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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24976
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CROWN PACIFIC PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 93-1161833
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
121 SW Morrison Street, Suite 1500, Portland, Oregon 97204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-274-2300
--------------------------
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
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Units 27,314,277
(Class) (Outstanding at August 3, 1998)
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CROWN PACIFIC PARTNERS, L.P.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statement of Income - Three and Six
Month Periods Ended June 30, 1998 and 1997 2
Consolidated Balance Sheet - June 30, 1998 and December 31, 1997 4
Consolidated Statement of Cash Flows - Six Months Ended
June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
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<S> <C> <C>
Revenues ......................................... $ 171,690 $ 125,427
Operating costs:
Cost of products sold .......................... 143,737 101,753
Selling, general and administrative expenses .... 7,492 6,983
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Operating income ................................. 20,461 16,691
Interest expense ................................. 12,923 9,305
Amortization of debt issuance costs .............. 216 183
Other income, net ................................ (206) (167)
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Net income ....................................... $ 7,528 $ 7,370
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Basic and diluted net income per unit.............. $ 0.27 $ 0.27
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Weighted average units outstanding ............... 27,314,277 27,104,277
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</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
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CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
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<S> <C> <C>
Revenues ......................................... $ 325,620 $ 242,818
Operating costs:
Cost of products sold .......................... 270,931 195,924
Selling, general and administrative expenses .... 14,588 13,703
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Operating income ................................. 40,101 33,191
Interest expense ................................. 25,918 18,784
Amortization of debt issuance costs .............. 432 365
Other income, net ................................ (668) (25)
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Net income ........................................ $ 14,419 $ 14,067
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Basic and diluted net income per unit.............. $ 0.52 $ 0.51
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Weighted average units outstanding ............... 27,314,277 27,104,277
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</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
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CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT UNIT DATA)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 25,251 $ 22,384
Accounts receivable ............................ 80,175 50,523
Notes receivable ............................... 6,079 4,063
Inventories .................................... 34,907 44,914
Deposits on timber cutting contracts ........... 6,132 6,656
Prepaid and other current assets ............... 3,063 2,421
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Total current assets ........................ 155,607 130,961
Property, plant and equipment, net of accumulated
depreciation of $26,895 and $22,916 ............ 48,835 47,325
Timber, timberlands and roads, net ............... 616,612 645,641
Intangible assets, net of accumulated amortization
of $205 and $61................................. 17,600 1,778
Other assets ..................................... 23,191 13,439
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Total assets ................................ $ 861,845 $ 839,144
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LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Notes payable .................................. $ 16,500 $ 9,000
Accounts payable ............................... 28,754 14,626
Accrued expenses ............................... 19,201 25,007
Accrued interest ............................... 8,639 6,144
Current portion of long-term debt .............. 66 1,000
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Total current liabilities ................... 73,160 55,777
Long-term debt .................................. 591,031 574,500
Other non-current liabilities ................... 626 628
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664,817 630,905
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COMMITMENTS AND CONTINGENT LIABILITIES
Partners' capital:
General partners ............................. 1,833 2,093
Limited partners (27,314,277 and 27,104,277 units
outstanding at June 30, 1998 and December 31, 1997,
respectively)................................. 195,195 206,146
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Total partners' capital .................... 197,028 208,239
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Total liabilities and partners' capital ..... $ 861,845 $ 839,144
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</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
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CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income ..................................... $ 14,419 $ 14,067
Adjustments to reconcile net income to
net cash provided by operating activities:
Depletion, depreciation and amortization .... 29,459 18,092
Gain on sale of property ................... (8,301) (482)
Other ...................................... 175 564
Net change in current assets and current
liabilities:
Accounts and notes receivable .............. (21,517) 3,766
Inventories ................................ 15,851 4,195
Deposits on timber cutting contracts ....... 524 (505)
Prepaid and other current assets ........... (643) 447
Accounts payable and accrued expenses ...... 8,313 6,739
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Net cash provided by operating activities ........ 38,280 46,883
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Cash flows from investing activities:
Additions to timberlands ....................... (7,250) (6,331)
Additions to timber cutting rights ............. (3,989) (1,275)
Additions to equipment ......................... (3,483) (5,068)
Proceeds from sales of property ................ 12,290 1,178
Principal payments received on notes ........... 67 5,260
Purchase of businesses ......................... (15,413) -
Other investing activities ..................... (82) 18
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Net cash used in investing activities ............ (17,860) (6,218)
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Cash flows from financing activities:
Net increase (decrease) in short-term
borrowings .................................... 7,500 (12,000)
Proceeds from issuance of long-term debt ....... 183,244 -
Repayments of long-term debt ................... (177,271) (1,000)
Distributions to partners ...................... (30,355) (29,372)
Debt and equity issuance costs ................. (646) (69)
Other financing activities ..................... (25) (58)
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Net cash used in financing activities ............ (17,553) (42,499)
---------- ---------
Net increase (decrease) in cash and cash
equivalents .................................... 2,867 (1,834)
Cash and cash equivalents at beginning of period... 22,384 16,818
---------- ---------
Cash and cash equivalents at end of period......... $ 25,251 $ 14,984
---------- ---------
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</TABLE>
See accompanying notes to consolidated financial statements
5
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CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS OR AS OTHERWISE INDICATED)
(UNAUDITED)
1: ORGANIZATION AND BASIS OF PRESENTATION
Crown Pacific Partners, L.P. (the "Partnership"), a Delaware limited
partnership, through its 99% owned subsidiary, Crown Pacific Limited
Partnership, was formed in 1994 to acquire, own and operate timberlands and
wood product manufacturing assets. The Partnership's business consists
primarily of growing and harvesting timber for sale as logs and stumpage in
domestic and export markets and the manufacture and sale of lumber and other
wood products.
The financial statements included in this Form 10-Q are unaudited and reflect
the consolidated financial position, results of operations and cash flows of
the Partnership. These financial statements include all the accounts of the
Partnership but do not contain all of the information required by generally
accepted accounting principles to be included in a full set of financial
statements. The financial statements in the Partnership's 1997 annual report
on Form 10-K, which includes a summary of significant accounting policies of
the Partnership, should be read in conjunction with this Form 10-Q. In the
opinion of management, all material adjustments necessary to present fairly
the results of operations for the three and six month periods ended June 30,
1998 and 1997 have been included. All such adjustments are of a normal and
recurring nature and all significant intercompany transactions have been
eliminated. The results of operations for any interim period are not
necessarily indicative of the results of operations for the entire year.
Net income per unit was calculated using the weighted average number of
common and subordinated units outstanding divided into net income, after
adjusting for the General Partner interest. The General Partner income
allocation was $75 and $74 for the three months ended June 30, 1998 and 1997,
respectively, and $144 and $141 for the six months ended June 30, 1998 and
1997, respectively. Adoption of Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE (SFAS 128), in 1997 had an immaterial effect on
the Partnership. There is no significant difference between basic and
diluted earnings per unit as net income is allocated proportionately to both
subordinated and common units.
NOTE 2: INVENTORIES
Inventories, consisting of lumber and logs, are stated at the lower of LIFO
cost or market. Supplies and inventories maintained at non-manufacturing
locations are valued at the lower of average cost or market. Inventories
consisted of the following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
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<S> <C> <C>
Finished goods $ 19,475 $ 13,054
Logs 12,398 29,720
Supplies 1,568 1,224
LIFO adjustment 1,466 916
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Total $ 34,907 $ 44,914
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</TABLE>
6
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NOTE 3: TIMBER, TIMBERLANDS AND ROADS
In the first quarter of 1998, the Partnership performed its annual update of
its timber inventory system, resulting in an increase to depletion costs for
the first half of 1998 of approximately $3.9 million, or $0.14 per unit, with
no impact on cash flow.
NOTE 4: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1998 1997
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<S> <C> <C>
Cash paid during the period for interest $ 23,543 $ 18,582
</TABLE>
NOTE 5: ACQUISITION OF ALLIANCE WHOLESALE LUMBER, INC.
In January 1998, the Partnership completed its acquisition of Alliance
Wholesale Lumber, Inc. ("Alliance Lumber") of Phoenix, Arizona. Alliance
Lumber operates three contractor service yards, which provide a variety of
wood products to residential and commercial contractors. Consideration given
by the Partnership totaled $29.5 million, consisting of $15.0 million in
cash, $5.0 million in the Partnership's Common Units and the assumption of
$9.5 million of existing debt. The acquisition was accounted for as a
purchase and the results of Alliance Lumber operations have been included
with those of the Partnership since the acquisition date. Goodwill related
to this acquisition was $15.9 million, which is being amortized over 40 years.
NOTE 6: DISTRIBUTIONS
On April 21, 1998, the Board of Control authorized the Partnership to make a
distribution of $0.551 per unit. The total distribution was $15.2 million
(including $0.2 million to the General Partners) and was paid on May 15, 1998
to unitholders of record on May 4, 1998.
NOTE 7: SUBSEQUENT EVENTS
On July 21, 1998, the Board of Control authorized the Partnership to make a
distribution of $0.551 per unit. The total distribution will be $15.2
million (including $0.2 million to the General Partners) and will be paid on
August 14, 1998 to unitholders of record on August 5, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Crown Pacific's principal operations consist of the growing and harvesting of
timber, the sale of logs and stumpage and the processing and sale of lumber
and other wood products. The Partnership's ability to implement its business
strategy over the long term and its results of operations depend upon a
number of factors, many of which are beyond its control. These factors
include general industry conditions, domestic and international prices and
supply and demand for logs, lumber and other wood products, seasonality and
competition from other supplying regions and substitute products.
FORWARD-LOOKING STATEMENTS
Information contained in Item 2 and other sections of this report includes
forward-looking statements including statements regarding the Partnership's
expectations, hopes, beliefs, intentions or strategies regarding the future
that are not purely historical, but are based on assumptions that in the
future may prove not to be accurate. The Partnership's business and
prospects are subject to a number of risks,
7
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including the volatility of global timber and lumber prices and supplies,
factors limiting harvesting of timber including contractual obligations,
governmental restrictions, weather and access limitations - as well as the
substantial capital expenditures required to supply its operations.
Additional factors that could affect future performance include environmental
risks, operating risks normally associated with the timber industry,
competition, government regulation and economic changes in the regions where
the Partnership's products are sold, including Southeast Asia and Japan.
Other risk factors include the value of the U.S. dollar against foreign
currencies and the ability of the Partnership to implement its business
strategy. These and other risks are described in the Partnership's
registration statements and reports filed from time to time on forms 10-K,
8-K and 10-Q and reports to unitholders, which are available from the Company
or the United States Securities and Exchange Commission.
FINANCIAL CONDITION
The Partnership's primary sources of liquidity have been cash provided by
operating activities as well as debt and equity financings. Cash provided by
operating activities was $38.3 million and $46.9 million for the six-month
periods ended June 30, 1998 and 1997, respectively. Working capital increased
to $82.4 million at June 30, 1998 compared to $75.2 million at December 31,
1997.
Net cash used in investing activities of $17.9 million resulted from the
acquisition of Alliance Lumber and additions to timberlands, equipment and
timber cutting rights, which was partially offset by proceeds from sales of
properties.
Net cash used by financing activities of $17.6 million resulted primarily
from distributions to partners of $30.4 million, offset by $6.0 million of
net proceeds from long-term debt and $7.5 million of net short-term
borrowings.
Cash required to meet the Partnership's quarterly cash distributions (as
required by the Partnership Agreement), to pay for capital expenditures and
to satisfy interest and principal payments on indebtedness, will be
significant. Capital expenditures, excluding purchases of timber and
timberlands, acquisitions of businesses and any costs incurred in connection
with new mills, are expected to be approximately $16.0 million in 1998, $8.5
million of which has already been incurred. The Managing General Partner
expects that capital expenditures will be funded by property sales, cash
generated from operations, current funds and/or bank borrowings. The
Partnership is currently constructing a new sawmill in Port Angeles,
Washington and one in Bonners Ferry, Idaho. The new mills will be financed
using operating leases and are expected to be running on a two shift basis in
the fourth quarter of 1998. Debt service is expected to be funded from
current operations. The Partnership expects to make cash distributions from
its current funds and cash generated from operations.
The Partnership has a $40 million revolving credit facility with a group of
banks for working capital purposes and stand-by letters of credit that expire
on September 30, 2000. The credit facility bears a floating rate of
interest, 8.5% at June 30, 1998, and among other provisions, requires the
Partnership to repay all outstanding indebtedness under the facility for at
least 30 consecutive days during any twelve-month period. The line of credit
is secured by the Partnership's inventories and receivables. At June 30,
1998, the Partnership had $16.5 million outstanding under this facility.
8
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The Partnership also has an Acquisition Facility with a group of banks to
provide for a $150 million revolving line of credit for the acquisition of
additional timber, timberlands and related assets. The Acquisition Facility
is unsecured, bears a floating rate of interest, 6.68% at June 30, 1998, and
expires September 30, 2000. At the end of the revolving period, the
Partnership may elect to convert any outstanding borrowings under this
facility to a four-year term loan, requiring quarterly principal payments
equal to 6.25% of the outstanding principal balance on the conversion date.
Borrowings against this facility were $52.5 million at June 30, 1998.
On October 15, 1997, the Partnership used $107.5 million of seller provided
financing to fund the purchase of 65,000 acres of timberland from Trillium
Corp. The notes to Trillium require monthly interest payments, at variable
rates, with principal payments of $55 million in January 1998 and $52.5
million in 1999. The $55 million payment in January 1998 was paid with the
proceeds from a new senior note offering, which was issued in January 1998.
On December 30, 1997, the Partnership issued $15 million of new senior notes
and on January 13, 1998, the Partnership issued an additional $80 million of
new senior notes. The $95 million of combined notes have an average interest
rate of 7.80%, with principal payments of varying amounts due 2010 to 2018.
The proceeds of these notes were used to refinance indebtedness associated
with the Trillium acquisition and to finance a portion of the Alliance Lumber
acquisition.
The Partnership's 9.78%, 9.60% and 8.17% senior notes, issued in 1994, 1995
and 1996, respectively, are unsecured and require semi-annual interest
payments through 2013. The senior note agreements require the Partnership to
make an aggregate annual principal payment of $37.5 million on December 1,
2002, and principal payments in various amounts from December 1, 2003 through
2013.
All of the Partnership's senior note agreements and bank lines of credit
contain certain restrictive covenants, including limitations on harvest
levels, land sales, cash distributions and the amount of future indebtedness.
The Partnership was in compliance with such covenants at June 30, 1998.
RESULTS OF OPERATIONS (THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1997)
Net revenues during the second quarter ended June 30, 1998 increased 36.9% to
$171.7 million, from $125.4 million in the same quarter in 1997. The $46.3
million increase was principally due to increased sales from the
Partnership's wholesale operations, increased log and stumpage sales and
increased timberland property sales, offset by a decrease in lumber sales
from the partnership's mills. The first quarter of 1998 was the first
quarter which included the results of operations for the recently acquired
Alliance Lumber division.
Lumber sales, excluding sales of lumber by the wholesale operations,
represented 27.5% of sales in the second quarter of 1998, compared to 43.4%
of sales in the same quarter of 1997. Average external prices received for
lumber in the Oregon and Inland regions decreased 14.7% and 20.9%,
respectively, to $596 per thousand board feet (MBF) and $382/MBF,
respectively, for the second quarter of 1998 from prices received in the same
quarter of 1997. Lumber prices decreased in Oregon during the third and
fourth quarters of 1997 and began increasing slightly in the first and second
quarters of 1998 as the U.S. millwork industry worked off existing inventory
levels and seasonal demand increased. In addition, the average market price
for low-grade industrial lumber products improved in the latter part of the
second quarter. Price decreases in the Inland region are
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primarily due to a general decline in market conditions. The Company
believes that this region may have seen the bottom of the price cycle as
several mills closed during June and July on either a permanent or temporary
basis. Prices for lumber products sold from the Partnership's studmill in
Marysville, Washington decreased 5.2% to $309/MBF in the second quarter of
1998 compared to $326/MBF in the comparable quarter of 1997. The decrease is
primarily a result of a general decline in general market conditions for
studs in the second quarter of 1998. The Partnership expects prices for
lumber from this region to remain stable over most of the remainder of the
year with possible modest increases toward the end of the fourth quarter.
External lumber sales volumes, excluding sales from the wholesale operation,
increased 5.9% in the second quarter of 1998 to 99.4 million board feet
(MMBF), compared to 93.9 MMBF in the same period of 1997. Sales volumes of
Oregon lumber increased 8.2% to 45.3 MMBF in the second quarter of 1998 from
41.9 MMBF in the second quarter of 1997 due to increases in capacity at the
Partnership's Gilchrist and Prineville, Oregon facilities subsequent to
capital improvements made in 1996 and 1997. External lumber sales volumes in
the Inland region increased by 2.3% to 45.5 MMBF in the second quarter of
1998 compared to 44.4 MMBF in the second quarter of 1997. The Partnership
expects sales volumes in the Inland region to remain relatively stable
throughout the remainder of 1998. External lumber sales volume from the
Marysville studmill increased 14.5% to 8.7 MMBF during the second quarter of
1998 compared to 7.6 MMBF in the second quarter of 1997 primarily as a result
of capital improvements made in 1997. The Partnership expects sales volume
from this region to also remain stable throughout the remainder of 1998.
Total log sales represented approximately 21.8% of sales in the second
quarter of 1998, compared to 20.8% in the comparable quarter of 1997.
Average external domestic prices received for logs sold from the Oregon tree
farm increased 13.1% to $466/MBF over prices experienced in the comparable
quarter of 1997. Average external domestic prices received for logs,
including stumpage sales, sold from the Olympic, Inland and Hamilton tree
farms decreased 13.3%, 24.5% and 35.7%, respectively, to $423/MBF, $364/MBF
and $410/MBF, respectively, from prices experienced during the comparable
quarter of 1997. Overall decreases in domestic log prices are primarily a
result of a general decline in domestic log prices commensurate with lumber
price declines and a significantly smaller amount of stumpage sales the mix
in the 1997 quarter. Average prices increased slightly from the first
quarter of 1998 primarily as a result of improved prices for Douglas Fir in
the second quarter of 1998. The Partnership expects average domestic prices
to increase moderately in the third quarter as the stumpage sale component of
the sales mix is reduced.
Domestic log sales volumes increased 97.1% in the second quarter of 1998 to
78.7 MMBF, compared to 40.0 MMBF in the same quarter of 1997. The increases
at each of the Partnership's tree farms are primarily a result of continued
movement of lower grade export logs to the domestic market, the addition of
the Trillium timberlands and increased stumpage sales volumes compared to the
1997 quarter. Due to planned reductions in stumpage sales for the third
quarter of 1998, a decline in quarterly sales volumes from first and second
quarters of 1998 is expected.
Sales of logs to customers involved in exporting activities (included in
total log sales above) were approximately $2.3 million, or 1.4% of sales in
the second quarter of 1998, compared to $4.6 million, or 3.6% of sales for
the same quarter in 1997. Prices received for export logs increased 1.3% to
$636/MBF while sales volumes decreased 49.5% to 3.7 MMBF in the second
quarter of 1998 from levels experienced in the same quarter of 1997.
Decreases in sales volumes resulted from a shift toward selling logs in the
domestic market as a result of weak Asian demand for logs. The
10
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volume of log exports is expected to remain relatively low, and possibly
decrease further, as the Partnership gets higher value selling similar
quality logs to domestic mills in log form or on the stump.
During the third and fourth quarters of 1998, the Partnership's new mill in
Port Angeles, Washington will begin adding conversion margin to logs from the
Olympic tree farm, effectively reducing the amount of logs and stumpage sold
domestically and for export.
Sales from the Partnership's wholesale operations consisted of lumber and
other wood products, most of which were not manufactured by the Partnership,
and represented 35.1% of sales in the second quarter of 1998 compared to
26.1% in the second quarter of 1997. The increase is primarily a result of
the acquisition of Alliance Lumber, which the Partnership began operating in
the first quarter of 1998. The Partnership expects the wholesale operations
to continue to perform well as they have in the first half of the year, in
spite of lagging lumber prices, as demand for housing remains strong.
The gain from property sales in the second quarter of 1998 was $4.6 million
and was immaterial in the second quarter of 1997. The largest parcel sold in
the second quarter of 1998 was a combination of non-strategic tracts from the
October 1997 Trillium acquisition and previously owned tracts in northwest
Washington. The Partnership will continue to sell or trade properties in
both Oregon and northwest Washington as part of its strategy to reinvest the
value of non-strategic timberlands.
By-product and other revenues accounted for 4.3% of sales in the second
quarter of 1998, compared to 8.6% of sales in the same quarter of 1997.
Residual wood chip prices increased 30.2% to $56 per bone dry unit ("BDU") in
the second quarter of 1998 compared to $43/BDU in the second quarter of 1997.
Paper mills are finding an adequate supply of wood chips as many paper mills
have taken down time to keep their finished inventory from building. As a
result, wood chip prices are expected to remain at current levels through the
remainder of 1998.
Cost of sales as a percentage of sales increased to 83.7% in the second
quarter of 1998, compared to 81.1% in the same quarter of 1997. The
increase is primarily the result of a larger portion of the Partnership's
revenue being derived from its wholesale operations, which operate at a lower
margin and lower sales realizations for logs and lumber, which were partially
offset by property sale gains and operating efficiencies resulting from
capital improvements. In addition, the Partnership has increased its reserve
for uncollectible accounts by $1.0 million in 1998.
Selling, general and administrative expenses increased $0.5 million to $7.5
million in the second quarter of 1998, compared to $7.0 million in the second
quarter of 1997, reflecting the additional operations of Alliance Lumber.
Selling, general and administrative expenses represented 4.4% of sales in the
second quarter of 1998 and 5.6% of sales in the same quarter of 1997. The
Partnership has been able to achieve operating efficiencies within its
administrative functions as operations have increased.
Interest expense increased $3.6 million to $12.9 million in the second
quarter of 1998, from $9.3 million in the same quarter of 1997. The increase
is primarily a result of increased debt related to the Trillium and Alliance
Lumber acquisitions.
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The Partnership pays no significant income taxes and does not include a
provision for income taxes in its financial statements.
RESULTS OF OPERATIONS (SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997)
Net sales during the six months ended June 30, 1998 increased 34.1% to $325.6
million, from $242.8 million in the same 1997 period. The $82.8 million
increase was principally due to increased sales from the Partnership's
wholesale operations, increased log and stumpage sales and increased
timberland property sales, offset by a decrease in lumber sales from the
Partnership's mills. The first quarter of 1998 was the first quarter which
included the results of operations for the recently acquired Alliance Lumber
division.
Lumber sales, excluding sales from the wholesale operation, represented 29.3%
of sales in the 1998 period, compared to 43.5% of sales in the 1997 period.
Average external prices received for lumber in the Oregon and Inland regions
decreased 16.4% and 17.0%, respectively, to $582 per thousand board feet
(MBF) and $401/MBF, respectively, for the first six months of 1998 from
prices received in the same period of 1997. Lumber prices decreased in Oregon
during the third and fourth quarters of 1997 and began increasing slightly in
the first and second quarters of 1998 as the U.S. millwork industry worked
off existing inventory levels and seasonal demand increased. The average
market price for low-grade industrial lumber products began to improve in the
latter part of the second quarter. Price decreases in the Inland region are
primarily due to a general decline in market conditions. The Company
believes that this region may have seen the bottom of the price cycle as
several mills closed during June and July on either a permanent or temporary
basis. Prices for lumber products sold from the Partnership's studmill in
Marysville, Washington remained stable at $320/MBF in the first six months of
1998 compared to $319/MBF in the comparable period of 1997. The Partnership
expects prices for lumber from this region to remain stable over most of the
remainder of the year with possible modest increases toward the end of the
fourth quarter.
External lumber sales volumes, excluding sales from the wholesale operation,
increased 7.5% in the 1998 period to 199.7 MMBF, from 185.8 MMBF in the same
period in 1997. Sales volumes of Oregon lumber increased 19.9% to 90.7 MMBF
in the 1998 period from 75.7 MMBF in the 1997 period due to increases in
capacity at the Partnership's Gilchrist and Prineville, Oregon facilities
subsequent to capital improvements made in 1996 and 1997. External lumber
sales volumes in the Inland region decreased by 3.3% to 91.9 MMBF in the
first half of 1998 compared to 95.1 MMBF in the first half of 1997. The
Partnership expects sales volumes in the Inland region to remain relatively
stable throughout the remainder of 1998. External lumber sales volume from
the Marysville studmill increased 13.6% to 17.1 MMBF during the first half of
1998 compared to 15.1 MMBF in the first half of 1997 as a result of capital
improvements made in 1997. Sales volumes from the Marysville studmill are
also expected to remain relatively flat throughout the remainder of 1998.
Total log sales represented 24.0% of sales for the six months ended June 30,
1998, compared to 21.3% in the same period of 1997. Average external
domestic prices received for logs sold from the Oregon tree farm increased
7.3% to $449/MBF over prices experienced in the 1997 period. Average
external domestic prices received for logs sold, including stumpage sales,
from the Inland, Hamilton and Olympic tree farms decreased 32.0%, 31.1% and
6.0%, respectively, to $328/MBF, $396/MBF and $436/MBF, respectively, from
prices experienced during the 1997 period. Overall decreases in domestic log
prices are primarily a result of decreases in the selling prices for lumber
and a greater
12
<PAGE>
proportion of stumpage sales in the mix in the first and second quarters of
1998 compared to the first half of 1997. The overall price decrease was
partially offset by increased sales of higher quality logs that previously
had been sold for export. The Partnership expects average domestic prices to
increase moderately in the third quarter as the stumpage sale component of
the sales mix is reduced.
Domestic log sales volumes increased 117.1% in the 1998 six-month period to
170.9 MMBF, compared to 78.7 MMBF in the same 1997 period. The increases at
each of the Partnership's tree farms are primarily a result of continued
movement of lower grade export logs to the domestic market, the addition of
the Trillium timberlands and increased stumpage sales volumes compared to the
1997 quarter.
Sales of logs to customers involved in exporting activities (included in
total log sales above) were $3.6 million, or 1.1% of sales in the 1998
six-month period, compared to $10.3 million, or 4.2% of sales for the same
period in 1997. Prices received for export logs decreased 7.3% to $610/MBF
while sales volumes decreased 62.2% to 5.9 MMBF in the 1998 period from
levels experienced in the 1997 period. Decreases in sales volumes resulted
from a shift toward selling logs in the domestic market as a result of weak
Asian demand for logs. The volume of log exports is expected to remain
relatively low, and possibly decrease further, as the Partnership gets higher
value selling similar quality logs to domestic mills in log form or on the
stump.
Sales from the Partnership's wholesale operations consisted of lumber and
other wood products, most of which were not manufactured by the Partnership,
and totaled $114.2 million, or 35.1% of sales in the first six months of 1998
compared to $58.6 million, or 24.1% of sales in the first six months of 1997.
The increase is primarily a result of the acquisition of Alliance Lumber,
which the Partnership began operating in the first quarter of 1998. The
Partnership expects the wholesale operations to continue to perform well as
they have in the first half of the year, in spite of lagging lumber prices,
as demand for housing remains strong.
The gain from property sales in the first half of 1998 was $8.3 million and
was immaterial in the first half of 1997. Several parcels were sold in the
first half of 1998, primarily from Oregon Eastside properties acquired from
Cavenham in 1996 and from northwest Washington properties, primarily acquired
with the Trillium acquisition. The Partnership will continue to sell or
trade properties in both Oregon and northwest Washington as part of its
strategy to reinvest the value of non-strategic timberlands.
By-product and other revenues, accounted for 4.2% of sales in the 1998
period, compared to 10.5% of sales in the 1997 period. Residual wood chip
prices increased to $59 per bone dry unit ("BDU") in the first half of 1998
compared to $44/BDU in the first half of 1997. Paper mills are finding an
adequate supply of wood chips as many paper mills have taken down time to
keep their finished inventory from building. As a result, wood chip prices
are expected to remain at current levels at least through the remainder of
1998.
Cost of sales as a percentage of sales increased to 83.2% for the six months
ended June 30, 1998, compared to 80.7% in the 1997 period. The increase is
primarily the result of a larger portion of the Partnership's revenue being
derived from its wholesale operations, which operate at a lower margin and
lower sales realizations for logs and lumber, which were partially offset by
property sale gains and operating efficiencies resulting from capital
improvements. In addition, the Partnership has increased its reserve for
uncollectible accounts by $1.0 million in 1998.
13
<PAGE>
Selling, general and administrative expenses increased $0.9 million to $14.6
million in the six months ended June 30, 1998, from $13.7 million in the 1997
period. Selling, general and administrative expenses represented 4.5% of
sales in the 1998 period and 5.6% of sales in the same period of 1997. The
Partnership has been able to achieve operating efficiencies within its
administrative functions as operations have increased.
Interest expense increased $7.1 million to $25.9 million in the first half of
1998, from $18.8 million in the same period of 1997. The increase is
primarily a result of increased debt related to the Trillium and Alliance
Lumber acquisitions.
The Partnership pays no significant income taxes and does not include a
provision for income taxes in its financial statements.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for all
derivative instruments. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. The Company does not utilize any derivative instruments
and, accordingly, the adoption of SFAS 133 will have no impact on the
Company's financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below and this list is
intended to serve as the exhibit index:
EXHIBIT NO. AND DESCRIPTION
10.1 Amendment No. 2 to $25,000,000, 9.60% Senior Notes due December 1,
2009, dated as of January 15, 1998. (1)
10.2 Amendment No. 2 to $275,000,000, 9.78% Senior Notes due December 1,
2009, dated as of January 15, 1998. (1)
10.3 Amendment No. 1 to $91,000,000 Senior Notes, Series A, B, C and D, due
2006-2013, dated as of January 15, 1998. (1)
27 Financial Data Schedule
(1) Previously filed as an exhibit to the Company's Form 10-Q for the quarter
ended March 31, 1998, as filed with the Securities and Exchange Commission
on May 14, 1998, and is hereby incorporated by reference.
(b) Reports on Form 8-K:
On June 10, 1998, the Partnership filed a report on Form 8-K, dated June 9,
1998, under Item 5, Other Events and Item 7, Financial Statements and
Exhibits, related to the filing of audited financial statements for Crown
Pacific Ltd. and Crown Pacific Management Limited Partnership.
14
<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.
Date: August 10, 1998 CROWN PACIFIC PARTNERS, L.P.
By: Crown Pacific Management Limited
Partnership, as General Partner
By: Richard D. Snyder
----------------------------------
Richard D. Snyder
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
15
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 25,251
<SECURITIES> 0
<RECEIVABLES> 87,809
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<CURRENT-ASSETS> 155,607
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<COMMON> 197,028
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