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 September 30, 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 October 15, 1999
90,762,288 shares
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED PAPERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<CAPTION>
As Of
September 30 September 30
1999 1998 December 31
(Unaudited) (Unaudited) 1998
ASSETS
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 2,174 $ 10,494 $ 3,230
Receivables (net of reserves of
$6,871 as of September 30, 1999,
$6,772 as of September 30, 1998,
and $6,504 as of December 31,
1998) 173,129 157,643 147,307
Inventories
Finished stock 76,215 89,713 78,928
Unfinished stock 8,285 11,183 10,449
Raw materials and supplies 93,583 112,640 99,743
Total inventories 178,083 213,536 189,120
Prepaid expenses 32,484 48,047 48,550
Total current assets 385,870 429,720 388,207
Investments and other assets 61,410 58,399 59,319
Restricted cash related to leases 444,652 442,025 438,429
Goodwill 132,851 142,469 140,211
Plant and Equipment
Buildings, machinery and equipment 3,614,860 3,391,476 3,524,361
Less: Accumulated depreciation 1,148,717 1,010,323 1,048,409
2,466,143 2,381,153 2,475,952
Land and timberlands 41,474 40,598 40,831
Capital additions in process 61,800 172,791 84,537
Total plant and equipment 2,569,417 2,594,542 2,601,320
$ 3,594,200 $ 3,667,155 $ 3,627,486
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<S> <C> <C> <C>
Current Liabilities
Accounts payable $ 109,446 $ 100,167 $ 88,651
Other 149,607 151,656 134,310
Total current liabilities 259,053 251,823 222,961
Long-term debt 961,000 1,056,014 1,054,564
Capital lease obligations 469,559 470,558 465,613
Deferred income taxes 365,152 337,891 349,573
Postretirement benefits 159,717 162,988 148,508
Other noncurrent liabilities 31,343 30,525 31,416
Shareholders' Investment
Preferred stock, authorized and
unissued 15,000,000 shares - - -
Common stock, shares issued
91,049,919 as of September 30, 1999,
90,621,171 as of September 30, 1998,
and 90,713,876 as of December 31,
1998 91,050 90,621 90,714
Capital in excess of par value 68,474 58,255 61,657
Accumulated other comprehensive
income (2,878) (2,585) (2,705)
Treasury stock, at cost, 304,025
shares as of September 30, 1999,
186,026 shares as of September 30,
1998, and 409,426 shares as of
December 31, 1998 (7,093) (4,898) (9,906)
Reinvested earnings 1,198,823 1,215,963 1,215,091
Total shareholders' investment 1,348,376 1,357,356 1,354,851
$ 3,594,200 $ 3,667,155 $ 3,627,486
CONSOLIDATED PAPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA - UNAUDITED)
Three Months Ended Nine Months Ended
September 30 June 30 September 30
1999 1998 1999 1999 1998
<S> <C> <C> <C> <C> <C>
Net sales $ 471,431 $ 491,580 $ 435,119 $ 1,365,783 $ 1,517,026
Cost of goods sold 400,314 421,996 378,780 1,177,150 1,249,270
Gross profit 71,117 69,584 56,339 188,633 267,756
Selling, general
and
administrative
expenses 24,669 25,799 26,487 76,311 74,531
Income from
operations 46,448 43,785 29,852 112,322 193,225
Interest expense (19,894) (24,455) (20,022) (60,967) (72,785)
Interest income 5,381 8,058 5,423 16,849 23,337
Miscellaneous, net 467 1,245 1,547 4,282 2,766
Total other
income
(expense), net (14,046) (15,152) (13,052) (39,836) (46,682)
Income before
provision for
income taxes 32,402 28,633 16,800 72,486 146,543
Provision for
income taxes 12,960 11,454 6,720 28,994 58,618
Net income before
extraordinary
item 19,442 17,179 10,080 43,492 87,925
Loss on debt
extinguishment,
net of tax
benefit of
$3,069 - - - - (4,603)
Net income $ 19,442 $ 17,179 $ 10,080 $ 43,492 $ 83,322
Net income per
share before
extraordinary
item - basic $ 0.21 $ 0.19 $ 0.12 $ 0.48 $ 0.98
Net income per
share before
extraordinary
item - diluted $ 0.21 $ 0.19 $ 0.12 $ 0.48 $ 0.98
Net income per
share - basic $ 0.21 $ 0.19 $ 0.12 $ 0.48 $ 0.92
Net income per
share - diluted $ 0.21 $ 0.19 $ 0.12 $ 0.48 $ 0.92
Average number of
common shares
outstanding 90,725,897 90,389,164 90,648,913 90,600,312 90,160,542
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
(DOLLARS IN THOUSANDS - UNAUDITED)
Three Months Ended Nine Months Ended
September 30 June 30 September 30
1999 1998 1999 1999 1998
<S> <C> <C> <C> <C> <C>
Balance beginning
of period $ 1,199,339 $ 1,218,670 $ 1,209,164 $ 1,215,091 $ 1,191,237
Add: Net income 19,442 17,179 10,080 43,492 83,322
Deduct: Cash
dividends (19,958) (19,886) (19,905) (59,760) (58,596)
Balance end of
period $ 1,198,823 $ 1,215,963 $ 1,199,339 $ 1,198,823 $ 1,215,963
CONSOLIDATED PAPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS - UNAUDITED)
Nine Months Ended
September 30
1999 1998
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 43,492 $ 83,322
Depreciation and depletion 141,107 134,174
Amortization of goodwill and intangibles 7,683 7,601
Debt premium amortization ( 992) ( 7,026)
Undepreciated cost of plant and equipment
retirements 3,279 -
Deferred income taxes 21,788 24,398
Earnings of affiliates ( 2,833) ( 3,307)
(Increase) decrease in current assets,
other than cash and cash equivalents ( 6,967) ( 26,800)
Increase (decrease) in current
liabilities, other than current
maturities of long-term debt 29,724 46,080
Increase (decrease) in postretirement
benefits 11,209 10,518
Increase (decrease) in other noncurrent
liabilities ( 73) ( 2,626)
Net cash provided by operating activities 247,417 266,334
Cash Flows From Investing Activities
Capital expenditures (128,177) (302,518)
Proceeds from sale of assets 24,422 -
Other ( 2,352) 3,215
Net cash (used in) investing activities (106,107) (299,303)
Cash Flows From Financing Activities
Cash dividends ( 59,760) ( 58,596)
Proceeds from long-term debt - 160,000
Repayment of long-term debt ( 20,572) (143,831)
Net borrowings under lines of credit
and revolvers ( 72,000) 57,783
Other 9,966 14,938
Net cash provided by (used in) financing
activities (142,366) 30,294
Net increase (decrease) in cash and cash
equivalents ( 1,056) ( 2,675)
Cash and cash equivalents - beginning of
period 3,230 13,169
Cash and cash equivalents - end of period $ 2,174 $ 10,494
Cash paid during the period for:
Interest $ 50,387 $ 56,207
Income taxes 1,816 37,838
<FN>
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 in 1998 of $269.7 million.
3. In the second quarter 1998, the company recognized an extraordinary loss of
$4.6 million, after tax, or 6 cents per share - basic, 6 cents per share -
diluted. The extraordinary loss was the result of the early redemption of
the company's $143.8 million, face value, term loan assumed as part of the
operating lease buy out on production equipment at Lake Superior Paper
Industries (see Note 2). The loss consisted primarily of a prepayment
penalty and costs associated with the early redemption, net of the write-
off of the remaining debt premium and net of income tax benefits of
$3.1 million. The redemption of the 12.08% debt was financed with proceeds
from senior secured notes with interest rates between 6.93% and 7.30%.
4. In April 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 have been moved to other available capacity. In accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", the company recorded a $4.5 million pretax write-off of these
assets in the third quarter 1999. The write-off included $3.3 million for
the paper machine and $1.2 million for other related assets.
5. On May 28, 1999, the company sold the assets of Castle Rock Container
Company, a division of Consolidated Papers, Inc. and manufacturer of
corrugated products, to St. Laurent Packaging Corp. The sale proceeds
approximated net book value.
6. Summarized financial information concerning the company's reportable
segments is shown in the following table:
Printing Corporate
(Dollars in thousands) Papers Other Items Total
<S> <C> <C> <C> <C>
Three months ended
September 30, 1999
Revenues $ 417,724 $ 63,627 $ ( 9,920) $ 471,431
Segment profit (loss) 65,146 5,970 (38,714) 32,402
Three months ended
September 30, 1998
Revenues 432,248 70,689 (11,357) 491,580
Segment profit (loss) 63,830 5,753 (40,950) 28,633
Nine months ended
September 30, 1999
Revenues 1,195,217 202,112 (31,546) 1,365,783
Segment profit (loss) 168,157 20,475 (116,146) 72,486
Nine months ended
September 30, 1998
Revenues 1,333,190 216,141 (32,305) 1,517,026
Segment profit (loss) 248,869 18,886 (121,212) 146,543
* * * * *
The financial information 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 third quarter were $471 million, a decrease of $20 million
or 4% compared to one year ago. The first nine months' net sales of
$1,366 million represented a $151 million or 10% decrease compared with the
same period in 1998. Third quarter shipments were 551,000 tons, up 2%, but
the first nine months' shipments were 1,580,000 tons, down 4%, when compared
with similar periods in 1998. Net income for the third quarter 1999 was
$19 million, or 21 cents per share, an increase of 13% compared with
$17 million, or 19 cents per share in 1998.
The machines that produce groundwood-free coated printing papers at Wisconsin
Rapids Division and Inter Lake Papers operated at 91% of available capacity
for the third quarter and 88% of available capacity for the first nine months
of 1999, compared with 87% for the third quarter and 91% for the first nine
months of 1998. The Converting Division, which converts heavier-weight
groundwood-free rolls into sheets, operated at 85% of available capacity in
the third quarter of 1999 and at 92% of available capacity for the first nine
months of 1999, compared with 100% for the third quarter and 97% for the first
nine months 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 for the third quarter and 93% of available capacity for the
first nine months of 1999, compared with 94% for the third quarter and 97% for
the first nine months of 1998. The company's smallest coated groundwood paper
machine, No. 61 at the Wisconsin River Division, was idle during all of 1999.
On April 23, 1999, the company retired the No. 41 machine line at its Niagara
division. The company recorded a $4.5 million pretax write-off of these
assets in the third quarter 1999.
Lake Superior Paper Industries, which manufactures supercalendered printing
papers, operated at 100% of available capacity in the third quarter and the
first nine months of 1999 and 1998.
The coated specialty paper division at Stevens Point operated at 84% of
available capacity in the third quarter and 79% of available capacity for the
first nine months 1999, compared with 83% in the third quarter and 85% in the
first nine months of 1998.
Shipments of corrugated products declined 48% compared to the first nine
months of 1998 due to the May 28, 1999 sale of the company's corrugated
container facility to St. Laurent Packaging Corp.
Gross profit margin as a percent of net sales increased to 15.1% for the third
quarter, compared to 14.2% for the same period in 1998. The increase in gross
profit margin was due primarily to improved operating rates and continued
efforts to reduce costs. The gross profit margin for the first nine months of
1999 was 13.8%, compared to 17.7% for the same period in 1998. The decrease in
gross profit margin was due to reduced selling prices, less-than-optimal
product mix and periodic downtime partially offset by improved cost of sales.
The periodic downtime was caused by global over-capacity and a continued high
level of imports.
Selling, general and administrative expenses as a percent of net sales was
5.2% and 5.6% for the third quarter and first nine months of 1999,
respectively, compared with 5.2% and 4.9% for similar periods in 1998.
Other income (expense) improved $1 million in the third quarter 1999 compared
to 1998 and improved $7 million for the first nine months 1999 as compared
with similar periods in 1998. This improvement was due mainly to lower
interest rates and decreased debt.
The effective tax rate was 40.0% in both 1999 and 1998.
Liquidity and Capital Resources
On September 30, 1999, the ratio of current assets to current liabilities was
1.5:1, compared with 1.7:1 at September 30, 1998. During the third quarter,
working capital decreased by $10 million. Cash and cash equivalents decreased
by $1 million while receivables increased by $27 million due to increased
shipments at the end of the quarter. Days sales outstanding increased 2.5 days
compared to September, 1998. Inventories decreased $11 million, and prepaid
expenses decreased $3 million. Current liabilities increased $22 million
compared to June 30, 1999, primarily in accounts payable.
The company's long-term debt decreased $32 million during the third quarter
and $94 million during the first nine months of 1999. The decrease is due in
part to the use of proceeds from the sale of the company's corrugated
container facility. The resulting long-term funded debt to capital ratio on
September 30, 1999, was 42%, compared with 44% on both December 31, 1998 and
September 30, 1998.
Capital expenditures in the third quarter 1999 totaled $35 million compared
with $50 million during the same period in 1998. The major projects with
capital expenditures during the third quarter included: a paper machine
rebuild at Biron Division, a coating profiler and gauging system upgrade at
Wisconsin Rapids Division, a cutter and sheeter modification at Converting
Division and a winder rebuild at Lake Superior Paper Industries. The company
expects to spend a total of $175 million during 1999 for capital additions.
Year 2000 Compliance
General. The company's overall Year 2000 compliance project is nearly
complete. Internal efforts to identify, test and remediate the company's
business and process applications are expected to prevent any material
disruption of the company's business. The company has also completed surveys
of its critical customers and suppliers. Contingency plans are now being
finalized and implemented.
Internal Efforts. The company defined two major areas for its internal Year
2000 compliance efforts: business systems and process applications. In both
areas, inventories, assessments and testing have been completed. Compliant
systems have been installed where necessary. Some work remains, but no
obstacles to achieving satisfactory compliance have been identified.
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 were prioritized based on their relative importance to
the company's operations. The company focused its efforts with suppliers on
those whose failure to be Year 2000 compliant could significantly affect the
company's ability to do business. Prioritization also included an analysis of
alternative sources of raw materials or production equipment. The company has
also engaged in an ongoing dialogue with major customers. Key customers and
suppliers appear to be making good progress toward Year 2000 compliance, and
no major problems have been identified. However, the company has no control
over the readiness of its customers or suppliers.
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 have been reduced over the course
of the project as technical assessment, remediation and testing continued, and
as vendors provided compliance status information. In many cases, workarounds
were identified which allowed the company to avoid unnecessary costs. The
company presently estimates that it will spend approximately $18 million on
its overall Year 2000 project. This includes $12 million for remediation and
replacement of noncompliant systems, $1 million for outside consultants, and
$5 million for internal labor. The amount expected to be spent on remediation
and replacement includes previously budgeted items totaling $7 million, where
these expenditures were accelerated to meet Year 2000 requirements. As of
September 30, 1999, approximately 90 percent of the estimated total cost had
been expended.
Contingency Plans. All divisions and key departments are participating in
contingency planning. This requires identification of 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. It is possible that excessive stockpiling of products in advance of
the rollover could disrupt transportation systems. Contingency plans have
been developed to address these problems where possible. These plans are now
being finalized and implemented.
Should problems arise which 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.
Employee Matters
During the third quarter, the company executed a six-year contract with the
Paper, Allied-Industrial, Chemical and Energy Workers International Union,
which represents approximately 2,800 employees at the company's central
Wisconsin locations (Wisconsin Rapids, Whiting, Stevens Point and Biron).
Negotiations continue with four unions representing clerical and craft
employees at the central Wisconsin locations. Five-year contracts with these
unions expired April 30, 1999. Key issues in the negotiations include health
care and pension benefits.
Legal Proceedings
The United States Environmental Protection Agency has increasingly focused its
enforcement efforts on conducting nationwide audits of compliance with New
Source Review/Prevention of Significant Deterioration ("PSD") rules under the
Clean Air Act, particularly in the paper, utility and petroleum refining
industries. In April, 1999, the company's kraft mill received a request for
information under Section 114(a) of the Clean Air Act. The request from the
EPA spanned a 23-year period and focused on whether the mill obtained proper
permits under PSD rules governing expansion and other capital projects during
the period. The company complied with the request and has provided voluminous
information to the EPA.
In June, 1999, the Wisconsin Department of Natural Resources issued a Notice
of Violation applicable to the pressurized groundwood facility at the
company's Niagara Division. The NOV alleges that Niagara constructed and
operated the groundwood facility without first obtaining required construction
and operating permits. The alleged violations took place prior to the
company's acquisition of the Niagara operations and, if necessary,
indemnification may be available under the company's agreement with the prior
owner. The company and the DNR are discussing the steps necessary to resolve
this matter.
Forward-looking Statements
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 of the year ended December 31, 1998, under the
heading "Management's Discussion and Analysis - Forward-looking Statements."
PART II. OTHER INFORMATION
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
September 30, 1999.
Items 1, 2, 3, 4, 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 November 9, 1999 By /s/Richard J. Kenney
Richard J. Kenney, Senior Vice President, Finance
Principal Financial Officer
Date November 9, 1999 By /s/Carl R. Lemke
Carl R. Lemke, Assistant Secretary
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>This schedule contains summary financial information extracted from
the September 30, 1999 consolidated balance sheet and the consolidated
statements of income, reinvested earnings and cash flows for the nine-month
period ended 9/30/99 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 2,174
<SECURITIES> 0
<RECEIVABLES> 180,000
<ALLOWANCES> 6,871
<INVENTORY> 178,083
<CURRENT-ASSETS> 385,870
<PP&E> 3,718,134
<DEPRECIATION> 1,148,717
<TOTAL-ASSETS> 3,594,200
<CURRENT-LIABILITIES> 259,053
<BONDS> 961,000
<COMMON> 91,050
0
0
<OTHER-SE> 1,257,326
<TOTAL-LIABILITY-AND-EQUITY> 3,594,200
<SALES> 1,365,783
<TOTAL-REVENUES> 1,365,783
<CGS> 1,177,150
<TOTAL-COSTS> 1,177,150
<OTHER-EXPENSES> 76,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,967
<INCOME-PRETAX> 72,486
<INCOME-TAX> 28,994
<INCOME-CONTINUING> 43,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,492
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.48
</TABLE>
