<PAGE>
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 September 30, 2000
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 - 13,851,729 shares as of October 31, 2000.
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Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income-
Three and Nine Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings *
ITEM 2. Changes in Securities and Use of Proceeds *
ITEM 3. Defaults Upon Senior Securities *
ITEM 4. Submission of Matters to a Vote of Security Holders *
ITEM 5. Other Information *
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
*Omitted since no answer is called for, answer is in the negative or
inapplicable.
2
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Part I. Financial Information
ITEM 1. Financial Statements
POPE & TALBOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 14,978 $ 22,719
Short-term investments 13,037 10,649
Accounts receivable 71,662 74,099
Inventories 71,781 84,466
Prepaid expenses 11,853 10,866
------------- ------------
Total current assets 183,311 202,799
Properties
Plant and equipment 478,301 457,537
Accumulated depreciation (242,912) (232,129)
------------- ------------
235,389 225,408
Land and timber cutting rights 8,269 8,759
------------- ------------
Total properties 243,658 234,167
Other assets
Deferred income tax assets, net 5,502 19,448
Other 13,168 13,792
------------- ------------
Total other assets 18,670 33,240
------------- ------------
$ 445,639 $ 470,206
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ - $ 11,059
Current portion of long-term debt 3,236 4,024
Accounts payable 29,522 29,305
Accrued payroll and related taxes 15,030 18,727
Other accrued liabilities 19,346 32,101
------------- ------------
Total current liabilities 67,134 95,216
Long-term liabilities
Long-term debt, net of current portion 143,920 147,038
Other long-term liabilities 40,791 41,851
------------- ------------
Total long-term liabilities 184,711 188,889
Stockholders' equity
Preferred stock - -
Common stock 15,457 15,451
Additional paid-in capital 48,064 48,596
Retained earnings 170,977 147,893
Cumulative translation adjustment (17,914) (11,149)
Common stock held in treasury, at cost (22,790) (14,690)
------------- ------------
Total stockholders' equity 193,794 186,101
------------- ------------
$ 445,639 $ 470,206
============= ============
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of this statement.
3
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POPE & TALBOT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Pulp products $ 85,097 $ 62,706 $247,792 $170,620
Wood products 45,596 65,039 166,499 186,585
-------- -------- -------- --------
Total 130,693 127,745 414,291 357,205
Costs and expenses:
Cost of sales:
Pulp products 62,384 55,471 188,063 170,342
Wood products 43,204 49,016 149,844 148,765
Selling, general and administrative 7,430 6,985 20,979 18,604
Interest, net 1,567 2,168 6,211 6,891
-------- -------- -------- --------
Total 114,585 113,640 365,097 344,602
Income before income taxes and
minority interest 16,108 14,105 49,194 12,603
Income tax provision 6,834 6,262 20,704 6,443
-------- -------- -------- --------
Income before minority interest 9,274 7,843 28,490 6,160
Minority interest in subsidiary net (profit) loss,
net of income taxes - 683 - (1,645)
-------- -------- -------- --------
Net income $ 9,274 $ 7,160 $ 28,490 $ 7,805
======== ======== ======== ========
Per common share:
Basic net income $ .66 $ .53 $ 1.98 $ .58
======== ======== ======== ========
Diluted net income $ .64 $ .53 $ 1.94 $ .58
======== ======== ======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of this statement.
4
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POPE & TALBOT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------
2000 1999
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<S> <C> <C>
Cash flow from operating activities:
Net income $28,490 $ 7,805
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 24,666 24,853
Minority interest in subsidiary income - (1,645)
Changes in assets and liabilities:
Accounts receivable 2,437 (12,105)
Inventories 12,685 2,171
Prepaid expenses and other assets (1,279) 5,078
Accounts payable and accrued liabilities (6,991) 9,328
Current and deferred income taxes 4,645 1,073
Other liabilities (206) (83)
-------- -------
Net cash provided by operating activities 64,447 36,475
Cash flow from investing activities:
Purchases of short-term investments (18,645) (25,066)
Proceeds from maturities of short-term investments 16,257 19,075
Capital expenditures (41,071) (15,036)
Minority interest in subsidiary treasury stock issue - 100
Proceeds from sale of assets 18 271
-------- -------
Net cash used for investing activities (43,441) (20,656)
Cash flow from financing activities:
Net decrease in short-term borrowings (11,059) (2,095)
Proceeds from issuance of long-term debt - 64,574
Reduction of long-term debt, including current portion (3,906) (2,076)
Shares repurchased (10,054) -
Proceeds from exercise of stock options 1,678 -
Cash dividends (5,406) (5,527)
-------- -------
Net cash (used for) provided by financing activities (28,747) 54,876
-------- -------
Increase (decrease) in cash and cash equivalents (7,741) 70,695
Cash and cash equivalents at beginning of period 22,719 27,473
-------- -------
Cash and cash equivalents at end of period $14,978 $98,168
======== =======
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of this statement.
5
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POPE & TALBOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(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. 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, 1999.
2. Net Income Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", the Company presents "basic" earnings per share,
which is net income divided by the weighted average common shares
outstanding during the period, and "diluted" earnings per share, which
considers the impact of common share equivalents. Common equivalent
shares represent shares potentially issuable using the treasury stock
method.
The following table summarizes the computation of net income per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 14,101,466 13,481,441 14,418,425 13,481,441
Application of the "treasury stock"
method to the stock option plan 259,775 76,794 265,630 38,988
----------- ----------- ----------- -----------
Total common and common equivalent
shares, assuming dilution 14,361,241 13,558,235 14,684,055 13,520,429
=========== =========== =========== ===========
Net income $ 9,274,000 $ 7,160,000 $28,490,000 $ 7,805,000
=========== =========== =========== ===========
Diluted net income per common share $ 0.64 $ .53 $ 1.94 $ .58
=========== =========== =========== ===========
</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.
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3. Accounting Change
Effective January 1, 2000, the Company changed the method for valuation
of fiber in wood chip, log and pulp inventories of the Harmac pulp
operations from the FIFO method to the LIFO method. This change was
made to conform Harmac's method of valuing fiber inventories with the
Company's other pulp manufacturing facility. The impact of this change
was an increase in cost of sales and corresponding decrease in
operating earnings of $1.9 million ($1.2 million after tax, or $.08 per
diluted share) for the nine months ended September 30, 2000 and $.8
million ($.5 million after tax, or $.03 per diluted share) for the
third quarter of 2000. The cumulative effect of this change to the LIFO
method on operating results prior to 2000 has not been presented, as
the effect is not readily determinable.
4. Comprehensive Income
Comprehensive income was as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 9,274 $ 7,160 $ 28,490 $ 6,602
Foreign currency translation adjustment 3,567 718 (6,765) (7,655)
-------- -------- -------- --------
Comprehensive income (loss) $ 5,707 $ 7,878 $ 21,725 $ (1,053)
======== ======== ======== ========
</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 was as follows:
<TABLE>
<S> <C> <C> <C> <C>
Pulp products $ 85,097 $ 62,706 $247,792 $170,620
Wood products 45,596 65,039 166,499 186,585
-------- -------- -------- --------
Total operating segments $130,693 $127,745 $414,291 $357,205
======== ======== ======== ========
Operating profit (loss):
Pulp products $ 20,450 $ 4,865 $ 53,071 $ (5,965)
Wood products 692 13,720 11,243 32,546
-------- -------- -------- --------
Total operating segments 21,142 18,585 64,314 26,581
Corporate (3,467) (2,312) (8,909) (7,087)
Interest expense, net (1,567) (2,168) (6,211) (6,891)
-------- -------- -------- --------
Income before income taxes
and minority interest $ 16,108 $ 14,105 $ 49,194 $ 12,603
======== ======== ======== ========
</TABLE>
7
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6. 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 these contingencies 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 June 2000, the Company received a partial decision on its claim
filed against the Government of Canada under the Investment Chapter of
the North American Free Trade Agreement ("NAFTA"). The complaint arises
from the fact that the Company, like other companies operating in
British Columbia, had its duty-free export quota reduced by the
Canadian Government since the Canada/U.S. Softwood Lumber Agreement
came into effect. The three-person NAFTA Tribunal dismissed two of the
Company's four claims of breaches of NAFTA and rejected Canada's
assertion that the Company is estopped from making its claims. The
Tribunal asked for further information in anticipation of future
hearings on the Company's core claims of violation of NAFTA Article
1102 on National Treatment and NAFTA Article 1105 on Minimum Standards
of Treatment. The next hearing has been scheduled for November 14,
2000. There can be no assurance as to when this claim will be resolved.
7. New Accounting Pronouncements
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board has evaluated how a seller of goods should classify in
the income statement amounts billed to a customer for shipping and
handling (EITF Issue Number 00-10, "ACCOUNTING FOR SHIPPING AND
HANDLING FEES AND COSTS"). The consensus the EITF reached was that
amounts billed to a customer related to shipping and handling represent
revenues earned for the goods provided and should be classified as
revenue. Implementation of EITF 00-10 is required for the fourth
quarter of 2000 and prior period financial statements will be restated
for comparability. The Company believes that the implementation of EITF
00-10 will not have a material impact on its financial position or
results of operations.
8
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ITEM 2.
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") net income in the third quarter of 2000
was $9.3 million, or $.64 per diluted share, compared with net income of $7.2
million, or $.53 per diluted share, in the third quarter of 1999. On a
year-to-date basis, net income for the first nine months of 2000 was $28.5
million, or $1.94 per diluted share, compared with net income of $7.8 million,
or $.58 per diluted share, for the same period a year ago. Strong pulp markets
and a significant increase in pulp prices were the primary reasons for the
improved performance.
Total revenues were $130.7 million in the third quarter of 2000 compared with
$127.7 million in the same period of 1999. Pulp products revenues were $85.1
million in the third quarter of 2000 compared with $62.7 million in the same
period of 1999. Pulp sales totaled 136,830 metric tons in the third quarter of
2000, compared with 144,560 metric tons in the third quarter of 1999 and 136,650
metric tons in the second quarter of 2000. Pulp sales volumes in the third
quarter of 2000 were lower than the third quarter of 1999 due to scheduled
maintenance downtime at the Halsey pulp mill taken in the third quarter of 2000.
Average mill net pulp prices of $609 per metric ton in the third quarter of
2000 rose $177 per metric ton, or 41 percent, over the same period a year ago
and $32 per metric ton, or six percent, from the second quarter of 2000.
Wood products revenues, including lumber, log and chip sales, in the third
quarter of 2000 totaled $45.6 million compared with $65.0 million in the same
quarter of 1999 and $62.4 million in the second quarter of 2000. Average lumber
prices of $270 per thousand board feet in the current quarter were down 31
percent compared with the third quarter of last year and down 13 percent
compared with second quarter of 2000. Lumber sales volumes of 132.1 million
board feet in the third quarter of 2000 were down 8 percent compared with the
same period a year ago and down 20 percent from the second quarter of 2000. To
avoid paying the higher tariff associated with the U.S. and Canadian Softwood
Lumber Agreement ("SLA"), the Company curtailed production in Canada at two of
its facilities for two weeks and at one facility for one week in the third
quarter of 2000.
Cost of sales for pulp products was $62.4 million in the third quarter of 2000
compared with $55.5 million in the same period of 1999. Pulp production totaled
140,000 metric tons in the third quarter of 2000 compared with 147,900 metric
tons in the same period last year and 131,700 metric tons in the second quarter
of 2000. Production in the third quarter of 2000 was reduced by the impact of
the scheduled maintenance shutdown at the Company's Halsey pulp mill, and
production in the second quarter of 2000 was affected by the scheduled
maintenance downtime at the Company's Harmac pulp mill. Average production costs
per ton of pulp increased in the third quarter of 2000 compared with the same
quarter last year, primarily the result of higher fiber costs. Reduced
availability of wood chips due to anticipated sawmill downtime in the fourth
quarter of 2000 may lead to upward pressure on chip pricing. After subtracting
chips produced by the Company's sawmills, the Company is a net buyer of
approximately 200 thousand bone dry units ("BDU's") of fiber per quarter.
Potentially higher costs associated with this fiber could approximate $5 per BDU
or an additional $1 million in production costs in the fourth quarter of 2000.
Cost of sales for wood products in the third quarter of 2000 decreased 12
percent compared with the third quarter of 1999 due primarily to a decrease in
sales volume. Lumber production totaled 117.7 million board feet in the third
quarter of 2000 compared with 149.4 million board feet in the same
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period of last year and 158.6 million board feet in the second quarter of
2000. Quota costs under the SLA are anticipated to cause additional downtime
in the fourth quarter of 2000, estimated to negatively affect fourth quarter
pre-tax income by approximately $1.0 million to $1.5 million.
Selling, general and administrative expenses ("SG&A") for the first nine months
of 2000 totaled $21.0 million compared with $18.6 million in the same period of
1999. SG&A expenses in the third quarter and on a year-to-date basis for 2000
included higher levels of costs related to employee incentive plans linked to
the Company's financial performance and legal fees related to the Company's
NAFTA claim against the Canadian Government.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2000, operations generated cash of $64.4 million
compared with $36.5 million in the first nine months of 1999. Income in the
third quarter of 2000 before interest, taxes, depreciation and amortization
("EBITDA") was $25.2 million, compared with $24.7 million in the third quarter
of 1999 and $27.8 million in the second quarter of 2000. In the first nine
months of 2000, accounts receivable decreased primarily due to lower lumber
sales prices. Net cash provided by inventories related to reductions in saw log,
pulp raw materials and pulp finished goods inventories. Net cash used for the
decrease in accounts payable and accrued liabilities related mainly to Canadian
stumpage payments and normal fluctuations in accrued payroll related
liabilities.
The Company invested $41.1 million in capital projects in the first nine months
of 2000 and estimates that total 2000 capital spending will approximate $48
million to $49 million. Costs to complete the chlorine dioxide capital projects
at the Halsey pulp mill, expected to be completed in the fourth quarter of 2000,
are anticipated to be approximately $29.9 million in 2000. Other capital
projects are expected to total $19 million in 2000. These capital projects
relate primarily to maintenance of existing operations and include a limited
number of relatively small, high-return projects. The Company anticipates
capital spending of approximately $20.0 million in 2001.
In July 2000, the Board of Directors authorized the repurchase of an additional
one million common shares, for a total authorization of three million shares,
through open market purchases and privately negotiated transactions. During the
first nine months of 2000, the Company purchased 636,100 shares for $10.4
million. In October 2000, the Company purchased an additional 188,800 shares for
$2.6 million. Through October 2000, the Company has repurchased a total of
1,254,500 shares since November 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The statements contained in this report that are not statements of historical
fact, including without limitation, statements containing the words "believes",
"anticipates", "could" and words of similar import, constitute forward-looking
statements that involve a number of risks and uncertainties. Moreover, from time
to time the Company may issue other forward-looking statements. 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 the
following:
CYCLICAL OPERATING RESULTS AND PRODUCT PRICING
The Company's financial performance is principally dependent on the prices it
receives for its products. Prices for the Company's products are highly cyclical
and have fluctuated significantly in the past and may fluctuate significantly in
the future. Pulp prices increased significantly in the first nine months of 2000
relative to the same period of 1999. Lumber prices reached a cyclical peak in
the
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third quarter of 1999 and have declined since then. No assurance can be
given as to the sustainability of the recent pulp price improvements.
The Company's financial performance is also dependent on the rate at which it
utilizes its production capacity. When capacity utilization is reduced, as in
the case of market or maintenance related shut downs, the cost per unit of
production increases and profitability decreases.
The markets for the Company's products are highly cyclical and are characterized
by periods of excess product supply due to many factors, including:
- additions to industry capacity;
- increased industry production;
- periods of insufficient demand due to weak general economic activity
or other causes; and
- inventory de-stocking by customers.
The Company's primary products are commodities, resulting in extreme price
competition. The global demand for pulp in the first nine months of 2000
exceeded supply, and pulp prices increased as a result. Demand for pulp has
begun to slacken in the fourth quarter of 2000. Prices for lumber have declined
from the beginning of this year as the result of a higher level of imported
lumber into the U.S. due to the strong U.S. dollar, rising U.S. interest rates
and oversupply of lumber due to producer productivity gains. The Company's
industries are capital-intensive, which leads to high fixed costs and generally
results in continued production as long as prices are sufficient to cover
marginal costs. This has also caused substantial price competition and
volatility and, as a result, the Company generated net losses from continuing
operations in its pulp operations segment as recently as 1999.
RISKS OF INTERNATIONAL BUSINESS
In general, the Company's sales are subject to the risks of international
business, including:
- fluctuations in foreign currencies relative to the U.S. dollar;
- changes in the economic strength of the countries in which it
does business;
- trade disputes;
- changes in regulatory requirements;
- tariffs and other barriers; and
- quotas, duties, taxes and other charges or restrictions
upon exportation and importation.
Beginning in mid-1999, pulp prices increased steadily through mid-2000 as a
result of strong paper demand and reduced world-wide pulp inventories. Pulp
prices flattened at the end of the third quarter of 2000 due to increases in
worldwide pulp production and concerns over falling paper producers' profit
margins. Additionally, the 1998 economic crisis in Asia softened demand for wood
and pulp products in that region and, as a result, producers for the Asian
markets redirected their products to other regions. Weakness in Asian markets
eroded worldwide pricing for the Company's products, indirectly adversely
affecting its financial results. Asian markets have since strengthened, but if
these markets worsened, it could have a material adverse effect on the Company's
financial condition and results of operations.
AVAILABILITY AND PRICING OF RAW MATERIALS
Logs, wood chips and sawdust, the principal raw materials used in the
manufacture of the Company's products, are purchased in highly competitive,
price-sensitive markets. These raw materials have historically exhibited price
and demand cyclicality. Supply and price of these raw materials are dependent
upon a variety of factors over which the Company has no control, including
environmental
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and conservation regulations, and natural disasters, such as forest fires,
hurricanes and other extreme weather conditions. A decrease in the supply of
logs, wood chips and sawdust can cause higher raw material costs.
The principal sources of raw material for the Company's wood products operations
are timber obtained through long-term cutting licenses on public lands, logs
purchased on open markets, timber offered for sale through competitive bidding
by U.S. federal agencies and timber purchased under long-term contracts to cut
timber on private lands. The Company's lumber capacity comes from British
Columbia (75%) and the Black Hills region of South Dakota (25%). In Canada, the
Company's timber requirements are obtained primarily from the Provincial
Government of British Columbia under long-term timber harvesting licenses which
allow the Company to remove timber from defined areas annually on a sustained
yield basis. Under these licenses, the Provincial Government has the authority
to modify prices and harvest volumes at any time. British Columbia's Commission
on Resources and Environment issued the Kootenay Boundary Land Use Plan of 1997.
This land use plan set aside several new wilderness areas. The British Columbia
government has also implemented a Forest Practices Code, which sets strict
standards for logging activities and reforestation responsibilities. No
assurance can be given that in the near or long-term the Company's timber
supplies will be stable or that these forest restrictions will not have a
material adverse effect on the Company's operations.
Supply of softwood fiber (wood chips and sawdust), particularly in the
quantities necessary to support world-scale pulp production facilities,
fluctuates in the Pacific Northwest. In the last decade, Pacific Northwest log
availability has been reduced, lumber and plywood mills have shut down and the
volume of lower cost residual chips has dropped correspondingly. Pulp mills that
require wood chips as the primary source of raw material may have to rely on
additional higher cost supply sources which produce chips directly from pulpwood
and/or deliver from greater distances. To provide an adequate supply of wood
fiber for its Halsey, Oregon mill, the Company has expanded its capability of
using sawdust as a raw material for a significant portion of the production and
diversified its suppliers of fiber.
The Company's pulp mill in British Columbia (Harmac) has a long-term fiber
supply agreement with Weyerhaeuser Company Limited (Weyerhaeuser) that provides
for 1.7 million cubic meters of fiber per year through 2019. Fiber is purchased
at market or at prices determined under a formula intended to reflect fair
market value of the fiber and which takes into account the net sales value of
pulp sold by Harmac. The failure by Weyerhaeuser to produce the required fiber
pursuant to this contract could have a material adverse effect on the Company as
a whole. The Company has entered into arrangements with other independent fiber
suppliers to provide fiber incremental to that provided by Weyerhaeuser. There
can be no assurance that the Company will be able to obtain an adequate supply
of softwood fiber for its pulp operations.
DEPENDENCE ON A SINGLE CUSTOMER FOR THE HALSEY, OREGON PULP MILL
Approximately 32% of the pulp produced by the Halsey, Oregon pulp mill is sold
to Grays Harbor Paper Company pursuant to a long-term contract. Loss of this key
customer would have a material adverse impact on the Company if replacement
buyers could not be secured on a timely basis.
QUOTAS AND EXPORT FEES ON LUMBER EXPORTS TO THE UNITED STATES
Softwood lumber exports to the U.S. by Canadian producers have been a
contentious trade issue between Canada and the U.S. for a number of years.
Effective April 1996, the governments of Canada and the U.S. entered into a
five-year agreement, the Softwood Lumber Agreement, concerning the export of
softwood lumber to the U.S. Pursuant to the agreement, in each of the subsequent
five fiscal years ended March 31, Canadian softwood lumber producers in certain
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provinces were assigned quotas of lumber volumes that could be shipped to the
U.S. fee-free. Incremental volumes are subject to a two-tier fee, currently
$53.94 per thousand board feet and $107.88 per thousand board feet. On August
26, 1999, in settlement of a British Columbia stumpage dispute, Canada and the
United States amended the Softwood Lumber Agreement for producers in British
Columbia to add a third-tier fee, currently $148.27 per thousand board feet.
In March 1999, the Company filed under the North American Free Trade Agreement a
claim against the Canadian Government. In its claim, the Company asserted that
its duty-free export quota volume has been unfairly allocated and then unfairly
reduced since the agreement came into effect. A merits hearing with the
appointed arbitration panel took place on May 1, 2000, with a partial decision
on the case rendered in June 2000. The next hearing has been scheduled for
November 14, 2000. There can be no assurance as to when the claim will be
ultimately resolved. The Canadian Softwood Lumber Agreement expires in 2001 and
the Company cannot predict whether the agreement will be renewed or what the
terms of any renewed agreement might be.
GLOBAL COMPETITION
The markets for the Company's products are highly competitive on a global basis,
with a number of major companies competing in each market and with no company
holding a dominant position. For both lumber and pulp, the industry is highly
competitive, with a large number of companies producing products that are
reasonably standardized. Many of the Company's competitors have substantially
greater financial resources than it does. Some of its competitors may have the
advantage of not being affected by fluctuations in the value of the Canadian
dollar. While the principal basis for competition is price, the Company also
competes to a lesser extent on the basis of quality and customer service.
EXCHANGE RATE FLUCTUATIONS
Although the Company's sales are made primarily in U.S. dollars, a substantial
portion of its operating costs and expenses are incurred in Canadian dollars.
Significant variations in relative currency values, particularly a significant
increase in the value of the Canadian dollar relative to the U.S. dollar, could
have a material adverse effect on its business, financial condition, results of
operations and cash flows.
ENVIRONMENTAL REGULATION
The Company is subject to extensive federal, state, provincial and local
environmental laws and regulations. These laws and regulations impose stringent
standards on the Company regarding, among other things:
- air emissions;
- water discharges;
- use and handling of hazardous materials;
- use, handling and disposal of waste; and
- remediation of environmental contamination.
The Company may incur substantial costs to comply with current requirements or
new environmental laws that might be adopted. In addition, the Company may
discover currently unknown environmental problems or conditions that may or may
not require remediation. Any such event could have a material adverse effect on
its business, financial condition, and results of operations and cash flows. The
Company has spent significant amounts of money in the past to comply with
environmental regulations and expects that it will have to spend money in the
future. The Company has established reserves based on current information to
address known environmental liabilities. Additional
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significant expenditures could be required if the law changes or new
information is discovered, and those expenditures could have a material
adverse effect on its financial condition.
In April 1998, the U.S. Environmental Protection Agency published regulations
known as the "Cluster Rules" establishing standards and limitations for air and
water emissions by pulp mills. The capital costs to comply with these
regulations at the Halsey pulp mill are anticipated to total approximately $42.7
million, with compliance required by the first quarter of 2001. The Company has
spent $39.5 million of the total expected costs as of September 30, 2000.
Current legislation requires all pulp mills in British Columbia to eliminate the
discharge of chlorinated organic compounds by December 31, 2002. Currently, the
cost of available technology to eliminate all chlorinated organic compounds at
kraft pulp mills is prohibitive. The British Columbia government, industry
participants and other stakeholders are engaged in discussions to resolve this
issue. If the current legislation is not amended, substantially all of the
chemical pulp mills in British Columbia would likely be required to be closed,
which would have a material adverse effect on the Company's business.
The Company is currently participating in the investigation of environmental
contamination at two sites on which it previously conducted business. The
ultimate cost to the Company for site remediation and monitoring on these sites
cannot be predicted with certainty due to the difficulties in measuring the
magnitude of the contamination, the varying costs of alternative clean-up
methods, the clean-up time frame possibilities, the evolving nature of
remediation technologies and governmental regulations and the inability to
determine its share of multi-party obligations or the extent to which
contributions will be available from the other parties, including insurance
carriers.
COST REDUCTIONS EXPECTED FROM CAPITAL EXPENDITURES
The Company has made and will continue to make capital expenditures in both its
lumber and pulp operations that it expects to generate cost savings. Although
the Company's management is experienced in achieving cost reductions and
operating efficiencies, there can be no assurance that any specified level of
cost savings will be fully achieved or will be achieved within the time periods
contemplated. In addition, costs savings from capital projects may be offset by
cost increases in other areas so that total costs may not actually decrease.
FINANCIAL LEVERAGE
The Company's long-term debt as a percentage of total capitalization at
September 30, 2000 was 43 percent and net debt to total capitalization was 38
percent. While the Company's current leverage level is not unusual for the
forest products and pulp industries, an increase in leverage would increase its
financial risk by (i) potentially increasing the cost of additional financing
for working capital, capital expenditures and other purposes, and (ii)
increasing the amount of cash flow dedicated to the payment of interest and
principal.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has significant operations in Canada and, therefore, is exposed to
foreign currency rate risk. For the Company, a weakening of the Canadian dollar
relative to the U.S. dollar has a positive affect on the cost of operating in
Canada but has a negative foreign currency translation effect. Conversely, a
strengthening of the Canadian dollar would have the opposite effect.
The Company's investments in foreign subsidiaries with a functional currency
other than the U.S. dollar are not hedged. The net assets in foreign
subsidiaries translated into U.S. dollars using the period-end exchange rates
were approximately $178 million. The potential loss in fair value resulting from
a hypothetical 10% adverse change in foreign exchange rates would be
approximately $18
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million at September 30, 2000. Any loss in fair value would be reflected as a
cumulative translation adjustment and would not reduce reported net income of
the Company.
The Company is exposed to foreign currency transaction gains and losses on the
translation of U.S. dollar denominated intercompany borrowings, cash and
accounts receivable of its Canadian subsidiary and Canadian dollar denominated
intercompany loans made by the parent company. Transaction gains and losses
were not material to the results for Company's 2000 or 1999 periods.
Changes in interest rates affect fixed and variable rate debt differently. A
change in the interest rate on fixed rate debt will affect the fair value of the
debt, whereas a change in the interest rate on variable rate debt will affect
interest expense and cash flows. The Company's debt is primarily fixed rate and,
therefore, net income is not materially affected when market interest rates
change.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
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.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended September 30,
2000.
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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.
POPE & TALBOT, INC.
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Registrant
Date: November 13, 2000 /s/ Maria M. Pope
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Maria M. Pope
Vice President and
Chief Financial Officer
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