SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1 - 3506
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GEORGIA-PACIFIC CORPORATION
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 93-0432081
(State of Incorporation) (IRS Employer Id. Number)
133 PEACHTREE STREET, N.E., ATLANTA, GEORGIA 30303
(Address of Principal Executive Offices)
(404) 652 - 4000
(Telephone Number of Registrant)
-------------------
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 and Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
As of the close of business on November 7, 1997, Georgia-Pacific Corporation
had 92,607,698 shares of Common Stock outstanding.
2
PART I - FINANCIAL INFORMATION
-------------------------------------------
Item 1. Financial Statements
STATEMENTS OF INCOME (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
Three months Nine months
ended September 30, ended September 30,
-------------- --------------
(Millions, except per share amounts) 1997 1996 1997 1996
- -----------------------------------------------------------------------
Net sales $3,373 $3,451 $9,844 $9,828
- -----------------------------------------------------------------------
Costs and expenses
Cost of sales, excluding depreciation
and cost of timber harvested
shown below 2,579 2,643 7,691 7,441
Selling, general and
administrative 288 344 862 1,048
Depreciation and cost of timber
harvested 243 247 710 707
Interest 114 120 355 346
Other income - (78) (128) (4)
- -----------------------------------------------------------------------
Total costs and expenses 3,224 3,276 9,490 9,538
- -----------------------------------------------------------------------
Income before income taxes
and extraordinary item 149 175 354 290
Provision for income taxes 63 76 151 131
- -----------------------------------------------------------------------
Income before extraordinary item 86 99 203 159
Extraordinary item - loss from early
retirement of debt, net of taxes - - - (5)
- -----------------------------------------------------------------------
Net income $ 86 $ 99 $ 203 $ 154
==========================================================================
Per share:
Income before extraordinary item $ 0.94 $ 1.09 $ 2.23 $ 1.75
Extraordinary item - loss from early
retirement of debt, net of taxes - - - (.05)
- -----------------------------------------------------------------------
Net income $ 0.94 $ 1.09 $ 2.23 $ 1.70
==========================================================================
Average number of shares outstanding 91.5 90.6 91.2 90.5
==========================================================================
The accompanying notes are an integral part of these financial statements.
3
STATEMENTS OF CASH FLOWS
Georgia-Pacific Corporation and Subsidiaries
(Unaudited)
Nine months
ended September 30,
-------------------------
(Millions) 1997 1996
- -------------------------------------------------------------------------
Cash provided by (used for) operations
Net income $ 203 $ 154
Adjustments to reconcile net income to cash
provided by operations:
Depreciation 588 574
Cost of timber harvested 122 133
Other income (128) (41)
Deferred income tax provision 111 23
Amortization of goodwill 44 45
Stock compensation programs 8 29
Gain on sales of assets (29) (24)
Increase in receivables (142) (27)
Decrease in inventories 73 41
Change in other working capital (61) 60
Increase in taxes payable 17 39
Change in other assets and other
long-term liabilities (26) 28
- -------------------------------------------------------------------------
Cash provided by operations 780 1,034
- -------------------------------------------------------------------------
Cash provided by (used for) investment activities
Capital expenditures
Property, plant and equipment (426) (871)
Timber and timberlands (118) (92)
- -------------------------------------------------------------------------
Total capital expenditures (544) (963)
Acquisition - (363)
Decrease in cash restricted
for capital expenditures 11 78
Proceeds from sales of assets 356 113
Other (2) (7)
- -------------------------------------------------------------------------
Cash used for investment activities (179) (1,142)
- -------------------------------------------------------------------------
Cash provided by (used for) financing activities
Proceeds from option plan exercises 29 2
Repayments of long-term debt (306) (161)
Additions to long-term debt - 24
Fees paid to issue debt - (1)
Decrease in bank overdrafts (33) (25)
Increase (decrease) in commercial paper and
other short-term notes (157) 405
Cash dividends paid (137) (137)
- -------------------------------------------------------------------------
Cash provided by (used for) financing activities (604) 107
- -------------------------------------------------------------------------
Decrease in cash (3) (1)
Balance at beginning of period 10 11
- -------------------------------------------------------------------------
Balance at end of period $ 7 $ 10
========================================================================
The accompanying notes are an integral part of these financial statements.
4
BALANCE SHEETS
Georgia-Pacific Corporation and Subsidiaries
September 30, December 31,
(Millions, except shares and per share amounts) 1997 1996
- -------------------------------------------------------------------------
ASSETS (Unaudited)
Current assets
Cash $ 7 $ 10
Receivables, less allowances of $10 and $10 1,449 959
Inventories 1,385 1,467
Deferred income taxes 129 129
Other current assets 55 50
- -------------------------------------------------------------------------
Total current assets 3,025 2,615
- -------------------------------------------------------------------------
Timber and timberlands 1,176 1,337
- -------------------------------------------------------------------------
Property, plant and equipment
Land, buildings, machinery and equipment, at cost 14,012 13,733
Accumulated depreciation (7,648) (7,173)
- -------------------------------------------------------------------------
Property, plant and equipment, net 6,364 6,560
- -------------------------------------------------------------------------
Goodwill 1,614 1,658
- -------------------------------------------------------------------------
Other assets 929 648
- -------------------------------------------------------------------------
Total assets $ 13,108 $12,818
========================================================================
5
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank overdrafts, net $ 218 $ 251
Commercial paper and other short-term notes 838 645
Current portion of long-term debt 424 311
Accounts payable 558 662
Accrued compensation 211 196
Accrued interest 97 85
Other current liabilities 347 340
- -------------------------------------------------------------------------
Total current liabilities 2,693 2,490
- -------------------------------------------------------------------------
Long-term debt, excluding current portion 3,954 4,371
- -------------------------------------------------------------------------
Other long-term liabilities 1,548 1,275
- -------------------------------------------------------------------------
Deferred income tax liabilities 1,272 1,161
- -------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Common stock, par value $.80; 150,000,000
shares authorized; 91,949,000 and 91,396,000
shares issued 74 73
Additional paid-in capital 1,330 1,277
Retained earnings 2,266 2,200
Long-term incentive plan deferred compensation (8) (11)
Other (21) (18)
- -------------------------------------------------------------------------
Total shareholders' equity 3,641 3,521
- -------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 13,108 $12,818
===========================================================================
The accompanying notes are an integral part of these financial statements.
6
NOTES TO FINANCIAL STATEMENTS (Unaudited)
GEORGIA-PACIFIC CORPORATION
SEPTEMBER 30, 1997
1. PRINCIPLES OF PRESENTATION. The interim financial information included
herein is unaudited; however, such information reflects all adjustments
which are, in the opinion of management, necessary for a fair
presentation of the Corporation's financial position, results of
operations, and cash flows for the interim periods. All such adjustments
are of a normal, recurring nature except for the items discussed in Notes
3 and 4 below. Certain 1996 amounts have been reclassified to conform
with the 1997 presentation.
2. INCOME PER SHARE. Income per share is computed based on net income and
the weighted average number of common shares outstanding, net of
restricted shares. The effects of assuming issuance of common shares
under long-term incentive, stock option, and stock purchase plans were
either insignificant or antidilutive.
3. OTHER (INCOME) EXPENSE. The first quarter 1997 sale of the Corporation's
Martell operations, which included a sawmill, particleboard mill and
timberlands, generated a pretax gain of $128 million (after-tax gain of
$80 million). In the 1996 third quarter, the Corporation recorded other
pretax income of $78 million. The sale of two gypsum wallboard production
facilities generated a pretax gain of $41 million. The remaining gain of
$37 million primarily related to settlement of pension obligations from
the implementation of the Corporation's voluntary early retirement
program. 1996 nine-month operating profits include second quarter pretax
expense of $74 million for the estimated costs of enhanced pension
benefits and continued health care benefits offered under the voluntary
early retirement program.
4. EXTRAORDINARY ITEM. The Corporation redeemed $150 million of its
outstanding debt during the 1996 second quarter. As a result, an after-
tax extraordinary loss of $5 million (5 cents per share) was recognized.
5. SUPPLEMENTAL DISCLOSURES - STATEMENTS OF CASH FLOWS. The cash impact of
interest and income taxes is reflected in the table below. The effect of
foreign currency exchange rate changes on cash was not material in either
period.
Nine months
ended September 30
------------------------
(Millions) 1997 1996
---------------------------------------------------------------
Total interest costs $ 364 $ 369
Interest capitalized (9) (23)
---------------------------------------------------------------
Interest expense $ 355 $ 346
================================================================
Interest paid $ 349 $ 349
================================================================
Income taxes paid, net of refunds $ 24 $ 63
================================================================
7
6. INVENTORY VALUATION. Inventories include costs of materials, labor, and
plant overhead. The Corporation uses the dollar value pool method for
computing LIFO inventories. The major components of inventories were as
follows:
September 30, December 31,
(Millions) 1997 1996
---------------------------------------------------------------
Raw materials $ 371 $ 415
Finished goods 932 979
Supplies 295 295
LIFO reserve (213) (222)
---------------------------------------------------------------
Total inventories $ 1,385 $1,467
============================================================
7. PROVISION FOR INCOME TAXES. The effective tax rate was 42 percent for
the three months ended September 30, 1997, and 43 percent for the three
months ended September 30, 1996. The effective tax rate was 43 percent
for the nine months ended September 30, 1997, and 45 percent for the nine
months ended September 30, 1996. The effective tax rate for each period
was different than the statutory rates primarily because of nondeductible
goodwill amortization expense.
8. COMMITMENTS AND CONTINGENCIES. The Corporation is a party to various legal
proceedings incidental to its business and is subject to a variety of
environmental and pollution control laws and regulations in all
jurisdictions in which it operates. As is the case with other companies in
similar industries, the Corporation faces exposure from actual or potential
claims and legal proceedings involving environmental matters. Liability
insurance in effect during the last several years provides only very
limited coverage for environmental matters.
The Corporation is involved in environmental remediation activities at
approximately 200 sites, both owned by the Corporation and owned by others,
where it has been notified that it is or may be a potentially responsible
party under the Comprehensive Environmental Response, Compensation and
Liability Act or similar state "superfund" laws. Of the known sites in
which it is involved, the Corporation estimates that approximately 31
percent are being investigated, approximately 40 percent are being
remediated and approximately 29 percent are being monitored (an activity
which occurs after either site investigation or remediation has been
completed). The ultimate costs to the Corporation for the investigation,
remediation and monitoring of many of these sites cannot be predicted with
certainty, due to the often unknown magnitude of the pollution or the
necessary cleanup, the varying costs of alternative cleanup methods, the
amount of time necessary to accomplish such cleanups, the evolving nature
of cleanup technologies and government regulations and the inability to
determine the Corporation's share of multi-party cleanups or the extent to
which contribution will be available from other parties. The Corporation
has established reserves for environmental remediation costs for these
sites in amounts which it believes are probable and reasonably estimable.
Based on analysis of currently available information and previous
experience with respect to the cleanup of hazardous substances, the
Corporation believes that it is reasonably possible that costs associated
with these sites may exceed current reserves by amounts that may prove
insignificant or that could range, in the aggregate, up to approximately
$57 million. This estimate of the range of reasonably possible additional
costs is less certain than the estimates upon which reserves are based, and
in order to establish the upper limit of such range, assumptions least
favorable to the Corporation among the range of reasonably possible
outcomes were used. In estimating both its current reserves for
environmental remediation and the possible range of additional costs, the
Corporation has not assumed it will bear the entire cost of remediation of
every site to the exclusion of other known potentially responsible parties
who may be jointly and severally liable. The ability of other potentially
responsible parties to participate has been taken into account, based
generally on such parties' financial condition and probable contribution on
a per site basis.
The Corporation and many other companies are defendants in suits brought in
various courts around the nation by plaintiffs who allege that they have
suffered personal injury as a result of exposure to asbestos-containing
products. These suits allege a variety of lung and other diseases based on
alleged exposure to products previously manufactured by the Corporation.
In many cases the plaintiffs are unable to demonstrate that they have
suffered any compensable loss as a result of such exposure. The
Corporation generally resolves asbestos cases by voluntary dismissal or
settlement for amounts it considers reasonable given the facts and
circumstances of each case. The amounts it has paid to defend and settle
these cases to date have been substantially covered by product liability
insurance. The Corporation currently is defending claims of approximately
58,000 such plaintiffs and anticipates that additional suits will be filed
against it over the next several years. The Corporation has insurance
available in amounts which it believes are adequate to cover substantially
all of the reasonably foreseeable damages and settlement amounts arising
out of claims and suits currently pending. The Corporation has further
insurance coverage available for the disposition of suits that may be filed
against it in the future, but there can be no assurance that the amounts of
such insurance will be adequate to cover all future claims. The
Corporation has established reserves for liabilities and legal defense
costs it believes are probable and reasonably estimable with respect to
pending suits and claims and a receivable for expected insurance
recoveries.
As previously reported, the Corporation is defending an action in Alabama
state court that seeks to recover damages on behalf of a class of all
persons currently owning structures in the United States on which hardboard
siding manufactured by the Corporation after January 1, 1980, has been
installed. The plaintiffs allege that this hardboard siding was
inadequately designed and manufactured and as a consequence prematurely
discolors and deteriorates. They also dispute the validity and
availability of the warranty issued with the product. On July 24, 1997,
the court preliminarily approved a proposed settlement of this case,
authorized a program to provide notice to class members and set a date in
January 1998 for a hearing on the fairness of the settlement. Accordingly,
the settlement remains subject to final court approval. The settlement
provides a procedure for resolving product warranty claims on certain of
the Corporation's hardboard siding products and for payment of $3 million
in legal fees to plaintiffs' counsel, plus expenses not to exceed $200,000.
In addition, plaintiffs' counsel will be entitled to additional fees based
upon a percentage of claims paid by the Corporation. The Corporation has
previously established financial reserves it believes to be adequate to pay
eligible claims and legal fees. However, the volume and timing of actual
claims, or the number of potential claimants who choose not to participate
in the settlement, could cause settlement costs to exceed established
reserves. A similar case has been filed against the Corporation and
another defendant in state court in Georgia seeking to certify a class of
individuals whose mobile homes contain the Corporation's hardboard siding.
On July 8, 1997, a purported nationwide class action was filed against the
Corporation in state court in Georgia making claims substantially similar
to those alleged in the Alabama class action. The Corporation believes the
claims of the members of these purported class actions are encompassed
within the settlement of the Alabama case and it will seek to have these
cases dismissed.
In May of 1997, the Corporation and nine other companies were named as
defendants in a class action suit alleging that they engaged in a
conspiracy to fix the prices of sanitary commercial paper products, such as
towels and napkins, in violation of federal and state laws. Approximately
40 similar suits have been filed in federal courts in California, Florida,
Georgia and Wisconsin, and in the state courts of California and Tennessee.
The Corporation and the other defendants have removed the California and
Tennessee state court actions to federal court. However, plaintiffs have
filed motions seeking to have these cases remanded to state court. In
addition, the Corporation and the other defendants filed a petition with
the Federal Judicial Panel on Multi-District Litigation asking the Panel to
consolidate all of the federal court cases in one jurisdiction. On October
15, 1997, the Panel consolidated all federal court cases in the federal
district court in Gainesville, Florida. Although some cases have been
remanded back to state court in California, the federal court in
Gainesville will decide the motions to remand the remaining cases to state
courts in California and Tennessee. The Corporation has denied that it has
engaged in any of the illegal conduct alleged in these cases and intends to
defend itself vigorously.
Although the ultimate outcome of these environmental matters and legal
proceedings cannot be determined with certainty, based on presently
available information management believes that adequate reserves have been
established for probable losses with respect thereto. Management further
believes that the ultimate outcome of such environmental matters and legal
proceedings could be material to operating results in any given quarter or
year, but will not have a material adverse effect on the long-term results
of operations, liquidity or consolidated financial position of the
Corporation.
For a discussion of anticipated Cluster Rule compliance costs refer to
"Management's Discussion and Analysis".
SALES AND OPERATING PROFITS BY INDUSTRY SEGMENT (unaudited)
Georgia-Pacific Corporation and Subsidiaries
(Dollar amounts, except Second Quarter
per share, in millions) First -------------------------
Quarter Quarter Year-to-date
- -------------------------------------------------------------------------
1997
NET SALES
Building products $1,781 57% $1,943 59% $3,724 58%
Pulp and paper 1,351 43 1,371 41 2,722 42
Other operations 13 - 12 - 25 -
- -------------------------------------------------------------------------
Total net sales $3,145 100% $3,326 100% $6,471 100%
=========================================================================
OPERATING PROFITS
Building products $ 289 92% $ 203 93% $ 492 93%
Pulp and paper 20 7 12 6 32 6
Other operations 4 1 3 1 7 1
- -------------------------------------------------------------------------
Total operating profits 313 100% 218 100% 531 100%
=== === ===
General corporate expense (37) (48) (85)
Interest expense (122) (119) (241)
Provision for income taxes (64) (24) (88)
- -------------------------------------------------------------------------
Net income $ 90 $ 27 $ 117
==========================================================================
Net income per common share $ .99 $ .30 $ 1.28
==========================================================================
SALES AND OPERATING PROFITS BY INDUSTRY SEGMENT (unaudited)
Georgia-Pacific Corporation and Subsidiaries
(Dollar amounts, Third Quarter Fourth Quarter
except per share ----------------- --------------------
in millions) Quarter Year-to-date Quarter Year-to-date
- -------------------------------------------------------------------------
1997
NET SALES
Building products $ 1,946 58% $ 5,670 58%
Pulp and paper 1,414 42 4,136 42
Other operations 13 - 38 -
- --------------------------------------------------------------------------------
Total net sales $ 3,373 100% $ 9,844 100%
===============================================================================
OPERATING PROFITS
Building products $ 221 70% $ 713 84%
Pulp and paper 93 29 125 15
Other operations 3 1 10 1
- --------------------------------------------------------------------------------
Total operating
profits 317 100% 848 100%
=== === === ===
General corporate
expense (54) (139)
Interest expense (114) (355)
Provision for
income taxes (63) (151)
- --------------------------------------------------------------------------------
Net income $ 86 $ 203
===============================================================================
Net income
per common share $ .94 $ 2.23
===============================================================================
==========================================================
SALES AND OPERATING PROFITS BY INDUSTRY SEGMENT (unaudited)
Georgia-Pacific Corporation and Subsidiaries
(Dollar amounts, except Second Quarter
per share, in millions) First --------------
Quarter Quarter Year-to-date
- --------------------------------------------------------------------------------
1996
NET SALES
Building products $1,571 52% $1,896 57% $3,467 55%
Pulp and paper 1,471 48 1,416 43 2,887 45
Other operations 11 - 12 - 23 -
- --------------------------------------------------------------------------------
Total net sales $3,053 100% $3,324 100% $6,377 100%
===============================================================================
OPERATING PROFITS
Building products $ 67 28% $ 141 80% $ 208 50%
Pulp and paper 174 72 33 19 207 49
Other operations 2 - 3 1 5 1
- --------------------------------------------------------------------------------
Total operating profits 243 100% 177 100% 420 100%
=== === ===
General corporate expense (41) (38) (79)
Interest expense (112) (114) (226)
Provision for income taxes (40) (15) (55)
- --------------------------------------------------------------------------------
Income before extraordinary
item 50 10 60
Extraordinary item - loss from
early retirement of debt, net
of taxes - (5) (5)
- --------------------------------------------------------------------------------
Net income $ 50 $ 5 $ 55
===============================================================================
Per common share:
Income before extraordinary
item $ .55 $ .11 $ .66
Extraordinary item - loss from
early retirement of debt, net
of taxes - (.05) (.05)
- --------------------------------------------------------------------------------
Net income $ .55 $ .06 $ .61
===============================================================================
14
SALES AND OPERATING PROFITS BY INDUSTRY SEGMENT (unaudited)
Georgia-Pacific Corporation and Subsidiaries
(Dollar amounts, Third Quarter Fourth Quarter
except per share, ------------------------ ------------------------
in millions) Quarter Year-to-date Quarter Year-to-date
- --------------------------------------------------------------------------------
1996
NET SALES
Building products $ 2,040 59% $ 5,507 56% $ 1,858 58% $ 7,365 57%
Pulp and paper 1,401 41 4,288 44 1,321 41 5,609 43
Other operations 10 - 33 - 17 1 50 -
- --------------------------------------------------------------------------------
Total net sales $ 3,451 100% $ 9,828 100% $ 3,196 100% $13,024 100%
===============================================================================
OPERATING PROFITS
Building products $ 240 69% $ 448 58% $ 68 46% $ 516 56%
Pulp and paper 104 30 311 41 79 54 390 43
Other operations 4 1 9 1 (1) - 8 1
- --------------------------------------------------------------------------------
Total operating
profits 348 100% 768 100% 146 100% 914 100%
=== === === ===
General corporate
expense (53) (132) (27) (159)
Interest expense (120) (346) (113) (459)
Provision for
income taxes (76) (131) (4) (135)
- --------------------------------------------------------------------------------
Income before extraordinary
item 99 159 2 161
Extraordinary item - loss from
early retirement of debt, net
of taxes - (5) - (5)
- --------------------------------------------------------------------------------
Net income $ 99 $ 154 $ 2 $ 156
===============================================================================
Per common share:
Income before extraordinary
item $ 1.09 $ 1.75 $ .02 $ 1.78
Extraordinary item - loss
from early retirement of
debt, net of taxes - (.05) - (.06)
- --------------------------------------------------------------------------------
Net income $ 1.09 $ 1.70 $ .02 $ 1.72
===============================================================================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996
The Corporation reported consolidated net sales of approximately $3.4 billion
for the three months ended September 30, 1997 and 1996. Net income for the 1997
third quarter was $86 million (94 cents per share) compared with $99 million
($1.09 per share) in 1996. The 1996 third quarter results include other pretax
income of $78 million (after-tax 53 cents per share), including a gain of $37
million primarily related to the Corporation's voluntary early retirement
program and a gain of $41 million from the sale of two gypsum wallboard
production facilities.
The Corporation reduced its selling, general and administrative expenses (SG&A)
to $288 million in the 1997 third quarter, compared with $344 million in 1996.
The cost reduction is largely a result of a voluntary early retirement program
implemented in the second half of 1996 and overhead reduction plans implemented
in 1997. Approximately 950 employees elected to take early retirement effective
August 30, 1996. The Corporation expects full-year 1997 SG&A to be more than
$200 million lower than in 1996.
The remaining discussion refers to the "Sales and Operating Profits by Industry
Segment" table (included in PART I - ITEM 1. hereto).
The Corporation's building products segment reported net sales of $1.9 billion
and operating profits of $221 million for the three months ended September 30,
1997, compared with net sales of $2.0 billion and operating profits of $240
million in 1996, including unusual items. The 1996 third quarter results
included a pretax gain of $41 million generated from the sale of two gypsum
wallboard production facilities and a $17 million gain primarily related to
settlement of pension obligations from the implementation of the Corporation's
voluntary early retirement program. Return on sales was 11.4 percent in the 1997
third quarter compared with 9.1 percent in the 1996 third quarter, excluding
unusual items.
Average prices in the third quarter of 1997 were higher than 1996 third quarter
averages for gypsum wallboard (up 9 percent), plywood (up 7 percent) and lumber
(up 5 percent), contributing to the higher return on sales quarter over quarter.
These increases were offset by 26 percent lower average prices for oriented
strand board in the 1997 third quarter than in the same period in 1996. Prices
for oriented strand board and industrial wood products remain weak due to excess
industry capacity.
Operating losses for the Corporation's building products distribution division
were $13 million in the third quarter, compared with a 1996 third quarter loss
of $20 million that included $16 million of restructuring charges. See further
discussion under "Nine Months Ended September 30, 1997 Compared With September
30, 1996". Selected financial and operating data for the building products
distribution business are shown in the table below:
Selected Distribution Division Data
(in millions)
3 months ended September 30, 9 months ended September 30,
1997 1996 1997 1996
Sales $1,098 $1,236 $3,189 $3,298
Operating Loss (13) (20) (55) (93)
Capital expenditures 9 53 33 207
Depreciation 12 12 35 34
The Corporation's pulp and paper segment reported net sales of $1.4 billion and
operating profits of $93 million in the 1997 third quarter. For the same period
in 1996, this segment reported net sales of $1.4 billion and operating profits
of $104 million. The 1996 third quarter results included a $20 million gain
related to the early retirement program. Return on sales increased to 6.6
percent in 1997 from 6 percent in 1996 (excluding the $20 million unusual gain).
Significant third quarter average price improvements in pulp (up 12% from third
quarter 1996, and up 13% from second quarter 1997), and increases in bleached
board prices, contributed to the increased return on sales over the prior year's
third quarter. Average containerboard and communication paper prices for the
quarter remained below prices in the same 1996 period; however, prices increased
notably from the 1997 second quarter. Prices and volumes for tissue products
remained stable compared to the prior year's third quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
The Corporation reported consolidated net sales of $9.8 billion and net income
of $203 million ($2.23 per share) for the nine months ended September 30, 1997,
compared with net sales of $9.8 billion and net income of $154 million ($1.70
per share) for the nine months ended September 30, 1996. The 1997 results
include a first quarter pretax gain of $128 million (88 cents per share after-
tax) from the sale of the Corporation's Martell, California assets. The 1996
results include other pretax income of $4 million (3 cents per share after-tax),
resulting from a net pretax charge of $37 million primarily related to the
voluntary early retirement program discussed above and a pretax gain of $41
million from the sale of two gypsum wallboard facilities. An extraordinary,
after-tax loss of $5 million (5 cents per share) was recorded in the 1996 second
quarter for the early retirement of debt.
In 1996, the Corporation set a goal of improving its annual pretax earnings by
approximately $400 million through a three-year effort to reduce overhead costs
and improve efficiencies throughout the Corporation. The Corporation expects to
achieve about half of this cost reduction by eliminating work and the related
salaried positions. As part of this effort, the Corporation implemented a
voluntary early retirement program in 1996. The Corporation also expects to
realize significant efficiencies and cost savings from cost reduction efforts at
its manufacturing facilities.
Selling, general and administrative expense ("SG&A") was $862 million for the
nine months ended September 30, 1997, compared with $1,048 million for the same
period in 1996. The cost reduction is largely a result of a voluntary early
retirement program initiated in 1996 and overhead reduction plans implemented in
1997. The Corporation expects full-year 1997 SG&A to be more than $200 million
lower than in 1996.
The Corporation reported income before income taxes of $354 million and an
income tax provision of $151 million for the nine months ended September 30,
1997, compared with pretax income of $290 million and an income tax provision of
$131 million for the first nine months of 1996. The effective tax rate used to
calculate the provision for income taxes for both years was higher than the
statutory rates used to calculate federal and state income taxes primarily
because of nondeductible goodwill amortization expense associated with past
business acquisitions.
The remaining discussion refers to the "Sales and Operating Profits by Industry
Segment" table (included in PART I - ITEM 1. hereto).
BUILDING PRODUCTS
The Corporation's building products segment reported net sales of $5.7 billion
and operating profits of $713 million for the nine months ended September 30,
1997, compared with net sales of $5.5 billion and operating profits of $448
million for the same period in 1996. The 1996 nine months' results included a
$17 million expense for the voluntary early retirement program referred to above
and a $41 million pretax gain on the sale of two gypsum wallboard production
facilities. Return on sales increased to 12.6% in the first nine months of 1997
from 8.1% in the first nine months of 1996. A 15% increase in lumber prices,
combined with a 12% increase in gypsum prices, more than offset approximately
32% lower prices for oriented strand board and an increase in log costs.
Operating losses for the Corporation's building products distribution division
were $55 million for the first nine months of 1997, compared with losses of $25
million for the same period in 1996 before restructuring charges of $68 million.
Operating losses were worse for the first nine months of 1997 compared to the
first nine months of 1996 primarily as a result of an approximate $33 million
deterioration in margins. Sales volumes were down in the first nine months of
1997 compared with the same period in 1996. The Corporation is currently
projecting an operating loss for this division for 1997, as this business
continues to experience problems stemming from a restructuring of administrative
and logistical processes that is impeding its ability to return to
profitability. Management is aggressively addressing these problems, but cannot
predict when the division will return to profitability. Capital expenditures
for the acquisition and construction of new distribution facilities are expected
to total approximately $400 million, excluding proceeds from asset sales.
Approximately $385 million of that amount had been invested since the inception
of the restructuring program through September 30, 1997.
Lumber prices began to decrease towards the end of the third quarter of 1997,
and the Corporation anticipates sharply lower lumber prices and somewhat lower
plywood and oriented strand board prices in the fourth quarter. In addition,
the operating loss of the Distribution Division is expected to increase
significantly in the fourth quarter of 1997 compared to earlier quarters. These
factors will adversely affect fourth quarter 1997 operating profits of the
building products segment, compared to the third quarter of 1997. The foregoing
statements regarding anticipated prices in the fourth quarter for the
Corporation's building products, and the expected fourth quarter loss from the
Distribution Division, are forward-looking statements based on current
expectations and involve a number of risks and uncertainties. See "Cautionary
Statement For Purposes Of The 'Safe Harbor' Provisions Of The Private Securities
Litigation Reform Act of 1995" below.
Selected financial and operating data for the building products distribution
business are shown in the table under the caption "Three Months Ended September
30, 1997 Compared With Three Months Ended September 30, 1996" above.
PULP AND PAPER
The Corporation's pulp and paper segment reported net sales of $4.1 billion and
operating profits of $125 million for the nine-month period ended September 30,
1997, compared with net sales of $4.3 billion and operating profits of $311
million for the nine-month period ended September 30, 1996. The 1996 nine
months' results included a $20 million expense for the voluntary early
retirement program referred to above. Return on sales decreased to 3% for the
first nine months of 1997 compared with 7.3% for the same period in 1996,
primarily as a result of substantially lower year-to-date average prices for
containerboard and communication papers. Compared with the first nine months of
1996, year-to-date average prices were approximately 25% lower for
containerboard and approximately 10% lower for communication papers. Year-to-
date average prices for the other major paper grades were approximately the same
as the comparable amounts for 1996.
Prices for market pulp and communication paper increased in the second and third
quarters of 1997, but are expected to be flat in the fourth quarter. The
Corporation anticipates modest increases in containerboard and packaging prices
in the fourth quarter compared to earlier quarters of 1997. The fourth quarter
of 1997 will also be impacted due to scheduled maintenance shutdowns at certain
facilities. Overall operating profits of the pulp and paper segment in the
fourth quarter of 1997 are expected to be slightly below those of the third
quarter. The foregoing statements regarding anticipated prices in the fourth
quarter for the Corporation's pulp and paper products, and overall operating
profits of the pulp and paper segment are forward-looking statements based on
current expectations and involve a number of risks and uncertainties. See
"Cautionary Statement For Purposes Of The `Safe Harbor' Provisions Of The
Private Securities Litigation Reform Act of 1995" below.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
The Corporation generated cash from operations of $780 million during the first
nine months of 1997, compared with $1,034 million in the first nine months of
1996, primarily due to higher working capital levels.
INVESTING ACTIVITIES
Property, plant, and equipment investments for the nine months ended September
30, 1997, were $426 million compared with $871 million in the first nine months
of 1996. Expenditures through September 30, 1997, included $256 million in the
pulp and paper segment, $125 million in the building products segment, and $45
million of other and general corporate. The Corporation expects to invest
approximately $750 million in 1997 without considering the cost of any
acquisitions.
During the first nine months of 1997, the Corporation received $356 million of
proceeds from asset sales. This amount included $308 million of proceeds from
the sale of the Corporation's Martell, California assets on March 31, 1997. The
Martell assets included 127,000 acres of timberlands, a sawmill, and a
particleboard plant.
In the second quarter of 1996, the Corporation purchased for $363 million the
United States and Canadian gypsum operations of Domtar Inc., consisting of 14
plants. As part of its agreement with the United States Department of Justice
permitting the Domtar acquisition, during the third quarter of 1996 the
Corporation sold its gypsum wallboard plants at Buchanan, New York, and
Wilmington, Delaware, for approximately $60 million.
During 1996, the Corporation invested $130 million for pollution control and
abatement. The Corporation's 1997 capital expenditure budget currently includes
approximately $80 million for environmental-related projects. Certain other
capital projects that are being undertaken for the primary reasons of improving
financial returns or safety will also include expenditures for pollution
control.
The United States Environmental Protection Agency has announced that it will
promulgate a set of technical provisions known as the "Cluster Rule" that will
establish new requirements for air emissions and wastewater discharges from pulp
and paper mills. The Corporation estimates that capital expenditures of
approximately $550 million will be made over the next eight years in order to
comply with the Cluster Rule's requirements. Of that total, about $300 million
will be needed within three years of the Cluster Rule's effective date, which is
expected to be in the first quarter of 1998. One of the main components of the
Cluster Rule is that pulp and paper mills use only elemental chlorine free
("ECF") technology, which will require the complete substitution of chlorine
dioxide for elemental chlorine in the pulp bleaching process. Approximately
$165 million of the amounts required to be spent in the next three years will go
toward ECF conversion at mills located in Ashdown, Arkansas; Crossett, Arkansas;
Bellingham, Washington; Palatka, Florida; and Woodland, Maine. The bulk of the
remaining $135 million to be spent within the next three years is for additional
air emissions controls at the Corporation's pulp and paper facilities.
FINANCING ACTIVITIES
At September 30, 1997, and December 31, 1996, the Corporation's total debt was
$5.4 billion and $5.6 billion, respectively. The amounts of the Corporation's
debt and accounts receivable on the balance sheet at December 31, 1996, does not
include $350 million of proceeds from the accounts receivable sale program.
That amount, although not reflected on the balance sheet, was considered part of
the Corporation's total debt at December 31, 1996, under the assumption that at
the end of the program the proceeds will be replaced by debt. In the 1997 first
quarter, the Corporation adopted SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." As a
result, the accounts receivable sale program is accounted for as a secured
borrowing effective January 1, 1997. The $280 million of receivables
outstanding under the program and the corresponding debt are included as current
receivables and short-term debt, respectively, on the Corporation's balance
sheet at September 30, 1997. The fees associated with the program are included
in interest expense for all periods.
In conjunction with the sale of the Corporation's Martell, California
operations, in March 1997, the Corporation received notes receivable from the
purchaser in the amount of $270 million. These notes are included in "Other
assets" on the Corporation's balance sheet at September 30, 1997. In April
1997, the Corporation monetized these notes receivable through the issuance of
notes payable in a private placement. Proceeds from the notes receivable will
be used to fund payments required for the notes payable. The notes payable are
classified as "Other long-term liabilities" on the Corporation's balance
sheet. Proceeds from the issuance of the notes payable and cash from operations
were used to reduce debt in the 1997 second quarter, including $300 million of
9.85% notes that were due on June 1, 1997.
At September 30, 1997, the Corporation had outstanding borrowings of $646
million under certain Industrial Revenue Bonds. Approximately $15 million from
the issuance of these bonds is being held by trustees and is restricted for the
construction of certain capital projects. Amounts held by trustees are
classified as noncurrent assets in the accompanying balance sheet.
The Corporation has a $1.5 billion unsecured revolving credit facility that is
used for direct borrowings and as support for commercial paper and other short-
term borrowings. As of September 30, 1997, $942 million of committed credit was
available in excess of all short-term borrowings outstanding under or supported
by the facility.
The Corporation's senior management establishes parameters of the Corporation's
financial risk. Hedging interest-rate exposure through the use of swaps and
options, and hedging foreign exchange exposure through the use of forward
contracts, are specifically contemplated to manage risk in keeping with
management policy. Derivative instruments such as swaps, forwards, option or
futures, which are based directly or indirectly upon interest rates, currencies,
equities and commodities, may be used by the Corporation to manage and reduce
the risk inherent in price, currency and interest rate fluctuations.
The Corporation does not utilize derivatives for speculative purposes.
Derivatives are transaction-specific so that a specific debt instrument,
contract, invoice or transaction determines the amount, maturity and other
specifics of the hedge. Counterparty risk is limited to institutions with long-
term debt ratings of A or better.
At September 30, 1997, the Corporation's weighted average interest rate on its
total debt was 7.7% including outstanding interest rate exchange agreements. At
September 30, 1997, these interest rate exchange agreements effectively
converted $496 million of floating rate obligations with a weighted average
interest rate of 5.7% to fixed rate obligations with an average effective
interest rate of 9%. These agreements increased interest expense by $12 million
for the nine months ended September 30, 1997. These agreements have a weighted
average maturity of approximately 1.3 years. As of September 1997, the
Corporation's total floating rate debt exceeded related interest rate exchange
agreements by $1.2 billion.
The Corporation also enters into foreign currency exchange agreements, the
amounts of which were not material to the consolidated financial position of the
Corporation at September 30, 1997.
As of September 30, 1997, the Corporation had registered for sale up to $500
million of debt securities under a shelf registration statement filed with the
Securities and Exchange Commission.
In 1997, the Corporation expects its cash flow from operations, together with
proceeds from any asset sales and available financing sources, to be sufficient
to fund planned capital investments, pay dividends and make scheduled debt
repayments.
OTHER
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard Number 128 (SFAS 128), "Earnings Per Share,"
that specifies the computation, presentation, and disclosure requirements for
earnings per share. The Corporation will be required to adopt the new Standard
in the 1997 fourth quarter. All prior period earnings per share data will be
restated to conform with the provisions of SFAS 128. Based on a preliminary
evaluation of this Standard's requirements, the Corporation does not expect the
per share amounts reported under SFAS 128 to be materially different from those
calculated and presented under APB Opinion 15.
In June 1997, the FASB issued Financial Accounting Standard Number 130 (SFAS
130) "Reporting Comprehensive Income," that establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Corporation will be required to
adopt the new Standard in 1998.
Also in June 1997, the FASB issued Financial Accounting Standard Number 131
(SFAS 131) "Disclosure about Segments of an Enterprise and Related
Information." This statement requires companies to determine segments based on
how management makes decisions about allocating resources to segments and
measuring their performance. Disclosures for each segment are similar to those
required under current standards, with the addition of certain quarterly
disclosure requirements. SFAS 131 also requires entity-wide disclosure about
the products and services an entity provides, the countries in which it holds
material assets and reports material revenues, and its significant customers.
The Corporation will be required to adopt the new standard in 1998; prior period
information will be restated. Management is evaluating the effect of this
statement on reported segment information.
For a discussion of commitments and contingencies refer to Note 8 of the Notes
to Financial Statements.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements under "Management's Discussion and Analysis" and other
statements contained herein which are not historical facts are forward-looking
statements (as such term is defined under the Private Securities Litigation
Reform Act of 1995) based on current expectations. The accuracy of such
statements is subject to a number of risks, uncertainties and assumptions. In
addition to the risks, uncertainties and assumptions discussed elsewhere
herein, factors that could cause or contribute to actual results differing
materially from such forward-looking statements include the following: the
realization of projected savings from the Corporation's investments in systems,
operations and cost reduction programs, including the ability of management to
return the Corporation's building products distribution division to
profitability; the Corporation's ability to timely and efficiently address the
Year 2000 problem; changes in the productive capacity of other building products
and pulp and paper producers; the effect on the Corporation of changes in
environmental and pollution control laws and regulations; the general level of
economic activity in U.S. and export markets; variations in the level of housing
starts; fluctuations in currency exchange rates; the supply and cost of wood
fiber; and other risks and assumptions discussed in the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, as amended by
the Corporation's Annual Report on Form 10-K/A filed on March 17, 1997, and the
Corporation's Annual Report on Form 10-K/A-1 filed on March 25, 1997, the
Corporation's Quarterly Reports on Form 10-Q for the periods ended March 31,
1997 and June 30, 1997, the Corporation's Registration Statement No. 333-35813
dated November 7, 1997, and the Corporation's Current Reports on Form 8-K dated
October 17, 1996, September 17, 1997 and September 18, 1997 and Current Report
on Form 8-K/A dated September 18, 1997.
18
PART II - OTHER INFORMATION
---------------------------
GEORGIA-PACIFIC CORPORATION
September 30, 1997
Item 1. Legal Proceedings
The information contained in Note 8 "Commitments and Contingencies"
of the Notes to Financial Statements filed as part of this Quarterly
Report on Form 10-Q is incorporated herein by reference.
The Corporation has resolved an enforcement action brought by the
Georgia Environmental Protection Division against its Brunswick pulp
and paper mill for violations of the Clean Air Act that occurred prior
to 1992. These violations were discovered by the Corporation and
voluntarily disclosed to the State. The Corporation was assessed a
$401,000 penalty plus costs of a supplemental environmental project.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11. Statements of Computation of Per Share Earnings.
Exhibit 27. Financial Data Schedule.
(b) Current Reports on Form 8-K dated September 17, 1997 and
September 18, 1997 and Current Report on Form 8-K/A dated
September 18, 1997 were filed by the Corporation during the
quarter ended September 30, 1997.
19
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: November 14, 1997 GEORGIA-PACIFIC CORPORATION
(Registrant)
by /s/John F. McGovern
----------------------------
John F. McGovern,
Executive Vice President -
Finance and Chief
Financial Officer
by /s/James E. Terrell
----------------------------
James E. Terrell,
Vice President and Controller
(Chief Accounting Officer)
20
GEORGIA-PACIFIC CORPORATION
---------------------------
INDEX TO EXHIBITS
FILED WITH THE QUARTERLY REPORT
ON FORM 10-Q FOR THE
QUARTER ENDED SEPTEMBER 30, 1997
Number Description
- ------ -----------
11. Statements of Computation of Per Share Earnings. (1)
27. Financial Data Schedule. (1)
- -------------------------------
(1) Filed by EDGAR