<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d) of the Securities Exchange Act of
1934 for the Quarterly Period Ended March 26, 1994
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Commission File No. 1-2300
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Scott Paper Company
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1065080
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Scott Plaza, Philadelphia, Pennsylvania 19113
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(Address of principal executive offices) (Zip Code)
(610) 522-5000
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 3, 1994
- - --------------------------- --------------------------
Common Shares, no par value 74,365,870 shares
1.
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SCOTT PAPER COMPANY
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Consolidated statement of earnings for the three month
periods ended March 26, 1994 and March 27, 1993....... 3
Consolidated balance sheet at March 26, 1994,
December 25, 1993 and March 27, 1993.................. 4
Consolidated statement of changes in common share-
holders' equity for the nine month period ended
December 25, 1993 and the three month period ended
March 26, 1994........................................ 5
Consolidated statement of cash flows (condensed) for
the three month periods ended March 26, 1994
and March 27, 1993.................................... 6
Notes to Consolidated Financial Statements............. 7
Item 2. Management's Discussion and Analysis................... 9
<CAPTION>
PART II. OTHER INFORMATION
<S> <C>
Item 1. Legal Proceedings...................................... 12
Signatures...................................................... 13
</TABLE>
2.
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SCOTT PAPER COMPANY
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CONSOLIDATED STATEMENT OF EARNINGS
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(Millions, Except on a Per Share Basis)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
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March 26, March 27,
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1994 1993(a)
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<S> <C> <C>
Sales $1,100.4 $1,149.9
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Costs and expenses
Product costs 836.6 867.2
Marketing and distribution 133.3 145.3
Research, administration and general 55.8 59.4
Other 1.5 1.6
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1,027.2 1,073.5
-------- -------
Income from operations 73.2 76.4
Interest expense 44.2 46.8
Other income and (expense) .6 1.0
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Income before taxes 29.6 30.6
Taxes on income 11.4 10.7
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Income before share of earnings of international 18.2 19.9
equity affiliates and cumulative effect of
accounting change
Share of earnings of international equity affiliates 7.0 3.6
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Income before cumulative effect of accounting change 25.2 23.5
Cumulative effect of change in accounting for income - 21.7
taxes ------- -------
Net Income $ 25.2 $ 45.2
======== ========
Earnings per share:
Income before cumulative effect of accounting change $.34 $.32
Cumulative effect of change in accounting for - .29
income taxes ---- ----
Net Income $.34 $.61
==== ====
Dividends per share $.20 $.20
Average shares outstanding 74.3 73.9
</TABLE>
(a) Certain accounting reclassifications (not affecting net income) have been
made to present more clearly the results of operations.
The accompanying notes are an integral part of these financial statements.
3.
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SCOTT PAPER COMPANY
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CONSOLIDATED BALANCE SHEET
--------------------------
(Millions)
(UNAUDITED)
<TABLE>
<CAPTION>
March 26, 1994 December 25, 1993 March 27, 1993
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
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Current assets
Cash and cash equivalents $ 101.6 $ 133.6 $ 80.0
Receivables 573.5 600.3 593.8
Inventories
Finished products $ 221.1 $ 220.0 $ 239.2
Work in process 66.4 69.6 76.9
Raw materials and other 229.9 517.4 234.1 523.7 265.0 581.1
--------- --------- --------
Deferred income taxes 271.7 277.9 180.1
Prepaid items and other 75.8 74.4 65.4
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1,540.0 1,609.9 1,500.4
Plant assets at cost 7,354.8 7,298.9 7,071.6
Accumulated depreciation (3,345.6) 4,009.2 (3,275.0) 4,023.9 (3,143.3) 3,928.3
--------- --------- --------
Timber resources 112.3 113.0 112.1
Investments in and advances
to affiliates 307.7 307.9 342.2
Construction funds held by trustees 87.2 87.1 2.1
Notes receivable, goodwill
and other assets 493.2 483.3 487.3
-------- -------- --------
Total $6,549.6 $6,625.1 $6,372.4
======== ======== ========
Liabilities and Shareholders' Equity
- - ----------------------------------------
Current liabilities
Payable to suppliers and others $ 799.7 $ 891.5 $ 850.1
Accruals for restructuring programs 584.6 639.0 212.0
Current maturities of long-term debt 122.0 180.2 274.8
Accrued taxes on income 50.8 59.1 56.4
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1,557.1 1,769.8 1,393.3
Long-term debt 2,463.0 2,366.2 2,051.1
Deferred income taxes and
other liabilities 932.8 913.4 911.3
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4,952.9 5,049.4 4,355.7
Preferred shares 7.1 7.1 7.1
Common shareholders' equity 1,589.6 1,568.6 2,009.6
-------- -------- --------
Total $6,549.6 $6,625.1 $6,372.4
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4.
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SCOTT PAPER COMPANY
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CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
----------------------------------------------------------------
(Millions)
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
Reinvested Common Treasury Translation
Earnings Shares Shares Adjustment Total
----------- ------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance at March 27, 1993 $1,738.6 $448.8 $(13.4) $(164.4) $2,009.6
Net loss (322.2) (322.2)
Dividends
Common shares (44.4) (44.4)
Preferred Shares (0.2) (0.2)
Shares issued for the
exercise of stock options,
stock awards, and
restricted stock grants - 1.6 1.0 2.6
Foreign currency
translation adjustment - (63.1) (63.1)
Minimum pension liability charge (13.7) (13.7)
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Balance at December 25, 1993 $1,358.1 $450.4 $(12.4) $(227.5) $1,568.6
Net income 25.2 25.2
Dividends
Common shares (14.8) (14.8)
Preferred shares (0.1) (0.1)
Shares issued for the
exercise of stock options,
stock awards, and
restricted stock grants 8.8 0.5 9.3
Foreign currency
translation adjustment 1.4 1.4
- - ---------------------------------------------------------------------------------------------
Balance at March 26, 1994 $1,368.4 $459.2 $(11.9) $(226.1) $1,589.6
======== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5.
<PAGE>
SCOTT PAPER COMPANY
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CONSOLIDATED STATEMENT OF
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CASH FLOWS (Condensed)
----------------------
(Millions)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 26, March 27,
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1994 1993
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- - -------------------------------------------------------
Net income $ 25.2 $ 45.2
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of accounting change - (21.7)
Share of earnings of affiliates, net of
distributions (4.7) (1.4)
Depreciation, cost of timber harvested and
amortization 74.4 76.9
Deferred income taxes 10.3 6.2
Other postretirement benefits, deferred expenses 8.8 9.9
Net changes in current assets and current
liabilities (105.8) (145.6)
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Net cash provided by (used for) operating activities 8.2 (30.5)
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CASH FLOWS FROM INVESTING ACTIVITIES
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Investments in plant assets, timber resources
and other assets (87.8) (67.5)
Advances to affiliates, net (0.3) (1.3)
Other investing 9.8 (1.8)
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Net cash used for investing activities (78.3) (70.6)
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CASH FLOWS FROM FINANCING ACTIVITIES
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Dividends paid (14.9) (14.9)
Proceeds from issuance of long-term debt,
net of issuance costs 166.7 87.2
Repayments of long-term debt (144.1) (11.9)
Net increase (decrease) in short-term borrowings 14.9 (16.6)
Other financing 14.7 (1.8)
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Net cash provided by financing activities 37.3 42.0
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Effect of exchange rate changes on cash 0.8 (2.6)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (32.0) (61.7)
Cash and cash equivalents at beginning of period 133.6 141.7
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Cash and cash equivalents at end of period $ 101.6 $ 80.0
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. Statement of Information Furnished
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The accompanying financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, these consolidated financial
statements give effect to all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of
Scott Paper Company and its subsidiaries as of March 26, 1994, March 27, 1993
and December 25, 1993, and the earnings and cash flows for the three month
periods ended March 26, 1994 and March 27, 1993.
The Company presumes that users of this Quarterly Report on Form 10-Q have
read or have access to the audited financial statements contained in the
Company's Annual Report on Form 10-K for the year ended December 25, 1993.
Accordingly, footnote disclosures which would substantially duplicate the
disclosures contained therein have been omitted.
2. Supplemental Cash Flow Information
----------------------------------
Cash payments for interest, net of amounts capitalized, were $46.9 million
and $43.0 million during the first three months of 1994 and 1993,
respectively. Cash payments for income taxes were $7.9 million and $10.3
million during the first three months of 1994 and 1993, respectively.
3. Restructuring and Productivity Improvement
------------------------------------------
At year end 1993 the Company had accruals for restructuring programs of
$639.0 million recorded in its balance sheet including the 1993 charges for
restructuring and productivity improvement programs. During the first
quarter of 1994, $54.4 million was charged to these reserves primarily for
lump sum payments related to early retirements and the effects of the sale of
the polystyrene bead operations.
While the accrued liability for these programs is shown as a current
liability, a portion of the cash outflows for the above actions initiated in
1994 will occur in 1995 and 1996.
4. Accounting Standards Changes
----------------------------
The Company adopted Financial Accounting Standards No. 112, Employers'
Accounting for Postemployment Benefits (FAS 112), during the first quarter of
1994. This standard requires employers to recognize and when necessary
accrue for the estimated cost of benefits provided to former or inactive
employees after employment but before retirement. The effect on the Company
of adopting this statement was not material.
7.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Statement of Information Furnished (Continued)
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4. Accounting Standards Changes (Continued)
----------------------------------------
Beginning in 1993, the Company adopted Financial Accounting Standards No.
109, Accounting for Income Taxes (FAS 109). This standard requires that the
deferred tax liability account at the beginning of the year be adjusted to
equal the taxes that will be paid on taxable income deferred into future
years based on the tax rates in effect for the future years. The Company
reported a positive adjustment for the cumulative effect of adopting the
provisions of FAS 109 of $21.7 million, or $.29 per share, in the first
quarter of 1993.
8.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations -
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First Quarter 1994 Compared with First Quarter 1993
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The Company's first quarter 1994 net income increased 7% to $25.2 million from
$23.5 million for the same period in 1993 and earnings per share increased 6% to
$.34 from $.32 in 1993, excluding a one-time positive adjustment in 1993 for
the cumulative effect of the required adoption of Financial Accounting Standards
Board Statement No. 109, Accounting for Income Taxes. Net income and earnings
per share for the first quarter 1993, including the positive adjustment, were
$45.2 million and $.61, respectively. Dollar sales in the first quarter 1994
declined 4% to $1.1 billion.
The Company continued to experience a difficult market environment during the
first quarter in which productivity improvement was modestly able to offset the
negative impacts of this difficult environment. The competitive and economic
realities reaffirm management's belief that improvement in 1994 results must be
attained primarily through productivity improvement efforts.
Income from operations for the consolidated Scott Worldwide personal care and
cleaning business increased 14% during the first quarter 1994 despite a decline
in sales revenue of 5% during the same period.
Income from operations for the U.S. personal care and cleaning business
increased 14% from the same quarter last year, while sales revenue was flat on
lower unit volume. The results were achieved in a continuing highly competitive
U. S. market and were negatively impacted by severe weather conditions.
Outside the U. S., Scott Worldwide's European business increased income from
operations by 4% despite lower volume, negative price pressures and unfavorable
foreign exchange effects, while sales revenue for the quarter declined 15% in
this economically depressed market area. Income from operations in the Pacific
region was up strongly. Scott's share of earnings from equity affiliates also
increased significantly primarily due to productivity improvement efforts in
Mexico and Canada.
Sales revenue from S. D. Warren's printing and publishing papers business in the
first quarter 1994 decreased 4%, with unit volume flat. Income from operations
declined 59% as selling prices eroded further in an environment of weak demand,
excess industry capacity and higher levels of coated paper imports. S.D.
Warren's manufacturing costs were also higher.
The continued difficult environment has caused the Company to aggressively
pursue an annual minimum 5% productivity improvement target. The Company has
initiated the process of lowering its overall base costs worldwide and
restructuring the manufacturing operations. The Company's worldwide work force
was reduced by more than 2,000 people by the end of the first quarter,
approximately half occurring in the Mexican operations, versus the 8,300 person,
two- to three-year target announced in January 1994. Management believes the
commitment to establish a low-cost foundation and then add differentiation, is
essential to regaining control of the Company's destiny, improving short-term
results and building long-term shareholder value.
9.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Condition-
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Liquidity and Capital Resources
- - -------------------------------
Cash provided by (used for) operations during the first three months of 1994 and
1993 was $8.2 million and ($30.5) million, respectively. The net amount of cash
provided by (used for) operations during these periods was adversely affected by
increases in working capital. The increase in working capital for the three
months ended March 26, 1994 was primarily due to a decrease in payables to
suppliers and others.
Capital expenditures were $87.8 million during the first three months of 1994
compared with $67.5 million during the same period in 1993. During 1994 and
1995, the Company plans to invest between $800 and $900 million in capital
projects. The projects include: $200 million of spending related to the
productivity improvement program; the continuation of four projects underway -
the modernization of the pulp mill in Mobile, Alabama, capacity expansion for
the wet wipes business in Dover, Delaware, a sheeting facility for S.D. Warren
in Allentown, Pennsylvania, and construction of a state-of-the-art tissue mill
in Owensboro, Kentucky; and other projects designed to sustain existing
operations and reduce costs. The Company expects to finance this spending
primarily from internally generated funds.
Total debt at March 26, 1994 was $2,585.0 million compared with $2,325.9 million
at March 27, 1993 and $2,546.4 million at December 25, 1993. During the first
three months of 1994, the Company's financing activities included retirement of
$85.4 million in debentures primarily through the issuance of commercial paper.
The Company also amended a loan agreement to extend the maturity of $75.3
million of notes which were then transferred from current maturities of long-
term debt to long-term debt.
To maintain financing flexibility, the Company maintains two long-term revolving
credit agreements totaling $775 million, all unused at March 26, 1994.
The Company's debt to equity ratios at March 26, 1994, December 25, 1993 and
March 27, 1993 are set forth below:
March 26, 1994 December 25, 1993 March 27, 1993
-------------- ----------------- --------------
Debt to equity 162% 162% 115%
March 26, 1994 Compared With March 27, 1993
- - -------------------------------------------
Total assets of $6,549.6 million at March 26, 1994 increased $177.2 million or
2.8% compared with total assets of $6,372.4 million at March 27, 1993. The
increase was primarily due to an increase in construction funds held by trustees
of $85.1 million and increase in net plant assets of $80.9 million.
Total liabilities of $4,952.9 million at March 26, 1994 increased $597.2 million
or 13.7% compared with total liabilities of $4,355.7 million at March 27, 1993.
The increase was primarily due to an increase in the accruals for restructuring
programs of $372.6 million and an increase in total debt of $259.1 million.
During August 1993 the Company issued $200 million in debentures used primarily
to repay commercial paper and current maturities of long-term debt.
10.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
March 26, 1994 Compared With March 27, 1993 (Continued)
- - -------------------------------------------------------
Common shareholders' equity at March 26, 1994 of $1,589.6 million decreased $420
million compared with the March 27, 1993 balance of $2,009.6 million due
primarily to a net loss resulting from restructuring charges during 1993 as well
as foreign currency translation adjustments and dividends paid.
March 26, 1994 Compared With December 25, 1993
- - ----------------------------------------------
Total assets at March 26, 1994 of $6,549.6 million decreased $75.5 million or
1.1% compared with total assets of $6,625.1 million at December 25, 1993. This
was primarily due to a decrease in cash and cash equivalents of $32.0 million as
well as a decrease in receivables of $26.8 million.
Total liabilities of $4,952.9 million at March 26, 1994 decreased $96.5 million
or 1.9% compared with total liabilities of $5,049.4 million at December 25,
1993. The decrease was primarily due to a decrease in payables to suppliers and
others of $91.8 million.
Common shareholders' equity at March 26, 1994 of $1,589.6 million was $21.0
million greater than the balance at December 25, 1993 of $1,568.6 million due
primarily to reinvested earnings, shares issued for the exercise of stock
options, awards and grants, net of dividends paid.
11.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
As disclosed in Item 3 of the Company's 1993 Form 10-K, the Company is a
defendant in numerous actions in state and federal court seeking damages
relating to breast implants. The actions allege that the plaintiffs' breast
implants were covered by polyurethane foam manufactured by the Company's former
Foam Division, which was sold in 1983, and that the foam caused physical and/or
psychological harm to the plaintiffs. In each of these actions the Company is
one of several defendants, including the Foam Division's successor and the
manufacturers of implants. The Company believes that only a small percentage of
breast implants were covered by polyurethane foam manufactured by the Company's
Foam Division prior to its sale.
Pursuant to an order of the Multidistrict Litigation Panel, all of the
federal cases involving breast implants have been consolidated for pre-trial
purposes in the Northern District of Alabama. One of these cases, Lindsey, et.
------------
al., v. Dow Corning Corporation, et. al., has been provisionally certified by
- - ----------------------------------------
the Court as a class action for settlement purposes. Included in the
provisionally approved class are all persons who received one or more breast
implants before June 1, 1993 ("settlement class members"). On March 29, 1994,
an initial Breast Implant Litigation Settlement Agreement between the settlement
class members and certain settling defendants was filed with the Court, and
additional settling defendants were added in April 1994. The settling
defendants include all of the manufacturers of breast implants and some of those
from whom the manufacturers purchased materials. On April 13, 1994, the Court
approved a notice to settlement class members of the proposed settlement
agreement. The notice informs them of their right by June 17, 1994 to opt out
of the proposed settlement and, thus, to preserve their right to take direct
legal action against one or more settling defendants. The notice sets August
18, 1994 as the date of a hearing to determine the fairness, reasonableness and
adequacy of the settlement agreement. The Court will approve the settlement
agreement only if it is found to be fair, reasonable and adequate.
The Company has chosen not to settle on the terms offered, and therefore is
not a party to the settlement agreement. As a result, individuals who have
received breast implants covered by polyurethane foam manufactured by the
Company's former Foam Division would retain their right to take legal action
against the Company even if they do not opt out of the settlement agreement.
The Company believes that it has meritorious defenses against these claims and
intends to conduct a vigorous defense and seek insurance recovery to the extent
provided under its insurance policies, if necessary. Although the final results
of these claims cannot be predicted with certainty, it is the present opinion of
the Company, after consulting with counsel, that they will not have a material
adverse effect on the Company's financial condition.
12.
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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.
Scott Paper Company
--------------------------------
(Registrant)
DATE: May 6, 1994 /s/ Edward B. Betz
----------- --------------------------------
Edward B. Betz
Vice President & Controller
(Authorized Signer and
Chief Accounting Officer)
13.
