SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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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 (I.R.S. Employer Identification No.)
incorporation or organization
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
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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, 1999
- ---------------------------------------- ------------------------------
Common stock, $.50 par value 95,995,239
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements.
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CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (unaudited)
(in millions, except per share)
Six Months Ended Three Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- -------------- ------------- -------------
Net Sales $2,575.9 $ 2,950.8 $1,301.2 $1,473.8
Costs and Expenses
Cost of products sold 2,245.2 2,579.6 1,114.7 1,287.1
Selling, general and administrative expenses 174.1 190.0 90.5 96.1
Interest and debt expense 124.3 134.8 61.5 67.3
Other (income) expense - net (Note 2) (60.9) (21.7) (17.9) (19.7)
------------- -------------- ------------- -------------
Total costs and expenses 2,482.7 2,882.7 1,248.8 1,430.8
Income Before Income Taxes 93.2 68.1 52.4 43.0
Income Taxes 12.3 17.0 13.1 10.9
------------- -------------- ------------- -------------
Net Income $ 80.9 $ 51.1 $ 39.3 $ 32.1
============= ============== ============= =============
Average Number of Common Shares Outstanding 95.7 96.2 95.8 96.2
============= ============== ============= =============
Earnings Per Common Share (Exhibit 11):
Basic $ .85 $ .53 $ .41 $ .33
============= ============== ============= =============
Diluted $ .84 $ .53 $ .41 $ .33
============= ============== ============= =============
Cash Dividends Declared $ .10 $ .10 $ .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)
June 30, December 31,
1999 1998
ASSETS: (unaudited)
-------------- -------------
Current Assets:
Cash and cash equivalents $ 413.0 $ 300.4
Short-term investments 32.0 -
Receivables - net 580.1 520.5
Inventories 419.0 503.5
Prepaid expenses 41.6 27.5
Deferred income taxes 83.9 86.6
-------------- -------------
Total Current Assets 1,569.6 1,438.5
-------------- -------------
Timber and timberlands, at cost - less cost of timber harvested 2,303.1 2,430.4
-------------- -------------
Property, plant and equipment, at cost 7,376.5 8,585.3
Less - Accumulated depreciation 3,476.1 4,356.5
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3,900.4 4,228.8
-------------- -------------
Other assets and deferred charges 666.8 742.2
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Total Assets $ 8,439.9 $8,839.9
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current installments of long-term debt $ 428.8 $ 228.0
Short-term borrowings 72.3 89.8
Accounts payable and accrued liabilities 646.7 720.3
Income taxes 13.4 10.4
-------------- -------------
Total Current Liabilities 1,161.2 1,048.5
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Long-term debt 2,592.5 2,947.5
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Other liabilities 805.5 786.8
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Deferred income taxes 937.4 961.2
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Shareholders' Equity:
Capital Shares:
Common (111,408,219 and 111,025,755, shares issued at
June 30, 1999 and December 31, 1998, respectively) 55.7 55.5
Capital surplus 1,721.2 1,705.5
Retained Earnings 2,299.7 2,228.4
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4,076.6 3,989.4
Treasury shares, at cost (689.3) (689.7)
Accumulated other comprehensive income (444.0) (203.8)
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Total Shareholders' Equity 2,943.3 3,095.9
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Total Liabilities and Shareholders' Equity $ 8,439.9 $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)
Six Months Ended
June 30,
-----------------------------
1999 1998
-------------- -------------
Cash flows from operating activities:
Net income $ 80.9 $ 51.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 177.3 207.4
Cost of timber harvested 39.9 46.0
Net gain on sale of assets (4.1) (16.5)
Foreign currency transaction (gain) loss (41.6) (4.1)
Changes in assets and liabilities, net of acquisitions
and divestitures:
Receivables (96.4) (31.0)
Inventories 8.2 (0.1)
Prepaid expenses (18.2) 3.2
Accounts payable and accrued liabilities (5.4) (54.8)
Income taxes payable 12.2 10.4
Other liabilities 18.1 3.9
Deferred income taxes (12.2) (6.4)
All other - net 10.3 12.9
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Net cash provided by operating activities 169.0 222.0
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Cash flows from investing activities:
Expenditures for property, plant and equipment (94.8) (144.6)
Timber and timberlands expenditures (47.7) (63.9)
Acquisitions of timberlands and mills (Note 3) - (58.1)
Purchase of investments (32.0) (2.7)
Proceeds from sales of divested operations 192.2 459.1
Proceeds from sales of property, plant and equipment
and timber and timberlands 8.9 28.1
All other - net (8.6) (2.4)
-------------- -------------
Net cash provided by investing activities 18.0 215.5
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Cash flows from financing activities:
Proceeds from issuance of long-term debt 25.1 441.0
Payments of current installments of long-term
debt and long-term debt (95.0) (902.9)
Cash dividends paid (9.6) (9.6)
All other - net 5.1 (2.1)
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Net cash used in financing activities (74.4) (473.6)
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Increase (decrease) in cash and cash equivalents 112.6 (36.1)
Cash and Cash Equivalents:
Beginning of period 300.4 275.0
-------------- -------------
End of period $ 413.0 $ 238.9
============== =============
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest (net of capitalized amounts) $ 120.6 $ 145.5
Income taxes (net of refunds) 12.3 12.1
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, 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 six months ended June 30, 1999 includes a
net foreign currency transaction gain of $38.6 million recorded in the first
quarter of 1999 for the company's Brazilian operations. Other income (expense) -
net for the three months and six months ended June 30, 1998 includes a gain of
$11.6 million from the sale of certain timberlands.
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.
Information about the company's operations in different businesses is as
follows:
Six Months Ended Three Months Ended
June 30, June 30,
----------------------------- ----------------------------
(in millions of dollars) 1999 1998 1999 1998
- -------------------------------------------- ------------- -------------- ------------- -------------
Net Sales to Unaffiliated Customers
Pulp and Paper
North America $1,386.8 $1,837.8 $ 675.5 $ 908.0
Brazil 188.0 226.4 102.3 119.4
Distribution 396.6 423.5 197.0 206.0
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Total Pulp and Paper 1,971.4 2,487.7 974.8 1,233.4
------------- -------------- ------------- -------------
Wood Products 604.5 463.1 326.4 240.4
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Total $2,575.9 $2,950.8 $1,301.2 $1,473.8
============= ============== ============= =============
5
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
----------------------------- ----------------------------
(in millions of dollars) 1999 1998 1999 1998
- -------------------------------------------- ------------- -------------- ------------- -------------
Intersegment Sales
Pulp and Paper
North America $ 67.1 $ 71.8 $ 33.3 $ 34.6
Brazil 9.1 3.5 6.0 1.5
Distribution 8.8 12.2 4.3 6.0
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Total Pulp and Paper 85.0 87.5 43.6 42.1
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Wood Products 204.2 262.4 92.6 124.0
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Total $ 289.2 $ 349.9 $ 136.2 $ 166.1
============= ============== ============= =============
Income From Operations
Pulp and Paper
North America $ (9.8) $ 121.1 $ 0.9 $ 59.1
Brazil 67.5 48.9 35.3 26.8
Distribution 9.7 6.8 3.6 1.6
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Total Pulp and Paper 67.4 176.8 39.8 87.5
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Wood Products 111.1 27.6 68.7 13.3
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General Corporate Expense (22.0) (23.2) (12.5) (10.1)
------------- -------------- ------------- -------------
Total $ 156.5 $ 181.2 $ 96.0 $ 90.7
============= ============== ============= =============
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
several non-strategic product segments and approximately 300,000 acres of
timberlands and will divest the Hamilton, Ohio mill. 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.
6
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
At June 30, 1999, the company had achieved its targeted reduction in its
world-wide workforce in the businesses which are not part of the planned
divestitures (excluding positions added as the result of certain acquisitions in
Canada, Brazil and Maine).
In 1998, the company sold its newsprint business, 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. As part
of the transaction, on June 30, 1999, the company completed the sale of
approximately 143,000 acres in New York for approximately $46 million. In July
and August 1999, the company completed the sale of the remaining approximately
151,000 acres of timberlands in New Hampshire and Vermont for a total of
approximately $30.2 million. On May 14, 1999, the company sold its mill in
Canton, North Carolina and its liquid packaging business for $200 million,
consisting of $170 million in cash and a $30 million note. The contract also
provides the opportunity for the company to receive an additional contingency
payment in the future. On June 11, 1999, the company sold its mill in Deferiet,
New York for $34.5 million, a substantial portion of which was paid in cash. 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,
included in the accompanying consolidation statement of income, are as follows.
Six Months Ended Three Months Ended
June 30, June 30,
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(in millions of dollars) 1999 1998 1999 1998
- -------------------------------------------- ------------- -------------- ------------- -------------
Net sales $ 308.5 $ 618.8 $ 124.0 $ 291.1
Costs and expenses 322.2 615.1 132.7 287.8
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Income (loss) from operations $ (13.7) $ 3.7 $ (8.7) $ 3.3
============= ============== ============= =============
The consolidated balance sheet includes the following amounts related to the
product segments to be divested, excluding the reserve for asset impairment:
June 30, 1999
- -------------------------------------------- --------------
(in millions of dollars)
Current assets $ 76.4
Long-term assets (primarily property, plant
and equipment) 128.8
Current liabilities (11.1)
--------------
Net assets $ 194.1
==============
7
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Activity in the first six months of 1999 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 June 30,
(in millions of dollars) 1998 Payments 1999
- -------------------------------------------- ------------- -------------- -------------
Reserve for asset impairment $ 569.0 $ (436.3) $ 132.7
Liabilities 92.5 (9.3) 83.2
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$ 661.5 $ (445.6) $ 215.9
============= ============== =============
Note 6.
Comprehensive income reflects changes in equity that result from transactions
and economic events from nonowner sources. Comprehensive income for the periods
presented below includes 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)
Six Months Ended Three Months Ended
(in millions of dollars) June 30, June 30,
- -------------------------------------------- ----------------------------- ----------------------------
1999 1998 1999 1998
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Net income $ 80.9 $ 51.1 $ 39.3 $ 32.1
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 (240.2) (41.5) (12.7) (27.8)
------------- -------------- ------------- -------------
Net foreign currency translation
adjustment (240.2) (93.0) (12.7) (27.8)
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Comprehensive income (loss) $(159.3) $ (41.9) $ 26.6 $ 4.3
============= ============== ============= =============
8
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 7.
The company occasionally enters into forward exchange contracts and interest
rate swap agreements to hedge certain assets that are denominated in foreign
currencies. In addition, the company occasionally enters into interest rate swap
agreements which convert variable rate debt to fixed interest rate. At June 30,
1999, the company had no significant forward exchange contracts and interest
rate swap agreements outstanding. The company does not hold financial
instruments for trading purposes.
Note 8.
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 2001, 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.
9
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
- ---------------------
Overall Quarterly Results
The company reported net income in the second quarter of 1999 of $39 million or
41 cents per diluted share, compared to last year's second quarter net income of
$32 million or 33 cents per share, which included income of seven cents per
share due to the sale of certain timberlands. In the first quarter of 1999, net
income was $42 million or 43 cents per diluted share, which included earnings of
40 cents per share from the impact of the devaluation of the Brazilian currency
on U.S.-denominated investments held by the company's Brazilian operation.
Excluding special items, net income was $25 million or 26 cents per share in the
second quarter of last year and $3 million or three cents per share in the first
quarter of 1999. As discussed below, the improvement from the second quarter of
last year was primarily due to significantly higher operating income in the wood
products segment, which more than offset the decline in operating income in the
North American pulp and paper segment. The improvement from the year-ago quarter
also reflected lower overall manufacturing costs, lower selling, general and
administrative expenses, lower interest expense and--excluding a special item
last year--higher other (income) expense - net. The improvement from last
quarter was mainly due to higher operating income in the wood products and pulp
and paper segments and--excluding a special item last quarter--higher other
(income) expense - net.
Significant Income Statement Changes
Net sales of $1.3 billion decreased from $1.47 billion last year and increased
from $1.27 billion last quarter. Gross profit of $187 million was even with last
year and improved from $144 million last quarter. Pre-tax income of $52 million
improved from $43 million a year ago and $41 million last quarter, including
special items in the two prior quarters. The decline in net sales from the
year-ago quarter was principally due to (i) the June 1998 sale of the company's
newsprint business, (ii) the May 1999 sale of the company's mill in Canton,
North Carolina, the extruding and converting facility in Waynesville, North
Carolina, and the liquid packaging business (the "Canton System"), (iii) the
June 1999 sale of the company's groundwood specialty mill in Deferiet, New York
and (iv) significantly lower prices for pulp and most of the company's paper
grades, all of which more than offset higher lumber and plywood prices and
shipments. The improvement in pre-tax income from last year was primarily due to
significantly higher lumber and plywood prices and shipments, higher West Coast
timber sales, and lower overall manufacturing costs, interest expense and
selling, general and administrative expenses, which was partially offset by
sharply lower prices for pulp and most of the company's paper grades. The
improvements in net sales, gross profit and pre-tax income from last quarter
were mainly due to higher lumber and plywood prices, increased shipments of
lumber and plywood in Canada, higher West Coast
10
timber sales and higher prices for uncoated free sheet and kraft papers, which
more than offset lower prices for coated and uncoated groundwood papers, and,
with respect to pre-tax income, less favorable other (income) expense - net due
to a special item last quarter.
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 sales of the newsprint business, the Canton System and the
Deferiet mill, as well as lower overall manufacturing costs. The decline from
last quarter was primarily due to lower paper shipments resulting from the sales
of the Canton System and the Deferiet mill.
Selling, general and administrative expenses declined from last year and
increased from last quarter. The decline from last year was mainly due to
corporate and sales staff reductions resulting from the company's profit
improvement plan. The increase from last quarter was principally due to higher
legal and professional costs and 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, primarily
due to lower outstanding domestic and foreign debt.
Other (income) expense - net included a $12 million gain from the sale of
certain timberlands last year and a net foreign currency transaction gain of $39
million for the company's Brazilian subsidiary, Champion Papel e Celulose Ltda.
("CPC"), last quarter. Excluding these items, other (income) expense - net
improved from last year and last quarter, mainly due to higher interest income
(primarily resulting from the investment of asset divestiture proceeds) and
higher gains from the dispositions of fixed assets and timberlands.
The company's effective tax rate reflects 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. The effective tax
rate for the second quarter of 1999 was approximately even with last year, but
was higher than the rate associated with the tax benefit for last quarter. The
income tax benefit last quarter reflected the impact of the $39 million net
foreign currency transaction gain, which is not taxable.
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, second quarter operating income of $40 million compared with $88
million in the year-ago quarter and $28 million last quarter. The decline from
the year-ago quarter was principally due to significantly lower prices for pulp
and most grades of paper, which was partially offset by lower overall
manufacturing costs and by improved results in Brazil. The improvement from last
quarter was primarily due to higher prices for uncoated free sheet and kraft
papers and increased shipments of coated papers.
11
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").
Operating income for the company's North American pulp and paper segment of $1
million represented a significant decline from the operating income of $59
million a year ago, but an improvement from the operating loss of $11 million
last quarter. Total North American paper, packaging and pulp shipments of
approximately 1.1 million tons decreased from 1.4 million tons last year and 1.2
million tons last quarter, primarily due to the divestiture of various
facilities discussed above under "Significant Income Statement Changes".
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
------------------------- -----------------------
2nd Qtr 1st Qtr 2nd Qtr 2nd Qtr 1st Qtr 2nd Qtr
Product 1999 1999 1998 1999 1999 1998
- ------- ---- ---- ---- ---- ---- ----
Uncoated Free Sheet 339 371 377 $610 $587 $689
Coated Free Sheet 154 147 143 $848 $855 $950
Coated Groundwood 193 170 189 $819 $835 $943
Uncoated Groundwood 52 50 90 $658 $698 $642
Kraft Paper & Linerboard 130 133 131 $374 $344 $388
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 substantially from last year and moderately from last quarter. The
declines were mainly due to lower prices for coated and uncoated groundwood
papers and, compared to the year-ago quarter, coated free sheet papers and pulp,
as well as a scheduled maintenance outage at the Quinnesec pulp mill.
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 decline
from the operating profit of last year, but improved substantially from the
larger loss last quarter. The decline from last year was principally due to
lower prices for coated and uncoated free sheet papers and pulp, partially
offset by lower manufacturing costs. The improvement from last quarter was due
to higher prices for uncoated free sheet papers and pulp. Prices for uncoated
free sheet papers continued to improve early in the third quarter.
12
Linerboard and kraft papers are produced at the Roanoke Rapids, North Carolina
mill. Operating income for the kraft papers business decreased slightly from
last year, but improved from last quarter. The decline from the year-ago quarter
was mainly due to lower prices for kraft papers and linerboard. The improvement
from last quarter was principally due to higher prices for kraft papers and
linerboard. A maintenance outage is scheduled at Roanoke Rapids in the third
quarter.
The divested operations consist of the Canton System and the Deferiet mill,
which were sold in May 1999 and June 1999, respectively, and the Hamilton, Ohio
mill, which remains to be sold. The second quarter operating loss for the
divested operations was larger than the operating loss of last year, which also
included the results of the company's newsprint business, and the operating loss
of last quarter. The decline from last year was primarily due to lower prices
for uncoated free sheet and coated groundwood papers and the operating profit at
the newsprint business last year. The decline from last quarter was mainly due
to a maintenance outage at the Canton mill and lower prices for uncoated
groundwood papers.
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 represented a decline from the operating
profit last year and was larger than the operating loss last quarter. The
decline from last year was principally due to higher manufacturing costs for
northern bleached softwood kraft ("NBSK") pulp as a result of scheduled
maintenance outages at both pulp mills and a two-week strike at the Hinton mill
which ended on April 5, as well as lower prices and shipments for NBSK pulp. The
decline from last quarter was primarily due to higher manufacturing costs for
NBSK pulp as a result of the scheduled maintenance outages and lower shipments,
which more than offset higher prices for NBSK pulp. The average price for NBSK
pulp was (U.S.) $342 per ton in the second quarter of 1999, compared to $388 per
ton in the second quarter of 1998 and $323 per ton in the first quarter.
Shipments of 117,000 tons decreased from 143,000 tons last year and 168,000 tons
last quarter. Prices for NBSK pulp improved somewhat early in the third 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. During the second quarter, the
exchange rate began to stabilize, devaluing only an additional 3% against the
U.S. dollar. 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 30% and 60% of CPC's sales. However, the devaluation
reduced the domestic selling prices on a U.S. dollar basis. Overall, the effect
of the devaluation on CPC's operating income for the first two quarters of 1999
was slightly positive.
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 $35 million improved from $27 million last year
and $32 million last quarter. The improvement from last year was mainly due to
higher operating income for Inpacel, a coated groundwood papers mill acquired in
13
January 1998. The improvement from last quarter was primarily due to higher
domestic prices for uncoated free sheet papers and higher prices for coated
groundwood papers. The overall average price for uncoated free sheet papers was
$585 per ton in the second quarter, compared to $700 per ton in the year-ago
quarter and $550 per ton last quarter. The average price for coated groundwood
papers at Inpacel was $716 per ton, compared to $899 per ton last year and $634
per ton last quarter. Uncoated free sheet papers shipments of 102,000 tons were
approximately even with last year and increased from 98,000 tons last quarter.
Coated groundwood papers shipments of 51,000 tons increased from 43,000 tons
last year and 48,000 tons last quarter. A maintenance outage is scheduled at
Inpacel in the third quarter.
Distribution Segment
For the company's distribution segment, income from operations of $4 million
improved from $2 million last year but declined from $6 million last quarter.
The improvement from last year was mainly due to improved margins. The decline
from last quarter was principally due to lower supplier 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
---------------------------- ------------------------------
2nd Qtr 1st Qtr 2nd Qtr 2nd Qtr 1st Qtr 2nd Qtr
Product 1999 1999 1998 1999 1999 1998
- ------- ---- ---- ---- ---- ---- ----
U.S.
Lumber - MMBF 120 119 116 $338 $328 $325
Softwood Plywood - MMSF 3/8" 229 229 223 $286 $267 $225
Canada
Lumber - MMBF 283 229 214 $323 $281 $273
Softwood Plywood - MMSF 3/8" 115 98 90 $275 $238 $198
For the company's wood products segment, which includes the wood-related
operations of Weldwood, income from operations of $69 million improved from $13
million last year and $42 million in the first quarter of 1999. The improvement
from last year and last quarter was primarily due to higher lumber and plywood
prices, increased shipments of lumber and plywood in Canada, higher West Coast
timber sales and lower purchased wood 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 six months
of 1999 were (U.S.) $197 million and (U.S.) $340 million, accounting
14
for 8% and 13%, respectively, of consolidated net sales of the company.
Excluding the special foreign currency transaction gain of $39 million in the
first quarter, pre-tax income and net income of CPC for the first six months of
1999 were $58 million and $44 million, respectively. Pre-tax income and net
income of Weldwood for the first six months of 1999 were $28 million and $17
million, respectively. The pre-tax income and net income of CPC and Weldwood for
the first six months of 1999 accounted for all of the company's pre-tax and net
income.
Labor Contracts
A new six-year labor contract, effective September 1, 1999, was ratified at the
Roanoke Rapids, North Carolina paper mill.
Financial Condition
- -------------------
General
The company's current ratio was 1.4 to 1 at June 30, 1999, March 31, 1999 and
year-end 1998. Total debt to total capitalization declined to 44% at June 30,
1999 from 45% at March 31, 1999 and year-end 1998 as a result of lower
outstanding domestic and foreign debt.
Significant Balance Sheet Changes
The May 1999 sale of the Canton System, the June 1999 sale of the Deferiet mill
and the 33% devaluation of the Brazilian currency relative to the U.S. dollar
were the main reasons for the decreases from December 31, 1998 in inventories,
property, plant and equipment - net, other assets and deferred charges and
accounts payable and accrued liabilities. The 33% devaluation of the Brazilian
currency was the principal reason for the decline from December 31, 1998 in
timber and timberlands - net. The increase in receivables - net from December
31, 1998 was mainly due to higher prices for lumber and plywood and the sale of
timberlands. The net effect of foreign currency fluctuations relative to the
U.S. dollar was a $240 million increase in the cumulative translation adjustment
since December 31, 1998 in the accumulated other comprehensive income component
of shareholders' equity.
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 six months of 1999, the company's net cash provided by operating
activities and asset sales, principally the May 1999 sale of the Canton System
and the June 1999 sale of the Deferiet mill, exceeded the requirements of its
investing activities (principally capital expenditures). The excess was used to
pay dividends, to pay a portion of the company's long-term debt (including
current installments)
15
and to increase cash and cash equivalents. Cash and cash equivalents increased
by $113 million in the first six months to a total of $413 million, $175 million
of which was held by the company's Brazilian and Canadian subsidiaries. In the
first six months, net debt payments were $70 million. Long-term debt (including
current installments) and short-term borrowings in the aggregate decreased by
$172 million, mainly due to the impact of the devaluation on the debt of the
company's Brazilian subsidiary.
1998
- ----
In the first six months of 1998, the company's net cash provided by operating
activities and asset sales, primarily the June 1998 sale of the company's
newsprint operations, exceeded the requirements of its investing activities
(principally capital expenditures and the acquisition of Inpacel). The excess,
together with cash and cash equivalents, was mainly used to pay a portion of the
company's long-term debt (including current installments). Cash and cash
equivalents decreased by $36 million to a total of $239 million.
Cash Flows Statement - Operating Activities
For the first six months, net cash provided by operating activities of $169
million decreased from $222 million a year ago. The decrease was principally due
to lower net income, excluding the Brazilian foreign currency transaction gain,
lower non-cash expenses for depreciation and cost of timber harvested, a higher
increase in receivables and an increase in prepaid expenses, partially offset by
lower net gains on asset sales, a decrease in inventories, a smaller decrease in
accounts payable and accrued liabilities and a larger increase in other
liabilities.
Cash Flows Statement - Investing Activities
For the first six months, net cash provided by investing activities of $18
million decreased from $216 million a year ago. The decline was primarily due to
lower proceeds from the sales of divested operations this year. This was
partially offset by lower capital expenditures this year, as well as the
acquisition of Inpacel last year.
Cash Flows Statement - Financing Activities
For the first six months, net cash used in financing activities of $74 million
decreased significantly from $474 million a year ago, mainly due to lower net
payments of long-term debt.
At June 30, 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 June 30, 1999 and December 31, 1998, no notes
were outstanding under the company's U.S. bank lines of credit. Domestically, at
June 30, 1999, the company had unused bank lines of credit of $1.1 billion. At
June 30, 1999, Weldwood had unused bank lines of credit of (U.S.) $90 million.
16
The annual principal payment requirements under the terms of all long-term
agreements for the period from July 1 through December 31, 1999 are $214 million
and for the years 2000 through 2003 are $248 million, $229 million, $28 million
and $26 million, respectively.
In June 1999, the company announced that it will construct a sawmill near
Cantonment, Florida. The project is expected to be completed in the third
quarter of 2000 at a cost of $61 million.
The company presently anticipates that capital spending will be approximately
$425 million in 1999, all of which is expected to be financed through internally
generated funds and the use of cash and cash equivalents.
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. As part
of this transaction, on June 30, 1999, the company completed the sale of
approximately 143,000 acres in New York for approximately $46 million. In July
and August 1999, the company completed the sale of the remaining approximately
151,000 acres of timberlands in New Hampshire and Vermont for a total of
approximately $30.2 million. On May 14, 1999, the company sold its mill in
Canton, North Carolina, its extruding and converting facility in Waynesville,
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 contract also provides the opportunity for the company to receive an
additional contingency payment in the future. On June 11, 1999, the company sold
its groundwood specialty mill in Deferiet, New York to The Deferiet Paper
Company for $34.5 million, a substantial portion of which was paid in cash. 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.
The Environment
- ---------------
As part of a national enforcement initiative by the United States Environmental
Protection Agency, several forest products companies have received requests for
information under Section 114 of the Clean Air Act (the "Act") and/or notices of
violation ("NOV") relating to compliance with permitting requirements under the
Act. The company has not received a Section 114 request or a NOV concerning any
of its facilities.
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.
17
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.
The company has completed all stages of the remediation plan, including testing,
for its business- information systems. The company has virtually completed all
stages of the remediation plan, including testing, for its process-control
systems and expects to finish testing in October.
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, has
ascertained and assessed the progress of major Third Parties in identifying and
addressing problems with respect to the Year 2000 issue. These Third Parties
have indicated that they expect to successfully address the issue in timely
fashion. However, certain of these parties have not yet provided details, deemed
satisfactory by the company, regarding their state of readiness. The company
will continue to monitor information regarding Year 2000 compliance by major
Third Parties.
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,
substantially all of which had been expended as of June 30, 1999, to make the
required Year 2000 modifications and replacements to its own systems.
Approximately two-thirds of the estimated total cost was 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,
were 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 were capitalized and will be depreciated
over the assets'
18
useful lives. All of these costs were 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; such
expenditures are not expected to be significant.
Most Reasonably Likely Worst-Case Scenarios
The company currently believes that it has modified or replaced its own affected
systems so as to minimize detrimental effects on its operations. The company has
received written assurances regarding Year 2000 compliance from almost all Third
Parties with respect to their own systems, but 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 determined the most reasonably likely worst-case scenarios 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. Such scenarios 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 which,
depending on the extent of the disruptions, could be material. 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.
Contingency Plans
The company has substantially completed the development of contingency plans to
address and mitigate the potential risks associated with the most reasonably
likely worst-case scenarios, and expects to have such plans in place by the end
of the third quarter of 1999. Such plans include, among other things, seeking
alternative sources of raw materials, parts, other supplies and services.
* * *
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.
19
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 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 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.
20
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 20,
1999.
(b) N/A
(c) (i) Five nominees were elected to the Board of Directors at the 1999
Annual Meeting.
Lawrence A. Bossidy - 83,057,316 votes were cast in favor of his
election and 390,536 votes were withheld.
Robert A. Charpie - 83,032,791 votes were cast in favor of his
election and 415,061 votes were withheld.
Allan E. Gotlieb - 83,024,140 votes were cast in favor of his election
and 423,712 votes were withheld.
Henrique C. Meirelles - 83,062,420 votes were cast in favor of his
election and 385,432 votes were withheld.
Richard E. Olson - 83,049,073 votes were cast in favor of his election
and 398,779 votes were withheld.
(ii) The shareholders approved the appointment of Arthur Andersen LLP as
the company's auditors for 1999. There were 83,136,835 votes cast in
favor of the proposal, 81,540 votes cast against the proposal and
229,477 abstentions.
(iii) The shareholders approved the adoption of the company's 1999 Stock
Option Plan. There were 61,709,236 votes cast in favor of the
proposal, 15,817,345 votes cast against the proposal, 430,905
abstentions and 5,490,366 broker non-votes.
(iv) The shareholders rejected a shareholder proposal to link executive
compensation to environmental criteria. There were 3,698,407 votes
cast in favor of the proposal, 71,655,124 votes cast against the
proposal, 2,603,955 abstentions and 5,490,366 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.
21
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, 1999 /s/ John M. Nimons
------------------------- ----------------------------
(Signature)
John M. Nimons
Vice President and Controller
Date: August 13, 1999 /s/ Kenwood C. Nichols
------------------------- ----------------------------
(Signature)
Kenwood C. Nichols
Vice Chairman and Executive Officer
22
EXHIBIT INDEX
Each exhibit is listed according to the number assigned to it in the Exhibit
Table of Item 601 of Regulation S-K.
11- Calculation of Basic Earnings Per Common Share and Diluted Earnings per
Common Share (unaudited).
27- Financial Data Schedule (unaudited).
23