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, 1999
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 22, 1999
90,615,948 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
1999 1998 December 31
(Unaudited) (Unaudited) 1998
ASSETS
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 7,012 $ 9,860 $ 3,230
Receivables (net of reserves of
$6,626 as of March 31, 1999,
$6,508 as of March 31, 1998,
and $6,504 as of December 31,
1998) 162,071 159,658 147,307
Inventories
Finished stock 81,996 86,036 78,928
Unfinished stock 7,649 10,689 10,449
Raw materials and supplies 103,597 115,566 99,743
Total inventories 193,242 212,291 189,120
Prepaid expenses 41,262 34,801 48,550
Total current assets 403,587 416,610 388,207
Investments and other assets 60,068 57,914 59,319
Restricted cash related to leases 429,609 432,163 438,429
Goodwill 137,953 145,806 140,211
Plant and Equipment
Buildings, machinery and equipment 3,544,095 3,327,493 3,524,361
Less: Accumulated depreciation 1,094,092 926,482 1,048,409
2,450,003 2,401,011 2,475,952
Land and timberlands 41,063 39,847 40,831
Capital additions in process 118,735 141,908 84,537
Total plant and equipment 2,609,801 2,582,766 2,601,320
$ 3,641,018 $ 3,635,259 $ 3,627,486
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities
Accounts payable $ 90,476 $ 100,839 $ 88,651
Other 147,195 148,940 134,310
Total current liabilities 237,671 249,779 222,961
Long-term debt 1,052,193 1,074,315 1,054,564
Capital lease obligations 455,210 461,987 465,613
Deferred income taxes 355,235 317,396 349,573
Postretirement benefits 152,910 156,239 148,508
Other noncurrent liabilities 32,657 30,011 31,416
Shareholders' Investment
Preferred stock, authorized and
unissued 15,000,000 shares - - -
Common stock, shares issued
90,896,802 as of March 31, 1999,
90,388,922 as of March 31, 1998,
and 90,713,876 as of December 31,
1998 90,897 90,389 90,714
Capital in excess of par value 64,907 53,272 61,657
Accumulated other comprehensive
income (2,658) (2,508) (2,705)
Treasury stock, at cost, 307,025
shares as of March 31, 1999,
265,702 shares as of March 31, 1998,
and 409,426 shares as of
December 31, 1998 (7,168) (7,038) (9,906)
Reinvested earnings 1,209,164 1,211,417 1,215,091
Total shareholders' investment 1,355,142 1,345,532 1,354,851
$ 3,641,018 $ 3,635,259 $ 3,627,486
CONSOLIDATED PAPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA - UNAUDITED)
Three Months Ended
March 31 December 31
1999 1998 1998
<S> <C> <C> <C>
Net sales $ 459,233 $ 517,009 $ 472,289
Cost of goods sold 398,056 412,882 399,995
Gross profit 61,177 104,127 72,294
Selling, general
and administrative expenses 25,155 23,107 27,507
Income from operations 36,022 81,020 44,787
Interest expense (21,051) (24,044) (23,133)
Interest income 6,045 7,633 7,831
Miscellaneous, net 2,268 463 2,241
Total other income
(expense), net (12,738) (15,948) (13,061)
Income before provision for
income taxes 23,284 65,072 31,726
Provision for income taxes 9,314 26,029 12,691
Net income $ 13,970 $ 39,043 $ 19,035
Net income per share - basic $ .15 $ .43 $ .21
Net income per share - diluted $ .15 $ .43 $ .21
Average number of
common shares outstanding 90,422,797 89,838,384 90,316,098
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
(DOLLARS IN THOUSANDS - UNAUDITED)
Three Months Ended
March 31 December 31
1999 1998 1998
Balance beginning of period $ 1,215,091 $ 1,191,237 $ 1,215,963
Add: Net income 13,970 39,043 19,035
Deduct: Cash dividends (19,897) (18,863) (19,907)
Balance end of period $ 1,209,164 $ 1,211,417 $ 1,215,091
CONSOLIDATED PAPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS - UNAUDITED)
Three Months Ended
March 31
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 13,970 $ 39,043
Depreciation and depletion 47,628 44,403
Amortization of goodwill and intangibles 2,366 2,581
Debt premium amortization ( 898) ( 1,773)
Deferred income taxes 5,662 7,521
Earnings of affiliates ( 952) ( 874)
(Increase) decrease in current assets,
other than cash and cash equivalents ( 11,598) ( 14,324)
Increase (decrease) in current
liabilities, other than current
maturities of long-term debt 14,710 40,418
Increase (decrease) in postretirement
benefits 4,402 3,769
Increase (decrease) in other noncurrent
liabilities 1,241 ( 3,140)
Net cash provided by operating activities 76,531 117,624
Cash Flows from Investing Activities
Capital expenditures ( 56,109) (200,972)
Other ( 1,441) 4,318
Net cash (used in) investing activities ( 57,550) (196,654)
Cash Flows from Financing Activities
Cash dividends ( 19,897) ( 18,863)
Repayment of long-term debt ( 19,473) -
Net borrowings under lines of credit
and revolvers 18,000 87,001
Other 6,171 7,583
Net cash provided by (used in) financing
activities ( 15,199) 75,721
Net increase (decrease) in cash and cash
equivalents 3,782 ( 3,309)
Cash and cash equivalents - beginning of period 3,230 13,169
Cash and cash equivalents - end of period $ 7,012 $ 9,860
Cash paid during the period for:
Interest $ 13,197 $ 12,790
Income taxes 340 9,466
Notes to Financial Statements:
1. Reference is made to the Notes to Financial Statements that appear in the
1998 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. In March 1999, the company announced an agreement in principle to sell the
assets of Castle Rock Container Company, a division of Consolidated
Papers, Inc. and manufacturer of corrugated products, to St. Laurent
Paperboard Inc. Closing is subject to completion of due diligence
activities, negotiation of a definitive purchase agreement, and approval
of the transaction by regulatory authorities and by the parties'
respective boards of directors.
4. Summarized financial information concerning the company's reportable
segments is shown in the following table:
Printing Corporate
(Dollars in thousands) Papers Other Items Total
Three months ended
March 31, 1999
Revenues $ 399,091 $ 70,678 $(10,536) $ 459,223
Segment profit (loss) 52,655 8,522 (37,893) 23,284
Three months ended
March 31, 1998
Revenues 455,064 71,676 ( 9,731) 517,009
Segment profit (loss) 97,905 6,222 (39,055) 65,072
5. On April 23, 1999, the company retired a paper machine production line at
its Niagara Division. The machine was retired as a result of market
conditions and production inefficiencies compared with other production
lines. The sales and resulting operating profit generated from the
previous operations of these assets will be moved to other available
capacity, and the company is currently investigating alternative uses of
the machine. Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of," requires that an impairment loss be recorded if
the expected future cash flows of an asset are less than the carrying
amount. Because estimated future cash flows are currently unknown, the
company has not yet determined if the net book value of $3.3 million has
been impaired.
* * * * * *
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
Sales and Cost of Sales
Net sales for the first quarter were $459 million, a decrease of 11% compared
with the record sales of $517 million in the first quarter of 1998. First
quarter shipments were 524,000 tons, down 6% compared with 557,000 tons for
the same period in 1998. The decreases were due primarily to a high level of
imports and decreased selling prices.
Net income for the first quarter of 1999 was $14 million, a decrease of 64%
compared with $39 million for the same period in 1998. The net earnings
decrease is primarily due to: decreased selling prices and less favorable
product mix along with lower capacity utilization at Inter Lake Papers.
The machines that produce groundwood-free coated papers at Wisconsin Rapids
Division and Inter Lake Papers operated at 89% of available capacity, compared
with 100% during the first quarter 1998. The Converting Division, which
converts heavier-weight groundwood-free coated rolls into sheets, operated at
98% of available capacity, compared with 100% in the same period in 1998. The
facilities that produce lightweight coated groundwood papers at Inter Lake
Papers and the Biron, Wisconsin River and Niagara divisions operated at 95% of
available capacity, compared with 100% during the first quarter 1998. The
company's smallest groundwood coated paper machine, No. 61, was idle during
the first quarter of 1999. On April 23, 1999, the company retired the No. 41
machine at its Niagara Division. The production generated from the operations
of this machine will be moved to other available capacity. The company is
currently evaluating alternative uses of the machine.
During the first quarter of 1999, the coated specialty papers division at
Stevens Point operated at 79% of capacity, as it did during the same period in
1998. The company's supercalendered paper machine at its Lake Superior Paper
Industries facility operated at 100% of available capacity in both the first
quarters 1999 and 1998. Due to weak recycled fiber market conditions,
shipments of recycled fiber made from postconsumer office scrap paper
declined, with operations at 81% of available capacity during the period,
compared with 86% during the first quarter of 1998. Shipments of corrugated
products declined, while paperboard products increased slightly compared with
the first quarter of l998.
Gross profit margin as a percent of net sales decreased in the first quarter
1999 to 13.3% from 20.1% in the first quarter 1998. Decreased selling prices
and less favorable product mix, along with lower capacity utilization at Inter
Lake Papers resulted in the decreased gross profit margin. The first quarter
1999 was also negatively impacted by one-time expenses of $8 million (pretax)
related to the major rebuild of the company's No. 25 paper machine production
line at its Biron division. The first quarter 1998 was negatively affected by
$8 million (pretax) related to lost sales and delays recovering normal
productivity for the 1998 rebuild of the company's supercalender paper machine
at Lake Superior Paper Industries.
Selling, general and administrative expenses increased $2 million when
compared with last year's first quarter. Other income (expense) improved $3
million in first quarter 1999 as compared with first quarter 1998, primarily
due to lower interest rates.
The effective tax rate was 40.0% in both 1999 and 1998.
Liquidity and Capital Resources
On March 31, 1999, the ratio of current assets to current liabilities was
1.7:1, compared with 1.7:1 at December 31, 1998. During the first quarter,
working capital change was insignificant. Cash and cash equivalents increased
by $4 million and receivables increased by $15 million due to higher March
1999 sales as compared to December, 1998. Days sales outstanding has not
changed materially. Inventories increased by $4 million. Prepaid expenses
decreased by $7 million, primarily due to lower prepaid tax as of March 31,
1999. Accounts payable and other current liabilities increased by $14
million, due primarily to an increase in interest payable and wages payable
offset slightly by a decrease in leases payable at March 31, 1999, compared
with December 31, 1998.
The company's debt decreased $2 million during the quarter. The resulting
balance sheet long-term funded debt to capital ratio was 44% on March 31,
1999, December 31, 1998, and March 31, 1998.
Capital expenditures totaled $56 million compared with $201 million during the
same period in 1998. The major first quarter 1999 expenditures included
$24 million of a $86 million project for the paper machine rebuild at Biron
Division. The first quarter 1998 capital expenditures included $149 million
for the buyout of the operating lease at Lake Superior Paper Industries. The
company expects to spend a total of $200 million during 1999 for capital
additions, including $46 million for projects at Inter Lake Papers.
Year 2000 Compliance
General. The company's Year 2000 efforts are continuing, with completion of
the final stages of its internal compliance project scheduled for August 1999.
The company has defined two major areas for its internal efforts: business
applications and process applications (all other hardware and software
systems). The company has defined a nine-step process toward Year 2000
compliance: (1) planning and awareness; (2) inventory; (3) triage (assess
risks and prioritize efforts); (4) detailed assessment (identify where
failures may occur, determine solutions and plans to repair or replace); (5)
resolution (repair, retire or replace noncompliant systems, create bridges to
other systems and perform unit testing); (6) test planning; (7) test
execution; (8) deployment of compliant systems; and (9) fallout (remove
bridges and patches, recertify standards). In both business and process
applications, planning and awareness, inventory, triage, and detailed
assessment are substantially complete. Work continues in the remaining areas.
The company's overall Year 2000 project was 84% complete at the end of the
first quarter of 1999.
In addition to its internal efforts, the company's Year 2000 team is also
focusing on external factors that may affect the company, including the
compliancy status of suppliers and customers. The external effort includes
the development of contingency plans to address identified risks.
Business Applications. This area includes in-house developed applications,
purchased software systems and all hardware required for business application.
Assessment in this area is substantially complete, and the Year 2000 team is
now developing and executing remediation plans for noncompliant purchased
software and hardware devices. Business applications are on schedule for
completion of system testing and deployment by August 1999.
Process Applications. This area includes the company's manufacturing
operations, where many items such as machine drives, scanners and process
control devices include date-dependent features. Assessment of these devices
has generally been completed, although some vendors have been slow to respond
to the company's inquiries. Remediation and testing of process applications,
which must be coordinated with scheduled mill downtime, are planned for
completion in August 1999.
Costs. The total cost associated with the hardware and software modifications
required by the Year 2000 problem is not expected to be material to the
company's financial position. Cost estimates are being refined as technical
assessment, remediation and testing continue and as vendors provide compliance
status information. The company presently estimates that it will spend
approximately $27 million on its overall Year 2000 project. This includes $20
million for remediation and replacement of noncompliant systems, $1 million
for outside consultant costs, and $6 million for internal labor costs. The
amount expected to be spent on remediation and replacement includes previously
budgeted items totaling $8 million, where these expenditures have been
accelerated to meet Year 2000 requirements. As of March 31, 1999,
approximately $8 million in program costs, including $3.5 million of internal
labor costs, have been funded from operating cash flows and expensed as
incurred. Capital costs for newly installed systems of approximately $5
million had been incurred or appropriated at the end of the first quarter of
1999.
External Factors - Customers and Suppliers. The company has surveyed its
customers and suppliers in an effort to determine and assess those parties'
Year 2000 compliance status. These groups have been prioritized based on
their relative importance to the company's operations. The company is
focusing its efforts with suppliers on those parties whose failure to be Year
2000 compliant could significantly affect the company's ability to do
business. Prioritization also includes an analysis of alternative sources of
raw materials or production equipment. The company is also engaged in an
ongoing dialogue with major customers. Most key customers and suppliers appear
to be making good progress toward Year 2000 compliance. The company's efforts
to determine its suppliers' and customers' Year 2000 status will continue
throughout 1999 as it monitors the progress of those parties' ongoing Year
2000 efforts.
Contingency Plans. The company believes that its internal compliance efforts
will prevent any material disruption of the company's business and process
applications caused by the Year 2000 problem. Current external efforts are
identifying certain potential risks, such as shutdown of key customers or
suppliers, breakdowns in transportation systems, or failures of the electrical
grid or the company's wide area network. Contingency plans are being
developed to address these problems where possible. These plans will involve
identification of alternative supply sources and may consider increased
inventories of raw materials and finished product. Identification of
alternative supply sources may prove difficult in some areas, particularly
with respect to existing assets that require repair, upgrade or replacement
parts from the original vendor.
Should problems arise that disrupt key suppliers' operations or prevent
customers from purchasing or using the company's products, the company would
likely take manufacturing downtime and other steps designed to minimize costs.
At this time, the company cannot predict the likelihood of a significant
disruption of its customers' or suppliers' businesses or of the economy as a
whole, either of which could have a material adverse impact on the company.
However, these potential problems are similar to those generally faced by
other manufacturers.
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 1998 Annual
Report and its Form 10-K Report for the year ended December 31, 1998, under
the heading "Management's Discussion and Analysis - 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 26, 1999. At the
meeting, the shareholders elected 13 directors to hold office until the next
annual meeting of shareholders. Total shares represented in person or by
proxy were 80,888,966, which was 89.40 percent of the 90,480,444 shares
outstanding. The shares represented at the meeting were voted as follows:
Election of directors.
Shares Voted
For
R.B. Barker 80,582,751
W.N. Caldwell 80,565,797
J.D. Ericson 80,583,284
G.M. Evans 80,580,208
J.J. King 80,583,536
B.S. Kubale 80,578,494
D.R. Mead, Jr. 80,556,168
G.W. Mead 80,584,837
G.D. Mead 80,585,542
L.R. Nash 79,976,780
G.N. Rupp 80,585,767
C.M. Sargent 80,581,538
J.S. Shiely 80,574,882
Withheld authority
for all directors 303,199
Withheld authority
on some directors 608,987
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, 1999.
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, 1999
/s/ Richard J. Kenney
By: Richard J. Kenney, Senior Vice President, Finance
Principal Financial Officer
Date May 12, 1999
/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, 1999 consolidated balance sheet and the consolidated statements
of income, reinvested earnings and cash flows for the three-month period ended
03/31/99 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-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 7,012
<SECURITIES> 0
<RECEIVABLES> 168,697
<ALLOWANCES> 6,626
<INVENTORY> 193,242
<CURRENT-ASSETS> 403,587
<PP&E> 3,703,893
<DEPRECIATION> 1,094,092
<TOTAL-ASSETS> 3,641,018
<CURRENT-LIABILITIES> 237,671
<BONDS> 1,052,193
<COMMON> 90,897
0
0
<OTHER-SE> 1,264,245
<TOTAL-LIABILITY-AND-EQUITY> 3,641,018
<SALES> 459,233
<TOTAL-REVENUES> 459,233
<CGS> 398,056
<TOTAL-COSTS> 398,056
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,051
<INCOME-PRETAX> 23,284
<INCOME-TAX> 9,314
<INCOME-CONTINUING> 13,970
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,970
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
