<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 June 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
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POPE & TALBOT, INC.
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Delaware 94-0777139
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1500 S.W. 1st Ave., Portland, Oregon 97201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 228-9161
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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 - 14,083,029 shares as of July 31, 2000.
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PART I. FINANCIAL INFORMATION
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<CAPTION>
Page No.
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<S> <C>
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income-
Three and Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 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 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 13
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 14
ITEM 5. Other Information *
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</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>
June 30, December 31,
2000 1999
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 26,826 $ 22,719
Short-term investments 14,458 10,649
Accounts receivable 68,937 74,099
Inventories 64,828 84,466
Prepaid expenses 13,170 10,866
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Total current assets 188,219 202,799
Properties
Plant and equipment 476,590 457,537
Accumulated depreciation (245,515) (232,129)
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231,075 225,408
Land and timber cutting rights 8,449 8,759
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Total properties 239,524 234,167
Other assets
Deferred income tax assets, net 11,100 19,448
Other 12,634 13,792
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Total other assets 23,734 33,240
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$ 451,477 $ 470,206
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ - $ 11,059
Current portion of long-term debt 3,121 4,024
Accounts payable 27,945 29,305
Accrued payroll and related taxes 16,119 18,727
Other accrued liabilities 20,789 32,101
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Total current liabilities 67,974 95,216
Long-term liabilities
Long-term debt, net of current portion 145,462 147,038
Other long-term liabilities 40,892 41,851
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Total long-term liabilities 186,354 188,889
Stockholders' equity
Preferred stock - -
Common stock 15,457 15,451
Additional paid-in capital 48,026 48,596
Retained earnings 163,906 147,893
Cumulative translation adjustment (14,347) (11,149)
Common stock held in treasury, at cost (15,893) (14,690)
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Total stockholders' equity 197,149 186,101
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$ 451,477 $ 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.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Wood products $ 62,372 $ 65,143 $ 120,903 $ 121,546
Pulp products 80,908 55,112 162,695 107,914
----------- ----------- ----------- ----------
Total 143,280 120,255 283,598 229,460
Costs and expenses:
Cost of sales:
Wood products 56,662 51,404 106,640 99,749
Pulp products 60,738 56,785 125,679 114,871
Selling, general and administrative 6,573 6,012 13,549 11,619
Interest, net 2,165 2,309 4,644 4,723
----------- ----------- ----------- ----------
Total 126,138 116,510 250,512 230,962
Income (loss) before income taxes and
minority interest 17,142 3,745 33,086 (1,502)
Income tax provision 7,319 1,777 13,870 181
----------- ----------- ----------- ----------
Income (loss) before minority interest 9,823 1,968 19,216 (1,683)
Minority interest in subsidiary net loss,
net of income tax benefit - (953) - (2,328)
----------- ----------- ----------- ----------
Net income $ 9,823 $ 2,921 $ 19,216 $ 645
=========== =========== =========== ==========
Per common share:
Basic net income $ .67 $ .22 $ 1.32 $ .05
=========== =========== =========== ==========
Diluted net income $ .66 $ .22 $ 1.30 $ .05
=========== =========== =========== ==========
Weighted average number of
common shares outstanding (000's) 14,940 13,481 14,838 13,481
=========== =========== =========== ==========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
4
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POPE & TALBOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
2000 1999
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<S> <C> <C>
Cash flow from operating activities:
Net income $ 19,216 $ 645
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 17,086 16,421
Minority interest in subsidiary loss - (2,328)
Changes in assets and liabilities:
Accounts receivable 5,162 (10,835)
Inventories 19,638 15,576
Prepaid expenses and other assets (1,503) 3,197
Accounts payable and accrued liabilities (9,963) (2,497)
Current and deferred income taxes 428 (4,171)
Other liabilities (462) 495
---------- ----------
Net cash provided by operating activities 49,602 16,503
Cash flow from investing activities:
Purchases of short-term investments (18,645) (13,248)
Proceeds from maturities of short-term investments 14,836 11,524
Purchases of noncurrent investments held for sale - (2,300)
Capital expenditures (26,018) (9,686)
Minority interest in subsidiary treasury stock issue - 100
Proceeds from sale of other properties 157 28
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Net cash used for investing activities (29,670) (13,582)
Cash flow from financing activities:
Net decrease in short-term borrowings (11,059) (771)
Reduction of long-term debt, including current portion (2,479) (273)
Shares repurchased (724) -
Proceeds from stock options exercised 1,640 -
Cash dividends (3,203) (4,044)
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Net cash used for financing activities (15,825) (5,088)
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Increase (decrease) in cash and cash equivalents 4,107 (2,167)
Cash and cash equivalents at beginning of period 22,719 27,473
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Cash and cash equivalents at end of period $ 26,826 $ 25,306
========== ==========
</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
June 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. 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 $1.1 million ($666,000 after tax, or $.04 per
diluted share) for the six months ended June 30, 2000 and $.8 million
($457,000 after tax, or $.03 per diluted share) for the second 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.
3. Comprehensive Income
Comprehensive income was as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 9,823 $ 2,921 $ 19,216 $ 645
Foreign currency translation adjustment (2,834) 2,630 (3,198) 4,169
---------- ---------- ---------- ----------
Comprehensive income $ 6,989 $ 5,551 $ 16,018 $ 4,814
========== ========== ========== ==========
</TABLE>
6
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4. 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>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Wood products $ 62,372 $ 65,143 $ 120,903 $ 121,546
Pulp products 80,908 55,112 162,695 107,914
----------- ----------- ----------- -----------
Total operating segments $ 143,280 $ 120,255 $ 283,598 $ 229,460
=========== =========== =========== ===========
Operating profit (loss):
Wood products $ 3,961 $ 12,304 $ 10,551 $ 18,826
Pulp products 17,855 (3,828) 32,621 (10,830)
----------- ----------- ----------- -----------
Total operating segments 21,816 8,476 43,172 7,996
Corporate (2,509) (2,422) (5,442) (4,775)
Interest expense, net (2,165) (2,309) (4,644) (4,723)
----------- ----------- ----------- -----------
Income (loss) before income
taxes and minority interest $ 17,142 $ 3,745 $ 33,086 $ (1,502)
=========== =========== =========== ===========
</TABLE>
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 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. There can be no assurance as to when this claim will be
resolved.
7
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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 second quarter of 2000
was $9.8 million, or $.66 per diluted share, compared with net income of $2.9
million, or $.22 per diluted share, in the second quarter of 1999. On a
year-to-date basis, net income for the first six months of 2000 was $19.2
million, or $1.30 per diluted share, compared with net income of $.6 million, or
$.05 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 $143.3 million in the second quarter of 2000 compared with
$120.3 million in the same period of 1999. Pulp products revenues were $80.9
million in the second quarter of 2000 compared with $55.1 million in the same
period of 1999. Pulp sales totaled 136,650 metric tons in the second quarter of
2000, compared with 135,350 metric tons in the second quarter of 1999 and
150,924 metric tons in the first quarter of 2000. Pulp sales volumes in the
second quarter of 2000 were lower than the first quarter of 2000 due to a
scheduled 12-day maintenance shutdown at the Harmac pulp mill. Average mill net
pulp prices of $577 per metric ton in the second quarter of 2000 rose $173 per
metric ton, or 43 percent, over the same period a year ago and $39 per metric
ton, or seven percent, from the first quarter of 2000.
Wood products revenues in the second quarter of 2000 totaled $62.4 million
compared with $65.1 million in the same quarter of 1999 and $58.5 million in
the first quarter of 2000. Average lumber prices of $309 per thousand board
feet in the current quarter were down 16 percent compared with the second
quarter of last year and down 14 percent compared with first quarter of 2000.
Lumber sales volumes of 164,300 million board feet in the second quarter of
2000 were up 10 percent compared with the same period a year ago and up 19
percent from the first quarter of 2000. In anticipation of the end of the
lumber import quota fiscal year on March 31, 2000, the Company curtailed
production at one of its Canadian sawmills and increased inventory levels at
the other mills to reduce quota costs at the highest tariff levels. A portion
of these inventories was sold in the second quarter of 2000.
Cost of sales for pulp products was $60.7 million in the second quarter of 2000
compared with $56.8 million in the same period of 1999. Pulp production totaled
131,700 metric tons in the second quarter of 2000 compared with 133,200 metric
tons in the same period last year and 147,792 in the first quarter of 2000.
Production in the second quarter of 2000 and 1999 was reduced by the impact of
planned maintenance shutdowns at the Company's Harmac pulp mill. Average
production costs per ton of pulp increased in the second 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 second half of 2000 may lead to upward pressure on chip pricing.
Cost of sales for wood products in the second quarter of 2000 increased 10
percent compared with the second quarter of 1999 due primarily to higher log
costs. The cost of the Canadian saw log inventory converted to lumber in the
second quarter of 2000 was indexed under the British Columbia log pricing system
to third quarter 1999 lumber sales prices, which were then experiencing a
cyclical peak. Log costs are expected to decrease in the second half of 2000 as
the log pricing index is lowered to reflect the significant drop in lumber
prices in the first half of the year. Lumber production totaled 158.6 million
board feet in the second quarter of 2000 compared with 145.8 million board feet
in the same period of last year and 166.0 million board feet in the first
quarter of 2000.
8
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Selling, general and administrative expenses ("SG&A") for the first half of 2000
totaled $13.5 million compared with $11.6 million in the same period of 1999.
SG&A expenses in the second quarter of 2000 included a higher level of costs
related to employee incentive plans linked to the Company's financial
performance. On a year-to-date basis, SG&A expenses included a higher level of
employee incentive costs and higher legal fees related to the Company's NAFTA
claim against the Canadian Government.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 2000, operations generated cash of $49.6 million
compared with $16.5 million in the first six months of 1999. Income in the
second quarter of 2000 before interest, taxes, depreciation and amortization
("EBITDA") was $27.8 million, compared with $14.3 million in the second quarter
of 1999 and $27.0 million in the first quarter of 2000. In the first six months
of 2000, net cash provided by inventories related to reductions in saw log and
lumber 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. In the first six months of
1999, net cash generated from reductions in raw material inventories was
partially offset by an increase in accounts receivable, primarily the result of
strong lumber sales volumes in the first half of 1999.
The Company invested approximately $26.0 million in capital projects in the
first six months of 2000 and estimates that total 2000 capital spending will
approximate $48.0 million. Costs to complete the chlorine dioxide capital
project at the Halsey pulp mill are anticipated to be approximately $25.7
million in 2000. Other capital projects are expected to total $22.3 million in
2000. These capital projects will relate primarily to maintenance of existing
operations with a limited number of relatively small, high-return projects.
On July 17, 2000, the Company's Board of Directors increased the second quarter
dividend to 15 cents per common share from 11 cents per share. In addition, 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 six months of
2000, the Company purchased 212,400 shares for $3.5 million. In July 2000, the
Company purchased an additional 381,000 shares for $6.3 million. Through July
2000, the Company has repurchased a total of 1,023,000 shares under this
program.
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",
"expects", 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 half of 2000
relative to the first half of 1999, while lumber prices reached a cyclical peak
in the third quarter of 1999 and have declined since then. No assurance can be
given as to the sustainability of the recent pulp price improvements.
9
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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 has recently begun to exceed supply, and
pulp prices have increased as a result. Prices for lumber have declined as
rising U.S. interest rates impact the rate of new housing starts. 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 caused the Company to generate net losses from continuing
operations in its pulp operations segment as recently as 1999. In the event of a
recession, demand and prices are likely to drop substantially.
RISKS OF INTERNATIONAL BUSINESS
In general, the Company's sales are subject to the risks of international
business, including:
- fluctuations in foreign currencies;
- 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.
Since mid-1999, pulp prices have increased steadily as a result of strong paper
demand and reduced world-wide pulp inventories. In contrast, 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 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
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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.
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 and 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. There can be no
assurance that the Company will be able to obtain an adequate supply of
softwood fiber for its operations.
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.
DEPENDENCE ON A SINGLE CUSTOMER FOR THE HALSEY, OREGON PULP MILL
Approximately 35% 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
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. There can be no assurance as to when the
claim will be ultimately
11
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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. In particular, the wood products 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, 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 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 $35
million, with compliance required by the first quarter of 2001. The Company has
spent $22.2 million of these capital costs through the end of the first half of
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
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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 June 30,
2000 of 42 percent is higher than in recent years. While the Company's leverage
level is not unusual for the forest products and pulp industries, such leverage
increases 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. In general, a weakening of the Canadian dollar
relative to the U.S. dollar has a negative 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 $166 million. The potential loss in fair value resulting from
a hypothetical 10% adverse change in foreign exchange rates would be
approximately $17 million at June 30, 2000. Any loss in fair value would be
reflected as a cumulative translation adjustment and would not impact 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 and U.S. dollar
accounts receivable of its Canadian subsidiary. Transaction gains and losses
were not material to the results for Company's 2000 or 1999 periods.
Changes in interest rates will impact fixed and variable rate debt differently.
A change in the interest rate on fixed rate debt will impact the fair value of
the debt, whereas a change in the interest rate on variable rate debt will
impact interest expense and cash flows. The Company's debt is primarily fixed
rate and, therefore, net income is not materially impacted when market interest
rates change.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's annual Meeting of Shareholders was held on April 27, 2000. The
following members were elected to the Company's Board of Directors to hold
office for three-year terms expiring in 2003.
<TABLE>
<CAPTION>
Nominee In Favor Withheld
------- -------- --------
<S> <C> <C>
Gordon P. Andrews 12,591,111 (99.01%) 125,348 (0.99%)
Peter T. Pope 12,588,711 (99.00%) 127,748 (1.00%)
Brooks Walker Jr. 12,586,371 (98.98%) 130,088 (1.02%)
</TABLE>
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: Hamilton W. Budge, Charles Crocker, Michael Flannery, Kenneth
G. Hanna, and Robert Stevens Miller, Jr. In October 1999, Lionel G. Dodd was
elected as a director of the Company.
The results of the voting on the ratification of selection of Arthur Andersen
LLP as independent public accountants were as follows:
<TABLE>
<CAPTION>
In Favor Opposed Abstained
-------- ------- ---------
<S> <C> <C>
12,655,910 (99.53%) 9,352 (0.07%) 51,197 (0.40%)
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) 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.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended June 30, 2000.
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<PAGE>
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.
----------------------
Registrant
Date: August 10, 2000 /s/ Maria M. Pope
-----------------------
Maria M. Pope
Vice President and
Chief Financial Officer
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