SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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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 1-3053
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Champion International Corporation
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(Exact name of registrant as specified in its charter)
New York 13-1427390
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State or other jurisdiction of incorpor- (I.R.S. Employer Identification
ation or organization No.)
One Champion Plaza, Stamford, Connecticut 06921
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(Address of principal executive offices) (Zip Code)
203-358-7000
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(Registrant's telephone number, including area code)
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 31, 1997
- ---------------------------------- ----------------------------------
Common stock, $.50 par value 95,915,528
Item 1. Financial Statements.
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CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (unaudited)
(in thousands, except per share)
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------ -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net Sales $ 2,774,180 $ 2,977,766 $ 1,407,460 $ 1,444,584
Costs and Expenses
Cost of products sold 2,562,689 2,546,870 1,281,586 1,286,417
Selling, general and administrative expenses 198,616 188,286 104,752 91,271
Interest and debt expenses 121,561 108,178 60,763 53,219
Other (income) expense - net (23,490) (19,856) (13,989) (8,688)
----------- ----------- ----------- -----------
Total costs and expenses 2,859,376 2,823,478 1,433,112 1,422,219
Income (Loss) Before Income Taxes (85,196) 154,288 (25,652) 22,365
Income Taxes (Benefit) (36,755) 55,087 (14,294) 6,813
----------- ----------- ----------- -----------
Net Income (Loss) $ (48,441) $ 99,201 $ (11,358) $ 15,552
=========== =========== =========== ===========
Average Number of Common Shares Outstanding 95,625 95,508 95,659 95,511
=========== =========== =========== ===========
Earnings (Loss) Per Common Share (Exhibit 11) $ (.51) $ 1.04 $ (.12) $ .16
=========== =========== =========== ===========
Cash dividends declared $ .10 $ .10 $ .05 $ .05
=========== =========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
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CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
June 30, December 31,
1997 1996
ASSETS: (Unaudited)
----------- -----------
Current Assets:
Cash and cash equivalents $ 139,668 $ 174,638
Short-term investments --- ---
Receivables - net 570,808 579,393
Inventories 401,194 458,043
Prepaid expenses 34,157 29,926
Deferred income taxes 74,832 73,732
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Total Current Assets 1,220,659 1,315,732
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Timber and timberlands, at cost - less cost of
timber harvested 2,349,484 2,364,858
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Property, plant and equipment, at cost 9,434,622 9,297,557
Less - Accumulated depreciation 3,827,701 3,644,088
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5,606,921 5,653,469
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Other assets and deferred charges 503,317 485,933
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Total Assets $ 9,680,381 $ 9,819,992
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current installments of long-term debt $ 76,887 $ 80,900
Short-term borrowings 84,956 126,910
Accounts payable and accrued liabilities 657,689 713,132
Income taxes 8,541 23,098
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Total Current Liabilities 828,073 944,040
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Long-term debt 3,144,683 3,085,424
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Other liabilities 695,184 664,643
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Deferred income taxes 1,302,915 1,363,910
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Minority interest in subsidiaries 4,813 6,307
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Shareholders' Equity:
Capital Shares:
Common (110,469,970 and 110,323,099
shares issued at June 30, 1997 and
December 31, 1996, respectively) 55,235 55,162
Capital Surplus 1,662,718 1,651,454
Retained Earnings 2,682,183 2,740,196
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4,400,136 4,446,812
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Treasury shares, at cost (657,855) (657,864)
Cumulative translation adjustment (37,568) (33,280)
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Total Shareholders' Equity 3,704,713 3,755,668
----------- -----------
Total Liabilities and Shareholders' Equity $ 9,680,381 $ 9,819,992
=========== ===========
The accompanying Notes to Consolidated Financial Statements are
an integral part of this statement.
-3-
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOWS (unaudited)
(in thousands of dollars)
Six Months Ended
June 30,
---------------------------
1997 1,996
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (48,441) $ 99,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 210,749 200,838
Cost of timber harvested 43,937 42,800
Net gain on sale of assets (10,608) (3,894)
(Increase) decrease in:
Receivables 8,130 82,043
Inventories 56,247 (5,600)
Prepaid expenses (4,279) (16,742)
Increase (decrease) in:
Accounts payable and accrued liabilities (54,691) (64,028)
Income taxes (14,483) (120,458)
Other liabilities 27,745 (18,653)
Deferred income taxes (59,072) 15,273
All other - net 20,483 1,430
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Net cash provided by operating activities 175,717 212,210
----------- -----------
Cash flows from investing activities:
Expenditures for property, plant and equipment (154,279) (185,778)
Timber and timberlands expenditures (57,095) (60,677)
Purchase of Lake Superior Land Company (Note 2) -- (71,990)
Purchase of investments (20,914) ---
Proceeds from redemption of investments 20,914 44,884
Proceeds from sales of property, plant and equipment
and timber and timberlands 29,085 17,805
All other - net (1,839) 3,982
----------- -----------
Net cash used in investing activities (184,128) (251,774)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 102,711 508,899
Payments of long-term debt and short-term debt (122,593) (449,474)
Cash dividends paid (9,563) (9,579)
Payments to acquire treasury stock -- (7,815)
All other - net 2,886 2,594
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Net cash provided by financing activities (26,559) 44,625
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Increase (decrease) in cash and cash equivalents (34,970) 5,061
Cash and Cash Equivalents:
Beginning of period 174,638 317,069
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End of period $ 139,668 $ 322,130
=========== ===========
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest (net of capitalized amounts) $ 122,941 $ 102,593
Income taxes (net of refunds) 29,138 153,116
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
-4-
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 1997
Note 1
The unaudited information furnished in this report reflects all adjustments
which are, in the opinion of management, necessary to present fairly a statement
of the results for the interim periods reported. All such adjustments made were
of a normal recurring nature.
Note 2
During the first quarter of 1996, the company acquired Lake Superior Land
Company for $76 million, before netting $4 million of cash owned by Lake
Superior Land Company, as well as an outstanding $44 million mortgage loan. The
acquisition was accounted for as a purchase. Liabilities recorded in connection
with the acquisition, including purchase accounting adjustments, were the $44
million mortgage loan, $68 million of deferred taxes payable and $13 million of
other liabilities.
Note 3
In March 1997, the company adopted a performance share plan under which share
units were awarded to senior executives and other key managers. These units
entitle the executives, upon earn-out, to receive shares of common stock. The
earn-out of shares is dependent on the company's stock price appreciation plus
dividend yield (i.e., total shareholder return or "TSR") increasing, at any time
within three years from the date of grant, to a value equivalent to 15% per
annum compounded for three years. If the TSR goal is achieved, the amount of the
payout will depend on the company's TSR, during the performance period, relative
to an industry peer group. If the TSR goal is not achieved, there will be no
payout.
Based on the current dividend rate, the shares would be earned if the common
stock price reaches approximately $67 per share. The number of shares that could
be earned ranges from 340,000 shares to 720,000 shares.
-5-
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
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Results of Operations
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Overall Quarterly Results
The company reported a net loss in the second quarter of 1997 of $11 million or
$.12 per share, compared to last year's second quarter net income of $16 million
or $.16 per share and last quarter's net loss of $37 million or $.39 per share.
As discussed below, the decline from last year was primarily due to lower
operating income in the paper segment, while the improvement from last quarter
was mainly due to higher operating income in the paper segment.
Significant Income Statement Line Item Changes for the Three Months Ended June
30, 1997
Net sales of $1.41 billion declined from $1.44 billion last year but increased
from $1.37 billion last quarter. Gross profit was $126 million, compared to $158
million last year and $86 million last quarter. A pre-tax loss of $26 million
represented a decline from pre-tax income of $22 million a year ago and an
improvement from a pre-tax loss of $60 million last quarter. The declines in net
sales, gross profit and pre-tax income from last year were principally due to
lower prices for all of the company's major paper grades, which more than offset
higher paper shipments, lower pulp and paper manufacturing costs and higher
lumber and plywood prices. The improvements from last quarter were primarily due
to lower pulp and paper manufacturing costs and increased pulp, paper and wood
products shipments, as well as higher prices for uncoated free sheet and coated
papers, newsprint, hardwood pulp and domestic lumber and plywood.
Despite higher shipments, the aggregate cost of products sold decreased from
last year and was approximately even with last quarter mainly due to lower
manufacturing costs.
Selling, general and administrative expenses were significantly higher than both
last year and last quarter. The increases were principally due to the impact of
stock price fluctuations on the value of stock appreciation rights and of other
stock-based compensation, including the performance shares described in Note 3
to the consolidated financial statements. Future stock price volatility would
impact the expense associated with the company's stock-based compensation plans.
Interest and debt expense increased from last year but was approximately even
with last quarter. The increase from last year was mainly due to higher long-
term debt, which more than offset a lower average interest rate.
Other (income) expense - net improved slightly from both prior periods,
principally as the result of the sale of certain timberlands.
-6-
Results for the second quarter of 1997 benefited from an effective tax rate that
was significantly higher than both last year and last quarter. The higher rate
was primarily due to the mix of U.S. and foreign earnings and lower taxes on the
company's Brazilian operations.
Year-to-Date Results
For the first six months, the company reported a net loss of $48 million or $.51
per share, compared to net income of $99 million or $1.04 per share a year ago.
Paper Segment
For the company's paper segment, second quarter operating income was $3 million.
This compared to income of $44 million a year ago and a loss of $30 million last
quarter. Total paper, packaging and pulp shipments were 1,563,000 tons in the
second quarter, compared to 1,521,000 tons a year ago and 1,539,000 tons last
quarter.
The slight operating loss for the domestic free sheet business represented an
improvement from the losses of both last year and last quarter. The improvement
from last year was mainly due to significantly lower manufacturing costs and
higher coated free sheet shipments, which more than offset lower prices for
coated and uncoated free sheet papers. The improvement from last quarter was
mainly due to lower manufacturing costs, higher prices for coated and uncoated
free sheet papers and higher shipments of uncoated free sheet papers. The
average price for domestic uncoated free sheet papers, the principal product of
the free sheet business, was $626 per ton in the second quarter of this year,
compared to $688 per ton in the second quarter of 1996 and $619 per ton last
quarter. The average price for coated free sheet papers was $833 per ton this
quarter, compared to $931 per ton a year ago and $811 per ton last quarter.
Shipments of all grades for the free sheet business were 562,000 tons, compared
to 549,000 tons last year and 554,000 tons last quarter. A maintenance outage is
scheduled at the company's Canton, North Carolina, mill in the third quarter. A
price increase for most grades of coated and uncoated free sheet papers was
implemented early in the third quarter.
Operating income at the Brazilian subsidiary, Champion Papel e Celulose Ltda.
("Celulose"), declined slightly from the year-ago quarter and last quarter
principally due to lower export and domestic prices for uncoated free sheet
papers. The overall average price for uncoated free sheet papers was $714 per
ton this quarter, compared to $813 per ton last year and $743 per ton last
quarter. Uncoated free sheet papers shipments of 96,000 tons were approximately
even with last year and last quarter. A maintenance outage is scheduled at
Celulose in the third quarter.
Operating income for the groundwood business declined substantially from last
year but improved from an operating loss last quarter. The decline from last
year was primarily due to significantly lower prices for coated and uncoated
groundwood papers and newsprint, which more than offset lower manufacturing
costs and higher coated groundwood papers shipments. The improvement from last
quarter was principally due to higher prices for all grades as well as lower
manufacturing costs. The average price for coated groundwood papers was $799 per
ton this quarter, compared to $1,023 per ton last year and
-7-
$772 per ton last quarter. The average price for newsprint of $490 per ton this
quarter declined from $600 per ton last year but improved from $460 per ton last
quarter. Shipments of all groundwood and newsprint grades of 443,000 tons
compared to 406,000 tons last year and 444,000 tons last quarter. Early in the
third quarter, a discount reduction for coated groundwood papers was
implemented.
An operating loss for the specialty business represented a decline from the
operating income of last year and the smaller operating loss last quarter. The
declines were mainly due to lower prices, higher purchased pulp costs and higher
manufacturing costs resulting from scheduled maintenance outages. Prices for
uncoated groundwood and premium free sheet papers, linerboard and kraft papers
declined from last year and last quarter. Prices for coated groundwood papers
declined from last year but improved from last quarter. Shipments of all grades
were 218,000 tons, compared to 201,000 tons last year and 220,000 tons last
quarter. A discount reduction for coated groundwood papers was implemented early
in the third quarter.
The small operating loss for the company's U.S. and Canadian market pulp
operations represented a significant improvement from the operating loss of last
year and a slight improvement from the operating loss of last quarter. The
improvement from last year was primarily due to higher prices for all grades,
which more than offset lower shipments. The improvement from last quarter was
principally due to higher prices for northern hardwood pulp and higher
shipments, partially offset by higher manufacturing costs resulting from
scheduled maintenance outages at all of the company's northern hardwood and
Canadian softwood pulp mills. The average price for Canadian softwood pulp was
(U.S.) $398 per ton in the second quarter of this year, compared to $362 per ton
last year and $403 per ton last quarter. The average price for northern hardwood
pulp was $398 per ton this quarter, compared to $328 per ton last year and $378
per ton last quarter. Shipments of all pulp grades of 243,000 tons decreased
from 266,000 tons last year but increased from 224,000 tons last quarter. Price
increases for all grades were implemented early in the third quarter. A
maintenance outage is scheduled at the company's Pensacola, Florida, pulp mill
in the third quarter.
Wood Products Segment
The company's wood products segment, which includes the wood-related operations
of the company's Canadian subsidiary, Weldwood of Canada Limited ("Weldwood")
and Celulose, reported second quarter income from operations of $37 million, up
from $29 million a year ago and $31 million last quarter. The improvement from
last year was mainly due to higher prices for lumber and plywood in the U.S. and
Canada, higher overall shipments and higher timber sales. The improvement from
last quarter was primarily due to higher prices for lumber and plywood in the
U.S. and higher overall shipments.
The average price for plywood overall was up slightly from both prior quarters.
The average price for lumber overall was 14% higher than last year and
approximately even with last quarter. Wood products shipments increased slightly
from both last year and last quarter.
-8-
Foreign Operations
The company's major foreign operations, which are discussed above under their
respective business segment headings, are in Canada and Brazil. Net sales to
unaffiliated customers by the company's foreign subsidiaries for the first six
months of 1997 were (U.S.) $437 million, accounting for 16% of consolidated net
sales of the company. Pre-tax income and net income of the foreign subsidiaries
for the first six months of 1997 were (U.S.) $64 million and (U.S.) $54 million,
respectively, which were more than offset by the pre-tax loss and net loss of
the company's domestic operations.
Labor Contracts
At Weldwood, labor agreements covering the Hinton, Alberta, pulp mill and wood
products plant, the joint venture pulp mill at Quesnel, British Columbia, and
most of Weldwood's wood products plants have run past their expiration dates.
These facilities presently are operating under the terms of their expired
contracts while efforts to negotiate new labor agreements continue.
Financial Condition
- -------------------
The company's current ratio was 1.5 to 1 at June 30, 1997 and March 31, 1997,
compared to 1.4 to 1 at year-end 1996. Total debt to total capitalization was
40% at June 30, 1997 and March 31, 1997, compared to 39% at year-end 1996.
Significant Balance Sheet Line Item Changes
Inventories declined by $57 million primarily due to a decrease in log inventory
resulting from seasonal factors, as well as increased shipments. Net property,
plant and equipment decreased by $47 million mainly due to depreciation expense
exceeding capital additions in the first six months of 1997. Short-term
borrowings, and accounts payable and accrued liabilities, decreased by $42
million and $55 million, respectively, principally due to the timing of
payments. Income taxes payable decreased by $15 million, as $29 million in net
payments were made in the first six months of 1997 for U.S. and foreign income
taxes. The deferred income tax liability and shareholders' equity decreased by
$61 million and $51 million, respectively, primarily due to the company's net
loss in the first half of 1997. For a discussion of changes in long-term debt
(including current installments) and cash and cash equivalents, see below.
Cash Flows Statement - General
1997
- ----
In the first six months of 1997, the company's net cash provided by operating
activities and asset sales was not sufficient to meet the requirements of its
investing activities (principally capital expenditures) and its financing
activities (principally debt payments and cash dividends). The difference was
financed through the use of cash and cash equivalents. Cash and cash equivalents
decreased by $35 million in the first six months to a total of $140 million,
$108 million of which was held by the company's Canadian and Brazilian
subsidiaries. In the first six months, net long-term and short-term debt
payments in the aggregate were $20 million; long-term and short-term debt in the
aggregate increased by $13 million.
-9-
1996
- ----
In the first six months of 1996, the company's net cash provided by operating
activities and asset sales was not sufficient to meet the requirements of its
investing activities (principally capital expenditures and the acquisition of
Lake Superior Land Company) and its financing activities (principally debt
payments, cash dividends and the purchase of shares of the company's common
stock). The difference was financed through borrowings. Net borrowings generated
cash proceeds of $59 million; long-term debt (including current installments)
increased by $111 million, including a $44 million mortgage loan of Lake
Superior Land Company which was outstanding at the time of its acquisition. Cash
and cash equivalents increased by $5 million.
Cash Flows Statement - Operating Activities
For the first six months, net cash provided by operating activities of $176
million declined from $212 million a year ago. The decrease was mainly due to a
net loss this year and a smaller decrease in receivables, partially offset by
lower income tax payments, a significant decrease in inventories and an increase
in other liabilities.
Cash Flows Statement - Investing Activities
For the first six months, net cash used in investing activities of $184 million
declined from $252 million a year ago. The decrease was principally due to lower
capital expenditures this year and the acquisition of Lake Superior Land Company
for $76 million (as well as an outstanding $44 million mortgage loan) last year.
Cash Flows Statement - Financing Activities
For the first six months, net cash used in financing activities of $27 million
decreased from net cash provided by financing activities of $45 million a year
ago. The change was primarily due to net debt payments this year.
At June 30, 1997, the company had $399 million of U.S. commercial paper, current
maturities of long-term debt and other short-term obligations outstanding, all
of which is classified as long-term debt, up from $102 million at March 31, 1997
and $7 million at year-end 1996. At June 30, 1997 and December 31, 1996, no
notes were outstanding under the company's U.S. bank lines of credit. At March
31, 1997, $15 million of notes were outstanding. Domestically, at June 30, 1997,
$399 million of the company's unused bank lines of credit of $1,085 million
supported the classification of commercial paper, current maturities of long-
term debt and other short-term obligations as long-term debt. At June 30, 1997,
Weldwood had unused bank lines of credit of (U.S.) $130 million.
The annual principal payment requirements under the terms of all long-term
agreements for the period from July 1 through December 31, 1997 are $72 million
and for the years 1998 through 2001 are $436 million, $255 million, $206 million
and $206 million, respectively.
-10-
Strategic Review
- ----------------
On March 20, 1997, the company announced that it is increasing its focus on
improving total return to shareholders. The company has retained Marakon
Associates, a consulting firm, to assist in this process.
The Board of Directors and senior management, with the assistance of Marakon
Associates, have been engaged in an extensive strategic review of the company's
businesses, markets, facilities, organizational structure and management
processes. The company anticipates that the strategic review will be
substantially complete in the Fall.
-11-
PART II. OTHER INFORMATION
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
(a) The Annual Meeting of Shareholders of the company was held on May
15, 1997.
(b) N/A
(c) (i) Five nominees were elected to the Board of Directors at the 1997
Annual Meeting.
Robert A. Charpie - 80,648,003 votes were cast in favor of his
election and 1,470,679 votes were withheld.
H. Corbin Day - 80,662,357 votes were cast in favor of his election
and 1,456,325 votes were withheld.
Richard E. Olson - 80,661,605 votes were cast in favor of his
election and 1,457,077 votes were withheld.
Walter V. Shipley - 80,113,680 votes were cast in favor of his
election and 2,005,002 votes were withheld.
Richard E. Walton - 80,665,353 votes were cast in favor of his
election and 1,453,329 votes were withheld.
(ii) The shareholders approved the appointment of Arthur Andersen LLP as
the company's auditors for 1997. There were 81,890,541 votes cast in
favor of the proposal, 100,335 votes cast against the proposal and
127,806 abstentions.
(iii) The shareholders approved a proposal to amend the company's 1986
Stock Option Plan. There were 78,749,862 votes cast in favor of the
proposal, 2,680,749 votes cast against the proposal, 334,409
abstentions and 353,662 broker non-votes.
(iv) The shareholders rejected a shareholder proposal concerning
cumulative voting. There were 25,536,380 votes cast in favor of the
proposal, 51,036,025 votes cast against the proposal, 457,953
abstentions and 5,088,324 broker non-votes.
(v) The shareholders rejected a shareholder proposal concerning the use
of chlorine in the pulp-manufacturing process. There were 2,654,569
votes cast in favor of the proposal, 71,077,504 votes cast against
the proposal, 3,298,285 abstentions and 5,088,324 broker non-votes.
(d) N/A
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) See exhibit index following the signature page.
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
-12-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the undersigned on behalf of the registrant as duly
authorized officers thereof and in their capacities as the chief accounting
officers of the registrant.
Champion International Corporation
--------------------------------------
(Registrant)
Date: August 13, 1997 /s/ John M. Nimons
- ------------------------------ --------------------------------------
(Signature)
John M. Nimons
Vice President and Controller
Date: August 13, 1997 /s/ Kenwood C. Nichols
- ------------------------------ --------------------------------------
(Signature)
Kenwood C. Nichols
Vice Chairman and Executive Officer
-13-
EXHIBIT INDEX
Each exhibit is listed according to the number assigned to it in the Exhibit
Table of Item 601 of Regulation S-K.
10 - Amendment to Champion International Corporation 1986 Management Incentive
Program (filed by incorporation by reference to the appendix to the
company's Proxy Statement for the 1997 Annual Meeting of Shareholders).
11 - Calculation of Primary Earnings Per Common Share and Fully Diluted
Earnings per Common Share (unaudited).
27 - Financial Data Schedule (unaudited).
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