SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(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, 1996 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: 0-20473
FORT HOWARD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 39-1090992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1919 South Broadway, Green Bay, Wisconsin 54304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 414/435-8821
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 stock, as of the latest practicable date.
Class Outstanding at July 15, 1996
----- ----------------------------
Common Stock, par value $.01 73,967,097
per share
PART I. FINANCIAL INFORMATION
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except per share data)
Net sales....................... $402,397 $412,110 $788,144 $779,486
Cost of sales................... 243,487 297,644 481,856 565,500
-------- -------- -------- --------
Gross income.................... 158,910 114,466 306,288 213,986
Selling, general and
administrative................ 34,211 26,375 67,386 55,120
-------- -------- -------- --------
Operating income................ 124,699 88,091 238,902 158,866
Interest expense................ 66,201 76,311 136,974 163,081
Other expense (income), net..... 475 (713) 1,038 (937)
-------- -------- -------- --------
Income (loss) before taxes...... 58,023 12,493 100,890 (3,278)
Income tax expense (credit)..... 21,646 4,874 37,573 (1,379)
-------- -------- -------- --------
Net income (loss) before
extraordinary item............ 36,377 7,619 63,317 (1,899)
Extraordinary item -- loss
on debt repurchases (net
of income taxes of $2,180 in
1996 and $11,986 in 1995)..... (3,340) -- (3,340) (18,748)
-------- -------- -------- --------
Net income (loss)............... $ 33,037 $ 7,619 $ 59,977 $(20,647)
======== ======== ======== ========
Net income (loss) per share:
Net income (loss) before
extraordinary item.......... $ 0.53 $ 0.12 $ 0.96 $ (0.04)
Extraordinary item............ (0.05) -- (0.05) (0.35)
-------- -------- -------- --------
Net income (loss)............. $ 0.48 $ 0.12 $ 0.91 $ (0.39)
======== ======== ======== ========
Average shares outstanding...... 68,759 63,338 66,066 52,999
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1996 1995
-------- ------------
Assets (In thousands)
Current assets:
Cash and cash equivalents................. $ 732 $ 946
Receivables, less allowances of $3,160 in
1996 and $2,883 in 1995................. 87,068 97,707
Inventories............................... 135,623 163,076
Deferred income taxes..................... 47,000 29,000
Income taxes receivable................... 700 700
---------- ----------
Total current assets.................... 271,123 291,429
Property, plant and equipment............... 1,993,548 1,971,641
Less: Accumulated depreciation........... 754,638 706,394
---------- ----------
Net property, plant and equipment....... 1,238,910 1,265,247
Other assets................................ 84,633 95,761
---------- ----------
Total assets............................ $1,594,666 $1,652,437
========== ==========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable.......................... $ 103,615 $ 112,384
Interest payable.......................... 60,984 64,375
Income taxes payable...................... 2,621 1,339
Other current liabilities................. 77,121 85,351
Current portion of long-term debt......... 34,372 62,720
---------- ----------
Total current liabilities............... 278,713 326,169
Long-term debt.............................. 2,598,850 2,903,299
Deferred and other long-term income taxes... 254,994 225,043
Other liabilities........................... 35,184 36,355
Shareholders' deficit:
Common Stock.............................. 740 634
Additional paid-in capital................ 1,100,864 895,652
Cumulative translation adjustment......... (2,785) (2,844)
Retained deficit.......................... (2,671,894) (2,731,871)
---------- ----------
Total shareholders' deficit............. (1,573,075) (1,838,429)
---------- ----------
Total liabilities and shareholders'
deficit............................... $1,594,666 $1,652,437
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
------------------
1996 1995
---- ----
(In thousands)
Cash provided from (used for) operations:
Net income (loss)............................. $ 59,977 $ (20,647)
Depreciation.................................. 50,231 49,020
Non-cash interest expense..................... 6,645 6,429
Deferred income tax (credit) expense.......... 11,975 (11,774)
Pre-tax loss on debt repurchases.............. 5,519 30,734
(Increase) decrease in receivables............ 10,639 (27,410)
(Increase) decrease in inventories............ 27,453 (33,284)
Decrease in income taxes receivable........... -- 4,500
Increase (decrease) in accounts payable....... (8,769) 19,605
Decrease in interest payable.................. (3,391) (21,440)
Increase (decrease) in income taxes payable... 1,282 (180)
All other, net................................ (8,891) (21,044)
---------- ---------
Net cash provided from (used for)
operations................................ 152,670 (25,491)
Cash used for investment activity:
Additions to property, plant and equipment.... (24,384) (23,119)
Cash provided from (used for) financing
activities:
Proceeds from long-term borrowings............ 192 1,428,800
Repayment of long-term borrowings............. (332,529) (1,616,001)
Debt issuance costs........................... (1,481) (48,421)
Issuance of Common Stock, net of
offering costs.............................. 205,318 284,104
---------- ---------
Net cash provided from (used for)financing (128,500) 48,482
activities ---------- ---------
Decrease in cash............................... (214) (128)
Cash at beginning of period..................... 946 422
---------- ---------
Cash at end of period......................... $ 732 $ 294
========== =========
Supplemental Cash Flow Disclosures:
Interest paid................................. $ 133,678 $ 178,529
Income taxes paid (refunded) - net............ 22,096 (6,005)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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FORT HOWARD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements reflect all adjustments
(consisting only of normally recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Certain reclassifications have been made to conform prior
years' data to the current format. These financial statements should be read
in conjunction with the Company's annual report on Form 10-K for the year
ended December 31, 1995 and the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1996.
2. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed on the basis of the weighted
average number of common shares outstanding during the periods. The weighted
average number of shares outstanding for the three and six month periods ended
June 30, 1996 was 68,759,446 and 66,065,754, respectively. The average number
of shares outstanding for the three and six month periods ended June 30, 1995
was 63,338,210 and 52,999,385, respectively. The assumed exercise of all
outstanding stock options has been excluded from the computation of earnings
(loss) per share for the three and six month periods ended June 30, 1996 and
1995 because the result was not material or was antidilutive.
3. INVENTORIES
Inventories consist of:
June 30, December 31,
1996 1995
-------- ------------
(In thousands)
Raw materials and supplies.............. $ 63,911 $ 80,134
Finished and partly-finished products... 71,712 82,942
-------- --------
$135,623 $163,076
======== ========
4. COMMON STOCK OFFERING
On May 15, 1996, the Company issued 10 million shares of Common Stock at
$20.25 per share in a public offering (the "Offering"). Proceeds from the
Offering, net of underwriting commissions and other related expenses totaling
$9 million, were $194 million. On June 4, 1996, an additional 520,000 shares
of Common Stock were issued at $20.25 per share upon the exercise of a portion
of the underwriters' over-allotment option granted in connection with the
Offering, resulting in additional net proceeds of $10 million after deducting
underwriting commissions.
- 5 -
5. LONG-TERM DEBT
The Company used the net proceeds of its Common Stock Offering of $204
million to prepay a portion of the outstanding indebtedness under the 1995
Bank Credit Agreement.
At June 30, 1996, the available capacity under the 1995 Revolving Credit
Facility under the Company's 1995 Bank Credit Agreement was $274 million.
6. CONTINGENCIES
The Company and its subsidiaries are parties to lawsuits and state and
federal administrative proceedings incidental to their businesses. Although
the final results in such suits and proceedings cannot be predicted with
certainty, the Company currently believes that the ultimate resolution of all
such lawsuits and proceedings, after taking into account the liabilities
accrued with respect to such matters, will not have a material adverse effect
on the Company's financial condition or on its results of operations.
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FORT HOWARD CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Second Quarter and First Six Months of 1996 Compared to 1995
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except percentages)
Net sales:
Domestic tissue............... $345,574 $323,565 $670,482 $617,493
International operations...... 42,545 41,166 86,353 77,353
Harmon........................ 14,278 47,379 31,309 84,640
-------- -------- -------- --------
Consolidated.................. $402,397 $412,110 $788,144 $779,486
======== ======== ======== ========
Operating income:
Domestic tissue............... $116,962 $ 82,111 $223,882 $149,475
International operations...... 6,977 4,387 13,282 6,359
Harmon........................ 760 1,593 1,738 3,032
-------- -------- -------- --------
Consolidated.................. $124,699 $ 88,091 $238,902 $158,866
======== ======== ======== ========
Consolidated net income (loss).. $ 33,037 $ 7,619 $ 59,977 $(20,647)
======== ======== ======== ========
Operating income as a percent of
net sales..................... 31.0% 21.4% 30.3% 20.4%
Net Sales. Net sales in the Company's domestic tissue operations
increased 6.8% and 8.6% for the second quarter and first six months of 1996,
respectively, compared to the same periods in 1995. Because of significantly
lower selling prices in the Company's wastepaper brokerage subsidiary,
consolidated net sales decreased 2.4% for the second quarter of 1996 compared
to the second quarter of 1995. For the first six months of 1996 compared to
the first six months of 1995, consolidated net sales increased 1.1%.
For the second quarter of 1996 compared to the second quarter of 1995,
domestic tissue sales volume increased 6.1% based on significant growth of the
Company's consumer products and a modest decline in commercial products.
Overall, domestic tissue net selling prices in the second quarter of 1996 were
slightly higher than the second quarter of 1995.
For the first six months of 1996 compared to the first six months of
1995, domestic tissue net selling prices increased 8.7%, while sales volume
was flat. From the first quarter of 1996 to the second quarter of 1996,
overall domestic tissue net selling prices decreased 3.1% principally as a
result of price decreases announced for the consumer market effective April
and June 1996 on certain product lines. In the commercial market net selling
prices in the second quarter of 1996 were down slightly from the first quarter
of 1996.
- 7 -
Net sales of the Company's international operations increased 3.3% and
11.6% for the second quarter and first six months of 1996 compared to 1995,
respectively, principally due to an increase in net selling prices on flat
volume at the Company's U.K. facilities. Net sales of the Company's
wastepaper brokerage subsidiary, Harmon Assoc. Corp. ("Harmon"), decreased
69.9% and 63.0% for the second quarter and first six months of 1996 compared
to 1995, respectively, due to significantly lower selling prices on slightly
lower volume.
Gross Income. Consolidated gross income increased 39% and 43% for the
second quarter and first six months of 1996 compared to 1995, respectively,
due to the higher selling prices and lower raw material costs. Consolidated
gross margins increased to 39.5% and 38.9% for the second quarter and first
six months of 1996 from 27.8% and 27.5% for the second quarter and first six
months of 1995, respectively. Domestic tissue gross margins increased for the
second quarter and first six months of 1996 compared to the second quarter and
first six months of 1995 due to higher selling prices and significantly lower
wastepaper prices. Gross margins of international operations increased in
both the second quarter and first six months of 1996 compared to 1995. In
addition, consolidated gross margins were positively affected for both the
second quarter and first six months of 1996 compared to 1995 because net sales
by Harmon (which typically has very low margins compared to either domestic or
international tissue operations) were a smaller proportion of total net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, as a percent of net sales, increased to 8.5% for the
second quarter and first six months of 1996 compared to 6.4% and 7.1% for the
second quarter and first six months of 1995, respectively. The increase was
principally due to the impact of the Company's strong earnings performance on
employee compensation plans, higher selling expenses resulting from greater
consumer product sales and lower net sales by Harmon.
Operating Income. Operating income increased to $125 million and
$239 million for the second quarter and first six months of 1996 from
$88 million and $159 million for the second quarter and first six months of
1995, respectively. Operating income as a percent of net sales increased to
31.0% and 30.3% in the second quarter and first six months of 1996 compared to
21.4% and 20.4% in the second quarter and first six months of 1995,
respectively. Domestic tissue operating income as a percent of net sales
increased to 33.8% and 33.4% in the second quarter and first six months of
1996 from 25.4% and 24.2% in the second quarter and first six months of 1995,
respectively. In addition, consolidated operating income increased as a
percent of net sales because net sales by Harmon (which typically has very low
operating income margins compared to either domestic or international tissue
operations) were a smaller proportion of total net sales.
Extraordinary Loss. The Company's net loss in the second quarter and
first six months of 1996 was increased by an extrordinary loss of $3 million
(net of income taxes of $2 million) representing the write-offs of deferred
loan costs associated with the prepayment of a portion of the outstanding
indebtedness under the 1995 Bank Credit Agreement. The Company's net loss in
the first six months of 1995 was increased by an extraordinary loss of $19
million (net of income taxes of $12 million) from debt repurchases.
- 8 -
Net Income (Loss). For the second quarter and first six months of 1996,
net income was $33 million and $60 million, respectively, compared to net
income of $8 million for the second quarter of 1995 and net loss of $21
million for the first six months of 1995.
FINANCIAL CONDITION
For the first six months of 1996, cash decreased $214,000. Capital
additions of $24 million and debt repayments of $333 million were funded
principally by net proceeds of $205 million from the sale of Common Stock and
$153 million of cash from operations provided by strong operating results.
During the first six months of 1996, receivables decreased $11 million
due principally to lower net selling prices in the domestic tissue and
international operations in the second quarter of 1996 compared to the fourth
quarter of 1995. Inventories decreased by $27 million principally due to
lower raw material costs. Accounts payable decreased $9 million due to
significantly lower wastepaper costs. The liability for interest payable
decreased $3 million due to the early payment of interest in connection with
the Offering. Other current liabilities declined $8 million resulting from
the payment of obligations due on an annual basis, including employee bonuses
and profit sharing and customer incentive payments. As a result of all these
changes and the prepayment of a portion of the indebtedness due within one
year under the 1995 Bank Credit Agreement from the net proceeds of the
Offering, the net working capital deficit decreased to $8 million at June 30,
1996 from a deficit of $35 million at December 31, 1995.
The Company's 1995 Revolving Credit Facility, which may be used for
general corporate purposes, has a final maturity of March 16, 2002. At
June 30, 1996, the Company had $274 million in available capacity under the
1995 Revolving Credit Facility.
- 9 -
PART II. OTHER INFORMATION
1. LEGAL PROCEEDINGS
In July 1992, the United States Environmental Protection Agency issued a
Finding of Violation to the Company concerning the No. 8 boiler at its Green
Bay mill. The Finding alleged violation of regulations issued by the U.S. EPA
under the Clean Air Act relating to New Source Performance Standards for
Fossil Fuel Steam Generators. On February 8, 1996, the Company executed a
consent decree whereby the Company, without admitting any wrongdoing, agreed
to make certain modifications to its No. 8 boiler which will physically limit
the boiler capacity to the level specified in the alleged relevant New Source
Performance Standards. The Company also agreed to pay $350,000 to settle this
matter. Such amount was paid on June 24, 1996. The physical modifications
will not affect the utility of the No. 8 boiler and are expected to be
completed by year end.
As previously reported, the Company responded during the first and second
quarters of 1995 to a Civil Investigative Demand issued by the U.S. Department
of Justice concerning a civil antitrust investigation into possible agreements
in restraint of trade in connection with the sales of commercial sanitary
paper products. On May 20, 1996, the Company received a subpoena to provide
certain documents to a federal grand jury in Cleveland that is investigating
possible antitrust violations in the sale of commercial sanitary paper
products. The Company is responding to the subpoena.
2. CHANGES IN SECURITIES
None
3. DEFAULTS UPON SENIOR SECURITIES
None
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 14, 1996.
James R. Burke, Kathleen J. Hempel and David I. Margolis were elected to the
Company's Board of Directors at the meeting to hold office for three-year
terms expiring in 1999. Following are the voting results:
Nominee Votes For Votes Withheld
------- --------- --------------
James R. Burke 58,768,061 239,449
Kathleen J. Hempel 58,768,261 239,249
David I. Margolis 58,768,061 239,449
5. OTHER INFORMATION
None
- 10 -
6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit No. Description
27 Financial Data Schedule for the six months ended
June 30, 1996.
99 News release containing financial results for the
quarter ended June 30, 1996.
b) The Company filed a Form 8-K on May 22, 1996, reporting under Item 5,
the receipt of a subpoena to provide documents in connection with a federal
grand jury investigation into possible antitrust violations in the sale of
commercial sanitary paper products.
- 11 -
FORT HOWARD CORPORATION
SIGNATURES
Pursuant to the requirement 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.
FORT HOWARD CORPORATION
Registrant
July 24, 1996 /s/ Kathleen J. Hempel
----------------------------------------
Kathleen J. Hempel, Vice Chairman and
Chief Financial Officer and Principal
Accounting Officer
July 24, 1996 /s/ James W. Nellen II
---------------------------------------
James W. Nellen II, Vice President
and Secretary
- 12 -
INDEX TO EXHIBITS
Exhibit No. Description
27 Financial Data Schedule for the six months ended
June 30, 1996
99 News release containing financial results for the
quarter ended June 30, 1996
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