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 March 31, 1999
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
incorporation or organization) Identification Number)
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 May 3, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
Page No.
--------
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations-
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk 11
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 11
ITEM 6. Exhibits and Reports on Form 8-K 11
2
<PAGE>
PART I.
<TABLE>
POPE & TALBOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,639 $ 27,473
Short-term investments 4,929 9,857
Accounts receivable 70,657 62,356
Inventories:
Raw materials 44,653 53,765
Finished goods 26,279 23,992
----------- -----------
70,932 77,757
Prepaid expenses and other 11,423 10,651
----------- -----------
Total current assets 188,580 188,094
Properties:
Plant and equipment 432,142 424,519
Accumulated depreciation (208,042) (199,417)
----------- --------
224,100 225,102
Land and timber cutting rights 9,275 9,290
----------- -----------
Total properties 233,375 234,392
Other assets:
Deferred income tax assets, net 20,191 16,218
Other 8,690 10,885
----------- -----------
Total other assets 28,881 27,103
----------- -----------
$ 450,836 $ 449,589
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 9,291 $ 10,259
Current portion of long-term debt 556 556
Accounts payable 25,056 21,532
Accrued payroll and related taxes 18,513 18,471
Other accrued liabilities 25,769 25,449
Income taxes 9,689 8,775
----------- -----------
Total current liabilities 88,874 85,042
Reforestation 15,962 15,441
Postretirement benefits 13,657 13,286
Long-term debt, net of current portion 138,610 138,004
Minority interest 38,974 39,759
Stockholders' equity:
Preferred stock - -
Common stock 13,972 13,972
Additional paid-in capital 31,160 31,160
Retained earnings 135,645 140,482
Cumulative translation adjustments (16,574) (18,113)
Common stock held in treasury, at cost (9,444) (9,444)
----------- -----------
Total stockholders' equity 154,759 158,057
----------- -----------
$ 450,836 $ 449,589
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
</TABLE>
3
<PAGE>
<TABLE>
POPE & TALBOT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
<CAPTION>
Three months ended
March 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Wood products $ 56,403 $ 57,168
Pulp products 52,802 46,325
----------- -----------
Total 109,205 103,493
Costs and expenses:
Cost of sales:
Wood products 48,345 55,396
Pulp products 58,086 50,778
Selling, general and administrative 5,607 6,429
Interest, net 2,414 2,299
----------- -----------
Total 114,452 114,902
----------- -----------
Loss before income taxes, minority interest
and discontinued tissue operations (5,247) (11,409)
Income tax benefit (1,596) (3,482)
----------- -----------
Loss before minority interest and discontinued operations (3,651) (7,927)
Minority interest in net loss of subsidiary, net of income tax (1,375) (1,334)
----------- -----------
Loss from continuing operations (2,276) (6,593)
Income from discontinued operations
(net of tax provision of $24,794) - 27,074
----------- -----------
Net income (loss) $ (2,276) $ 20,481
=========== ===========
Basic income (loss) per common share:
Loss from continuing operations $ (.17) $ (.49)
Income from discontinued operations - 2.01
----------- -----------
Net income (loss) $ (.17) $ 1.52
=========== ===========
Diluted income (loss) per common share:
Loss from continuing operations $ (.17) $ (.49)
Income from discontinued operations - 2.00
----------- -----------
Net income (loss) $ (.17) $ 1.51
=========== ===========
Cash dividends per common share $ .19 $ .19
=========== ===========
Weighted average number of
common shares outstanding (000's) 13,481 13,481
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
</TABLE>
4
<PAGE>
<TABLE>
POPE & TALBOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<CAPTION>
Three months ended
March 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (2,276) $ 20,481
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 8,220 7,204
Gain on sale of discontinued operations - (51,448)
Minority interest in subsidiary loss (1,375) (1,334)
Changes in assets and liabilities:
Accounts receivable (8,301) (4,548)
Inventories 6,825 6,457
Prepaid expenses and other assets 1,992 6,626
Accounts payable and accrued liabilities 4,174 1,099
Current and deferred income taxes (3,011) 19,021
Other liabilities 572 952
----------- -----------
Net cash provided by operating activities 6,820 4,510
Cash flow from investing activities:
Purchases of short-term investments (3,306) (26,131)
Proceeds from maturities of short-term investments 8,234 -
Capital expenditures (4,920) (4,349)
Investment in subsidiary, net of cash acquired - (35,846)
Proceeds from sale of discontinued operations - 121,218
Proceeds from sale of other properties 3 398
----------- -----------
Net cash provided by investing activities 11 55,290
Cash flow from financing activities:
Net decrease in short-term borrowings (968) (41,800)
Reduction in long-term debt (136) (127)
Cash dividends (2,561) (2,561)
----------- -----------
Net cash used for financing activities (3,665) (44,488)
----------- -----------
Increase in cash and cash equivalents 3,166 15,312
Cash and cash equivalents at beginning of period 27,473 31,911
----------- -----------
Cash and cash equivalents at end of period $ 30,639 $ 47,223
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
</TABLE>
5
<PAGE>
POPE & TALBOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared by the Company in accordance with the instructions to Form 10-Q
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, 1998.
2. 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 961,252
shares and 826,454 shares for the three months ended March 31, 1999 and
March 31, 1998, respectively.
Refer to Exhibit 11.1 of this filing for the computation of average common
shares outstanding and earnings per average common share.
3. 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
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 March 1999, the Company filed a claim against the Canadian Federal
Government under the Investment Chapter of the North American Free Trade
Agreement (NAFTA). The complaint arises from the Company's assertion that
its duty-free export quota under the Canada/U.S. Softwood Lumber Agreement
has been unfairly reduced each year since the agreement came into effect.
The NAFTA contains a special process that permits NAFTA investors who have
been harmed by government actions which are inconsistent with the
provisions of NAFTA's Investment Chapter to seek compensation before an
impartial international arbitration panel. There can be no assurance as to
when the claim will be resolved or that it will be resolved in favor of the
Company.
6
<PAGE>
4. Comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $ (2,276) $ 20,481
Foreign currency translation adjustment 1,539 2,639
--------- ---------
Comprehensive income (loss) $ (737) $ 23,120
========= =========
</TABLE>
5. Segment Information
The Company classifies its business into two operating segments: wood
products and pulp products. A reconciliation of the totals reported for the
operating segments to the applicable line items in the consolidated
financial statements is as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues
Wood products $ 56,403 $ 57,168
Pulp products 52,802 46,325
--------- ---------
Total operating segments $ 109,205 $ 103,493
========= =========
Operating profit (loss) from continuing
operations
Wood products $ 6,522 $ 726
Pulp products (7,002) (6,316)
--------- ---------
Total operating segments (480) (5,590)
Corporate (2,353) (3,520)
Interest expense, net (2,414) (2,299)
--------- ---------
$ (5,247) $ (11,409)
========= =========
</TABLE>
7
<PAGE>
POPE & TALBOT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Pope & Talbot, Inc.'s (the Company's) loss from continuing operations in the
first quarter of 1999 was $2.3 million, or $.17 per share, compared with a $6.6
million loss, or $.49 per share, in the first quarter of 1998. Strong lumber
markets and cost reduction efforts were the primary reasons for the improved
performance.
The first quarter of 1998 included $27.1 million of income from discontinued
operations, or $2.00 per diluted share. Net income was $20.5 million, or $1.51
per diluted share for the 1998 first quarter.
Total revenues were $109.2 million in the first quarter of 1999 compared with
$103.5 million in the same period of 1998. Wood products revenues declined
slightly, the net result of a 5 percent increase in sales prices and a 7 percent
decrease in volume sold. The volume decrease relates to downtime taken at the
Company's Canadian sawmills as a result of import duties on softwood lumber
shipped into the United States.
Pulp products revenues increased to $52.8 million in the first quarter of 1999
from $46.3 million in the same period of 1998. Pulp sales totaled 142,700 metric
tons in the first quarter of 1999 compared with 109,000 metric tons in the first
quarter of 1998. The Company's controlling interest in Harmac Pacific Inc.
(Harmac) was acquired February 2, 1998 and the business was consolidated for
three months in 1999 compared with two months in 1998. Pulp prices in the first
quarter of 1999 were 10 percent lower than the first quarter of 1998.
Cost of sales for wood products decreased $7.1 million, or 13 percent, from the
cost of sales in the first quarter of 1998. Sales volume was lower by 7 percent
in the first quarter of 1999, but manufacturing costs decreased 15 percent due
to lower log costs and improved production efficiencies.
Cost of sales for pulp products was $58.1 million in the first quarter of 1999
compared with $50.8 million in the same period of 1998. Pulp production totaled
142,600 metric tons in 1999 compared with 98,100 metric tons in the first
quarter of 1998. Harmac pulp production was included in 1998 for only two
months. Both of the Company's pulp mills experienced lower manufacturing costs.
At Harmac, the average conversion cost per ton, excluding fiber, dropped 19
percent from the first quarter of 1998 due to improved labor productivity,
higher operating rates and other manufacturing cost savings. These cost savings
have more than offset the 6 percent increase in Harmac's fiber costs in 1999.
Fiber costs at the Halsey mill were 10 percent lower in 1999 than the first
quarter of 1998.
Selling, general and administrative expenses declined $.8 million to $5.6
million in the first quarter of 1999 from $6.4 million in the same period of
1998. The reduction was primarily the result of restructuring initiatives taken
in the first quarter of 1998 after the divestiture of the tissue business and
acquisition of Harmac. Total employees have been reduced from 2,214 at March 31,
1998 to 2,088 at March 31, 1999.
8
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------
The Company's subsidiary, Harmac, enters into Canadian dollar forward exchange
contracts with maturities of one to five months to fix the conversion of a
portion of pulp sales receivables denominated in U.S. dollars. At March 31,
1999, the Company had contracts to purchase $26 million Canadian with the
exchange rate to be used at settlement approximating the spot rate at the date
the contract was acquired.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first quarter of 1999, operations generated cash of $6.8 million.
Income before interest, taxes, depreciation and amortization (EBITDA) was $5.4
million, a significant improvement from the negative result of $1.9 million in
the first quarter of 1998. Cash generated from reduction in raw material
inventories was more than offset by the increase in accounts receivable,
primarily the result of strong pulp sales volumes in the first quarter of 1999.
The Company invested $4.9 million in capital projects in the first quarter of
1999 and estimates that total 1999 capital spending, excluding
environmental-related capital costs at the Halsey pulp mill, will approximate
$17.5 million. These capital projects will relate primarily to sustain existing
operations with a limited number of relatively small, high-return projects.
Due to the Company's declining equity base, on February 4, 1999, the Company
announced a reduction in the dividend to $.44 per share from $.76 annually. The
change in the dividend was in line with the Company's policy of paying dividends
based on a percentage of equity rather than as a percentage of earnings. The
reduction in the dividend rate is effective with the May 1999 quarterly payment.
YEAR 2000 UPDATE
- ----------------
The Company, like all other companies using computers and microprocessors, is
faced with the task of addressing the Year 2000 problem. The Year 2000 issue
exists because many computer systems and applications currently use two-digit
fields to designate a year. This can lead to incorrect results when computer
software performs arithmetic operations, comparisons or data field sorting
involving years later than 1999. The Company has embarked on a comprehensive
approach to identify where this problem may occur in its information technology
and manufacturing systems, and to evaluate the Year 2000 readiness of certain
third parties, such as suppliers and customers. The direct costs of projects
solely intended to correct the Company's Year 2000 problems are currently
estimated at $3.4 million, of which $2.3 million has been spent as of March 31,
1999. Most of these expenditures relate to replacement of systems and
applications and will be capitalized. The Company completed an inventory of its
core financial reporting processes and other information technology systems in
1997 and expects to have the necessary revisions to these systems and processes
completed by the end of the third quarter of 1999. The Company has also
completed an inventory of the process control systems and embedded
microprocessors used in its manufacturing operations and determined that only a
small percentage of such systems and microprocessors could be subject to Year
2000 problems. The Company expects to have these affected manufacturing systems
replaced or corrected and complete testing and verification of such systems
early in the fourth quarter of 1999. The Company presently believes that, with
conversions to new computer and financial systems and modifications to existing
software, the Year 2000 issues will not pose significant operational
9
<PAGE>
problems for the Company. Due to the general uncertainty inherent in the Year
2000 problem, however, there can be no assurance that all Year 2000 problems
will be foreseen and corrected, or if foreseen, corrected on a timely basis, or
that no material disruption to the Company's business or operations will occur.
Further, the Company's expectations are based on the assumption that there will
be no general failure of external local, national or international systems (such
as power, communications or transportation systems) necessary for the ordinary
conduct of business. There can be no assurance that successful contingency plans
can, in fact, be developed or implemented to deal with such failures.
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. Such
statements are forward-looking statements and 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,
failure by the company to realize expected cost savings from capital
expenditures, actions by competitors, changing weather conditions and natural
phenomena, actions by government authorities, uncertainties associated with
legal proceedings, technological developments, assessment of the Company's Year
2000 compliance efforts and risks, 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.
10
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk
The information called for by this item is provided under the caption
"Derivative Financial Instruments" under Item 2 - Managements Discussion and
Analysis of Financial Condition and Results of Operations.
PART II.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on April 29, 1999. The
following members were elected to the Company's Board of Directors to hold
office for three-year terms expiring in 2002.
Nominee In Favor Withheld
------- -------- --------
Kenneth G. Hanna 10,538,668 (98.9%) 116,317 (1.1%)
Robert Stevens Miller, Jr. 10,538,668 (98.9%) 116,317 (1.1%)
Hugo G.L. Powell 10,534,618 (98.8%) 120,367 (1.2%)
Additionally, the following directors were elected in previous years to
three-year terms on the Company's Board of Directors and will continue their
terms of office: Gordon P. Andrews, Hamilton W. Budge, Charles Crocker, Michael
Flannery, Peter T. Pope, and Brooks Walker, Jr.
The results of the voting on the approval to ratify the implementation of the
Special Non-Employee Director Retainer Fee Plan was as follows:
In Favor Opposed Abstained
-------- ------- ---------
9,386,344 (88.1%) 1,080,394 (10.1%) 188,247 (1.8%)
The results of the voting on the ratification of selection of Arthur Andersen
LLP as independent public accountants was as follows:
In Favor Opposed Abstained
-------- ------- ---------
10,554,371 (99.1%) 70,634 (0.6%) 29,980 (0.3%)
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
--------
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
- -------------------
No reports on Form 8-K were filed during the three months ended March 31, 1999.
11
<PAGE>
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: May 11, 1999 /s/ Robert J. Day
-----------------------------------
Robert J. Day
Senior Vice President and
Chief Financial Officer
12
<PAGE>
Exhibit 11.1
<TABLE>
POPE & TALBOT, INC.
STATEMENT SHOWING CALCULATION OF AVERAGE
COMMON SHARES OUTSTANDING AND EARNINGS
PER AVERAGE COMMON SHARE
<CAPTION>
Three months ended
March 31,
-----------------------------
1999 1998
---- ----
<S> <C> <C>
Weighted average number of common
shares outstanding 13,481,441 13,481,441
Application of the "treasury stock"
method to the stock option plan - 60,474
----------- -----------
Total common and common equivalent
shares, assuming dilution 13,481,441 13,541,915
=========== ===========
Net income (loss) $(2,276,000) $20,481,000
=========== ===========
Diluted net income (loss) per common share $(.17) $1.51
===== =====
</TABLE>
The computation of basic net income per common share is not included because the
computation can be clearly determined from the material contained in this
report.
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE POPE &
TALBOT, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 30,639
<SECURITIES> 4,929
<RECEIVABLES> 70,657
<ALLOWANCES> 0
<INVENTORY> 70,932
<CURRENT-ASSETS> 188,580
<PP&E> 441,417
<DEPRECIATION> 208,042
<TOTAL-ASSETS> 450,836
<CURRENT-LIABILITIES> 88,874
<BONDS> 138,610
0
0
<COMMON> 13,972
<OTHER-SE> 140,787
<TOTAL-LIABILITY-AND-EQUITY> 450,836
<SALES> 109,205
<TOTAL-REVENUES> 109,205
<CGS> 106,431
<TOTAL-COSTS> 106,431
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,414
<INCOME-PRETAX> (5,247)
<INCOME-TAX> (1,596)
<INCOME-CONTINUING> (2,276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,276)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
