<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______ to_______
Commission File No. 1-7852
POPE & TALBOT, INC.
Delaware 94-0777139
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1500 S.W. 1st Ave., Portland, Oregon 97201
- ------------------------------------ ---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 228-9161
---------------------------
NONE
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by checkmark 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 close of the latest practicable date.
Common stock, $1 par value - 13,481,441 shares as of August 4, 1998
<PAGE> 2
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page No.
--------
<S> <C>
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 2
Consolidated Statements of Income -
Three and Six Months Ended June 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5-8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 13
</TABLE>
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PART I.
POPE & TALBOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,489 $ 31,911
Short-term investments 37,603 --
Accounts receivable 66,567 34,134
Inventories:
Raw materials 43,389 46,704
Finished goods 29,765 19,283
--------- ---------
73,154 65,987
Prepaid expenses and other 12,454 11,057
Discontinued operations net assets held for sale -- 67,861
--------- ---------
Total current assets 215,267 210,950
Properties:
Plant and equipment 426,420 279,298
Accumulated depreciation (190,453) (178,459)
--------- ---------
235,967 100,839
Land and timber cutting rights 11,669 7,326
--------- ---------
Total properties 247,636 108,165
Other assets:
Investment in equity securities -- 13,760
Deferred income tax assets, net -- 24,843
Other 13,327 18,049
--------- ---------
Total other assets 13,327 56,652
--------- ---------
$ 476,230 $ 375,767
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 41,800
Current portion of long-term debt 521 521
Accounts payable and accrued liabilities 62,260 40,488
Income taxes 3,267 2,026
--------- ---------
Total current liabilities 66,048 84,835
Noncurrent liabilities:
Reforestation 16,045 16,427
Postretirement benefits 12,412 6,338
Deferred income tax liabilities, net 3,740 --
Long-term debt, net of current portion 140,568 88,705
--------- ---------
Total noncurrent liabilities 172,765 111,470
Minority interest 53,221 --
Commitments and contingent liabilities -- --
Stockholders' equity:
Common stock 13,972 13,972
Additional paid-in capital 34,395 34,395
Retained earnings 158,618 150,386
Cumulative translation adjustments (13,345) (9,847)
Less treasury shares at cost (9,444) (9,444)
--------- ---------
Total stockholders' equity 184,196 179,462
--------- ---------
$ 476,230 $ 375,767
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
<PAGE> 4
POPE & TALBOT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Wood products $ 49,305 $ 70,014 $ 106,473 $ 134,328
Pulp products 57,197 18,323 103,522 38,101
------------ ------------ ------------ ------------
Total 106,502 88,337 209,995 172,429
Costs and expenses:
Cost of sales:
Wood products 52,528 59,225 107,924 115,665
Pulp products 56,914 18,984 107,692 40,557
Selling, general and administrative 5,579 4,199 12,008 8,190
Interest, net 1,809 1,590 4,108 3,164
------------ ------------ ------------ ------------
Total 116,830 83,998 231,732 167,576
------------ ------------ ------------ ------------
Income (loss) before income taxes, minority
interest and discontinued operations (10,328) 4,339 (21,737) 4,853
Income tax provision (benefit) (2,921) 1,997 (6,403) 2,268
------------ ------------ ------------ ------------
Income (loss) before minority interest
and discontinued operations (7,407) 2,342 (15,334) 2,585
Minority interest in subsidiary loss,
net of income tax (281) -- (1,615) --
------------ ------------ ------------ ------------
Income (loss) from continuing operations (7,126) 2,342 (13,719) 2,585
Discontinued operations:
Income from discontinued tissue operations (net of
tax provision of $1,048
for three months ended June 30, 1997, and $164
and $1,774 for the six months ended
June 30, 1998 and 1997, respectively) -- 1,639 256 2,774
Gain on disposal of discontinued tissue
operations (net of applicable income
taxes of $24,630) -- -- 26,818 --
------------ ------------ ------------ ------------
Income from discontinued operations -- 1,639 27,074 2,774
------------ ------------ ------------ ------------
Net income (loss) $ (7,126) $ 3,981 $ 13,355 $ 5,359
============ ============ ============ ============
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ (.53) $ .18 (1.02) .20
Income from discontinued operations -- .12 2.01 .20
------------ ------------ ------------ ------------
Net income (loss) $ (.53) $ .30 $ .99 $ .40
============ ============ ============ ============
Cash dividends per common share $ .19 $ .19 $ .38 $ .38
============ ============ ============ ============
Weighted average number of
common shares outstanding 13,481,441 13,363,997 13,481,441 13,363,888
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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POPE & TALBOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 13,355 $ 5,359
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 15,000 15,025
Gain on disposal of discontinued operations (51,448) --
Minority interest in subsidiary loss, net of income tax (1,615) --
Increase (decrease) in:
Accounts payable and accrued liabilities (8,015) (2,711)
Income taxes 1,241 1,853
Reforestation 39 859
Postretirement benefits 556 320
Deferred income taxes, net 13,702 (1,640)
Decrease (increase) in:
Accounts receivable (4,372) (8,319)
Inventories 21,509 24,328
Deposits on timber purchase contracts 457 192
Prepaid expenses 1,023 (809)
Other assets 2,554 (3,129)
--------- ---------
Net cash provided by operating activities 3,986 31,328
Cash flow from investing activities:
Purchase of short-term investments (37,603) --
Capital expenditures (10,694) (4,662)
Investment in subsidiary, net of cash acquired (35,846) --
Proceeds from disposal of discontinued operations 120,451 --
Proceeds from sale of other properties 463 23
--------- ---------
Net cash provided by (used for)
investing activities 36,771 (4,639)
Cash flow from financing activities:
Net decrease in short-term borrowings (41,800) (7,200)
Reduction in long-term debt (256) (240)
Partnership transaction tax settlement costs -- (1,846)
Cash dividends (5,123) (5,078)
--------- ---------
Net cash used for financing activities (47,179) (14,364)
--------- ---------
Increase (decrease) in cash and cash equivalents (6,422) 12,325
Cash and cash equivalents at
beginning of period 31,911 32,208
--------- ---------
Cash and cash equivalents at
end of period $ 25,489 $ 44,533
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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POPE & TALBOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements have
been prepared by the Company in accordance with the instructions to
Form 10Q and, therefore, do not include all information and footnotes
necessary for a complete presentation of financial position, results
of operations, and cash flow activity required under generally
accepted accounting principles (GAAP). In the opinion of the Company,
all adjustments (consisting of only normal accruals) necessary for a
fair presentation of results have been made, and the Company believes
such presentation is adequate to make the information presented not
misleading. These interim financial statements should be read in
conjunction with the consolidated financial statements and footnotes
in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
2. Acquisitions
On February 2, 1998, the Company acquired 6.8 million shares of
Harmac Pacific Inc. (Harmac) common stock for $77.8 million Canadian
dollars (approximately $53.4 million U.S. dollars). Combined with the
Company's previous Harmac stock purchases, this resulted in the
Company holding a 53 percent controlling ownership interest in
Harmac. Total consideration paid for Harmac, including acquisition
costs of $2.5 million Canadian dollars, was $101.8 million Canadian
dollars (approximately $69.9 million U.S. dollars).
The acquisition was accounted for as a purchase and the results of
operations of Harmac have been included in the consolidated financial
statements from the date of acquisition. The fair value of assets
acquired and liabilities assumed were as follows:
<TABLE>
<S> <C>
Current assets, other than cash $ 60,495
Property, plant and equipment 145,776
Other assets 728
Current liabilities (29,297)
Convertible subordinated debentures (52,556)
Other liabilities (20,429)
Minority interest (54,417)
-------------
Purchase price, net of cash received $ 50,300
=============
</TABLE>
The following unaudited pro forma information for the periods set
forth below give effect to the transaction as if it had occurred at
the beginning of each period after giving effect to certain
adjustments, including material differences between Canadian and U.S.
GAAP. The pro forma information does not necessarily reflect the
results of operations that actually would have been achieved had the
acquisition been consummated at that time.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 106,502 $ 124,922 $ 219,058 $ 247,497
Income (loss) from continuing
operations (7,126) 116 (14,501) (1,492)
Income from discontinued operations -- 1,639 27,074 2,774
Net income (loss) (7,126) 1,755 12,573 1,282
Basic and diluted income (loss) per share:
Loss from continuing operations (.53) .01 (1.08) (.11)
Income from discontinued
operations -- .12 2.01 .20
Net income (loss) (.53) .13 .93 .09
</TABLE>
5
<PAGE> 7
3. Discontinued Operations
On January 22, 1998, the Company entered into a definitive agreement
to sell assets of its tissue business (the business) for a total cash
consideration of $120.5 million and the assumption by the purchaser
of essentially all of the tissue business liabilities. This sale
closed on March 6, 1998. The liabilities assumed by the purchaser
included the $18.8 million City of Eau Claire note payable and the
business's $7.1 million postretirement benefit obligation. The
post-closing adjustments, based on the final working capital position
of the business, were settled during the quarter ended June 30, 1998,
and the final amount of cash received was adjusted accordingly.
The pre-tax gain on disposition of the business of $51.4 million was
accounted for as discontinued operations and includes closing costs
associated with the transaction and a provision of $0.4 million for
losses (including the allocation of interest expense) during the
phase-out period. The Consolidated Statements of Income for the three
and six month periods ended June 30, 1997, have been reclassified to
reflect the discontinuation of the tissue business.
4. Earnings Per Share
Certain Company stock options were not included in the computation of
diluted earnings per share because the options' exercise prices were
greater than the average market prices. Such stock options totaled
936,084 shares and 658,566 shares for the three and six months ended
June 30, 1998 and 1997.
Refer to Exhibit 11.1 of this filing for the computation of average
common shares outstanding and earnings per average common share.
5. Legal Matters and Contingencies
The Company is a party to legal proceedings, environmental matters
and other contingencies generally incidental to its business.
Although the final outcome of any legal proceeding or environmental
matter is subject to a great many variables and cannot be predicted
with any degree of certainty, the Company presently believes that the
ultimate outcome resulting from these proceedings and matters would
not have a material effect on the Company's current financial
position or liquidity; however, in any given future reporting period
such proceedings or matters could have a material effect on results
of operations.
In 1992, the Company was contacted by the local governmental owner of
a vacant industrial site in Oregon on which the Company previously
conducted business. The owner informed the Company that the site has
been identified as one containing creosote and coal tar, and that it
plans to undertake a voluntary cleanup effort of the site. The owner
has requested that the Company participate in the cost of the
cleanup. The Company is currently participating in the investigation
stage of this site with remediation and monitoring to occur over
several years, likely beginning in late 1999 or 2000. Based on
preliminary findings, the Company has estimated the likely cost of
remediation and monitoring to be in the range of $5 to $12 million
and that no amount within the range is more likely an outcome than
another. The ultimate cost to the Company for site remediation and
monitoring cannot be predicted with certainty due to the unknown
magnitude of the contamination, the varying costs of alternative
6
<PAGE> 8
cleanup methods, the cleanup time frame possibilities, the evolving
nature of remediation technologies and governmental regulations and
the inability to determine the Company's share of multi-party
obligations or the extent to which contributions will be available
from other parties. The Company has established reserves for
environmental remediation and monitoring related to this site in an
amount it believes is probable and reasonably estimable. The Company
has not assumed it will bear the entire cost of remediation to the
exclusion of other known potentially responsible parties (PRPs) who
may be jointly and severally liable. The ability of other PRPs to
participate has been taken into account based generally on the
parties' financial condition and probable contribution. Certain
recoveries from insurance carriers have been recorded as their
receipt is deemed probable and amounts are reasonably estimable.
On December 31, 1997, the Company filed a claim in the United States
District Court for the Western District of Washington in Seattle
against the Procter & Gamble Company (P&G) alleging anti-trust
violations and seeking a declaration of non-infringement and
invalidity of certain P&G disposable baby diaper patents. This claim
was filed in response to assertions made by P&G to the Company that
certain disposable diaper products produced by the Company's
discontinued disposable diaper operations infringed two of P&G's
inner-leg gather patents. P&G has indicated it believes the Company
is obligated to it with respect to the sale of diapers which
allegedly used the patents. The Company has asserted in its legal
action that it did not infringe any valid claims of the P&G patents
and also that P&G and another diaper supplier have taken actions to
prevent fair competition among sellers of disposable diapers. P&G
received a favorable judgment in the State of Delaware in December
1997 in an infringement action against Paragon Trade Brands, Inc.
(Paragon) based on the same diaper patents. Early in 1998, Paragon
appealed the Court's decision. If P&G proceeds against the Company
with legal action related to its patent infringement assertions and
is substantially successful in such legal action, the outcome could
have a material adverse affect on the Company's results of
operations, liquidity and financial position. The Company intends to
vigorously assert its position.
In 1985, the stockholders of the Company approved a Plan of
Distribution pursuant to which all of the Company's timber properties
and development properties and related assets and liabilities in the
State of Washington were transferred to newly-formed Pope Resources,
A Delaware Limited Partnership (the Partnership). The transfer
resulted in $10,266,000 of taxes currently payable in 1985, which was
charged to stockholders' equity.
Upon audit, the Internal Revenue Service (IRS) challenged the
distribution value of the assets reported by the Company for federal
income tax purposes. In January 1993, the Company petitioned the
United States Tax Court (Tax Court) in order to resolve the disputed
value of the distribution. The issue was tried in the Tax Court
during the third quarter 1995. The Company incurred costs (primarily
in 1995) in connection with the Tax Court litigation. In 1995, these
litigation costs, together with related tax payments and interest
charges totaling $4,884,000, net of tax benefits of $1,374,000, were
recognized as a reduction in additional paid-in capital with respect
to the Partnership transaction. In March and October, 1997, the Tax
Court rendered decisions concerning the Company's tax liability
arising from the Partnership transaction. The Company is presently in
the process of appealing the decision and filed notice as such with
the 9th Circuit Court of Appeals during December, 1997. In
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<PAGE> 9
the second quarter of 1997, based on the Company's best estimate of
the ultimate tax liability, taking into consideration the Tax Court's
March 1997 decision, the Company recognized a further reduction in
additional paid-in capital of $1,846,000. This charge to equity,
which represents the minimum in the estimated range of exposure to
the Company, reflected tax and interest amounts totaling $2,492,000,
net of tax benefits of $646,000. Taking into consideration the
potential outcomes of the Company's appeal of the Tax Court decision,
the Company estimates the potential for additional equity reductions
will range from zero (if the Company is wholly successful in its
appeal of the Tax Court decision) up to $4 million (if the Tax Court
decision becomes final or is sustained on appeal). Any further tax,
interest and litigation costs related to the Partnership transaction
will be recognized as a reduction in equity with respect to the
Partnership transaction.
In December 1996, the IRS proposed certain adjustments pertaining to
transactions between the Company and its wholly-owned Canadian
subsidiary, resulting in the assertion that additional taxes of
approximately $5 million were due for certain tax years under audit.
Although the final outcome of this matter cannot be predicted, the
Company presently believes that the results of the IRS proposed
adjustments will not have a material effect on the Company's
financial position or liquidity. However, in any given reporting
period, IRS adjustments pertaining to such transactions could have a
material effect on results of operations.
6. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," which establishes standards for
reporting and displaying comprehensive income and its components in a
full set of general-purpose financial statements. The statement is
effective for fiscal years beginning after December 15, 1997.
Comprehensive income is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ------------------------------
1998 1997 1998 1997
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net income $ (7,126) $ 3,981 $ 13,355 $ 5,359
Cumulative translation adjustments (6,137) 187 (3,498) (893)
------------ ----------- ------------- ------------
Comprehensive income $ (13,263) $ 4,168 $ 9,857 $ 4,466
============= =========== ============= ============
</TABLE>
8
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POPE & TALBOT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1998 AND 1997
(Unaudited)
RESULTS OF OPERATIONS
Pope & Talbot, Inc.'s (the "Company's") continuing operations lost $7.1 million,
or $.53 per diluted share, in the second quarter and $13.7 million, or $1.02 per
share, for the first six months of 1998. This compares to income from continuing
operations of $2.3 million, or $.18 per diluted share, in the second quarter of
1997 and $2.6 million, or $.20 per diluted share, for the first six months of
1997. The 1998 results reflected lower pulp prices due to reduced world-wide
demand for the product. In addition, the continuing Asian financial crisis led
to increased lumber supplies in the U.S. and lower lumber prices in the
Company's markets.
After the impact of discontinued operations, the Company's loss of $7.1 million
in the second quarter of 1998 compared with earnings of $4.0 million, or $.30
per diluted share in the same quarter a year ago and $20.5 million, or $1.51 per
diluted share, in the first quarter of 1998. On a year-to-date basis, earnings
were $13.4 million, or $.99 per diluted share, compared with $5.4 million, or
$.40 per diluted share, for the first six months of 1997.
Earnings for 1998 included the results of Harmac Pacific Inc. ("Harmac") from
February 2, 1998, the date of the Company's acquisition of 53 percent of
Harmac's common shares outstanding. Also, in the first quarter of 1998, the
Company sold the assets of its tissue business for cash and assumption of
certain tissue business liabilities by the purchaser. The Company currently
operates in principally two industries: wood products and pulp products. The
table and the following discussion below provides information about the
Company's operations by industry.
OPERATING RESULTS BY INDUSTRY:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(Thousands, unaudited) 1998 1997 1998 1997
- ---------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating profit (loss):
Wood products $ (4,072) $ 9,562 $ (3,346) $ 16,351
Pulp products (1,658) (1,371) (7,974) (3,831)
-------- -------- -------- --------
(5,730) 8,191 (11,320) 12,520
Interest expense, net (1,809) (1,590) (4,108) (3,164)
General corporate expense (2,789) (2,262) (6,309) (4,503)
-------- -------- -------- --------
Income (loss) before
income taxes, minority
interest and discontinued
operations $(10,328) $ 4,339 $(21,737) $ 4,853
======== ======== ======== ========
</TABLE>
Operating profit (loss) is total revenue less directly identifiable costs and
expenses. In computing operation profit (loss), none of the following items have
been included: general corporate expenses, non-operating other gains (losses),
net interest expense, income taxes, discontinued operations, and minority
interest.
9
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WOOD PRODUCTS. The Company operates five sawmills in the U.S. and Canada. Wood
products incurred an operating loss of $4.1 million in the second quarter of
1998 compared with an operating profit of $9.6 million in the same quarter last
year and $0.7 million in the first quarter of 1998.
Revenues from wood products declined as a percentage of total revenues to 46
percent in the second quarter of 1998 compared with 79 percent in the second
quarter of 1997, corresponding with lower lumber prices and the increase in
pulp revenues associatated with the acquisition of additional pulp facilities
in 1998. Wood products revenues were $49.3 million in the second quarter of
1998, compared with $70.0 million in the same quarter of 1997 and $57.2 million
in the first quarter of 1998. On a year-to-date basis, wood products revenues
were $106.5 million compared with $134.3 million in the same period a year ago.
Lumber prices hit a cyclical peak in the second quarter of 1997 and have fallen
steadily since then. Average sales prices in the second quarter of 1998 were 26
percent lower than the same quarter last year and seven percent below the first
quarter of 1998.
The Company's second quarter 1998 lumber sales volume of 140.8 million board
feet was down seven percent from the same quarter a year ago and three percent
from the first quarter of 1998. Year-to-date lumber sales totaled 286.1 million
board feet compared with 290.2 million board feet in the first half of 1997. At
the price levels experienced through June 30, 1998, the import duties imposed by
the U.S. and Canadian Softwood Lumber Agreement made additional U.S. sales from
the Company's Canadian operations uneconomical. As a result, Pope & Talbot's
Canadian mills experienced a one week shutdown at the end of June 1998, and one
mill was also down a week in July 1998. The Company will evaluate the need for
additional shutdowns in the second half of 1998.
Approximately 75 percent of the Company's lumber capacity is located in British
Columbia. Raw material costs in the second quarter of 1998 were largely
unchanged compared with the prior periods and should decrease in the future as
current market conditions should lead to lower stumpage costs. In the second
quarter of 1998, the Company was informed of its fiscal year 1998/1999 quota
volumes, effective April 1, 1998. The tariff-free volume for the current
fiscal year was reduced approximately 12 million board feet, and the volume
allocation subject to the $50 per thousand board feet tariff was increased
approximately 1 million board feet.
Residual chips produced in the Company's lumber business in excess of what it
uses in its pulp business are sold. In July 1998, Celgar Pulp Co., the
Company's largest chip customer, filed for bankruptcy and shut down its mill
indefinitely. The chips this customer would have purchased were used by the
Company's Nanaimo pulp mill or sold in the open market. Pope & Talbot does not
anticipate any material impact from the loss of this chip customer.
PULP PRODUCTS. The Company's pulp segment consists of its majority-owned Harmac
mill in Nanaimo, B.C. and its Halsey, Oregon mill. Harmac's results are included
from February 2, 1998. The $1.7 million pulp products operating loss in the
second quarter of 1998 was significantly less than the first quarter 1998
opearting loss of $6.3 million and slightly higher than the second quarter
1997 operating loss of $1.4 million.
Pulp prices in the second quarter of 1998 at the Harmac mill increased as the
European benchmark price of Northern Bleached Softwood Kraft (NBSK) pulp
averaged $558/ton, up from $530/ton in the first quarter of 1998. Harmac sold
84,000 tons of pulp in the second quarter of 1998 and 62,000 tons in the prior
quarter subsequent to the acquisition by Pope & Talbot.
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<PAGE> 12
The Harmac mill produced 81,500 tons of NBSK pulp in the second quarter of 1998,
and 52,900 tons in the previous quarter subsequent to the acquisition by the
Company. The weak lumber market has resulted in a lower level of logging and
lumber production, which, in turn, has reduced the residual chip and pulp supply
and led to steadily increasing fiber prices since the third quarter of 1997. In
the second quarter of 1998, Harmac modified its mix of raw materials and reduced
its fiber costs relative to the first quarter of 1998.
Pulp prices for sales in the second quarter of 1998 at the Halsey mill were flat
compared with the previous quarter and down slightly from the second quarter of
1997. Year-to-date 1998 pulp prices were one percent lower than the first half
of 1997 pulp prices. Pulp sales volume decreased to 43,000 tons in the second
quarter of 1998 from the previous quarter's 46,000 tons and 46,500 tons in the
second quarter of 1997. Approximately 40 percent of the Halsey mill output was
sold under contract to one customer, with a pricing formula tied to changes in
the price of southern mixed (U.S.) bleached hardwood kraft pulp.
Chip costs have been increasing since the fourth quarter of 1997. Sawdust costs
have also risen this period, but at a slower rate. In light of this raw material
cost differential, Halsey's 1998 sales mix was 35 percent softwood pulp and 65
percent sawdust pulp. Wood costs per ton of production in the second quarter of
1998 averaged $126 and year-to-date averaged $124, compared with $89 and $93 in
the respective comparable periods of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1998, operations generated cash of $4.0 million.
Income from continuing operations before non-cash charges for depreciation and
amortization generated $1.3 million of cash during this period. Increases in
current and deferred income taxes during the first six months totaling $14.9
million was due primarily to the utilization of deferred tax assets related to
net operating loss carryforwards in connection with the gain on sale of the
discontinued tissue business. Reductions of inventories, due primarily to
seasonal decreases in log inventories from their relatively high year-end 1997
levels, generated cash of $21.5 million.
During the first quarter of 1998, the Company acquired a controlling interest in
Harmac for cash. The investment in Harmac, net of cash acquired of $19.6
million, was $35.8 million, and included common stock purchases and acquisition
costs. The payment for the Harmac shares in the first quarter of 1998 was made
from existing cash and cash equivalent balances and borrowings of approximately
$20 million under the Company's revolving-credit agreement. From the sale of
the tissue business, the Company received $120.5 million in cash and the
purchaser assumed essentially all of the tissue business liabilities. The
Company used the cash received primarily to pay off short-term debt
obligations and to purchase short-term investments.
The Company invested $10.7 million in capital projects during the first six
months of 1998 and estimates that total 1998 capital spending will approximate
$30 million. Capital spending in 1998 includes various cost reducing, business
sustaining and profit improvement projects, the largest being a $9 million
project at the Castlegar sawmill to install an energy system, and a $9 million
project at the Harmac pulp mill to install a barge unloading facility which will
be completed during the fourth quarter of 1998. It is anticipated that capital
spending for the remainder of the year will be financed from internally
generated cash, existing balances of cash and cash equivalents and, if
necessary, from the Company's lines of credit.
Through the first six months of 1998, the Company paid $5.1 million of
dividends. On July 15, 1998, the Company declared its third quarter dividend of
19 cents per share, payable on August 14, 1998. Pope & Talbot had borrowing
capacity of $75 million under a revolving credit agreement at June 30, 1998.
11
<PAGE> 13
FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements in this report or in other Company communications, such as press
releases, may relate to future events or the Company's future performance and
such statements are forward-looking statements. Such forward-looking statements
are based on present information the Company has related to its existing
business circumstances. Investors are cautioned that such forward-looking
statements are subject to an inherent risk that actual results may differ
materially from such forward-looking statements. Factors that may result in such
variances include, but are not limited to, changes in commodity prices, interest
rates and other economic conditions, actions by competitors, changing weather
conditions and natural phenomena, actions by government authorities,
uncertainties associated with legal proceedings (as described in Notes to
Consolidated Condensed Financial Statements, Note 5), technological
developments, future decisions by management in response to changing conditions
and misjudgments in the course of preparing forward-looking statements. Such
factors are discussed in this report on Form 10-Q as well as in the Company's
Annual Report on Form 10-K.
12
<PAGE> 14
PART II.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
4.2 Rights Agreement, dated April 3, 1998, by and between
the Company and ChaseMellon Shareholder Services,
L.L.C., as rights agent. (Incorporated herein by
reference to the Company's Current Report on Form 8-K
filed April 7, 1998.)
11.1 Statement showing computation of per share earnings.
27.1 Financial Data Schedule.
The undersigned registrant hereby undertakes to file with the
Commission a copy of any agreement not filed under exhibit item (4)
above on the basis of the exemption set forth in the Commission's
rules and regulations.
Reports on Form 8-K
A Current Report on Form 8-K was filed on April 7, 1998 reporting
the Company entered into a Rights Agreement with ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, in connection with
the renewal of the Company's stockholder rights plan.
A Current Report on Form 8-K/A was filed on April 17, 1998, as
Amendment No. 1 to the Form 8-K dated February 2, 1998, reporting
the acquisition of Harmac Pacific Inc. common shares which resulted
in the Company owning 53 percent of Harmac's common shares
outstanding at that date.
13
<PAGE> 15
SIGNATURE
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.
POPE & TALBOT, INC.
----------------------------------------
Registrant
Date: August 10, 1998 /s/ ROBERT J. DAY
----------------------------------------
Robert J. Day
Senior Vice President and
Chief Financial Officer
<PAGE> 1
Exhibit 11.1
POPE & TALBOT, INC.
STATEMENT SHOWING CALCULATION OF AVERAGE
COMMON SHARES OUTSTANDING AND EARNINGS
PER AVERAGE COMMON SHARE
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average number
of common shares
outstanding 13,481,441 13,363,997 13,481,441 13,363,888
Application of the "treasury
stock" method to the stock
option plan -- 8,677 -- 11,239
------------ ------------ ------------ ------------
Total common and common
equivalent shares,
assuming dilution 13,481,441 13,372,674 13,481,441 13,375,127
============ ============ ============ ============
Net income(loss) $ (7,126,000) $ 3,981,000 $ 13,355,000 $ 5,359,000
============ ============ ============ ============
Diluted net income(loss) per share $ (.53) $ .30 $ .99 $ .40
============ ============ ============ ============
</TABLE>
The computation of basic net income (loss) per common share is not included
because the computation can be clearly determined from the material contained in
this report.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE POPE &
TALBOT, INC. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTH
PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 25,489
<SECURITIES> 37,603
<RECEIVABLES> 66,567
<ALLOWANCES> 0
<INVENTORY> 73,154
<CURRENT-ASSETS> 215,267
<PP&E> 438,089
<DEPRECIATION> 190,453
<TOTAL-ASSETS> 476,230
<CURRENT-LIABILITIES> 66,048
<BONDS> 140,568
0
0
<COMMON> 13,972
<OTHER-SE> 170,224
<TOTAL-LIABILITY-AND-EQUITY> 476,230
<SALES> 209,995
<TOTAL-REVENUES> 209,995
<CGS> 215,616
<TOTAL-COSTS> 215,616
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,108
<INCOME-PRETAX> (21,737)
<INCOME-TAX> (6,403)
<INCOME-CONTINUING> (15,334)
<DISCONTINUED> 27,074
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,355
<EPS-PRIMARY> .99
<EPS-DILUTED> .99
</TABLE>
