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 March 31, 1999
---------------------------------------------
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 1-3053
--------------------------------------------------------
Champion International Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-1427390
- -------------------------------------------- ---------------------------
State or other jurisdiction of incorporation (I.R.S. Employer
or organization Identification No.)
One Champion Plaza, Stamford, Connecticut 06921
- ------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
203-358-7000
- ------------------------------------------------------------------------------
(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 April 30, 1999
- ----------------------------------- -------------------------------------
Common stock, $.50 par value 95,737,185
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements.
- ------------------------------
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (unaudited)
(in millions, except per share)
Three Months Ended
March 31,
-------------------------------------
1999 1998
----------------- -----------------
Net Sales $1,274.6 $1,477.0
Costs and Expenses
Cost of products sold 1,130.5 1,292.5
Selling, general and administrative expenses 83.6 93.9
Interest and debt expenses 62.8 67.4
Other (income) expense - net (Note 2) (43.1) (1.9)
----------------- -----------------
Total costs and expenses 1,233.8 1,451.9
Income Before Income Taxes 40.8 25.1
Income Taxes (Benefit) (0.8) 6.1
----------------- -----------------
Net Income 41.6 $ 19.0
================= =================
Average Number of Common Shares Outstanding 95.6 96.1
================= =================
Earnings Per Common Share (Exhibit 11):
Basic $ .44 $ .20
================= =================
Diluted $ .43 $ .20
================= =================
Cash dividends declared $ .05 $ .05
================= =================
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
2
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions of dollars)
March 31, December 31,
1999 1998
ASSETS: (unaudited)
----------------- -----------------
Current Assets:
Cash and cash equivalents $ 247.6 $ 300.4
Receivables - net 531.2 520.5
Inventories 532.8 503.5
Prepaid expenses 24.4 27.5
Deferred income taxes 85.2 86.6
----------------- -----------------
Total Current Assets 1,421.2 1,438.5
----------------- -----------------
Timber and timberlands, at cost - less cost of timber harvested 2,341.3 2,430.4
----------------- -----------------
Property, plant and equipment, at cost 8,461.5 8,585.3
Less - Accumulated depreciation 4,384.4 4,356.5
----------------- -----------------
4,077.1 4,228.8
----------------- -----------------
Other assets and deferred charges 646.8 742.2
----------------- -----------------
Total Assets $8,486.4 $8,839.9
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current installments of long-term debt $ 225.5 $ 228.0
Short-term borrowings 88.5 89.8
Accounts payable and accrued liabilities 695.9 720.3
Income taxes 5.2 10.4
----------------- -----------------
Total Current Liabilities 1,015.1 1,048.5
----------------- -----------------
Long-term debt 2,843.4 2,947.5
----------------- -----------------
Other liabilities 779.4 786.8
----------------- -----------------
Deferred income taxes 940.1 961.2
----------------- -----------------
Shareholders' Equity:
Capital Shares:
Common (111,097,179 and 111,025,755, shares issued at
March 31, 1999 and December 31, 1998,
respectively) 55.5 55.5
Capital surplus 1,708.7 1,705.5
Retained Earnings 2,265.2 2,228.4
----------------- -----------------
4,029.4 3,989.4
Treasury shares, at cost (689.7) (689.7)
Accumulated other comprehensive income (431.3) (203.8)
----------------- -----------------
Total Shareholders' Equity 2,908.4 3,095.9
----------------- -----------------
Total Liabilities and Shareholders' Equity $8,486.4 $8,839.9
================= =================
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 millions of dollars)
Three Months Ended
March 31,
-------------------------------------
1999 1998
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 41.6 $ 19.0
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation expense 91.8 107.8
Cost of timber harvested 21.0 22.3
Net gain on sale of assets (2.3) (1.9)
Brazilian foreign currency transaction (gain) loss (38.6) 0.1
Changes in assets and liabilities, net of acquisitions
and divestitures:
Receivables (39.8) (3.5)
Inventories (42.2) (38.4)
Prepaid expenses 0.1 (2.1)
Accounts payable and accrued liabilities 7.3 (36.8)
Income taxes payable 0.2 (7.2)
Other liabilities (8.1) 6.4
Deferred income taxes (8.4) 3.7
All other - net 4.0 4.9
----------------- -----------------
Net cash provided by operating activities 26.6 74.3
----------------- -----------------
Cash flows from investing activities:
Expenditures for property, plant and equipment (41.7) (62.9)
Timber and timberlands expenditures (28.1) (29.3)
Acquisitions of timberlands and mills (Note 3) - (58.0)
Purchase of investments - (4.8)
Proceeds from sales of property, plant and equipment
and timber and timberlands 4.5 5.6
All other - net (0.4) 2.3
----------------- -----------------
Net cash used in investing activities (65.7) (147.1)
----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 25.4 353.3
Payments of current installments of long-term
debt and long-term debt (31.2) (390.6)
Cash dividends paid (4.8) (4.8)
All other - net (3.1) (4.3)
----------------- -----------------
Net cash used in financing activities (13.7) (46.4)
----------------- -----------------
Decrease in cash and cash equivalents (52.8) (119.2)
Cash and Cash Equivalents:
Beginning of period 300.4 275.0
----------------- -----------------
End of period $ 247.6 $ 155.8
================= =================
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest (net of capitalized amounts) $ 44.7 $ 58.7
Income taxes (net of refunds) 7.4 9.5
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)
March 31, 1999
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. Certain amounts for 1998 have been reclassified to
conform to the current year's presentation.
Note 2.
Other income (expense) - net for the three months ended March 31, 1999 includes
a net foreign currency transaction gain of $38.6 million for the company's
Brazilian operations.
Note 3.
In 1998, the company's Brazilian subsidiary acquired Inpacel and its forestry
affiliate for $75 million, before netting $17 million of cash and cash
equivalents owned by Inpacel. At the time of its acquisition, Inpacel had
outstanding debt of $277 million and $55 million of other liabilities. The
acquisition was accounted for as a purchase.
Note 4.
The company occasionally enters into forward exchange contracts to hedge certain
assets that are denominated in foreign currencies. At March 31, 1999, the
company had no significant forward exchange contracts outstanding. The company
does not hold financial instruments for trading purposes.
Note 5.
On October 7, 1997, the company approved a plan to maximize total shareholder
return by focusing on strategic businesses, increasing profitability and
improving financial discipline. As part of this plan, the company has divested
and will divest several non-strategic product segments and approximately 354,000
acres of timberlands. The profit-improvement program includes a reduction in the
company's world-wide workforce in the businesses remaining after the
divestitures by 11%, or approximately 2,000 positions, by the end of 1999. In
the fourth quarter of 1997, the company recorded a pre-tax charge of $891
million ($552 million after-tax, or $5.76 per share) in connection with this
plan. In the fourth quarter of 1998, the company recorded a pre-tax charge of
$80 million ($49 million after-tax, or $.52 per share) to recognize additional
costs associated with the divestiture of the non-strategic product segments.
5
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Through March 31, 1999, the company had reduced its world-wide workforce in the
businesses which are not part of the planned divestitures (excluding positions
added as the result of acquisitions in Canada, Brazil and Maine) by 1,751
positions.
In 1998, the company sold its newsprint business, including related working
capital, its Texas recycling centers and its Belvidere, Illinois tray plant for
a total of $481.5 million. In December 1998, the company agreed to sell
approximately 300,000 acres of timberlands in the northeast to the Conservation
Fund for $76.2 million. The transaction is expected to close in mid-1999. In
May 1999, the Company agreed to sell its mill in Deferiet, New York to The
Deferiet Paper Company. The transaction is expected to close in the second
quarter of 1999. On May 14 1999, the company sold its mill in Canton, North
Carolina and its liquid packaging business to Blue Ridge Paper Products Inc.
for $200 million, consisting of $170 million in cash and a $30 million note.
The agreement also provides the opportunity for the company to receive an
additional contingency payment in the future. The company is continuing to
actively pursue the sale of its mill in Hamilton, Ohio. In addition, the
company has offered for sale approximately 54,000 acres of timberlands in North
Carolina and Tennessee.
Results of operations for the product segments divested and to be divested are
as follows.
Three Months Ended
March 31,
-------------------------------------
(in millions of dollars) 1999 1998
------------------------------------------------------- ----------------- -----------------
Net sales $ 184.5 $ 327.7
Costs and expenses 189.5 327.3
----------------- -----------------
Income (loss) from operations $ (5.0) $ 0.4
================= =================
The consolidated balance sheet includes the following amounts related to the
product segments to be divested, net of the asset impairment provision:
March 31, 1999
------------------------------------------------------- -----------------
(in millions of dollars)
Current assets $ 178.3
Long-term assets (primarily property, plant
and equipment) 728.1
Current liabilities (52.6)
Long-term liabilities (0.6)
-----------------
Net assets $ 853.2
=================
6
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
First quarter 1999 activity of the remaining reserves and liabilities
associated with the provision for restructuring is as follows:
Asset
Balance at Retirements Balance at
December 31, and Cash March 31,
(in millions of dollars) 1998 Payments 1999
------------------------------------------------------- ---------------- ----------------- -----------------
Reserve for asset impairment $ 569.0 $ (0.3) $ 568.7
Liabilities 92.5 (4.6) 87.9
---------------- ----------------- -----------------
$ 661.5 $ (4.9) $ 656.6
================ ================= =================
Note 6.
Statement of Financial Accounting Standards No. 130 requires the disclosure of
comprehensive income to reflect changes in equity that result from
transactions and economic events from nonowner sources. Comprehensive income
for the periods presented below included foreign currency translation items
associated with the company's Brazilian and Canadian operations. There was no
tax expense or tax benefit associated with the foreign currency translation
items, other than the cumulative tax effect described below.
Comprehensive income (unaudited)
Three Months Ended
(in millions of dollars) March 31,
------------------------------------------------------- -------------------------------------
1999 1998
----------------- -----------------
Net income $ 41.6 $ 19.0
Foreign currency translation
adjustments:
Cumulative tax effect of
changing the functional
currency for Brazilian
operations to the Brazilian Real - (51.5)
Other foreign currency
translation adjustments (227.5) (13.7)
----------------- -----------------
Net foreign currency translation
adjustment (227.5) (65.2)
----------------- -----------------
Comprehensive loss $(185.9) $ (46.2)
================= =================
7
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 7.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Statement, which will be effective for the
company beginning in the fiscal year 2000, establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or a liability measured at its fair
value. The Statement requires that changes in each derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met.
The company has not yet quantified the anticipated impact on the financial
statements of adopting the Statement. However, given the current level of the
company's derivative and hedging activities, the impact is not expected to be
material.
Note 8.
Information about the company's operations in different businesses is as
follows:
Three Months Ended
March 31,
-------------------------------------
(in millions of dollars) 1999 1998
------------------------------------------------------- ----------------- -----------------
Net Sales to Unaffiliated Customers
Pulp and Paper
North America $ 711.3 $ 929.7
Brazil 85.6 107.0
Distribution 199.6 217.5
----------------- -----------------
Total Pulp and Paper 996.5 1,254.2
----------------- -----------------
Wood Products 278.1 222.8
----------------- -----------------
Total $ 1,274.6 $ 1,477.0
================= =================
Intersegment Sales
Pulp and Paper
North America $ 33.8 $ 37.2
Brazil 4.4 6.2
Distribution 3.2 2.0
----------------- -----------------
Total Pulp and Paper 41.4 45.4
----------------- -----------------
Wood Products 111.7 138.5
----------------- -----------------
Total $ 153.1 $ 183.9
================= =================
8
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended
March 31,
-------------------------------------
(in millions of dollars) 1999 1998
------------------------------------------------------- ----------------- -----------------
Income From Operations
Pulp and Paper
North America $ (10.7) $ 62.0
Brazil 32.1 22.1
Distribution 6.1 5.2
----------------- -----------------
Total Pulp and Paper 27.5 89.3
----------------- -----------------
Wood Products 42.4 14.3
----------------- -----------------
General Corporate Expense (9.4) (13.0)
----------------- -----------------
Total $ 60.5 $ 90.6
================= =================
9
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
Results of Operations
- ---------------------
Overall Quarterly Results
The company reported net income in the first quarter of 1999 of $42 million or
43 cents per diluted share. Results included earnings of $39 million or 40 cents
per share reflecting the impact of the devaluation of the Brazilian currency on
U.S. dollar-denominated investments held by the company's Brazilian operations.
Excluding this special item, first quarter net income of $3 million or three
cents per share compared to net income of $19 million or 20 cents per share for
the first quarter of 1998. In the fourth quarter of 1998, net income was $12
million or 13 cents per share, excluding special items, which consisted of a
charge related to the additional costs associated with the divestiture of the
company's non-strategic product segments and a benefit resulting from the
reversal of reserves that were no longer required. Including these special
items, the net loss was $7 million or seven cents per share in the fourth
quarter of 1998. As discussed below, excluding special items, the decline from
the first quarter of 1998 was principally due to lower overall operating income
in the paper segments, which more than offset higher operating income in the
wood products segment, lower selling, general and administrative expenses and
lower interest expense. The decline from last quarter was mainly due to lower
overall operating income in the paper segments and, excluding special items,
lower other (income) expense - net, which more than offset higher operating
income in the wood products segment.
Significant Income Statement Changes
Net sales of $1.27 billion decreased from $1.48 billion last year and $1.34
billion last quarter. Gross profit was $144 million, compared to $184 million
last year and $152 million last quarter. Pre-tax income of $2 million before a
special item declined from $25 million a year ago and $7 million, before the
impact of special items, last quarter. The declines in net sales, gross profit
and pre-tax income from the year-ago quarter were mainly due to (i) the June
1998 sale of the company's newsprint business, (ii) lower prices for pulp and
most of the company's paper grades and (iii) market-related outages at the
company's groundwood papers mills, all of which more than offset higher plywood
prices and increased shipments of lumber and plywood. The declines in gross
profit and pre-tax income from last quarter were primarily the result of lower
prices for coated and uncoated groundwood papers and the market-related outages
at the company's groundwood papers mills, which more than offset higher prices
for lumber and plywood. Compared to last quarter, net sales declined primarily
due to lower prices for coated and uncoated groundwood papers and the impact on
domestic sales of the company's Brazilian subsidiary, Champion Papel e Celulose
Ltda. ("CPC"), due to the devaluation of the Real.
The aggregate cost of products sold declined from last year and last quarter.
The decline from last year was principally due to lower paper shipments
resulting from the sale of the company's newsprint
10
business and lower manufacturing costs in Brazil due to the devaluation of the
Real. The decline from last quarter was mainly due to lower manufacturing costs
in Brazil and North America.
Selling, general and administrative expenses declined from last year and last
quarter. The declines were primarily due to corporate and sales staff reductions
resulting from the company's profit-improvement program as well as the impact of
stock price fluctuations on the value of stock appreciation rights and other
stock-based compensation.
Interest and debt expense decreased from last year and last quarter. The
decrease from last year was principally due to lower domestic debt, which was
partially offset by higher average outstanding foreign debt. The decline from
last quarter was primarily due to lower debt for the company's Brazilian
operations due to the devaluation of the Real.
Other (income) expense - net included a net foreign currency transaction gain of
$39 million for the company's Brazilian operations. Excluding this item, other
(income) expense - net was approximately even with last year and down from last
quarter. The decline from last quarter was mainly due to lower interest income
and lower gains from the dispositions of fixed assets and timberlands.
The income tax benefit for the first quarter of 1999 reflected the impact of the
$39 million net foreign currency transaction gain, which is not taxable, and the
mix of earnings from the company's operations in North America and Brazil. The
tax rate applicable to North American operations is higher than the Brazilian
tax rate.
Pulp, Paper and Distribution
Each of the company's North American and Brazilian pulp and paper segments and
its distribution segment is discussed separately below. For these segments in
the aggregate, first quarter operating income of $28 million compared with $89
million a year ago and $43 million in the fourth quarter of last year. The
principal reasons for the decline from the prior periods are discussed above
under "Significant Income Statement Changes." Total paper, packaging and pulp
shipments of approximately 1.3 million tons in the first quarter declined from
1.5 million tons in the year-ago quarter and were approximately even with last
quarter. The decline from the year-ago quarter was principally due to the sale
of the company's newsprint business in June 1998.
North American Pulp and Paper Segment
The North American pulp and paper segment consists of the company's domestic
pulp and paper operations, excluding its distribution business, as well as the
softwood market pulp operations at the company's Canadian subsidiary, Weldwood
of Canada Limited ("Weldwood").
The operating loss for the company's North American pulp and paper segment of
$11 million represented a significant decline from the operating income of $62
million a year ago and $6 million last quarter. Total North American paper,
packaging and pulp shipments of approximately 1.2 million tons decreased from
1.4 million tons last year and were approximately even with last quarter.
11
A summary of shipments and prices of the company's major U.S. paper products is
as follows:
Shipments
(Thousands of Short Tons) Average Price Per Ton
-------------------------------------- ----------------------------------------
1st Qtr 4th Qtr 1st Qtr 1st Qtr 4th Qtr 1st Qtr
Product 1999 1998 1998 1999 1998 1998
- ------- ---- ---- ---- ---- ---- ----
Uncoated Free Sheet 371 397 350 $587 $584 $725
Coated Free Sheet 147 139 138 $855 $856 $965
Coated Groundwood 170 186 186 $835 $876 $931
Uncoated Groundwood 50 65 100 $698 $735 $643
Kraft Paper & Linerboard 133 119 128 $344 $339 $398
The mills in the domestic coated papers business are in Bucksport, Maine;
Quinnesec, Michigan; and Sartell, Minnesota. Pulp sales at Quinnesec and
uncoated groundwood papers produced at Sartell also are included in the results
of this business. Operating income for the domestic coated papers business
declined significantly from last year and last quarter. The declines were
primarily due to lower prices for coated groundwood papers, pulp and, compared
to the year-ago quarter, coated free sheet papers. In order to bring inventory
levels for coated papers in balance with business conditions, the company took
market-related downtime at all of its groundwood papers mills during the first
quarter, eliminating approximately 15,000 tons of production. A maintenance
outage is scheduled at the Quinnesec pulp mill in the second quarter. Prices for
coated groundwood and free sheet papers continued to decline early in the second
quarter.
The mills in the domestic uncoated papers business are in Pensacola, Florida and
Courtland, Alabama. Pulp sales at Pensacola and Courtland and coated free sheet
papers sales at Courtland also are included in the results of this business. The
operating loss for the domestic uncoated papers business represented a
significant decline from the operating income of last year, and was
approximately even with last quarter. The decline from last year was mainly due
to lower prices for uncoated and coated free sheet papers and pulp.
Linerboard and kraft papers are produced at the Roanoke Rapids, North Carolina
mill. Operating income for the kraft papers business decreased from last year,
but improved from the operating loss of last quarter. The decline from last year
was principally due to lower prices for kraft papers and linerboard. The
improvement from last quarter was due to a scheduled capital improvement and
maintenance outage last quarter and higher shipments this quarter. A price
increase for certain linerboard grades was implemented on March 1.
The pulp and paper operations to be divested by the company as of March 31, 1999
included the mills at Canton, North Carolina, including the liquid packaging
business; Deferiet, New York; and Hamilton, Ohio. For these operations, the
operating loss was larger than the operating loss of last year, which included
the newsprint business
12
which was sold in June 1998, and was approximately even with last quarter. The
larger operating loss compared to the year-ago quarter was primarily due to
lower prices for uncoated free sheet and coated groundwood papers, market-
related downtime at Deferiet and the operating profit at the newsprint business
last year. Maintenance outages are scheduled at Deferiet in the second quarter.
As described below, the company has agreed to sell the Deferiet mill and on May
14, 1999, the company sold the Canton mill and the liquid packaging business.
The Deferiet mill has an annual capacity of 230,000 tons of groundwood papers.
The Canton mill and the liquid packaging business have an annual capacity of
245,000 tons of uncoated free sheet papers and 269,000 tons of bleached board.
Weldwood's market pulp operations consist of its mill in Hinton, Alberta and a
50% interest in a joint venture pulp mill in Quesnel, British Columbia. The
operating loss for these operations was approximately even with the year-ago
quarter and was larger than the operating loss last quarter. The larger loss
compared to last quarter was mainly due to higher manufacturing costs for
northern bleached softwood kraft ("NBSK") pulp, partially offset by higher
shipments. The Hinton pulp mill was shut down due to a two-week strike, which
ended on April 5, eliminating approximately 14,500 tons of NBSK pulp production
during the first quarter and approximately 10,000 tons in the second quarter.
The average price for NBSK pulp was (U.S.) $323 per ton in the first quarter of
1999, down from $360 per ton in the first quarter of 1998 and $325 per ton in
the fourth quarter of 1998. Shipments of 168,000 tons increased from 144,000
tons last year and 147,000 tons last quarter. Maintenance outages are scheduled
at both pulp mills in the second quarter.
Brazilian Pulp and Paper Segment
In January 1999, the government of Brazil ceased its efforts to control the rate
of devaluation of the Brazilian currency, the Real, and allowed the exchange
rate for the Real to float freely. As a result, the Real devalued 30% against
the U.S. dollar in the first quarter of 1999. This devaluation reduced the
overall cost of manufacturing, thereby improving the competitive position, for
exports by CPC. At any given time exports account for between 34% and 60% of
CPC's sales. However, the devaluation reduced the domestic selling prices on a
U.S. dollar basis. As a result, the effect of the devaluation on CPC's operating
income was not significant. In March and April, the Real strengthened somewhat
relative to the U.S. dollar.
The Brazilian pulp and paper segment consists primarily of the pulp and paper
operations of CPC. In addition, the segment includes CPC's wood-related
operations. Operating income of $32 million improved from $22 million last year
but declined from $34 million last quarter. The improvement from the first
quarter of 1998 was principally due to higher operating income of Inpacel, which
was acquired at the end of January 1998, and lower manufacturing costs primarily
due to the devaluation of the Real. The decline from the prior quarter was
mainly due to lower domestic prices. Compared to last quarter, exports increased
from 34% to 42% of sales. The overall average price for uncoated free sheet
papers was $542 per ton in the first quarter, compared to $697 per ton last year
and $715 per ton last quarter. The average price for coated groundwood papers at
Inpacel was $650 per ton, compared to $871 per ton last
13
year and $789 per ton last quarter. Uncoated free sheet papers shipments of
98,000 tons were even with last year and declined from 103,000 tons last
quarter. Coated groundwood papers shipments of 48,000 tons increased from 30,000
tons last year and 44,000 tons last quarter.
Distribution Segment
For the company's distribution segment, income from operations of $6 million
improved from $5 million last year and $3 million last quarter. The improvement
from last quarter was principally due to sales rebates received this quarter.
Wood Products Segment
A summary of shipments and prices of the company's major wood products is as
follows:
Shipments Price Per Unit
-------------------------------------- ----------------------------------------
1st Qtr 4th Qtr 1st Qtr 1st Qtr 4th Qtr 1st Qtr
Product 1999 1998 1998 1999 1998 1998
- ------- ---- ---- ---- ---- ---- ----
U.S.
Lumber - MMBF 119 112 108 $328 $308 $331
Softwood Plywood - MMSF 3/8" 229 246 222 $267 $242 $223
Canada
Lumber - MMBF 229 248 196 $281 $269 $293
Softwood Plywood - MMSF 3/8" 98 100 67 $238 $229 $216
For the company's wood products segment, which includes the wood-related
operations of Weldwood, income from operations of $42 million improved from $14
million in the first quarter of 1998 and $23 million in the fourth quarter of
1998. The improvement from the year-ago quarter was due to higher plywood prices
and increased shipments of lumber and plywood. The improvement from last quarter
was due to higher lumber and plywood prices and lower lumber and plywood
manufacturing costs in the United States.
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
(including intracompany transfers) for CPC and Weldwood for the first quarter of
1999 were (U.S.) $89 million and (U.S.) $160 million, accounting for 7% and 13%,
respectively, of consolidated net sales of the company. Excluding the foreign
currency transaction gain of $39 million, pre-tax income and net income of CPC
for the first quarter of 1999 were $25 million and $18 million, respectively.
Pre-tax income and net income of Weldwood for the first quarter of 1999 were $4
million and $2 million, respectively. The pre-tax income and net income of CPC
and Weldwood for the first quarter of 1999 accounted for all of the company's
pre-tax and net income.
14
Labor Contracts
At Weldwood, a new labor contract is in effect at the Hinton, Alberta pulp mill
and wood products plant. The contract expires in May 2003.
Financial Condition
- -------------------
General
The company's current ratio was 1.4 to 1 at March 31, 1999 and year-end 1998.
Total debt to total capitalization was 45% at March 31, 1999 and year-end 1998.
Significant Balance Sheet Changes
The 30% devaluation of the Brazilian currency relative to the U.S. dollar was
the main reason for the decreases in timber and timberlands - net, property,
plant and equipment-net, other assets and deferred charges, long-term debt and
shareholders' equity. The net effect of foreign currency fluctuations relative
to the U.S. dollar was a $228 million increase in the cumulative translation
adjustment from December 31, 1998 in the accumulated other comprehensive income
component of shareholders' equity. The increase in inventories was primarily due
to decreased shipments of uncoated free sheet and coated and uncoated groundwood
papers, reflecting weak markets, as well as a seasonal log inventory buildup in
Canada.
For a discussion of changes in long-term debt (including current installments),
short-term borrowings and cash and cash equivalents, see below.
Cash Flows Statement - General
1999
- ----
In the first three months of 1999, 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 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 $53 million in the first three months to a total of $248 million,
$163 million of which was held by the company's Brazilian and Canadian
subsidiaries. In the first three months, net debt payments were $6 million.
Long-term debt (including current installments) and short-term borrowings in the
aggregate decreased by $108 million, mainly due to the impact of devaluation on
the debt of the company's Brazilian subsidiary.
1998
- ----
In the first three months of 1998, 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
Inpacel) and 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 $119 million to a total of
$156 million.
15
Cash Flows Statement - Operating Activities
For the first three months, net cash provided by operating activities of $27
million decreased from $74 million a year ago. The decrease was primarily due to
lower net income, excluding the Brazilian foreign currency transaction gain, a
higher increase in receivables and decreases in other liabilities and deferred
income taxes, partially offset by an increase in accounts payable and accrued
liabilities.
Cash Flows Statement - Investing Activities
For the first three months, net cash used in investing activities of $66 million
decreased from $147 million a year ago. The decrease was mainly due to lower
capital expenditures this year and the acquisition of Inpacel last year.
Cash Flows Statement - Financing Activities
For the first three months, net cash used in financing activities of $14 million
decreased from $46 million last year. The decrease was principally due to lower
net payments of long-term debt.
At March 31, 1999 and December 31, 1998, the company had no U.S. commercial
paper, current maturities of long-term debt and other short-term obligations
classified as long-term debt. At March 31, 1999 and December 31, 1998, no notes
were outstanding under the company's U.S. bank lines of credit. Domestically, at
March 31, 1999, the company had unused bank lines of credit of $1.1 billion. At
March 31, 1999, Weldwood had unused bank lines of credit of (U.S.) $42 million.
The annual principal payment requirements under the terms of all long-term
agreements for the period from April 1 through December 31, 1999 are $225
million and for the years 2000 through 2003 are $282 million, $229 million, $29
million and $26 million, respectively.
Divestiture Program
In December 1998, the company agreed to sell approximately 300,000 acres of
timberlands in the northeast to the Conservation Fund for $76.2 million. The
transaction is expected to close in mid-1999. In May 1999, the company agreed to
sell its mill in Deferiet, New York to The Deferiet Paper Company. The
transaction is expected to close in the second quarter of 1999. On May 14 1999,
the company sold its mill in Canton, North Carolina and its liquid
packaging business to Blue Ridge Paper Products Inc. for $200 million,
consisting of $170 million in cash and a $30 million note. The agreement also
provides the opportunity for the company to receive an additional contingency
payment in the future. The company is continuing to actively pursue the sale of
its mill in Hamilton, Ohio. In addition, the company has offered for sale
approximately 54,000 acres of timberlands in North Carolina and Tennessee.
16
Year 2000 Computer Issue
- ------------------------
The company, as well as its customers and suppliers and the financial
institutions and governmental entities with which it deals (collectively, "Third
Parties"), utilize information systems that will be affected by the date change
to the year 2000. Many of these systems, if not modified or replaced, will be
unable to properly recognize and process date-sensitive information before, on
and after January 1, 2000.
State of Readiness
In early 1996, the company organized a Year 2000 project team to assess the
impact of the Year 2000 issue on its operations, develop plans to address the
issue and implement compliance. The project team developed a company-wide, Year
2000 remediation plan which consists of a five-step process with respect to the
company's own systems: (1) planning; (2) inventory (identification of systems
that require reprogramming or replacement); (3) analysis (assessment of risks,
identification of where failures may occur and development of solutions); (4)
programming (remediation and/or replacement of non-compliant systems); and (5)
testing. The project team also developed plans to seek information regarding and
to assess the Year 2000 compliance status and remediation efforts of major Third
Parties.
The company's information systems consist of business-information systems and
process-control systems. The business-information systems support financial and
administrative processes such as order entry, payroll, accounts payable and
accounts receivable. The process-control systems are used primarily in
manufacturing operations; they include information-technology systems as well as
embedded technology, such as chips embedded in various machine components.
With respect to the business-information systems, the planning, inventory,
analysis and programming stages are completed and the testing stage is
substantially completed. The company expects to finish testing by mid-1999.
With respect to the process-control systems, the planning and inventory stages
are completed and the analysis and programming stages are substantially
completed. The company expects to complete those stages and conduct and finish
testing by mid-1999. This schedule assumes timely assistance by the vendors of
certain process-control systems in the remediation of such systems. The vendors
of those systems that are essential to the company's operations have provided or
agreed to provide such assistance.
The Year 2000 issue also will impact the information systems of Third Parties.
The company, through meetings in some cases and written requests in others, is
in the process of seeking to ascertain and assess the progress of major Third
Parties in identifying and addressing problems with respect to the Year 2000
issue. Many of these Third Parties have indicated that they expect to
successfully address the issue in timely fashion. Some others, however, have not
yet provided information regarding their state of readiness or have provided
responses deemed unsatisfactory by the company. The company will continue to
seek and to assess information regarding Year 2000 compliance by major Third
Parties.
17
No significant information technology projects have been deferred as a result of
the company's Year 2000 program.
Estimated Cost of Remediation
The company currently estimates total expenditures of approximately $20 million,
of which approximately $13 million had been expended as of March 31, 1999, to
make the required Year 2000 modifications and replacements to its own systems.
Approximately two-thirds of the estimated total cost is associated with the
remediation and replacement of process-control systems. All modification and
maintenance costs, including costs to replace embedded technology that does not
significantly extend the life or improve the performance of the related asset,
are expensed as incurred. Costs to purchase new hardware and software and to
replace embedded technology that does significantly extend the life or improve
the performance of the related asset are capitalized and depreciated over the
assets' useful lives. All of these costs are being funded through internal cash
flow. The estimated total cost does not include any expenditures that may be
incurred in connection with the implementation of contingency plans, discussed
below.
Most Reasonably Likely Worst-Case Scenario
The company currently believes that it will be able to modify or replace its own
affected systems in timely fashion so as to minimize detrimental effects on its
operations, subject to timely assistance by the vendors of certain process-
control systems. The company has received written assurances regarding Year 2000
compliance from some, but not all, Third Parties with respect to their own
systems and is not in a position to reliably predict whether Third Parties will
experience remediation problems. If the company or major Third Parties fail to
successfully address the Year 2000 issue, there could be a material adverse
impact on the business and results of operations of the company. For example,
while the company self-generates approximately 55% of its electrical power
requirements, it purchases the balance from outside sources. If the electrical
power grid is disrupted as the result of Year 2000 systems failures, the company
expects to curtail production until the grid is restored.
The company has not determined the most reasonably likely worst-case scenario
that would result from any failure by the company or Third Parties to resolve
the Year 2000 issue. The company is considering this matter in connection with
its development of contingency plans, discussed below. However, such a scenario
could include a temporary curtailment or cessation of manufacturing operations
at one or more of the company's facilities, with a resulting loss of production;
safety and environmental exposures; a temporary inability on the part of the
company to process orders and deliver finished products to customers on a timely
basis; and, in the event of Year 2000 disruptions in the operations of the
company's customers, increased inventory and receivable levels. If these various
events were to occur, they would result in lower sales, earnings and cash flows.
However, failure to meet critical milestones identified in company plans would
provide advance notice and steps would be taken to prevent injuries to employees
and others, to prevent environmental contamination and to minimize the loss of
production.
18
Contingency Plans
The company is in the process of developing contingency plans to address and
mitigate the potential risks associated with the most reasonably likely worst-
case scenario, and expects to have such plans in place by mid-1999. Such plans
may include, among other things, seeking alternative sources of supply,
stockpiling raw materials and increasing inventory levels.
* * *
The company's Year 2000 program is an ongoing process. Estimates of remediation
costs and completion dates as well as projections of the possible effects of any
non-compliance are subject to change.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
- --------------------------------------------------------------------
The company's financial market risk arises from fluctuations in interest rates
and foreign currencies. Most of the company's debt obligations are at fixed
interest rates. Consequently, a 10% change in market interest rates would not
have a material effect on the company's pre-tax earnings or cash flows. The
company has no material sensitivity to changes in foreign currency exchange
rates on its derivative financial instrument position. The company does not hold
financial instruments for trading purposes.
Forward-Looking Statements
- --------------------------
Certain statements in this report that are neither reported financial results
nor other historical information are forward-looking statements. Such forward-
looking statements are not guarantees of future performance and are subject to
the risks and uncertainties that could cause actual results and company plans
and objectives to differ materially from those expressed in the forward-looking
statements. Such risks and uncertainties are discussed in the company's Annual
Report on Form 10-K.
Without limiting the generality of the foregoing, the disclosure in this report
concerning the Year 2000 computer issue includes estimates of remediation costs
and completion dates, projections of the possible effects of any non-compliance,
possible contingency plans and other statements that are based on the company's
current estimate of future events. All of these statements constitute forward-
looking statements and are subject to risks and uncertainties including, but not
limited to, the ability of the company to identify and remediate on a timely
basis Year 2000 issues that affect its own systems; the availability of
resources including, in particular, timely assistance by the vendors of certain
process-control systems; and the ability of the company's suppliers and
customers and other third parties with which it deals to identify and remediate
on a timely basis Year 2000 issues that affect their systems.
19
PART II. OTHER INFORMATION
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
Item 2. Changes in Securities and Use of Proceeds.
- ---------------------------------------------------
(a) The company's By-Laws were amended on February 18, 1999 to change
the date by which the holders of Common Stock must submit
director nominations and business proposals for any annual
meeting of shareholders. In general, such submissions must be
received by the company not less than 120 days before the date
which is the anniversary of the date the company's proxy
statement was released to shareholders in connection with the
previous year's annual meeting. Reference is made to Section 9 of
Article I of the By-Laws, annexed hereto as Exhibit 3.1, the full
provisions of which govern.
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.
20
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: May 14, 1999 /s/ John M. Nimons
---------------------- -------------------------------------
(Signature)
John M. Nimons
Vice President and Controller
Date: May 14, 1999 /s/ Kenwood C. Nichols
---------------------- -------------------------------------
(Signature)
Kenwood C. Nichols
Vice Chairman and Executive Officer
21
EXHIBIT INDEX
Each exhibit is listed according to the number assigned to it in the Exhibit
Table of Item 601 of Regulation S-K.
3.1 - By-Laws of the company, as amended to and including February 18,
1999.
11 - Calculation of Basic Earnings Per Common Share and Diluted
Earnings per Common Share (unaudited).
27 - Financial Data Schedule (unaudited).
22