period 13,169 12,928
Cash and cash equivalents-end of period $ 9,860 $ 22,431
Cash paid during the period for:
Interest $ 12,790 $ 6,041
Income taxes 9,466 1,445
<FN>
Notes to Financial Statements:
1. Reference is made to the Notes to Financial Statements that appear in the
1997 Annual Report on Form 10-K. The basic principles of those notes are
pertinent to these statements.
2. In January 1998, the company completed the exercise of its early purchase
option to buy out an operating lease on production equipment at Lake
Superior Paper Industries by paying $149.3 million in cash and assuming
$120.4 million in debt. This purchase resulted in an increase in fixed
assets of $269.7 million.
3. The company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" in the first quarter, 1998.
Other comprehensive income consists solely of the cumulative translation
adjustment and is not material in any period.
4. On April 27, 1998, the board of directors approved a two-for-one stock
split. The split will be completed by distributing one additional share of
stock for each share held on the record date of May 8, 1998.
* * * * * *
The financial information furnished is unaudited. It reflects all
adjustments that are, in the opinion of management, necessary to a fair
statement of the results.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Acquisition
Effective October 1, 1997, the company completed the acquisition of Repap USA,
Inc., the holding company for Repap Wisconsin, Inc. and Repap Sales
Corporation, in Kimberly, Wisconsin. The company renamed these operations
Inter Lake Papers, Inc., Inter Lake Wisconsin, Inc. and Inter Lake Sales
Corp., respectively. The operating results of the acquired companies
subsequent to the acquisition dates are included in the Consolidated
Statements of Income. Details of the acquisition are included in Note 2 of
the Notes to Consolidated Financial Statements in the company's 1997 Annual
Report.
Sales and Cost of Sales
Net sales for the first quarter were a record $517 million, an increase of 36%
compared with the first quarter of 1997. Shipments for the quarter increased
29% to 557,000 tons, compared with 430,000 tons for the same period in 1997.
The increase is primarily due to the October 1997 acquisition.
Net income for the first quarter of 1998 was $39 million, an increase of 39%
compared with $28 million for the same period in 1997. The net earnings
increase is primarily due to: improved selling prices for some paper grades;
volume increases, including the October 1997 acquisition; and improved
productivity on most grades.
The groundwood-free coated paper mill at the Wisconsin Rapids Division
operated at 100% of capacity as it did during the first quarter of 1997. The
Converting Division, which converts heavier-weight groundwood-free coated
rolls into sheets, operated at 100% of available capacity, compared with 97%
in the same period in 1997. Inter Lake Papers acquired in October 1997, which
manufactures a combination of groundwood-free coated papers and groundwood
coated papers operated at 100% of available capacity in the first quarter of
1998. The lightweight coated groundwood mills at the Biron, Wisconsin River
and at the Niagara division operated at 100% of capacity, compared with 91% in
the same period of 1997. The two smallest groundwood coated paper machines,
Nos. 41 and 61, were idle during the first quarter of 1997. The No. 41 paper
machine resumed operations on April 16, 1997, and No. 61 resumed operations on
July 6, 1997.
During the first quarter of 1998, the coated specialty paper division at
Stevens Point operated at 79% of capacity, compared with 100% in 1997. The
reduced operating rate reflects the March 1997 start-up of the No. 35 paper
machine, which increased this mill's available capacity 55%. The company's
supercalendered paper machine at its Lake Superior Paper Industries facility
underwent a 20-day rebuild in February, which included installation of a gap
former, enabling the machine to produce supercalendered "A-Plus" paper grades.
The mill otherwise operated at 100% of available capacity, compared with 96%
in the first quarter of 1997. Due to weak recycled fiber market conditions,
shipments of recycled fiber made from post consumer office wastepaper
declined, with operations at 86% of available capacity during the period,
compared with 100% during the first quarter of 1997. Shipments of corrugated
products remained level, while paperboard products decreased compared with the
first quarter of l997.
Gross profit margin as a percent of net sales increased in the first quarter
1998 to 20.1% from 17.0% in the first quarter 1997. Improved selling prices
for some paper grades, volume increases and improved productivity resulted in
the increase in gross profit margin. The first quarter 1997 was negatively
affected by one-time expenses of $2 million (pretax), associated with the
start-up of the new No. 35 specialty paper machine at Stevens Point Division.
The first quarter 1998 was negatively affected by $8 million (pretax) due to
the lost sales from the 20-day rebuild downtime plus associated delays in
recovering normal productivity at the company's supercalendered papermaking
facility.
Selling, general and administrative expenses increased $4 million when
compared with last year's first quarter. The 1998 increase resulted from
general inflation increases and the fold-in of the Inter Lake Papers' selling,
general and administrative expenses.
Other income (expense) increased $16 million in first quarter 1998 as compared
with first quarter 1997. Interest expense increased primarily due to the
higher debt associated with the October 1997 acquisition and the Lake Superior
Paper Industries operating lease buy-out.
The effective tax rate was 40.0% in 1998,compared with 38.0% for the first
quarter 1997.
Liquidity and Capital Resources
The October 1997 acquisition was accounted for as a purchase and the assets
and liabilities, which have been stated at their fair value, affect the
comparison to prior periods.
On March 31, 1998, the ratio of current assets to current liabilities was
1.7:1, compared with 1.9:1 at December 31, 1997. During the first quarter,
working capital decreased by $29 million. Cash and cash equivalents decreased
by $3 million and receivables decreased by $1 million. Inventories increased
by $7 million. Prepaid expenses increased by $8 million, primarily due to
higher prepaid insurance and tax benefits at March 31, 1998. Accounts payable
and other current liabilities increased by $40 million, due primarily to an
increase in interest payable, income taxes and leases payable at March 31,
1998, compared with December 31, 1997.
The company's debt increased $206 million during the quarter. The increase is
due primarily to the company's exercise of its early purchase option to buy
out an operating lease on production equipment at Lake Superior Paper
Industries by paying $149 million in cash and assuming $120 million in debt.
The resulting balance sheet long-term funded debt to capital ratio on
March 31, 1998, was 44%, compared with 40% on December 31, 1997, and 17% on
March 31, 1997.
Capital expenditures totaled $201 million compared with $51 million during the
same period in 1997. The major first quarter 1998 expenditures included $149
million for the buy-out of the operating lease at Lake Superior Paper
Industries, $8 million of a $86 million paper machine rebuild at Biron
Division, and $7 million of a $30 million paper machine rebuild at Lake
Superior Paper Industries. The company expects to spend a total of $389
million during 1998 for capital additions, including $149 million for the
lease buy-out at Lake Superior Paper Industries.
Year 2000 Compliance
The company continues to assess the impact of the Year 2000 on its operations
using a team of internal staff assisted by outside consultants. The company
presently estimates that it will spend $20 million to $30 million to remediate
existing business information and manufacturing systems over the next 18 to 24
months. In addition, a substantial amount of the company's engineering and
information technology efforts will be diverted to Year 2000 projects during
this period. The company's estimate does not include costs for items normally
budgeted for routine upgrades or replacement.
The company will refine its cost estimates as testing proceeds and as
additional information on the compliance status of specific items is received
from vendors and others. Decisions will then be made to modify, replace or
remove systems.
The company has initiated discussions with significant customers, suppliers
and financial institutions in an effort to determine and assess those parties'
Year 2000 compliance status. While the company believes that its efforts will
adequately address its own Year 2000 concerns, it is possible that the company
will be adversely affected by problems encountered by key customers and
suppliers.
Notation
Certain statements in Management's Discussion and Analysis in this report may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Because these forward-looking
statements include risks and uncertainties, actual results may differ
materially from those expressed in or implied by the statements. A discussion
of these risks and uncertainties may be found in the company's 1997 Annual
Report and its Form 10-K Report for the year ended December 31, 1997, under
the heading "Management's Discussion and Analysis - Liquidity and Capital
Resources - Forward-looking Statements".
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders was held on April 27, 1998. At the
meeting, the shareholders elected thirteen directors to hold office until the
next annual meeting of shareholders, and approved the Consolidated Papers,
Inc. 1998 Incentive Compensation Plan. Total shares represented in person or
by proxy were 40,459,661, which was 90.01 percent of the 44,949,487 shares
outstanding. The shares represented at the meeting were voted as follows:
Election of directors.
Shares Voted
For
R.B. Barker 40,103,082
W.N. Caldwell 40,154,748
J.D. Ericson 40,172,267
G.M. Evans 40,170,131
S.M. Hands 40,160,073
J.J. King 40,171,810
B.S. Kubale 39,931,541
D.R. Mead, Jr. 40,162,944
G.W. Mead 40,166,782
G.D. Mead 40,167,057
L.R. Nash 39,557,667
G.N. Rupp 38,773,421
J.S. Shiely 40,170,313
Withheld authority
for all directors 287,394
Withheld authority
on some directors 1,398,846
Consolidated Papers, Inc. 1998 Incentive Compensation Plan.
Shares Voted
For 34,984,956
Against 3,005,660
Withheld 393,382
Nonvotes 2,075,663
Item 6. Exhibits and Reports on Form 8-K.
(a) Furnish the exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarter ended
March 31, 1998.
Items 1, 2, 3, and 5 are not applicable and have been omitted.
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.
CONSOLIDATED PAPERS, INC.
Date May 12, 1998
/s/ Richard J. Kenney
By: Richard J. Kenney, Senior Vice President, Finance
Principal Financial Officer
Date May 12, 1998
/s/ Carl R. Lemke
By: Carl R. Lemke
Assistant Secretary
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the March 31, 1998 consolidated balance sheet and the consolidated statements
of income, reinvested earnings and cash flows for the three-month period ended
03/31/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 9,860
<SECURITIES> 0
<RECEIVABLES> 166,166
<ALLOWANCES> 6,508
<INVENTORY> 212,291
<CURRENT-ASSETS> 416,610
<PP&E> 3,509,248
<DEPRECIATION> 926,482
<TOTAL-ASSETS> 3,635,259
<CURRENT-LIABILITIES> 249,779
<BONDS> 1,074,315
<COMMON> 45,194
0
0
<OTHER-SE> 1,300,338
<TOTAL-LIABILITY-AND-EQUITY> 3,635,259
<SALES> 517,009
<TOTAL-REVENUES> 517,009
<CGS> 412,882
<TOTAL-COSTS> 412,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,044
<INCOME-PRETAX> 65,072
<INCOME-TAX> 26,029
<INCOME-CONTINUING> 39,043
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,043
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.86
</TABLE>
