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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2002 Commission File No. 0-1370
LONGVIEW FIBRE COMPANY
(Exact name of registrant as specified in its charter)
Washington 91-0298760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Fibre Way, Longview, Washington 98632
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (360) 425-1550
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $1.50 Ascribed Value New York Stock Exchange
Rights to purchase Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No ____
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant computed by reference to the closing price of
such common equity as of April 30, 2002, was $463,358,948. For purposes of
this computation, all executive officers and directors of the registrant have
been deemed affiliates. This shall not be deemed an admission that such
persons are affiliates.
The number of shares outstanding of the registrant's Common Stock, $1.50
Ascribed Value per share, as of December 31, 2002 was 51,076,567 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the Company's Notice of Annual
Meeting of Shareholders and Proxy Statement filed in connection with the
Company's Annual Meeting of Stockholders to be held January 28, 2003.
Page 1
PART I
This Annual Report on Form 10-K contains forward-looking statements. These
statements relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by terminology such as
may, will, should, expect, plan, intend, anticipate, believe, estimate,
predict, potential or continue, the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined in the
"Factors That May Affect Our Operating Results" below. These factors may
cause our actual results to differ materially from any forward-looking
statement. (See Forward Looking Statements.)
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We do not undertake an obligation to update any
of the forward-looking statements after the date of this annual report to
conform such statements to actual results or to changes in our expectations.
ITEM 1. BUSINESS
General
Longview Fibre Company is a publicly held forest, paper and packaging products
company engaged in three primary businesses: the ownership and management of
timberlands in Oregon and Washington, which principally produce logs for sale;
the ownership and operation of a pulp and paper mill, which produces kraft
paper and paperboard; and the ownership and operation of converting plants,
which produce finished products such as corrugated containers, specialty
packaging and merchandise bags.
We commenced operations in Longview, Washington in 1927 with a single
paperboard machine to produce paper products. Since our inception, we have
continued to expand our operations and currently own what we believe is one of
the world's largest pulp and paper making complexes, 17 converting plants in
12 states and significant holdings of valuable timberlands in the Pacific
Northwest composed of slightly more than 570,000 acres of timberlands.
Longview Fibre Company was incorporated in the State of Washington in 1990 as
a successor to a company of the same name incorporated in the State of
Delaware in 1926.
Products
We are a forest, paper and packaging products company engaged in three primary
businesses: timber, paper and paperboard, and converted products.
The following table sets forth the relative contribution to net sales of each
of our segments (including allocated sales of power).
2002 2001 2000
Timber 22% 19% 18%
Paper and Paperboard 23% 26% 30%
Converted Products 55% 55% 52%
Please see Note 7 of Item 8 of Part II of this Form 10-K for financial
information about industry segments and export sales.
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Timber
We own and manage approximately 570,000 acres of timberlands in nine tree
farms in Oregon and Washington that contain an estimated 4.2 billion board
feet of 30-year old and older timber. Approximately 60% of our specie mix is
Douglas Fir, which is a premium species of softwood primarily used in
residential and commercial construction. During fiscal year 2002, 68.7% of
our timber net sales were to domestic customers consisting of approximately 60
independent sawmills and plywood plants, with the balance exported primarily
to Japan. We believe we are the second largest U.S. exporter of logs to the
Japanese market. We realize a significant price premium on the logs we sell
into that market.
We also operate a sawmill near Leavenworth, Washington that processes logs
into lumber, wood chips and various by-products for domestic and Pacific Rim
construction and other markets. This sawmill uses logs from one of our tree
farms, and also produces wood chips for use at our pulp and paper mill in
Longview, Washington. In addition, we maintain four log chipping operations
principally located along the Snake River and Columbia River corridors. Our
Lewiston and The Dalles chip plants have been permanently shut down. We
supply these chipping facilities with lower-quality timber, also known as
pulpwood, that would command relatively low prices if sold as logs to
sawmills, and we also purchase pulpwood from third parties. We process the
wood chips for pulp for our Longview mill. Our timber is harvested by
independent logging contractors.
In addition to the docks on the Columbia River at our Longview complex, we
have close access to the Port of Longview on the Columbia River that allows us
to conveniently ship our logs, paper and paperboard to our overseas customers.
Timberlands. We believe that our timber resources represent significant value
and will remain an important contributor to our continued success. Over 90%
of our timber is softwood such as Douglas Fir and Hemlock that, because of
their long fiber, strength and flexibility, are generally preferred over
hardwoods for construction lumber and plywood. Our timberlands have primarily
second or third growth timber, a substantial amount of which is easily
accessible given the moderate terrain and extensive road systems where our
timber is located. Approximately 85% of our timberlands are located west of
the Cascade Mountains in Oregon and Washington. The remaining 15% of our
timberlands are in eastern Oregon and Washington.
We believe our timberlands are well diversified by age and advantageously
dispersed geographically throughout the states of Oregon and Washington. The
well-balanced age distribution of our timber reduces the likelihood of an
interruption in timber supply. Our timberlands span the two states on 677
non-contiguous parcels with an average parcel size of approximately 843 acres,
the largest of which is approximately 40,000 acres, which reduces our risk of
significant loss due to forest fires, disease and other natural disasters. As
a matter of policy, we have consistently acquired timberlands to increase our
inventory when available at acceptable prices reflecting the site, quality of
timber and growing stock. We have purchased 14,803 acres of timberlands over
the last five years.
As a substantial U.S. timberland owner, we believe we are positioned to
benefit from the continuing reduction in the availability of U.S. federal
timber for harvesting. The federal government has curtailed the harvesting of
timber in response to heightened environmental concerns. This curtailment is
pronounced in the Pacific Northwest due to concern over threatened and
endangered wildlife species such as the spotted owl, marbled murrelet and
salmon. We believe that the shift in governmental forest management emphasis
from timber resource production to conservation and habitat preservation has
added to the value of our private timberlands.
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Timber Resource Management. We maintain a conservative forest management plan
that seeks to enhance timber growth and quality in our timberlands while
simultaneously meeting or exceeding environmental requirements. We view our
timberland holdings as assets with substantial value apart from our
manufacturing facilities and manage the timberlands on a "sustained yield"
basis; that is, we harvest levels of timber that can be sustained into
perpetuity due to natural growth and our reforestation efforts. We operate
our timberlands on a sustained yield basis with rotations, or age of the
timber when cut, of 40 years for hardwood and 55 to 70 years for softwood.
Our average rotation age has been 60 years. Timber growth rates and existing
age class distribution are important variables for a forest products company
as they ultimately determine how much timber can be harvested. More
accelerated growth rates and proportionally larger acreage of older age
classes permit larger annual harvests. Growth rates vary depending on
species, location, age and forestry practices.
We can harvest approximately 280 million board feet of merchantable timber per
year from our timberlands on a sustained yield basis, based on our average 60-
year rotation. Under this sustained yield rotation, our inventory of mature,
standing timber 30-years old and older would remain at approximately 4.2
billion board feet in perpetuity. Our timber harvest plans are principally
based on forecasted demand, price and the availability of timber from external
sources. These harvest plans are reviewed several times throughout the year
and revised at least annually, and are sufficiently flexible to permit
modification in response to fluctuations in the log market.
During fiscal year 2002 we accelerated our harvest for cash flow which may
affect future harvest levels modestly.
Our timber operations involve forest management, harvesting operations and
ongoing reforestation. We employ a professional team of foresters and
engineers who lead these activities. Proper management of the forest cycle
includes preparing land for reforestation, pre-commercial and commercial
thinning, fertilizing and harvesting mature trees. The majority of seedlings
planted on our lands are developed through our forest genetics tree-
improvement program.
Our forestry practices vary by geographic region and depend upon factors such
as soil productivity, weather, terrain, tree size, age and density. Forest
stands are thinned and fertilized periodically to improve growth and stand
quality until they are harvested. We typically reforest within one year of
harvest, thereby continuing our balanced distribution of age classes. Any
deficiency in a particular age class is managed by maintaining adequate
harvestable inventory levels of other age classes and through acquisitions of
standing timber within that age class. A balanced distribution of age classes
will tend to provide a more regular source of cash flow, as the various timber
stands reach their harvestable age. We actively use pre-commercial and
commercial thinning, which is the practice of harvesting immature and lower-
value trees in order to maximize the long-term value of our timberlands and
generate incremental cash flow. In addition to providing another source of
wood chips, we believe that thinning improves the overall productivity of our
timberlands by enhancing the growth of the remaining trees.
Timber harvest timing depends in part on growth cycles and in part on economic
conditions. Growth cycles for timber tend to change over time as a result of
technological, biological and genetic advances that improve forest management
practices. We continue to develop our forest management operations to benefit
from such advances to improve timber yields.
Sales and Customers. As a steady supplier of timber for over 40 years, we
have cultivated and established long-standing relationships with many of our
timber customers. The majority of our domestic sales are to independent
sawmills and plywood plants within a reasonable hauling distance from our
timberlands. Our exports are principally to Japan through sales to U.S.
exporters or directly to foreign importers. Sales are generated mostly
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through long-standing relationships, generally at negotiated market prices.
In fiscal year 2002, no sales were made pursuant to long-term contracts.
During fiscal year 2002, our top 5 customers, including exporters, accounted
for approximately 34% of our timber net sales, which represented approximately
8% of our total net sales. Our largest customer accounted for approximately
7% of our segment net sales during this period, which represented 1.6% of our
total net sales.
Paper and Paperboard
We produce our high-quality kraft paper and paperboard at our Longview,
Washington mill, which we believe is one of the world's largest pulp and paper
making complexes with an aggregate annual paper and paperboard capacity in
excess of 1 million tons. Based on production capacity, we believe we are
North America's second-largest unbleached kraft paper manufacturer. Our mill
complex is located on 358 acres with deep water frontage on the Columbia
River, and has connections with two transcontinental railroads as well as
close access to the main north-south interstate on the West Coast. We produce
a wide variety of paper and paperboard at our mill, including corrugating
medium and linerboard, which are combined to make corrugated containers; kraft
paper; and heavier grades of paper for multi-wall shipping sacks used by the
agricultural, pet food, chemical and cement industries.
We have established a reputation for manufacturing strong, high-quality paper
and paperboard using a variety of fibers for superior packaging products. We
produce most of our high-quality kraft pulp through the use of what we believe
to be two of the world's largest continuous pulp digesters. These high-
efficiency Kamyr brand digesters break down wood chips into wood pulp that can
then be used to make paper and related products. Purchased bleached pulp and
pulp from sawdust and old corrugated containers ("OCC") provide the balance of
our pulp. Approximately 20% of the pulp that we used in fiscal year 2002 was
from OCC, which makes our paper and paperboard products more attractive to an
increasingly environmentally conscious public.
Manufacturing. We have continuously upgraded and expanded our paper mill to
produce higher-quality paper more quickly and economically. Our mill consists
of one pulp mill and twelve paper machines with more than 3,200 tons average
daily paper and paperboard production capacity. Our rated annual paper and
paperboard production capacity exceeds 1 million tons.
To balance the mill-to-market demand for our products and the availability of
raw materials at acceptable prices, we have been running only the nine most
efficient machines and not running batch digesting in our pulp mill.
Most of the paper mill's pulp is produced by the kraft process, in which raw
material fibers from wood chips are cooked under pressure in a chemical
mixture in vessels called digesters. The kraft process is widely considered
to be the most desirable process for making pulp because it produces paper and
paperboard with high structural strength due to the relatively longer fibers
in the pulp. Our fully automated digesters can produce large quantities of
unbleached pulp and feature an energy- and chemical-efficient pulping process.
In addition to digesting our own unbleached pulp, we purchase bleached pulp
from third parties and process recycled material into pulp. Pulp is then
refined, diluted and subsequently fed into our paper machines to be made into
paper.
The kraft process is an expensive method of producing pulp and is economically
feasible only through energy conservation and efficient recovery and reuse of
pulping chemicals. Accordingly, we recycle used chemicals both to produce
heat and to be reused in the digesters for additional pulp making. We also
continue to pursue computer-controlled process automation to improve mill
energy conservation, process control and quality. Our continuous Kamyr
digesters use only half the energy used by batch digesting, another widely
employed pulping process. The design and development efforts of a
Page 5
professional staff of more than 50 engineers and chemists contribute
significantly to all phases of pulp and paper making.
The flexibility of our paper machines enables us to focus on individual
customer needs by developing customized grades for specific product
requirements and enable us to rapidly adjust to market conditions. We
currently have several swing machines that can produce paper or paperboard.
In addition, paper machines of various trim widths and capabilities have been
added periodically, while our smaller machines have been utilized to make
small lots of specialty paper and paperboard.
We have engaged a third-party consulting group to assist us with our corporate
business process improvements, or BPI, initiative. Our BPI initiative has
identified cost savings throughout all of our segments by utilizing system
improvements to enhance business processes, implementing new procurement
practices, and decreasing working capital by reducing inventories and
improving customer service. The new procurement practices should leverage our
buying power by consolidating purchases of commodity items and rationalizing
the number of vendors and transactions. We have identified improvements that
we believe should result in substantial cost savings. Additionally, we will
focus on increasing overall efficiency through workforce reduction and, if
necessary, possible closure or curtailment of non-competitive facilities,
reallocation of production to different production facilities, and
implementation of a strategy to reduce energy consumption by better utilizing
existing capacity.
Raw Materials and Suppliers. Our mill's advanced technology combined with our
papermaking flexibility enables us to use virtually all species of Pacific
Northwest wood, including various firs, pines, cedars, hemlock and hardwoods.
Our raw material fibers come primarily from purchased wood chips and sawdust
with important contributions from fiber reclaimed from post-consumer and post-
industrial waste such as OCC and purchased bleach pulp from a variety of
sources. In addition to the wood chips and sawdust that we purchase, we
source raw materials from our own sawmill at Leavenworth and our four log
chipping facilities. Our chip operations are located principally along the
Snake and Columbia River corridors, allowing for low-cost transport by barge.
Residual wood chips and sawdust are also supplied by many of our timber
customers that generate these residuals from logs purchased from us.
During fiscal year 2002, approximately 8% of our fiber requirements were
generated from internal operations, and approximately 20% were generated from
recycled materials. The remainder of our fiber came from more than 60 chip
suppliers composed of sawmills, plywood plants and whole log chipping
facilities primarily located in Washington, Oregon, Idaho and Montana within a
1,300-mile radius of our Longview mill. Actual sourcing levels vary with
market conditions. We can receive over 30 rail cars, as many as 300
truckloads and a number of barges full of wood chips at the mill daily. In
addition, approximately 23% of our fiber is from wood chips that are purchased
at market prices from sawmills to which we also sell our logs. We believe our
stable historical relationships with these mills result in a dependable supply
of wood chips from them. We purchase bleached pulp from various sources and
have an arrangement to purchase pressed bleached pulp (which has not been
dried) from a nearby mill that has excess capacity. We continue to broaden
our raw material supply and reduce fiber costs by increased recovery of wastes
and use of OCC, which has been made possible through ongoing plant and machine
upgrades.
Sales and Customers. We continue to emphasize quality, service, continuity
and design of our paper and paperboard products to meet our customer needs.
We have been engaged in a long campaign to increase the production of value-
added specialty and custom paper grades and broaden our product lines. Our
paper products are sold by our sales forces located in Walnut Creek and Los
Angeles, California; Longview, Washington; Milwaukee, Wisconsin; and Atlanta,
Georgia, or through paper merchants. In fiscal year 2002, our converted
products segment obtained approximately 98% of its paper and paperboard
Page 6
requirements from our Longview mill, representing approximately 65% of total
mill production. We sell the remaining mill production to a small number of
export customers and a large number of geographically dispersed domestic
customers. Less than 5% of our fiscal year 2002 net sales were made pursuant
to long-term contracts.
Where possible, we develop products in conjunction with our customers and
enter into long-term relationships. Within our paper and paperboard segment,
approximately 15% of our segment net sales during fiscal year 2002 were from
our specialty TEA-KraftT paper, a highly rupture-resistant multi-wall bag used
in the agriculture, pet food, chemical and cement industries. Excluding sales
to our converting plants, during fiscal year 2002, our top 5 domestic
customers and top 5 export customers accounted for approximately 25% and 27%,
respectively, of our paper and paperboard net sales. The domestic customers
represented approximately 6% of our total net sales and the export customers
represented approximately 6% of our total net sales. Our largest paper and
paperboard customer, an exporter who resells our products to a number of
smaller customers, accounted for approximately 17% of our total segment net
sales during this period, which represented approximately 4% of our total net
sales. There were no other customers accounting for more than 10% of segment
net sales.
Converted Products
We own and operate 17 converting plants located in 12 states that produce
value-added corrugated containers, specialty packaging, creative point-of-
purchase displays, handle shopping bags and merchandise bags. We are capable
of producing containers in virtually any size, type, color and design, and we
believe that we have established a reputation for high-quality products and
services. With our advanced technologies, we are able to produce products
with high-quality six color graphics printed directly on corrugated material
using our computerized ink-blending expertise. We also produce complex
structural designs. Our corrugated containers are typically used for
packaging of items such as fresh and frozen fruits and vegetables, juice,
wine, beer, appliances, furniture, toys and electronics. Virtually all of our
products in this segment are sold to domestic customers.
In addition to manufacturing standard corrugated shipping containers, our
container products include solid-fiber boxes, containers with specialty
folding-gluing characteristics and a full line of jumbo boxes in a variety of
sizes. We also produce Liquiplexr, a family of bulk-liquid disposable bins
available in sizes up to 330-gallons, as well as a number of different types
of consumer bags including handle shopping bags, merchandise bags and other
specialty bags. Similar to boxes, bags are produced according to customer
specifications in a variety of colors, sizes and shapes, complete with
exacting printing of designs or promotional messages.
Manufacturing. Our commitment to automation and improvements in plant and
equipment is evidenced by our investments to modernize our facilities and
equipment. Investments in newer technology have produced a variety of
capabilities including high-speed corrugating, high-quality graphics printing
and other precise box finishing. As a result, we believe our converting
facilities are some of the best-equipped in the United States, capable of
producing corrugated containers and merchandise bags in virtually any size,
shape and design based on customer needs.
We implemented a process standardization initiative for order entry,
production scheduling, shipping and inventory control at our converting plants
which involves taking "best practices" from each of our plants and applying
them to our other plants. This initiative is expected to result in a number
of improvements, including more efficient production, inventory management and
on-time order fulfillment. We also expect that the BPI initiative will result
in cost savings and efficiencies in our converted products operations similar
to those in our paper and paperboard segment.
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Of our 17 converting plants: 4 are sheet plants that fashion corrugated sheets
obtained from our corrugator plants into finished products; 11 are corrugator
plants that, in addition to converting corrugated sheets into finished
products, can also produce corrugated sheets from corrugating medium and
linerboard; and 2 are bag plants. Our West Springfield corrugator plant was
converted to a sheet plant in January, 2003. We do not operate any sheet-
feeder plants. See "Properties" for the locations of our converting plants.
Raw Material Sources and Supply. The principal raw material used by our
converting plants is paper and paperboard. Our converting plants receive
approximately 98% of their paper and paperboard from our Longview mill either
directly, through barter arrangements or through buy/sell arrangements whereby
one of our converting plants acquires paper and paperboard from a third
party's paper mill that is geographically closer to it than our Longview mill.
In return, our mill supplies paper and paperboard to such third party's
converting plant.
Sales and Customers. Sales of converted products are made directly to end
users, as well as through jobbers. Each plant has its own sales force that
reports to a full-time sales manager for that location. Both sales managers
and plant managers in turn report to regional divisional managers. We have
approximately 90 full-time direct sales employees in our converted products
segment.
We sell our converted products to over 3,500 customers nationwide. We
maintain long-standing relationships with many of our customers, some of whom
have purchased from us for over 50 years. Although we have large account
customers with whom we have established relationships, we seek to focus on
market-niche business opportunities where we add value through service,
customized design, and specialty product capabilities. We believe we often
encounter less competition in pursuing those opportunities, as many of our
larger competitors do not find such specialty niches to have the volume of
production that would make this business attractive to them. Our vertical
integration with, and the process flexibility of, our Longview mill allow us
to quickly and efficiently respond to our customers' changing needs. During
fiscal year 2002, our top 5 customers accounted for approximately 25% of our
converted products net sales, with no customer accounting for more than 10% of
segment net sales. The top 5 customers represented approximately 14% of our
total net sales and our largest customer represented approximately 5% of our
total net sales. Approximately 15% of our net sales were made pursuant to
long-term contracts.
Energy
Our Longview mill contains six steam-driven turbine generators and one natural
gas-fired co-generation facility, all of which are capable of producing
electric power. The steam-driven generators generally have a combined
capacity to produce 40 megawatts of power and the co-generation facility
generally has a capacity to produce 60 megawatts of power. The primary
contracts pursuant to which we purchased and sold power in the past have
expired. Under current terms, we have agreed to use all of our steam-driven
generator capacity for internal use and, except under limited circumstances,
sell all of our power produced from our co-generation facility into the
market. Our future decisions regarding electric power generation, including
the extent to which we operate our co-generation facility and sell into the
market, will change from period to period based on market conditions and our
own power requirements. We do not expect sales of power to meaningfully
contribute to our results in the coming year.
Competition
We compete to varying degrees with a number of U.S. and foreign forest, paper
and packaging products companies in different product lines and in different
quality segments within each product line. Each segment in which we compete
is highly competitive. We compete on the basis of price and reputation, which
Page 8
we support through our product consistency, modern facilities, highly trained
workforce, manufacturing and delivery flexibility and experienced field sales
force.
There are numerous large timber suppliers in the United States for the
domestic and export markets and these suppliers compete on the basis of price
and quality. Ranked on the basis of annual board feet, Weyerhaeuser Company
was the largest domestic producer and exporter of timber in 2002. We believe
we were the second largest U.S. exporter of logs to the Japanese market in
2002.
Our paper and paperboard segment primarily competes in the highly-concentrated
U.S. unbleached kraft paper market. The 10 largest U.S. producers of kraft
paper comprised approximately 79% of industry capacity. International Paper
was the largest producer in 2002, based on industry capacity, and we believe
we were the second largest. Abroad, we compete with many domestic producers
as well as with foreign competitors such as Eurocan, New Zealand Paper and
Canadian Forest Products. Competition in the unbleached kraft paper market is
primarily based on price, service and quality.
In the world paperboard market we compete with many of the same foreign and
domestic paper producers. We believe Smurfit-Stone Container was the largest
producer in 2002 based on industry capacity. The paperboard market competes
primarily in the same manner as does the paper market.
There are many competitors in the markets for our converted packaging
products, including other large, vertically-integrated companies and numerous
smaller companies. Although no single company is dominant in any particular
market, we have significant competitors in this market, including Smurfit-
Stone Container and Weyerhaeuser who are our main competitors. The packaging
industry competes on price as well as design, quality and service, with
varying emphasis on these factors depending on the product line. Due to the
high cost of transporting corrugated containers, competition from foreign
manufacturers does not have a significant impact on the corrugated container
market in the United States.
We have listed below our principal competitors.
Segments Principal Competitors
Timber . . . . . . . . . . . . . Weyerhaeuser Corporation
Plum Creek
Guistina
Menasha
Campbell Group Managed Holdings
Paper and Paperboard
Paper . . . . . . . . . . . . International Paper
Eurocan
Canadian Forest Products
Georgia-Pacific
Smurfit-Stone
Tolko
Cascade
Paperboard. . . . . . . . . . Smurfit-Stone
Georgia-Pacific
Weyerhaeuser Corporation
International Paper
Temple-Inland
Converted Products . . . . . . . Smurfit-Stone
Georgia-Pacific
Weyerhaeuser Corporation
International Paper
PCA
Temple Inland
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Regulation
The forest, paper and packaging products industries are highly regulated in
the United States, subject to a variety of federal, state and local
environmental, pollution control and other laws and regulations.
Our forestry and manufacturing operations are subject to federal, state and
local environmental laws and regulations relating to the protection of the
environment, including laws relating to water quality, air quality, waste
management and hazardous substances. We believe that we are in substantial
compliance with all relevant local, state and federal regulations. All of our
facilities meet current regulatory standards in all material respects, and we
believe we are operating in an environmentally responsible manner. We
maintain environmental and industrial safety and health compliance programs
and periodically conduct internal regulatory audits of our operations to
monitor compliance with relevant laws and regulations. We continually review
all known environmental exposures, including the costs of remediation. At the
present time, we are not aware of any environmental liabilities that would
have a material impact on our results of operations.
Environmental impacts at some of our facilities resulting from current and
historic operations, and at certain third-party sites to which we sent
hazardous substances for disposal or storage, require expenditures for
remediation. Liability arising out of prior ownership or past operations is
sometimes imposed without regard to causation or prior knowledge of
contamination. Violations of environmental laws and regulations can subject
us, and in certain cases have subjected us, to additional costs and expenses,
including defense costs and expenses and civil penalties. Violations of
environmental laws and regulations can also subject us to criminal penalties.
In addition, the operations of our manufacturing facilities and timberlands
are subject to the requirements of the federal Occupational Safety and Health
Act and comparable state statutes relating to the health and safety of
employees. We conduct internal safety audits to identify potential violations
of law or unsafe conditions, and we believe that we are in material compliance
with all applicable safety and health laws and regulations.
In fiscal year 2003, we expect to spend approximately $3 million on capital
expenditures associated with achieving or maintaining compliance with
environmental laws and regulations, and approximately $7 million on operating
and other non-qualified expenditures relating to environmental matters.
Timberlands. Operations on timberlands are subject to specialized statutes
and regulations in the states of Oregon and Washington. These include Forest
Practices Acts that address many timber growing, harvesting and processing
activities, which in some cases require us to establish buffer, or "no cut,"
zones in or along environmentally sensitive areas. Other state laws and
regulations control timber slash burning operations during fire hazard periods
to protect air quality. State and federal statutes and regulations also have
the direct and indirect effect of controlling logging activities, including
ancillary road construction and maintenance activities, by testing these
activities' affect on, among other things, water quality, endangered species,
or and certain ocean and inland shorelines or wetlands. Changes in these
statutes and regulations, and related policies implementing them, including
changes in enforcement policies or changes resulting from judicial actions or
interpretations, can significantly affect local and regional timber harvest
levels. For instance, in early 2002 an environmental group filed an action in
Oregon, against the State Forester of the State of Oregon, that would, if
successful, further restrict the use of private lands for timber harvesting in
certain parts of the state where we own timberland
Water Quality and Wastewater. The federal Clean Water Act and comparable
state statutes regulate discharges of process wastewater, and require National
Pollutant Discharge Elimination System ("NPDES") permits for discharge of
Page 10
industrial wastewater and stormwater runoff into regulated public waters. Our
manufacturing facilities are generally in compliance with NPDES wastewater and
stormwater requirements.
Air Quality. The Clean Air Act regulates emissions into the air, and requires
air permits that set limits on such air emissions. We anticipate making
capital expenditures of approximately $4 to $7 million over the next three
years for air pollution control additions and modifications to ensure
compliance with air emissions standards and to accommodate facility production
capacity increases.
The Environmental Protection Agency is developing "Maximum Achievable
Technology," or MACT, standards for reducing hazardous air pollutants from
specified categories of industrial processes with major emissions. These
categories include boilers, paper coating and combustion turbines, some or all
of which we participate in. While the EPA has not yet finalized the MACT
standards and we do not expect compliance to be required until 2006, we expect
that the final standards could eventually have an impact on our operations and
require material expenditures.
Cluster Rule. The Environmental Protection Agency issued a final air and
water quality rule for the pulp and paper industry, referred to as the
"Cluster Rule" in 1998. This Cluster Rule is an integrated, multimedia
regulation enacted to control the release of pollutants to two media from one
industry.
Pulp and paper mills must meet standards for air emissions from several mill
processes, including the cooking, washing and bleaching stages of pulp
manufacturing.
The EPA also set effluent limits for wastewater discharged during the pulp
bleaching process and in the final discharge from mills. The limits set for
the bleaching process are significant to the pulp and paper industry as a
whole, but should not affect our operations since we do not bleach pulp and
have no plans to bleach pulp in the future. The most significant impacts to
us result from the Cluster Rule air emissions requirements.
The Cluster Rule contains significant compliance milestones for air emissions
in 2004, and for pulp and bleaching process in 2006. We estimate that over
the next three to five years, capital expenditures required to comply with
this regulatory program will range from $10 million to $15 million. The
majority of these expenses will be facility changes and additions for air
pollution control, the most significant of which will be replacing washer
lines used to remove spent cooking chemicals from pulp after the digesting
process at the Longview mill. The estimated cost of this replacement project
is $8 million. We do not expect the costs associated with other individual
Cluster Rule compliance projects to be material, but taken as a whole we
estimate the cost will be up to $7 million.
Endangered Species. The Federal Endangered Species Act and counterpart state
legislation protect species threatened with possible extinction. Protection
of endangered species habitat includes restrictions on timber harvesting and
related activities. A number of species indigenous to the Pacific Northwest
have already been protected under the Endangered Species Act, including the
northern spotted owl, marbled murrelet, mountain caribou, grizzly bear,
goshawk, bald eagle and various anadromous fish species. Some of these
species, including the northern spotted owl, marbled murrelet and goshawk, are
found in some of our timberlands, requiring us to refrain from harvesting some
of our timberland resources. There can be no assurance that additional
species within our timberlands will not subsequently receive protected status
under the Endangered Species Act or that more members of species currently
protected will not be discovered within our timberlands, requiring us to
refrain from harvesting timber on additional acres.
Page 11
Timber Exports. Federal law prohibits the export of unprocessed timber
acquired from federal lands in the Western United States, or the substitution
of unprocessed federal timber from the Western United States for unprocessed
private timber that is exported. Persons owning timber-processing facilities
may seek authorization from the U.S. Department of Agriculture for a "sourcing
area" within which the person may purchase federal timber while exporting
unprocessed private timber originating from outside the sourcing area. We
have one such sourcing area.
Energy. Although we generally are not regulated as a public utility, we must
comply with federal and state utility regulations in order to sell the
electricity that we produce into the market. Relevant regulations provide
that an industrial producer of electrical power such as Longview Fibre may
sell power into the wholesale market without being regulated as a public
utility, by obtaining certification as a Qualified Facility from the Federal
Energy Regulatory Commission. We currently have such certification and are
not regulated as a public utility.
Employees
As of October 31, 2002, we employed approximately 3,500 employees, of which
approximately 2,160 employees were parties to collective bargaining agreements
between us and one of five unions. We have 11 collective bargaining
agreements, which expire at various dates through the year 2007, including one
agreement covering approximately 104 employees that will expire in 2003. We
believe that our relationship with our employees is good and we have a
collective bargaining agreement with our 1,276 Longview mill employees that
extends through 2006.
Available Information
Our Internet website address is www.longviewfibre.com. Our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 are available or may be accessed
free of charge through the Investor Relations section of our Internet website
as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC. Our Internet website and the information
contained therein or connected thereto are not intended to be incorporated
into this Annual Report on Form 10-K.
Page 12
Item 2. Properties
As of October 31, 2002, we owned in fee 570,685 acres of tree farms located in
various counties of Washington and Oregon. As a matter of policy we have
consistently acquired and intend to continue to acquire more timberlands
whenever available at acceptable prices, dependent on the location and quality
of the site involved and the species and quality of the merchantable timber
and growing stock thereon.
Our production facilities are listed below:
Approx.
Approx. Building Leased/
Production Facilities Acres Sq. Ft. Owned
PULP, PAPER AND PAPERBOARD PRODUCTION FACILITY
Longview, Washington(a). . . . . . . . . . . . 358 3,115,080 Owned
CONVERTED PRODUCTS PRODUCTION FACILITIES
Amsterdam, New York (Corrugated Containers). . 11 219,840 Owned
Bowling Green, Kentucky (Corrugated
Containers) . . . . . . . . . . . . . . . . 20 306,486 Owned
Cedar City, Utah (Corrugated Containers)(b). . 22 143,000 Owned
Cedar Rapids, Iowa (Corrugated Containers) . . 21 388,000 Owned
Fridley, Minnesota (Corrugated Containers) . . 17 291,000 Owned
Grand Forks, North Dakota (Corrugated
Containers)(b) . . . . . . . . . . . . . . . 27 85,000 Owned
Longview, Washington (Corrugated and Solid
Fibre Containers). . . . . . . . . . . . . . (a) (a) Owned
Milwaukee, Wisconsin (Corrugated and Solid
Fibre Containers). . . . . . . . . . . . . . 15 493,700 Owned
Oakland, California (Corrugated Containers). . 7 215,500 Owned
Seattle, Washington (Corrugated Containers). . 3 132,300 Owned
Seward, Nebraska (Corrugated Containers)(b). . 18 85,000 Owned
Spanish Fork, Utah (Corrugated Containers)(c). 25 519,000 Owned
Spanish Fork, Utah (Merchandise and Specialty
Bags). . . . . . . . . . . . . . . . . . . . (c) (c) Owned
Twin Falls, Idaho (Corrugated Containers). . . 12 446,000 Owned
Waltham, Massachusetts (Merchandise and
Specialty Bags). . . . . . . . . . . . . . . 3 94,600 Owned
West Springfield, Massachusetts (Corrugated
Containers)(b) . . . . . . . . . . . . . . . 11 230,460 Owned
Yakima, Washington (Corrugated Containers) . . 18 419,000 Owned
WOOD CHIP PRODUCTION FACILITIES
Bullfrog, Washington . . . . . . . . . . . . . 74 (d) Owned
Clarkston, Washington. . . . . . . . . . . . . 19 (d) Leased
Clatskanie, Oregon (also log sorting). . . . . 23 (d) Owned
Kalama, Washington . . . . . . . . . . . . . . 12 (d) Leased
SAWMILL
Leavenworth, Washington (also log sorting) . . 69 125,000 Owned
____________
(a) Our Longview facility is used for pulp, paper and paperboard production,
converted products production and as our corporate headquarters.
(b) Corrugated sheet plants. Our West Springfield corrugator plant became a
sheet plant in January 2003.
(c) Our Spanish Fork facilities are located in the same complex. These are
considered separate facilities but share a common warehouse and other
structures.
(d) Chip production facilities do not have significant covered building
space. Buildings consist of office and shop buildings and special
purpose structures over chipping equipment.
Page 13
In addition to the facilities listed above, we have eight strategically
located corrugated container storage facilities that are used primarily as
warehouse space. We also have one chip reload facility.
Item 3. Legal Proceedings
We have agreed to participate in the arbitration of two disputes concerning
our electric power generation. The first dispute involves approximately $2
million that we believe the Bonneville Power Administration or BPA, owes us
for power we indirectly sold to BPA through our local public utility district
pursuant to a now expired contract. The second dispute involves approximately
$5 million that BPA claims is owed by our public utility district in
connection with power we sold over the last several years. We have agreed
with the public utility district that it may pass through to us as a cost
under our contract the amount of such claim, if any, that is awarded to BPA in
the arbitration. We do not believe that the results of these disputes will
have a material financial impact on us.
As we previously reported, in 2002 we were named a defendant in numerous
asbestos-related actions in Madison County, Illinois and St. Louis, Missouri,
along with numerous other defendants. In addition, we were named a defendant
in one asbestos related action in Smith County, Mississippi, along with 265
other defendants. In October 2002, we were dismissed from the Smith County,
Mississippi case. In Madison County, we were routinely dismissed from cases
prior to their scheduled trial date. In January 2003, the Madison County,
Illinois and St. Louis, Missouri plaintiffs agreed to dismiss us from all
pending lawsuits in those jurisdictions. On January 24, 2003, an order of
dismissal for the Madison County, Illinois cases was entered by the Court. In
each instance, we were and will be dismissed without any payment or liability
to the plaintiffs. Each of the dismissals is without prejudice.
We had also previously reported that we were a defendant in an asbestos-
related case in King County, Washington. That case was recently fully settled
for an immaterial amount that was covered by insurance. Other than the cases
referred to above, we are not a party to any other asbestos-related
proceeding.
From time to time we have been, and continue to be, subject to other legal
proceedings and claims in the ordinary course of our business. These include
various proceedings relating to environmental regulation, including the
cleanup of hazardous waste under the federal Comprehensive Environmental
Response Compensation and Liability Act, and similar state laws. These
claims, even when lacking merit, can result in the expenditure of significant
financial and managerial resources as we defend ourselves. Although the final
outcome of any legal proceeding cannot be predicted with any degree of
certainty, we presently believe that any ultimate liability resulting from any
of the legal proceedings, or all of them combined, would not have a material
effect on our financial position or results of operation.
Page 14
Item 4. Submission of Matters to a Vote of Security Holders
Nothing was submitted to a vote of the shareholders during the fourth quarter
of the fiscal year.
Executive Officers of the Company
The executive officers of the Company as of December 31, 2002, and certain
biographical information about each of these individuals, are set forth below:
Executive
Officer
Name Age Office Since
R. P. Wollenberg 87 Chairman of the Board 1953
R. H. Wollenberg 49 President and Chief Executive Officer 1996
R. J. Parker 54 Senior Vice President-Production 1994
and Mill Manager
K. D. Gettman 54 Senior Vice President-Container Group 2001
D. L. Bowden 67 Senior Vice President-Timber 1989
L. J. McLaughlin 47 Senior Vice President-Finance,
Secretary and Treasurer 1989
R. B. Arkell 72 Vice President-Industrial Relations
and General Counsel 1986
Richard P. Wollenberg was elected Chairman of the Board in 1985, and has been
a Director since 1946. He served as Chief Executive Officer from 1978 through
October 2002 and as President from 1969 through September 2001. He is a
member of the Executive Committee of the Board. Mr. Wollenberg has been
active at Longview Fibre since 1939. Mr. Wollenberg received a bachelor of
science degree in mechanical engineering from the University of California at
Berkeley and a master's degree in business administration from Harvard
University. Richard P. Wollenberg is the father of Richard H. Wollenberg and
David A. Wollenberg.
Richard H. Wollenberg was elected Chief Executive Officer November 1, 2002 and
has held the office of President since October 2001. He has been a Director
since 1995 and is a member of the Executive Committee and Nominating/Corporate
Governance Committee of the Board. Mr. Wollenberg previously served as Chief
Operating Officer from October 2001 through October 2002, Executive Vice
President from January 2001 through September 2001, and as Vice President-
Production, Western Container Division from January 1995 through December
2000. Mr. Wollenberg has been with Longview Fibre since 1988. He received a
juris doctorate from Willamette University and a bachelor of philosophy degree
from Reed College.
Richard J. Parker was elected Senior Vice President-Production and Mill
Manager in 1994 and was a Director from 1997 to January 28, 2003. He
previously served as Vice President and Assistant to the President, and Pulp
Mill Superintendent and has been with Longview Fibre since 1972. Mr. Parker
received a bachelor of science degree in chemical engineering from Washington
State University, and is a graduate of the Harvard Business School's Program
for Management Development.
Page 15
Ken D. Gettman was elected Senior Vice President-Container Group in September
2001, effective October 1, 2001. He previously served as Vice President-
Sales, Western Container Division from January 1998 to September 2001 and
Sales Manager from 1994 to 1997. Mr. Gettman has been with Longview Fibre
since 1967.
David L. Bowden was elected Senior Vice President-Timber in 1992, and has been
a Director since 1990. He previously served as Vice President-Timber. He
serves on the Executive Committee of the Board. Mr. Bowden has been with
Longview Fibre since 1960. Mr. Bowden received a bachelor of science degree
in forest engineering from Oregon State University.
Lisa J. McLaughlin was elected Senior Vice President-Finance, Secretary and
Treasurer in 1992 and has been a Director since 1992. Mrs. McLaughlin
previously served as Vice President-Finance, Secretary and Treasurer and has
been with Longview Fibre since 1977. Mrs. McLaughlin received a bachelor of
arts degree in business administration from Washington State University, and
is a graduate of the Harvard Business School's Program for Management
Development.
Robert B. Arkell was elected Vice President-Industrial Relations and General
Counsel in 1979 and has been a Director since 1986. He is a member of the
Nominating/Corporate Governance Committee of the Board. Mr. Arkell previously
served as Judge, Superior Court for Cowlitz County, Washington. Mr. Arkell
received a juris doctorate from the University of California, Hastings College
of Law, and a bachelor of business administration degree from the University
of Washington.
Each of our officers is elected to their positions at the board of directors'
annual meeting in January of each year. They serve until the next annual
meeting or until their resignation, removal or appointment of a successor.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Our common stock trades on the New York Stock Exchange under the symbol "LFB".
The following table sets forth, for the periods indicated, the range of high
and low market prices for our common stock as reported by the New York Stock
Exchange.
Fiscal 2002 2001
Quarter High Low High Low
1st $12.75 $10.62 $14.25 $12.50
2nd 11.07 9.85 14.12 11.30
3rd 10.48 7.83 13.98 11.70
4th 8.30 5.38 13.10 8.30
We estimate that there are approximately 8,000 beneficial owners of our common
stock.
Dividends paid per share paid in fiscal 2002, 2001 and 2000:
2002 2001 2000
January $0.03 $0.12 $0.12
April 0.00 0.12 0.12
July 0.00 0.12 0.12
October 0.00 0.12 0.12
$0.03 $0.48 $0.48
Our financing arrangements outstanding from time to time include covenants
that restrict the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Page 16
Item 6. Selected Financial Data
The following table sets forth selected financial information concerning our
company and should be read in conjunction with the audited financial
statements and notes included in "Financial Statements and Supplementary Data."
(dollars in thousands except per share) 2002 2001 2000 1999 1998
STATEMENT OF INCOME
Net Sales . . . . . . . . . . . . . . . $ 769,281 $ 875,955 $ 876,298 $ 774,349 $ 753,244
Timber. . . . . . . . . . . . . . . . 172,178 161,129 161,586 170,992 166,037
Paper and paperboard. . . . . . . . . 174,920 195,765 255,025 226,330 193,154
Converted products. . . . . . . . . . 417,451 441,975 451,195 377,027 394,053
Power . . . . . . . . . . . . . . . . 4,732 77,086 8,492 - -
Cost of products sold, including
outward freight . . . . . . . . . . . 655,028 725,313 710,235 644,071 666,960
Gross profit. . . . . . . . . . . . . . 114,253 150,642 166,063 130,278 86,284
Selling, administrative and general
expenses. . . . . . . . . . . . . . . 73,976 74,895 69,098 62,670 64,693
Operating profit. . . . . . . . . . . . 40,277 75,747 96,965 67,608 21,591
Timber. . . . . . . . . . . . . . . . 71,212 65,238 69,438 83,207 74,470
Paper and paperboard (a). . . . . . . (18,214) 2,173 6,472 (4,114) (13,009)
Converted products (a). . . . . . . . (12,721) 8,336 21,055 (11,485) (39,870)
Interest expensed . . . . . . . . . . . (44,858) (39,626) (40,115) (38,703) (39,935)
Other income. . . . . . . . . . . . . . 7,914 1,546 2,097 2,579 4,192
Income (loss) before income taxes . . . 3,333 37,667 58,947 31,484 (14,152)
Provision for income taxes. . . . . . . (1,800) 13,000 21,300 11,500 (7,500)
Net income (loss) . . . . . . . . . . . 5,133 24,667 37,647 19,984 (6,652)
PER SHARE
Net income (loss) . . . . . . . . . . . $ 0.10 $ 0.48 $ 0.73 $ 0.39 $ (0.13)
Dividends . . . . . . . . . . . . . . . 0.03 0.48 0.48 0.28 0.54
Earnings reinvested in the business . . 0.07 - 0.25 0.11 (0.67)
Shareholders' equity at year-end. . . . 8.40 8.33 8.38 8.14 8.03
Average shares outstanding (thousands). 51,077 51,152 51,677 51,677 51,677
Shares outstanding at year-end
(thousands). . . . . . . . . . . . . . 51,077 51,077 51,577 51,677 51,677
BALANCE SHEET DATA
Total assets. . . . . . . . . . . . . . $1,306,442 $1,324,448 $1,276,690 $1,212,753 $1,263,343
Working capital . . . . . . . . . . . . 37,116 38,059 42,378 68,001 55,318
Capital assets. . . . . . . . . . . . . 989,293 1,025,833 981,937 947,359 1,004,837
Deferred tax liabilities - net. . . . . 191,742 184,947 171,518 153,945 142,827
Long-term debt. . . . . . . . . . . . . 510,195 540,400 490,900 495,900 547,018
Shareholders' equity. . . . . . . . . . 428,996 425,395 432,042 420,463 414,949
(a) Includes allocated results from power sales.
OTHER DATA
Sales: Logs, thousands of board feet . 278,166 235,053 209,460 229,839 234,799
Lumber, thousands of board feet 93,893 99,919 93,035 84,513 76,251
Paper, tons . . . . . . . . . . 243,946 251,751 297,935 241,221 221,141
Paperboard, tons. . . . . . . . 79,885 105,961 182,644 240,295 139,509
Converted products, tons. . . . 519,652 535,183 550,070 499,815 523,734
Logs, $/thousand board feet . . $ 509 $ 548 $ 613 $ 605 $ 598
Lumber, $/thousand board feet . 327 323 357 378 336
Paper, $/ton FOB mill equivalent 568 590 580 565 610
Paperboard, $/ton FOB mill
equivalent. . . . . . . . . . 328 348 384 333 353
Converted products, $/ton . . . 803 826 820 754 752
Primary production, tons. . . . . . . . 872,536 954,328 1,048,167 1,015,839 902,924
Employees . . . . . . . . . . . . . . . 3,500 3,700 3,750 3,650 3,700
Funds: Used for plant and equipment. . $ 40,382 $ 115,530 $ 99,642 $ 29,237 $ 73,054
Used for timber and timberlands. . 3,584 4,101 6,532 3,541 15,622
Page 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion together with the financial
statements, including the related notes, and the other financial information
appearing elsewhere in this annual report. See "Forward-Looking Statements."
Overview
Our business is organized into three segments: timber, paper and paperboard,
and converted products. We benefit from significant integration between our
business segments. During fiscal year 2002, our paper and paperboard segment
obtained approximately 8% of its wood chips from logs that were harvested from
our timberlands and chipped by our chipping operations. In the same period,
our converted products segment obtained approximately 98% of its paper and
paperboard requirements from our Longview mill, representing approximately 65%
of total mill production. In addition, our business segments share
centralized corporate management, accounting, human resources and information
systems support. Our fiscal year ends on October 31.
Net sales for individual segments are reported net of intercompany transfers.
Segment operating profits reflect allocations of selling, general and
administrative expenses on the basis of the relative cost to produce products
in each segment. In the case of intercompany transfers of products between
segments, cost of products sold is based upon transfer pricing policies that
we believe assist us in managing and optimizing the consolidated financial
performance of our business as a whole. For example, paperboard acquired from
our paper mill and used in our converting operations is assigned a transfer
price equal to the paper mill's cost. Depending on market conditions, our
transfer pricing practices may understate or overstate the actual price at
which we could have sold those products into the open market or the actual
price in the open market at which we could have purchased the raw materials
used to produce those products. As a consequence, these allocations and
transfer pricing policies sometimes result in individual segment results that
do not reflect the financial performance that would have resulted for a
segment operating as a stand-alone business.
Our timber segment owns and operates timberlands in Oregon and Washington and
produces logs for sale in the domestic and export markets. During fiscal year
2002, our domestic customers consisted of approximately 60 independent
sawmills and plywood plants. Results of operations for our timber segment
also include our sawmill. Net sales of our timber segment are primarily
affected by housing starts and other construction activity in the domestic and
Japanese markets. Construction activity is influenced by mortgage interest
rates and general economic conditions in those markets. Net sales in this
segment are also affected by supply-side factors such as government regulation
restricting the harvest of timber from public and certain private lands and
competition from logs supplied by foreign producers, especially Canadian
producers. The strength of the Japanese export market can significantly
influence the results of our timber segment since our sales into that market
tend to be at higher prices than sales into the domestic market. Because all
of our sales are U.S. dollar denominated, our export sales are also
significantly influenced by the relative strength of the U.S. dollar. Cost of
products sold in the timber segment primarily include contract logging
expense, the cost of operating our sawmill, and depletion, which is based on
the historical cost of timber that is harvested.
Our paper and paperboard segment produces a wide variety of paper and
paperboard at our Longview mill. We sell our paper and paperboard products to
a number of domestic and export customers. In fiscal year 2002, our converted
products segment used approximately 65% of our paper and paperboard output.
Net sales in the paper and paperboard segment are primarily affected by
general economic activity in the United States and Southeast Asia and the
relative strength of the U.S. dollar. Average prices in this segment have
also been favorably affected by industry capacity rationalization over the
Page 18
last several years. The demand for certain specialty products manufactured by
our paper and paperboard segment tends to be less dependent on the economic
cycles affecting the commodity paper market. The major component of cost of
products sold for the paper and paperboard segment is fiber, which consists
primarily of wood chips, but also includes sawdust and recycled materials. We
have invested in processes that allow us to use an increased amount of less
expensive sawdust and recycled materials in making our paper and paperboard
products. Cost of products sold also includes labor, energy and chemicals
used in processing.
Our converted products segment produces corrugated containers, solid fiber
boxes, creative point-of-purchase displays, handle shopping bags and
merchandise bags. Nearly all of our converted products are sold domestically
for end uses that include packaging for consumables such as fresh and frozen
produce and beverages, as well as for toys, furniture and electronics. Net
sales in the converted products segment are primarily affected by general
economic activity in the United States. The primary constituent materials for
converted products are paper and paperboard. Our converted products segment
obtained approximately 98% of its paper and paperboard requirements from our
Longview mill. Cost of products sold also includes energy, labor, ink and
glue.
Our Longview mill contains six steam-driven generators and one natural gas-
fired co-generation facility, all of which are capable of producing electrical
power. During fiscal year 2001, we elected, based on the relationship between
rates we could obtain for third-party sales of electricity and the cost to us
of purchasing electricity and natural gas, to sell a significant percentage of
the electricity that we generated into the market. As a result, we realized
$77.1 million from net sales of electrical power during that period and
allocated the operating profit from those sales to the paper and paperboard
and converted products segments based on the relative cost to produce products
in each segment. The primary contracts pursuant to which we purchased and
sold power in fiscal year 2001 expired and, under new terms, we have
significantly less flexibility in selling and using power generated by our
facilities. However, during the first fiscal quarter of 2002, we elected to
sell electrical power. Due to poor margins, we discontinued the sale of
electrical power in January 2002. We also sold a minor amount of electrical
power in the fourth quarter of fiscal year 2002. Electrical power sales for
fiscal year 2002 were $4.7 million producing an operating loss of $5.7
million. We allocated the operating loss to our manufacturing segments with a
loss of $2.3 million to the paper and paperboard segment and a loss of $3.4
million to our converted products segment. Operating profit from the sale of
power totaled $35.0 million for fiscal year 2001, of which $15.6 million was
allocated to the paper and paperboard segment and $19.4 million was allocated
to the converted products segment.
Our future decisions concerning electrical power generation, including the
extent to which we operate our co-generation facility for sales into the
market, will change from period to period based on market conditions. We do
not expect sales of power to meaningfully contribute to our results in the
coming year.
We can curtail the operation of certain of our equipment and facilities from
time to time to provide us with flexibility in managing our operations and
cost structure. In order to meet market conditions and to maximize the
efficient use of our paper machines, we curtailed three of our twelve paper
machines for substantially all of fiscal year 2002 and for part of fiscal year
2001. In addition, we may curtail the operation of certain of our converting
facilities if we believe it is advantageous to do so. Impairment is reviewed
annually, or whenever events or circumstances indicate that the carrying value
of an asset or group of assets may not be recovered. Impairment evaluates
whether or not the undiscounted future cash flows generated by an asset will
exceed its carrying value. If estimated future cash flows indicate the
carrying value of an asset or group of assets may not be recoverable,
impairment exists, and the asset's book value is written down to its estimated
realizable value.
Page 19
Results of Operations
The following table highlights our net sales and profits for the periods
indicated:
Audited
Fiscal Years Ended October 31
(thousands) 2002 2001 2000
Net Sales. . . . . . . . . . . . . . . . . . . $769,281 $875,955 $876,298
Timber . . . . . . . . . . . . . . . . . 172,178 161,129 161,586
Paper and paperboard . . . . . . . . . . 174,920 195,765 255,025
Converted products . . . . . . . . . . . 417,451 441,975 451,195
Power. . . . . . . . . . . . . . . . . . 4,732 77,086 8,492
Cost of products sold. . . . . . . . . . . . . 655,028 725,313 710,235
Selling, administrative and general expenses . 73,976 74,895 69,098
Operating Profit . . . . . . . . . . . . . . . 40,277 75,747 96,965
Timber . . . . . . . . . . . . . . . . . 71,212 65,238 69,438
Paper and paperboard (1) . . . . . . . . (18,214) 2,173 6,472
Converted products (1) . . . . . . . . . (12,721) 8,336 21,055
Interest expensed. . . . . . . . . . . . . . . (44,858) (39,626) (40,115)
Net Income . . . . . . . . . . . . . . . . . . $ 5,133 $ 24,667 $ 37,647
(1) Includes allocated power profits.
Fiscal Year 2002 Compared to Fiscal Year 2001
Consolidated Results
Net sales. Fiscal year 2002 net sales were $769.3 million compared with
$876.0 million for fiscal year 2001. Net sales decreased 12.2% as a result of
a $72.4 million decrease in net sales of internally generated power to third
parties, a decrease in net sales in our paper and paperboard segment of $20.8
million, or 10.6%, and in our converted products segment of $24.5 million, or
5.5%, offset in part by an increase in net sales in our timber segment of
$11.0 million, or 6.9%. See "Selected Segment Results" below.
Cost of products sold. Fiscal year 2002 cost of products sold was $655.0
million, or 85.1% of net sales, compared with $725.3 million, or 82.8% of net
sales for fiscal year 2001. This increase as a percentage of net sales was
primarily the result of a 14% increase in natural gas costs per unit, a 40%
increase in cost of electrical power purchased from third parties per unit, a
13% increase in old corrugated containers (OCC) costs and losses on third-
party power sales. These cost increases were partially offset by an
approximate 18% decrease in average wood chip costs. Our cost of products
sold also includes depreciation, depletion and amortization costs.
Depreciation, depletion and amortization consist primarily of depreciation of
our plant and equipment, the depletion cost of timber harvested and, to a
lesser degree, amortization of logging roads. This expense was $75.8 million
for fiscal year 2002 compared with $71.6 million for fiscal year 2001.
Selling, general and administrative expenses. Fiscal year 2002 selling,
general and administrative expenses were $74.0 million, or 9.6% of net sales,
compared with $74.9 million, or 8.6% of net sales, for fiscal year 2001. This
increase as a percentage of net sales was primarily attributable to a decrease
in net sales, costs associated with our business process improvement plan and
increased health and welfare costs.
Operating profit. Fiscal year 2002 operating profit was $40.3 million, or
5.2% of net sales, compared with $75.7 million, or 8.6% of net sales, for
fiscal year 2001. See "Selected Segment Results" below.
Page 20
Provision (benefit) for taxes on income. Fiscal year 2002 provision (benefit)
for income taxes was $(1.8) million. Fiscal year 2001 provision for income
taxes was $13.0 million, reflecting a tax rate of 34.5%. The decrease was
primarily the result of a decrease in net income and a settlement with the IRS
of several tax issues providing a total benefit to the company of
approximately $2.5 million.
Net income. For the reasons noted above, net income decreased to $5.1 million
in fiscal year 2002 from $24.7 million in fiscal year 2001, representing a
79.2% decrease.
Selected Segment Results
Timber
Fiscal Years Ended
October 31
Percentage
2002 2001 Increase/(Decrease)
Timber net sales, $ millions $ 172.2 $ 161.1 6.9 %
Timber operating profit, $ millions 71.2 65.2 9.2 %
Logs, thousands of board feet 278,166 235,053 18.3 %
Lumber, thousands of board feet 93,893 99,919 (6.0)%
Logs, $/thousand board feet $ 509 $ 548 (7.1)%
Lumber, $/thousand board feet 327 323 1.2 %
Fiscal year 2002 timber net sales were $172.2 million, compared with $161.1
million for fiscal year 2001. This 6.9% increase was primarily due to an
18.3% increase in log volume sold and improved lumber prices, partially offset
by a decrease in log prices of 7.1% and a decrease in lumber volume of 6.0%.
Due to the relatively strong demand in the domestic log market, the company
was able to temporarily increase harvest levels to improve operating results
and cash flow. The overall log price decline was in part due to a soft
Japanese housing market and adverse U.S. dollar to Japanese yen exchange
rates. However, as a consequence of midyear improvement in the exchange rate,
export prices improved modestly in the fourth fiscal quarter of 2002. Fiscal
year 2002 export sales in the timber segment were $45.9 million, or 26.7%, of
timber net sales compared with $54.5 million, or 33.8%, for fiscal year 2001.
This decline was a result of decreases in export log prices and less lumber
sold in the export market. Fiscal year 2002 timber operating profit was $71.2
million, compared with $65.2 million for fiscal year 2001. The primary reason
for this 9.2% improvement was an increase in log volume sold, partially offset
by a decrease in average log prices.
Paper and Paperboard
Fiscal Years Ended
October 31
Percentage
2002 2001 Increase/(Decrease)
Paper and Paperboard net sales,
$ millions $ 174.9 $ 195.8 (10.6)%
Paper and Paperboard operating profit,
$ millions (18.2) 2.2 -
Paper, tons 243,946 251,751 (3.1)%
Paperboard, tons 79,885 105,961 (24.6)%
Paper, $/ton FOB mill equivalent $ 568 $ 590 (3.7)%
Paperboard, $/ton FOB mill equivalent 328 348 (5.7)%
Page 21
Fiscal year 2002 paper and paperboard net sales were $174.9 million, compared
with $195.8 million for fiscal 2001. This 10.6% decrease is primarily due to
a 24.6% and 5.7% decrease in paperboard volume and price and a 3.1% and 3.7%
decrease in paper volume and price, respectively. Paperboard volume decreased
primarily as a result of our decision not to sell into the Asian market at
prices that were depressed. Paperboard prices were negatively affected by
increased competition in the export market and the strength of the U.S.
dollar. Paper volume and prices decreased primarily as a result of the
general economic slowdown in the U.S. market. However, the weaker U.S. dollar
in the second half of 2002 decreased imports of Kraft paper to the United
States and increased export pricing and demand. Combined with machine
shutdowns and consolidation of converters, both demand and product pricing for
most grades improved in the fourth quarter, both domestically and for our
export sales. Demand and pricing has especially improved in the fourth
quarter for light weight Kraft paper with high OCC content and TEA-Kraft?
(semi-extensible) paper for use in multiwall bags. Fiscal year 2002 export
sales in the paper and paperboard segment were $47.6 million, or 27.2% of
paper and paperboard net sales, compared with $60.2 million, or 30.7%, for
fiscal year 2001. Fiscal year 2002 paper and paperboard operating loss was
$18.2 million, compared with an operating profit of $2.2 million for fiscal
year 2001. Operating results were negatively affected by losses from the sale
of electrical power allocated to the paper and paperboard segment. We
allocated losses of $2.3 million to the segment as a result of power sales in
fiscal year 2002, compared with allocated operating profits of $15.6 million
in fiscal year 2001. Operating results were also negatively affected by a 40%
increase in the cost of electrical power per unit, 14% increase in natural gas
costs per unit, a 13% increase in the cost of OCC and lower sales prices. As
a result of operating losses incurred early in the year, the mill operating
schedule and crew levels were changed to run and staff nine of our twelve
paper machines creating a more steady operation and allowing us to better
manage raw material purchases. Due to the new schedule and the availability
of lower cost residual wood chips, we used a lower proportion of more
expensive chips produced from whole log chipping operations. Operating
results were favorably impacted by an 18% reduction in average wood chip costs
and improved labor productivity. The mill operated at 73% of capacity during
fiscal year 2002 compared with 80% during fiscal year 2001.
Converted Products Fiscal Years Ended
October 31
Percentage
2002 2001 Increase/(Decrease
Converted products sales, $ millions $ 417.5 $ 442.0 (5.5)%
Converted products operating profit,
$ millions (12.7) 8.3 -
Converted Products, tons 519,652 535,183 (2.9)%
Converted Products, $/ton $ 803 $ 826 (2.8)%
Fiscal year 2002 converted products net sales were $417.5 million compared
with $442.0 million for fiscal year 2001. Converted products volume decreased
2.9% and average price decreased 2.8%. This deterioration was primarily the
result of the general slowdown in the domestic economy. Fiscal year 2002
converted products operating loss was $12.7 million, compared with an
operating profit of $8.3 million for fiscal year 2001. Operating results were
negatively affected primarily by allocated operating losses from the sale of
electrical power of $3.4 million for fiscal year 2002, compared with allocated
operating profits of $19.4 million in fiscal year 2001. Operating results
were also negatively affected by volume and price declines and the increased
cost of paper and paperboard supplied to us by the Longview mill. The average
mill cost of paper and paperboard supplied to our converting plants increased
1.4% for fiscal year 2002 as compared to fiscal year 2001. Labor productivity
improved for the year resulting from changing our operating schedules and crew
levels to match customer demand. Substantial progress has been made in
reducing rollstock and finished goods inventories and controllable waste.
Page 22
Fiscal Year 2001 Compared to Fiscal Year 2000
Consolidated Results
Net sales. Fiscal year 2001 net sales were $876.0 million, compared with
$876.3 million for fiscal year 2000. Net sales remained relatively unchanged
as a result of an incremental $68.6 million of opportunistic net sales of
internally generated power to third-parties on economically favorable terms,
offset by a decrease in net sales in our paper and paperboard segments of
$59.3 million, or 23.2%, and in our converted products segment of $9.2
million, or 2.0%. See "Selected Segment Results" below.
Cost of products sold. Fiscal year 2001 cost of products sold was $725.3
million, or 82.8% of net sales, compared with $710.2 million, or 81.0% of net
sales, for fiscal year 2000. This increase as a percentage of net sales was
primarily due to a 5% increase in average wood chip costs and a 59% increase
in average natural gas costs at the Longview mill, which were partially due to
increased power sales discussed above. These were partially offset by an
approximately 29% decrease in average OCC costs and high margins on power
sales. Our cost of products sold includes depreciation, depletion and
amortization costs. Depreciation, depletion and amortization consist
primarily of depreciation of our plant and equipment, the cost of timber
harvested and, to a lesser degree, amortization of logging roads. This
expense was $71.6 million for fiscal year 2001, compared with $67.4 million
for fiscal year 2000.
Selling, general and administrative expenses. Fiscal year 2001 selling,
general and administrative expenses were $74.9 million, or 8.6% of net sales,
compared with $69.1 million, or 7.9% of net sales, for fiscal year 2000. This
increase as a percentage of net sales was primarily attributable to salary
increases including market adjustments, the opening of our new Bowling Green,
Kentucky converting plant and costs associated with our business process
improvement plan.
Operating profit. Fiscal year 2001 operating profit was $75.7 million, or
8.6% of net sales, compared with $97.0 million, or 11.1% of net sales, for the
fiscal year 2000. See "Selected Segment Results" below.
Provision for taxes on income. Fiscal year 2001 provision for income taxes
was $13.0 million, reflecting a tax rate of 34.5%. Fiscal year 2000 provision
for income taxes was $21.3 million, reflecting a tax rate of 36.1%. The
decrease was primarily the result of a decrease in net income.
Net income. For the reasons noted above, net income decreased to $24.7
million from $37.6 million in fiscal year 2000, representing a 34.5% decrease.
Selected Segment Results
Timber
Fiscal Years Ended
October 31
Percentage
2001 2000 Increase/(Decrease)
Timber net sales, $ millions $ 161.1 $ 161.6 (0.3)%
Timber operating profit, $ millions 65.2 69.4 (6.0)%
Logs, thousands of board feet 235,053 209,460 12.2 %
Lumber, thousands of board feet 99,919 93,035 7.4 %
Logs, $/thousand board feet $ 548 $ 613 (10.6)%
Lumber, $/thousand board feet 323 357 (9.5)%
Page 23
Fiscal year 2001 timber net sales were $161.1 million, compared with $161.6
million for fiscal year 2000. The fiscal year 2001 results were impacted by a
decrease in log prices of 10.6% and a decrease in lumber prices of 9.5%,
offset by an increase in log volume of 12.2% and an increase in lumber volume
of 7.4%. The price decline was in part due to a soft Japanese housing market
and adverse U.S. dollar to Japanese yen exchange rates. Weak export market
prices significantly influence our average prices as export prices tend to be
significantly higher than domestic prices. The volume increases were largely
due to relatively strong demand in the domestic market, where prices, although
lower overall in fiscal year 2001, improved from levels in the first half of
the year, as well as to greater timber harvesting in 2001 as a result of
improved logging conditions over those experienced in 2000. Fiscal year 2001
export sales in the timber segment were $54.5 million, or 33.8%, of timber net
sales compared with $66.4 million, or 41.1%, for fiscal year 2000. This
decrease was a result of export price and volume declines. Fiscal year 2001
timber operating profit was $65.2 million, compared with $69.4 million for
fiscal year 2000. The primary reason for this 6.0% decline was a decrease in
average log and lumber prices, partially offset by an increase in log and
lumber volume due to relatively strong demand in the domestic market and less
curtailment of harvesting in fiscal year 2001, which resulted in some shifting
of export sales to domestic sales.
Paper and Paperboard
Fiscal Years Ended
October 31
Percentage
2001 2000 Increase/(Decrease)
Paper and Paperboard net sales,
$ millions $ 195.8 $ 255.0 (23.2)%
Paper and Paperboard operating profit,
$ millions 2.2 6.5 (66.4)%
Paper, tons 251,751 297,935 (15.5)%
Paperboard, tons 105,961 182,644 (42.0)%
Paper, $/ton FOB mill equivalent $ 590 $ 580 1.7 %
Paperboard, $/ton FOB mill equivalent 348 384 (9.4)%
Fiscal year 2001 paper and paperboard net sales were $195.8 million, compared
with $255.0 million for fiscal year 2000. This 23.2% decrease is primarily
due to a 25.6% decrease in paper and paperboard volume, along with a decrease
in paperboard pricing, partially offset by an increase in paper pricing.
Paperboard volume decreased by 42.0% primarily as a result of our decision not
to sell into the Asian market at prices that were depressed due to a general
worsening of business conditions in Asia and the strength of the U.S. dollar.
In addition, Chinese and other Asian producers added Kraft top recycled
linerboard capacity that tended to reduce export Kraft linerboard prices. As
a result of our decision, we have fully curtailed our least efficient
paperboard machine in addition to curtailing two other machines to match
production with incoming orders. Fiscal year 2001 export sales in the paper
and paperboard segment were $60.2 million, or 30.7%, of paper and paperboard
net sales, compared with $95.8 million, or 37.6%, for fiscal year 2000. Paper
volume decreased as a result of a general economic slowdown in the U.S. market
and increased competition from European producers in the export market due to,
among other things, strength in the U.S. dollar. However, paper prices
increased due to a change in our product mix as we continued to increase sales
of TEA-Kraft? paper in the domestic market and other value-added products.
Fiscal year 2001 paper and paperboard operating profit was $2.2 million,
compared with $6.5 million for fiscal year 2000. Operating profits were
negatively impacted by a 5% increase in the average cost of wood chips. In
fiscal year 2001, residual wood chip costs increased and we used a greater
proportion of more expensive wood chips from whole log chipping operations.
We have since reduced our use of whole log chips and are taking advantage of
Page 24
lower-cost residual chips. Operating profits were also negatively affected by
increased costs caused by low machine utilization rates in the first half of
fiscal year 2001 and higher energy prices. Operating profits were favorably
impacted by the profits from the sale of electrical power allocated to the
paper and paperboard segment. We allocated $15.6 million to the segment
operating profit as a result of power sales in fiscal year 2001, compared with
$1.3 million in fiscal year 2000. The basis for this allocation was
consistent with the method used to allocate identifiable assets and other
costs between segments. These sales had the effect of significantly
increasing our energy costs for operation of the paper and paperboard segment
as well as increasing our requirements for natural gas used to fuel the co-
generation facility. Due to the increased sale of power in fiscal year 2001,
plus the increased cost of natural gas, energy costs increased from 8% to 14%
of paper and paperboard and converted products net sales (including allocated
power sales) in fiscal years 2000 and 2001, respectively. However, energy
prices have decreased in the fourth quarter of fiscal year 2001 and we expect
decreased sales of energy into the market in fiscal year 2002. The Longview
mill operated at 80% of capacity during fiscal year 2001 compared with 88%
during fiscal year 2000.
Converted Products
Fiscal Years Ended
October 31
Percentage
2001 2000 Increase/(Decrease
Converted products sales, $ millions $ 442.0 $ 451.2 (2.0)%
Converted products operating profit,
$ millions 8.3 21.1 (60.4)%
Converted Products, tons 535,183 550,070 (2.7)%
Converted Products, $/ton $ 826 $ 820 0.7 %
Fiscal year 2001 converted products net sales were $442.0 million, compared
with $451.2 million for fiscal year 2000. Converted products volume decreased
2.7% due to general softening of the economy. Converted product pricing was
favorably impacted by increased sales of value-added products such as point-
of-purchase displays and higher-quality print orders. Our specialty products,
which we identify as print jobs with four colors or more, jobs with a high
percentage of die-cuts and other enumerated converted products, represented
26.7% of our converted products net sales for fiscal year 2001, compared with
26.3% for fiscal year 2000. Fiscal year 2001 converted products operating
profit was $8.3 million, compared with $21.1 million for the fiscal year 2000.
Operating profits were negatively impacted by the increased cost of paper and
paperboard supplied to us by the Longview mill and increased converting costs,
including labor and converting supplies, offset by the favorable impact of the
profits from the sale of electrical power allocated to the converted products
segment. The increase in paper and paperboard cost was due to the Longview
mill's increased cost of wood chips and natural gas and power related costs
described above and the increased costs due to a lower operating rate at the
mill. The average mill cost of paper and paperboard supplied to our
converting plants increased by 4.7% for fiscal year 2001, as compared to
fiscal year 2000. The increased cost was also partially attributable to the
increased use of high-quality paperboard used in manufacturing value-added
products. We allocated $19.4 million to the segment operating profit as a
result of power sales in fiscal year 2001, compared with $1.2 million in
fiscal year 2000.
Liquidity and Capital Resources
Net cash provided by operations was $63.9 million in fiscal year 2002, $110.5
million in fiscal year 2001 and $112.4 million in fiscal year 2000. The
decreases in fiscal years 2002 and 2001 were primarily due to decreases in
Page 25
operating profits during each of those fiscal years. For the fiscal year
2002, net cash provided by operations was negatively impacted by a $5.7
million operating loss attributable to power sales compared to $35.0 million
of operating profit attributable to power sales in fiscal year 2001. We do
not expect power sales to meaningfully contribute to cash provided by
operations for fiscal year 2003.
Net cash used for investing was $36.9 million in fiscal year 2002, $118.5
million in fiscal year 2001 and $104.9 million in fiscal year 2000. Our
capital expenditures, including timberland acquisitions, plant and equipment
maintenance and improvements and environmental compliance, were $44.0 million
in fiscal year 2002, $119.6 million in fiscal year 2001 and $106.2 million in
fiscal year 2000. In fiscal year 2000, we started a capital program to enable
us to increase our domestic converted products business in an effort to reduce
our reliance on selling into the competitive export paperboard market. This
program has been substantially completed. Significant capital expenditures in
2001 included the construction of our new Bowling Green, Kentucky converting
plant; purchasing of flexo folder gluers, expansion of the material handling
system and other equipment upgrades at our Spanish Fork, Utah converting
plant; upgrading our Amsterdam, New York converting facility by expanding the
building, increasing the corrugator's capacity and purchasing a flexo folder
gluer; and the completion of the replacement of the press section of a paper
machine which began in 2000. Significant capital expenditures in fiscal year
2000 included the purchase of a corrugator for our Spanish Fork converting
plant; the construction of our Seward, Nebraska converting plant; the
rebuilding of a paper machine; and the commencement of work to replace the
press section on a paper machine. As a result of these substantial capital
investments, we substantially reduced our capital expenditures for fiscal
2002.
Capital expenditures are expected to total approximately $43.0 million for
fiscal year 2003, and between $50.0 to $60.0 million for fiscal year 2004,
including expenditures for timber purchases, plant and equipment maintenance
and improvements and environmental compliance.
Net cash used for financing was $27.0 million in fiscal year 2002, while net
cash provided by financing was $8.0 million in fiscal year 2001 and net cash
used for financing was $7.6 million in fiscal year 2000. The change for 2002
primarily reflects a $19.0 million decrease in borrowings resulting from
reduced capital expenditures and dividends. The change in fiscal year 2001
primarily reflects a $39.4 million increase in borrowings during fiscal year
2001 to fund capital expenditures such as the construction of our Bowling
Green, Kentucky converting plant and the purchase of founders' stock for $6.8
million. Debt increased by $10.0 million in fiscal year 2000.
During fiscal year 2002, we did not purchase shares of our stock. During
fiscal years 2001 and 2000, we purchased an aggregate of 500,000 and 100,000
shares of our stock for approximately $6.8 million and $1.3 million,
respectively.
Each quarter we determine the amount of our dividend based on operating
results, current market conditions and debt levels. Cash dividends of $0.03
per share were declared and paid in the first fiscal quarter of 2002 in the
aggregate amount of $1.5 million. There were no additional dividends declared
or paid in the remainder of fiscal year 2002. The first fiscal quarter 2002
dividend reduction from prior levels was based on fourth fiscal quarter 2001
earnings. The suspension of the dividend for the remainder of fiscal year
2002 was due primarily to the net loss incurred in the first six months of
2002 and economic conditions that were negatively affecting our business.
During fiscal year 2001, we declared and paid total dividends of $0.48 per
share, for an aggregate amount of $24.6 million. Dividends of $0.48 per share
were paid in fiscal year 2000 in the aggregate amount of $24.8 million. Our
primary financing arrangements restrict the amount of dividends we may declare
based on certain financial performance tests. However, the suspension of our
dividend is not a result of those restrictions.
Page 26
During the first fiscal quarter 2002, we closed an offering of $215 million
10% Senior Subordinated Notes due 2009 (the "Notes") and entered into a new
three-year $250 million senior unsecured revolving credit facility. The
proceeds of the Notes and the initial borrowing under the new revolving credit
facility were used to repay and cancel our $320 million revolving credit
facility, prepay $25.0 million of 7.75% Series B Senior Notes due April 18,
2002, pay transaction costs relating to the Notes and the new revolving credit
facility and irrevocably place into an escrow account $20.5 million, the
amount that, together with interest accrued in the escrow account, was
sufficient to repay our $20.0 million 6.76% Senior Notes due August 15, 2002,
at their maturity.
In the second fiscal quarter 2002, we entered into two fixed-to-floating
interest rate swaps, for a total of $70.0 million of the $215 million of
senior subordinated notes, at an initial 426 basis points above LIBOR. The
purpose of the swaps is to manage our exposure to fixed rate debt by
converting a portion of our outstanding debt from a fixed to a lower variable
interest rate. In October 2002, due to lower interest rates and changes in
the yield curve, we monetized the gain on the fixed-to-floating swaps of $5.4
million by terminating the swap agreements and simultaneously entering into
two new fixed-to-floating interest rate swaps. The proceeds of the $5.4
million gain were used to repay debt and will be recognized as a reduction of
interest expense over the remaining life of the underlying debt, which matures
in 2009. Under the new swaps, fixed interest payments on $40.0 million of
Notes was swapped for variable rate payments at an initial 623.75 basis points
above LIBOR, and $30.0 million of Notes at 575 basis points above LIBOR.
At October 31, 2002, our financial position for borrowed debt included long-
term debt of $572.2 million, including current installments of long-term debt
of $62.4 million. Additionally, short-term borrowings at October 31, 2002
were $2.0 million.
At October 31, 2002, we had $124 million outstanding under our $250 million
senior unsecured revolving credit facility. In addition, we had $213.8
million of Notes outstanding. Also outstanding at October 31, 2002, were
other various senior notes totaling $204.5 million, $5.0 million under an
unsecured and uncommitted bank line of credit, and revenue bonds of $26.9
million. Our financing arrangements require us to be in compliance with
certain financial covenants, including minimum net worth, short- and long-term
borrowing ratio, current ratio and fixed charge coverage ratio requirements
and restrict our payment of dividends. The company was in compliance with
such covenants at October 31, 2002.
For the quarter ended July 31, 2002, we obtained amendments from the holders
of certain senior notes with respect to compliance with covenants that require
us to maintain a specified ratio of net income available for fixed charges to
fixed charges. The amendments reducing the coverage requirements are
effective for the quarters ended July 31, 2002 through April 30, 2003. In
connection with the grant of amendments we agreed to pay certain fees. As a
result of amendments to certain senior notes obtained in 1999, we continue to
pay an additional 0.75% per annum over the original note coupon rates until an
investment grade credit rating is obtained for our unsecured debt.
During fiscal year 2002, our outstanding debt generally exceeded historical
levels due to borrowings made in connection with substantial expenditures
related to the capital improvement program that we have engaged in since
fiscal year 2000, plus some timberland acquisitions, as well as the payment of
dividends and stock repurchases in 2001 and decreased operating profit in
fiscal years 2002 and 2001 as compared to fiscal year 2000. We have
substantially completed the capital investment program initiated in 2000 and
reduced our debt to $574 million at the end of fiscal year 2002 from $593
million at the end of fiscal year 2001 and $643 million at January 31, 2002.
We expect to continue to reduce debt to more moderate levels by continuing
substantial reduction of capital expenditures over the next few years and
improving operating results by reducing our raw material costs, lowering our
Page 27
cost of procurement and balancing our staffing levels consistent with current
orders. In addition, we have suspended our dividend until operating profits
and cash flow return to more acceptable levels.
As of October 31, 2002, our aggregate annual debt principal repayments are as
follows:
Principal
Fiscal Year Amount
2003 $ 67,400,000
2004 -
2005 (a) 154,000,000
2006 85,500,000
2007 -
2008 24,000,000
2009 215,000,000
2010-2018 29,500,000
(a) Includes $124 million drawn on our $250 million revolving credit
facility.
We believe that our cash flow generated from operations and available
borrowings under our revolving credit facility and our uncommitted line of
credit provide sufficient resources to fund operations and to meet our debt
payment obligations and foreseeable capital expenditure requirements.
Other
We continually review any known environmental exposures including the cost of
remediation. At the present time, we are not aware of any environmental
liabilities that would have a material impact on the consolidated financial
statements.
Although we believe that we are in substantial compliance with federal, state
and local laws regarding environmental quality, the Environmental Protection
Agency (EPA) has issued a final air and water quality rule referred to as the
"Cluster Rule." We estimate that over the next 3 to 5 years required
pollution control capital expenditures could range from $10.0 million to $15.0
million. We have included these estimated expenditures in our capital
expenditure budget discussed above.
Although future pollution control expenditures cannot be predicted with any
certainty and could continue to escalate because of continuing changes in laws
and regulations and uncertainty as to how they will be interpreted and
applied, we believe that compliance with these regulations will not have a
material impact on our capital expenditures, earnings or competitive position.
As part of an industry-supported effort, forestry regulations have been
developed in Oregon and Washington to protect salmon. These regulations
restrict the harvest of timber near streams and other environmentally
sensitive areas, thereby reducing the timber that can be harvested and
increasing costs.
Our exposure to market risks on our financial instruments is limited to
interest rate changes on variable rate debt, including debt under our
revolving credit facilities and interest rate swaps. The interest rates
applied to our variable rate borrowings and swaps are adjusted often and
therefore react quickly to any movement in the general trend of market
interest rates. Interest expense incurred annually related to our variable
rate debt is dependent upon the amount outstanding during the year and the
extent to which interest rates rise and fall. We do not engage in commodity,
currency or interest rate hedging arrangements or engage in transactions
involving derivatives, other than our entering into two interest rate swaps to
Page 28
obtain a lower effective interest rate on our borrowings. See Note 5 to our
financial statements included in Item 8 for a more detailed discussion of our
interest rate swaps. If the weighted average interest rate on our variable
rate debt increased by 1.0% per annum, our annual interest expense would
increase by $2.3 million based on our outstanding debt as of October 31, 2002.
Forward-Looking Statements
This Annual Report contains forward-looking statements, including statements
concerning:
* anticipated improvement of operating results and earnings and expected
cost reductions;
* anticipated reductions in working capital needs, including reducing
inventory and raw materials;
* anticipated pricing and market conditions for the company's products,
energy and certain raw materials, including log, paper, paperboard and
converted products pricing and demand, costs of power, anticipated reductions
in the amount of natural gas purchased from third-parties and the cost of wood
chips;
* expected log harvest levels and customer and product focus;
* improvement of reliability and uptime of equipment, creating a more steady
operation and better management of raw material purchases;
* anticipated savings and improvements to financial results from various
business improvement projects and programs, including from procurement teams
and processes and other reductions in spending;
* expected capital expenditures and the completion and results of capital
expenditure projects;
* expected reductions of debt;
* possible effects of changes in currency exchange rates between the U.S.
dollar and currencies of important export markets;
* anticipated contribution to results from sales of energy;
* anticipated competitive conditions;
* anticipated cost of compliance with certain environmental regulations; and
effects of environmental contingencies and litigation on financial conditions
and results of operations.
Forward-looking statements are based on the company's estimates and
projections on the date they are made, and are subject to a variety of risks
and uncertainties. Actual events could differ materially from those
anticipated by the company due to a variety of factors, including those
factors outlined in the following "Factors That May Affect Our Future
Operating Results" and, among others:
* developments in the world, national, or regional economy or involving the
company's customers or competitors affecting supply of or demand for the
company's products, energy or raw materials;
* changes in product, energy or raw material prices;
* delays in the implementation of cost savings initiatives or the failure to
obtain expected benefits from cost savings initiatives;
Page 29
* capital project delay, cost overruns or unforeseen maintenance on capital
assets;
* unforeseen developments in the company's business;
* adverse changes in the capital markets or interest rates affecting the cost
or availability of financing; or
* other unforeseen events.
We do not undertake any obligation to update forward-looking statements should
circumstances or our estimates or projections change.
FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
You should carefully consider the risks and uncertainties described below and
the other information in this report. They are not the only ones we face.
Additional risks and uncertainties that we are not aware of or that we
currently deem immaterial also may impair our business. If any of the
following risks actually occur, our business, financial condition and
operating results could be materially adversely affected and the trading price
of our common stock and other securities could decline.
Cyclical industry conditions and commodity pricing have adversely affected and
may continue to adversely affect our financial condition and results of
operations.
Our operating results reflect the general cyclical pattern of the forest,
paper and packaging products industries. Most of our products are commodity
products and are subject to competition from other timber companies and paper
and paperboard products manufacturers worldwide. Historically, prices for our
products have been volatile, and we, like other participants in the forest,
paper and packaging products industries, have limited influence over the
timing and extent of price changes for our products. Product pricing is
significantly affected by the relationship between supply and demand in the
forest, paper and packaging products industries. Product supply is influenced
primarily by fluctuations in available manufacturing capacity. Demand is
affected by the state of the economy in general and a variety of other
factors. The demand for our timber is primarily affected by the level of new
residential construction activity and home repair and remodeling activity.
Demand for our paper and packaging products is primarily affected by the state
of the global economy in general and the economies in North America and East
Asia in particular. Due to generally weak worldwide economic conditions,
global demand for our paper and paperboard products has generally declined.
For instance, the average price per thousand board feet we realized from the
sale of logs declined to $509 in fiscal year 2002 from $548 in fiscal year
2001, and over the same period, the average price per ton we realized from the
sale of paper declined to $568 from $590, the average price per ton we
realized from the sale of paperboard declined to $328 from $348, and the
average price per ton we realized from the sale of converted products declined
to $803 from $826. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." A prolonged and severe weakness in the
markets for one or more of our principal products could seriously harm our
financial condition and results of operations and our ability to satisfy our
cash requirements, including the payment of interest and principal on our
debt.
Our industries are highly competitive and subject to wide price fluctuations
that could adversely affect our results of operations.
The forest, paper and packaging products industries are highly competitive
globally, and no single company is dominant. These industries have suffered,
and continue to suffer, from excess capacity. During fiscal year 2002, our
Longview mill operated at 73% of capacity. These industries are also capital
Page 30
intensive, which leads to high fixed costs and generally results in continued
production as long as prices are sufficient to cover marginal costs. Our
competitors include large, vertically integrated forest, paper and packaging
products companies and numerous smaller companies. Larger companies that
compete with us in each of our markets may be better able to withstand the
adverse nature of the business cycle because they may have greater financial
resources than we do. In the past, we have seen significant competition in
the Japanese timber market as European competitors have benefited from the
strength of the U.S. dollar relative to the Euro. These conditions have
contributed substantial price competition and volatility within our industry,
especially during periods of reduced demand. During the latter half of fiscal
2002, the U.S. dollar has gradually weakened which has had a positive effect
on European competition in the Japanese lumber market and in turn gave the
Japanese buyer an advantage to purchase U.S. wood products. If this trend
reverses, future decreases in prices for our products would adversely affect
our operating results. These factors, coupled with our substantial leveraged
position, may harm our ability to respond to competition and other market
conditions.
Price fluctuations in raw materials could adversely affect our ability to
obtain the materials needed to manufacture our products.
The most significant raw material used in our operations is fiber, including
wood, recycled and other fiber, which during fiscal year 2002 accounted for
37.5% of our costs of products produced in our paper and paperboard segment,
not including shipping, warehousing and outward freight. We obtained
approximately 92% of our wood fiber requirements at open market prices during
fiscal year 2002. We also obtained almost all of our recycled fiber on the
open market. Wood and recycled fiber are both subject to commodity pricing,
which fluctuates on the basis of market factors over which we have no control.
In addition, the cost of fiber that we purchase in the market has at times
fluctuated greatly because of economic or industry conditions, particularly
the conditions in the Pacific Northwest, where we purchase most of our fiber.
Further, our access to wood fiber could be adversely affected by consolidation
of sawmills in the Pacific Northwest that supply wood fiber to our Longview
mill, mill closures due to oversupplied domestic lumber markets, as well as
more stringent environmental or other regulations affecting the supply or cost
of timber to those sawmills. We may not be able to pass any future raw
material cost increases through to our customers through product price
increases. Our inability to pass increased costs through to our customers
could harm our financial condition, results of operations and cash flow.
Our operations require substantial capital and our capital resources may not
be adequate to provide for all of our cash requirements.
Our operations require substantial capital. Capital requirements for
expansion, replacement and maintenance of existing facilities or equipment or
to comply with existing and future changes in environmental laws and
regulations may be substantial. Although we maintain our equipment with
regular periodic and scheduled maintenance, we cannot assure you that key
pieces of equipment will not need to be repaired or replaced or that we will
not incur significant additional costs associated with environmental
compliance. The costs of repairing or replacing equipment and the associated
downtime of an affected production line could harm our financial condition,
results of operations and cash flow. If our future capital resources are
inadequate to provide for our operating needs, capital expenditures and other
cash requirements on economic terms, our business, financial condition,
results of operations and cash flow could be harmed.
We are subject to significant environmental regulation and environmental
compliance expenditures and liabilities.
Our businesses are subject to many federal, state and local environmental,
health and safety laws and regulations, particularly with respect to the
Page 31
restoration and reforestation of timberlands, harvesting timber near
waterways, discharges of pollutants and emissions, and the management,
disposal and remediation of hazardous substances or other contaminants.
Compliance with these laws and regulations is a significant factor in our
business and we have incurred, and expect to continue to incur, significant
expenditures to remain in compliance. We expect that the environmental laws
and regulations to which we are subject will become more stringent and more
stringently enforced in the future. Our failure to comply with applicable
environmental laws and regulations and permit requirements could result in
civil or criminal fines or penalties or enforcement actions, including
regulatory or judicial orders enjoining or curtailing operations or requiring
corrective measures, installation of pollution control equipment or remedial
actions.
Some environmental laws and regulations impose liability and responsibility on
present and former owners, operators or users of facilities and sites for
contamination at such facilities and sites without regard to causation or
knowledge of contamination. Investigations may lead to discoveries of
contamination that must be remediated, and closures of facilities may trigger
compliance requirements that are not applicable to operating facilities.
Consequently, we cannot assure you that existing or future circumstances or
developments with respect to contamination, including unanticipated discovery
of contamination or discharges of hazardous substances, will not require
significant expenditures by us or that internally generated funds or other
sources of liquidity and capital will be sufficient to fund unforeseen
environmental liabilities or expenditures.
Some environmental laws permit individuals, citizens groups and other third
parties to file claims against us based upon alleged violations of laws or
damages to property stemming from contamination, or upon alleged injury to
persons stemming from exposure to hazardous substances used or otherwise
controlled by us. We may be required to expend significant sums to defend
and/or settle existing or future claims.
High energy costs could adversely affect our results of operations.
Energy costs are a significant variable operating expense for us and are
susceptible to rapid and substantial price increases. Our average cost of
electricity increased from $40.47 per mkwh, or thousand kilowatt hours, to
$44.27 per mkwh from fiscal year 2001 to fiscal year 2002, and our average
cost of natural gas increased from $5.66 per mmbtu, or million British thermal
units, to $6.39 per mmbtu during the same periods. We have not been able, and
in the future may not be able, to pass all increased energy costs through to
our customers. In addition, the primary contracts pursuant to which we
advantageously purchased and sold power in the past have expired and, under
current terms, we have less flexibility in our ability to mitigate the costs
of energy used by our facilities.
Changes in the value of the U.S. dollar relative to other currencies could
result in fluctuations in demand for our products.
While all of our revenues are earned in U.S. dollars, a large portion of our
sales are made to customers operating in markets that use currencies other
than U.S. dollars. For the fiscal year 2002, exports accounted for over 12.2%
of our total sales. Of this amount, 6.0% of our total sales came from timber
export sales, primarily to Japan, and 6.2% of our total sales came from export
sales of paper and paperboard, primarily to Hong Kong, Canada and Southeast
Asia. Strength in the value of the U.S. dollar relative to the currencies of
these countries could make it more expensive for our customers operating in
foreign markets to purchase our products, could make our products less price
competitive with our foreign competitors, and could consequently reduce the
demand for our products. The value of the U.S. dollar relative to the
Japanese yen had increased from JPY104.78 per U.S. dollar on April 14, 2000 to
JPY132.15 per U.S. dollar on April 15, 2002, but has subsequently weakened to
Page 32
JPY119.89 per U.S. dollar as of December 31, 2002. A reduction in demand for
our products as a result of strengthening the U.S. dollar could harm our
business, financial condition and results of operations.
In addition, adverse currency valuations could make paper and paperboard from
foreign competitors more price competitive in the U.S. market. This situation
has caused, and from time to time in the future may cause, excess supply of
paper and paperboard in the United States, which, in turn, will likely result
in a decrease in U.S. paper and paperboard prices.
Our substantial debt could adversely affect our cash flow and prevent us from
responding to economic, industry or competitive conditions and fund
operational requirements.
We have a significant amount of debt. At our October 31, 2002 fiscal year
end, we had $574.2 million of borrowed debt. Our substantial amount of debt
could have important consequences to you. For example, it could:
* increase our vulnerability to general adverse economic and industry
conditions;
* require us to dedicate a substantial portion of our cash flow from
operations to make interest and principal payments on our debt, thereby
limiting the availability of our cash flow to fund future capital
expenditures, working capital and other general corporate requirements;
* limit our flexibility in planning for, or reacting to, changes in our
business and the forest, paper and packaging products industries, which may
place us at a competitive disadvantage compared with competitors that have
less debt; and
* limit our ability to borrow additional funds, even when necessary to
maintain adequate liquidity.
Natural disasters or other events may cause losses to our timber holdings or
limit our ability to harvest our timber.
The volume and value of timber that can be harvested from our lands may be
limited by natural disasters and other events such as fire, insect
infestation, disease, ice storms, wind storms, flooding, other weather
conditions and other causes. The occurrence of any of these events could harm
our business, financial condition and results of operations. Further, as is
typical in the industry, we do not maintain insurance for any loss of our
standing timber from natural disasters or other causes. In addition, fire and
other natural disasters in adjacent or nearby timberlands may limit our access
to, or impede our ability to harvest, our timber. In periods of poor logging
conditions, we may harvest less timber than expected, thus impacting our net
sales of timber during that period.
Our business and financial performance may be harmed by future labor
disruptions.
Approximately 2,160 of our employees, or over 60% of our workforce, are
parties to collective bargaining agreements. As a result, there is a risk of
work stoppage due to strikes or walkouts. We have 11 collective bargaining
agreements expiring at various times through calendar year 2007, including one
agreement covering approximately 104 employees that will expire during
calendar year 2003. Any significant work stoppage as a result of the failure
to successfully negotiate new collective bargaining agreements could have a
material adverse effect on our business, financial condition and results of
operations.
Page 33
Our pulp and paper mill and all of our paper machines are located at a single
complex in Longview, Washington.
Our pulp and paper mill and all of our paper machines are located at a single
358 acre complex in Longview, Washington. Since we do not have pulp and paper
production elsewhere, a material disruption at our mill could result in a
material disruption of our paper making operations. Such disruptions could be
caused by:
* prolonged power failures;
* a breakdown of our continuous pulp digesters or recovery furnaces;
* chemical spill or release;
* disruptions in the transportation infrastructure including railroad tracks,
bridges, tunnels and roads; or
* fires, floods, earthquakes or other disasters.
Although we currently have certain business insurance and replacement value
insurance, we cannot assure you that we are adequately insured to cover the
total amount of any losses caused by any of the above events. In addition, we
are not insured against any losses due to interruptions in our business due to
damage to or destruction of our Longview pulp and paper making complex caused
by earthquakes or to major transportation infrastructure disruptions or other
events that do not occur on our premises. A disruption in our pulp and paper
operations would also adversely affect our converting plants, which in fiscal
year 2002 obtained approximately 98% of their paper and paperboard
requirements from our mill.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
We generally do not engage in commodity, currency or interest rate hedging
arrangements or engage in transactions involving derivatives, but we have
entered into two interest rate swaps to obtain a lower effective interest rate
on our borrowings. See Note 5 to our financial statements included in Item 8
for a more detailed discussion of our interest rate swaps. Our exposure to
market risks on our financial instruments is limited to interest rate changes
on variable rate debt, including debt under our revolving credit facilities.
The interest rates applied to our variable rate borrowings are adjusted often
and therefore react quickly to any movement in the general trend of market
interest rates. Interest expense incurred annually related to our variable
rate debt is dependent upon the amount outstanding during the year and the
extent to which interest rates rise and fall. If the weighted average
interest rate on our variable rate debt increased by 1.0% per annum, our
annual interest expense would increase by $2.3 million based on our
outstanding debt as of October 31, 2002.
Page 34
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements Page
Audited Consolidated Financial Statements:
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . 35
Consolidated Statement of Income for the three years ended October 31,
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Consolidated Statement of Shareholders' Equity for the three years
ended October 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . 36
Consolidated Balance Sheet at October 31, 2002, 2001 and 2000. . . . . . 37
Consolidated Statement of Cash Flows for the three years ended
October 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 39
Financial Statement Schedules
Schedules have been omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto
of this Form 10-K.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Longview Fibre Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Longview
Fibre Company and its subsidiaries at October 31, 2002, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years
in the period ended October 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
December 9, 2002
Page 35
LONGVIEW FIBRE COMPANY
CONSOLIDATED STATEMENT OF INCOME
Years Ended October 31
(thousands except per share) 2002 2001 2000
NET SALES. . . . . . . . . . . . . . . . . . . $769,281 $875,955 $876,298
Timber . . . . . . . . . . . . . . . . . 172,178 161,129 161,586
Paper and paperboard . . . . . . . . . . 174,920 195,765 255,025
Converted products . . . . . . . . . . . 417,451 441,975 451,195
Power. . . . . . . . . . . . . . . . . . 4,732 77,086 8,492
Cost of products sold, including
outward freight . . . . . . . . . . . . . . . 655,028 725,313 710,235
GROSS PROFIT . . . . . . . . . . . . . . . . . 114,253 150,642 166,063
Selling, administrative and general expenses . 73,976 74,895 69,098
OPERATING PROFIT . . . . . . . . . . . . . . . 40,277 75,747 96,965
Timber . . . . . . . . . . . . . . . . . 71,212 65,238 69,438
Paper and paperboard (including
allocated power profits). . . . . . . . (18,214) 2,173 6,472
Converted products (including allocated
power profits). . . . . . . . . . . . . (12,721) 8,336 21,055
Interest income. . . . . . . . . . . . . . . . 1,993 480 455
Interest expensed. . . . . . . . . . . . . . . (44,858) (39,626) (40,115)
Miscellaneous. . . . . . . . . . . . . . . . . 5,921 1,066 1,642
INCOME BEFORE INCOME TAXES . . . . . . . . . . 3,333 37,667 58,947
PROVISION FOR TAXES ON INCOME (see Note 6)
Current. . . . . . . . . . . . . . . . . . . (8,618) (1,161) 3,783
Deferred . . . . . . . . . . . . . . . . . . 6,818 14,161 17,517
(1,800) 13,000 21,300
NET INCOME . . . . . . . . . . . . . . . . . $ 5,133 $ 24,667 $ 37,647
Per share. . . . . . . . . . . . . . . . $ 0.10 $ 0.48 $ 0.73
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(thousands) 2002 2001 2000
COMMON STOCK:
Balance at beginning of year . . . . . . $ 76,615 $ 77,365 $ 77,515
Less ascribed value of stock purchased . - (750) (150)
Balance at end of year . . . . . . . . . $ 76,615 $ 76,615 $ 77,365
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year . . . . . . $ 3,306 $ 3,306 $ 3,306
Balance at end of year . . . . . . . . . $ 3,306 $ 3,306 $ 3,306
RETAINED EARNINGS:
Balance at beginning of year . . . . . . $345,474 $351,371 $339,642
Net income . . . . . . . . . . . . . . . 5,133 24,667 37,647
Less cash dividends on common stock
($0.03, $0.48, $0.48 per share,
respectively) . . . . . . . . . . . . (1,532) (24,553) (24,805)
Less purchases of common stock . . . . . - (6,011) (1,113)
Balance at end of year . . . . . . . . . $349,075 $345,474 $351,371
COMMON SHARES:
Balance at beginning of year . . . . . . 51,077 51,577 51,677
Less purchases. . . . . . . . . . . . . - (500) (100)
Balance at end of year . . . . . . . . . 51,077 51,077 51,577
The accompanying notes are an integral part of the financial statements.
Page 36
CONSOLIDATED BALANCE SHEET
October 31
(dollars in thousands except per share) 2002 2001 2000
ASSETS
Current assets:
Accounts and notes receivable. . . . . . . . $ 101,930 $ 99,419 $ 114,843
Allowance for doubtful accounts. . . . . . 1,350 1,350 1,350
Taxes on income, refundable. . . . . . . . . 2,293 - -
Inventories (see Note 2) . . . . . . . . . . 71,589 83,218 82,023
Other. . . . . . . . . . . . . . . . . . . . 7,458 8,595 9,532
Total current assets . . . . . . 181,920 189,882 205,048
Capital assets:
Buildings, machinery and equipment at cost . 1,828,841 1,806,039 1,717,587
Accumulated depreciation . . . . . . . . . 1,059,778 1,004,620 961,379
Costs to be depreciated in future
years (see Note 3). . . . . . . . . . . 769,063 801,419 756,208
Plant sites at cost. . . . . . . . . . . . . 3,524 3,483 3,444
772,587 804,902 759,652
Timber at cost less depletion. . . . . . . . 187,597 191,530 192,778
Roads at cost less amortization. . . . . . . 8,976 9,285 9,627
Timberland at cost . . . . . . . . . . . . . 20,133 20,116 19,880
216,706 220,931 222,285
Total capital assets . . . . . . 989,293 1,025,833 981,937
Pension and other assets (see Note 8 ) . . . 135,229 108,733 89,705
$1,306,442 $1,324,448 $1,276,690
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Payable to bank resulting from
checks in transit . . . . . . . . . . . . . $ 7,464 $ 11,365 $ 9,385
Accounts payable . . . . . . . . . . . . . . 51,168 60,636 61,388
Short-term borrowings (see Note 4) . . . . . 2,000 8,000 43,070
Payrolls payable . . . . . . . . . . . . . . 12,138 16,435 16,576
Federal income taxes payable . . . . . . . . - 606 2,638
Other taxes payable. . . . . . . . . . . . . 9,634 9,781 9,613
Current installments of long-term debt . . . 62,400 45,000 20,000
Total current liabilities . . . 144,804 151,823 162,670
Long-term debt (see Note 5). . . . . . . . . 510,195 540,400 490,900
Deferred taxes - net (see Note 6). . . . . . 191,742 184,947 171,518
Other liabilities. . . . . . . . . . . . . . 30,705 21,883 19,560
Commitments (see Note 9) . . . . . . . . . . - - -
Shareholders' equity:
Preferred stock; authorized 2,000,000 shares - - -
Common stock, ascribed value $1.50 per share;
authorized 150,000,000 shares; issued
51,076,567, 51,076,567 and 51,576,567 shares,
respectively (see Note 11). . . . . . . . . 76,615 76,615 77,365
Additional paid-in capital . . . . . . . . . 3,306 3,306 3,306
Retained earnings. . . . . . . . . . . . . . 349,075 345,474 351,371
Total shareholders' equity . . . 428,996 425,395 432,042
$1,306,442 $1,324,448 $1,276,690
The accompanying notes are an integral part of the financial statements.
Page 37
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended October 31
(thousands) 2002 2001 2000
CASH PROVIDED BY (USED FOR) OPERATIONS:
Net income . . . . . . . . . . . . . . . . . $ 5,133 $ 24,667 $ 37,647
Charges to income not requiring cash:
Depreciation . . . . . . . . . . . . . . 69,376 66,235 61,971
Depletion and amortization . . . . . . . 6,407 5,331 5,411
Deferred taxes - net . . . . . . . . . . 6,795 13,429 17,573
(Gain) loss on disposition of capital
assets. . . . . . . . . . . . . . . . . (2,357) 3,037 2,920
Change in:
Accounts and notes receivable . . . . . . (2,511) 15,424 (8,498)
Taxes on income, refundable . . . . . . . (2,293) - -
Inventories . . . . . . . . . . . . . . . 11,629 (1,195) (2,460)
Other . . . . . . . . . . . . . . . . . . 1,137 937 (1,370)
Pension and other noncurrent assets . . . (26,113) (19,028) (17,031)
Accounts, payrolls and other
taxes payable . . . . . . . . . . . . . (11,495) 1,365 12,735
Federal income taxes payable. . . . . . . (606) (2,032) 1,712
Other noncurrent liabilities. . . . . . . 8,822 2,323 1,834
Cash provided by operations. . . . . . . . . 63,924 110,493 112,444
CASH PROVIDED BY (USED FOR) INVESTING:
Additions to: Plant and equipment.. . . . . (40,382) (115,530) (99,642)
Timber and timberlands. . . . (3,584) (4,101) (6,532)
Proceeds from sale of capital assets . . . . 7,080 1,132 1,294
Cash used for investing. . . . . . . . . . . (36,886) (118,499) (104,880)
CASH PROVIDED BY (USED FOR) FINANCING:
Additions to long-term debt. . . . . . . . . 213,812 94,500 17,000
Reduction in long-term debt. . . . . . . . . (227,000) (20,000) (32,118)
Short-term borrowings. . . . . . . . . . . . (6,000) (35,070) 25,070
Payable to bank resulting from
checks in transit . . . . . . . . . . . . . (3,901) 1,980 493
Accounts payable for construction. . . . . . (2,417) (2,090) 8,059
Cash dividends . . . . . . . . . . . . . . . (1,532) (24,553) (24,805)
Purchase of common stock . . . . . . . . . . - (6,761) (1,263)
Cash provided by (used for) financing. . . . (27,038) 8,006 (7,564)
Change in cash position. . . . . . . . . . . - - -
Cash position, beginning of year . . . . . . - - -
Cash position, end of year . . . . . . . . . $ - $ - $ -
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest (net of amount capitalized) . . . $ 36,926 $ 38,539 $ 40,234
Capitalized interest . . . . . . . . . . . 1,971 2,054 1,301
Income taxes . . . . . . . . . . . . . . . (5,757) 1,204 1,844
The accompanying notes are an integral part of the financial statements.
Page 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the company and all
subsidiaries after elimination of intercompany balances and transactions.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a
last-in, first-out method except for supplies at current averages.
Property and depreciation
Buildings, machinery and equipment are recorded at cost and include those
additions and improvements that add to production capacity or extend useful
life. Cost includes interest capitalized during the construction period on
all significant asset acquisitions. Impairment is reviewed annually, or
whenever events or circumstances indicate that the carrying value of an
asset or group of assets may not be recovered. Impairment evaluates
whether or not the undiscounted future cash flows generated by an asset
will exceed its carrying value. If estimated future cash flows indicate
the carrying value of an asset or group of assets may not be recoverable,
impairment exists, and the asset's net book value is written down to its
estimated realizable value. When properties are sold or otherwise
disposed, the cost and the related accumulated depreciation are removed
from the respective accounts and the resulting profit or loss is recorded
in income. The costs of maintenance and repairs are charged to income when
incurred.
Depreciation for financial accounting purposes is computed on the straight-
line basis over the estimated useful lives of the assets. The estimated
useful lives of assets range from 20 to 40 years for buildings and
principally from 15 to 20 years for machinery and equipment.
Timberlands, depletion and amortization
Timber, timberlands and timber roads are stated at cost, net of accumulated
depreciation, depletion and amortization. Timber is tracked on a county-
by-county basis whereby capital costs and recoverable timber volumes are
accumulated in the county in which the related timber is located. Timber
upon reaching the age of 35 years is considered merchantable and available
for harvesting with all timber younger than 35 years of age being
classified as premerchantable. Expenditures for reforestation, including
costs such as site preparation, tree planting, fertilization and herbicide
application within two years after planting, are capitalized and depleted
as timber is harvested. After two years of age, seedling reforestation
maintenance and tree farm management costs, consisting of recurring items
necessary to the ownership and administration of the timber and timberlands
are recorded as a current period expense.
Provision for depletion of merchantable timber represents a charge per unit
of production (depletion rate) applied to actual harvest volumes.
Depletion rates are determined on a county-by-county basis and are
developed using total capital costs and current recoverable merchantable
volumes in the county in which the related timber is located. A computer
growth index model is utilized to track the timber volumes through the
growth cycle and is based upon actual growth rates from permanent timber
growth plots throughout the Northwest. Countywide depletion rates are
adjusted every five years for timber maturity, estimated growth, and actual
harvest volumes for the prior five-year period. Countywide depletion rates
are uniform regardless of the merchantable timber age, species or quality.
Page 39
Direct costs associated with the building of the primary access timber
roads are capitalized and amortized on the straight-line basis over
estimated useful lives ranging from 3 to 15 years. Costs incurred on
timber roads that serve short-term harvest needs are expensed as incurred.
Costs for road base construction of mainline roads, such as clearing and
grading, are not amortized and remain a capitalized cost until disposition
as they provide permanent value to the timberlands.
No gain or loss is recognized on timberland exchanges since the earnings
process is not considered complete until timber is harvested and marketed.
Financial instruments
We account for derivative financial instruments pursuant to Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), as amended. This standard requires that
all derivative financial instruments, such as interest rate swap contracts, be
recognized in the financial statements and measured at fair value regardless
of the purpose or intent for holding them. Changes in the fair value of
derivative financial instruments are either recognized periodically in income
or shareholders' equity (as a component of comprehensive income), depending on
whether the derivative is being used to hedge changes in fair value or cash
flows.
Earnings per share
Basic and diluted income per common share is computed on the basis of
weighted average shares outstanding of 51,076,567, 51,151,567 and
51,676,567 for 2002, 2001 and 2000, respectively.
Pension and other benefit plan costs
Our policy is to accrue as cost an amount computed by the actuary and to
fund at least the minimum amount required by ERISA.
Revenue recognition
We recognize revenues upon shipment when the sales price is fixed or
determinable, title transfers and risk of loss has passed to the customer.
Sales allowances for doubtful accounts were $1,350,000 at October 31, 2002,
2001 and 2000. Bad debt expense for the years ended October 31, 2002, 2001
and 2000 were $877,000, $453,000 and $474,000, respectively.
Note 2 - Inventories:
Inventories consist of the following:
October 31
(thousands) 2002 2001 2000
Finished goods . . . . . . . . $ 34,976 $ 37,618 $ 37,508
Goods in process. . . . . . . . 30,243 35,385 33,069
Raw materials . . . . . . . . . 7,725 14,042 14,595
Supplies (at average cost). . . 40,399 42,259 40,949
113,343 129,304 126,121
LIFO Reserve. . . . . . . . . . (41,754) (46,086) (44,098)
$ 71,589 $ 83,218 $ 82,023
During 2002, inventory quantities were reduced. This reduction resulted in
a liquidation of LIFO inventory, the effect of which increased net income
by approximately $1,400,000 or $0.03 per share.
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Note 3 - Buildings, machinery and equipment:
Buildings, machinery and equipment consist of the following:
October 31
(thousands) 2002 2001 2000
Buildings - net . . . . . . . . $ 86,016 $ 89,013 $ 75,468
Machinery and equipment - net . 683,047 712,406 680,740
$769,063 $801,419 $756,208
Note 4 - Short-term borrowings:
At October 31, 2002, we had bank lines of credit totaling $265 million. Of
this amount, $250 million was under a credit agreement with a group of
banks expiring December 10, 2004. The agreement provides for borrowings at
the Offshore Rate (LIBOR based) plus a spread, currently 2.50%, or the
bank's Reference Rate plus a spread, currently 1.25%. Up to $50 million of
the credit agreement can be used for letters of credit at a fee that is the
same as the Offshore Rate spread. The credit agreement contains certain
financial covenants and provides for a commitment fee on the unused
portion, currently 0.60% per year. At October 31, 2002, we had borrowings
of $124 million under this credit agreement and $14.7 million of letters of
credit issued under this credit agreement.
We have a $15 million uncommitted line of credit of which $5 million was
borrowed at October 31, 2002.
Short-term borrowings of $127 million, $309 million and $287 million at
October 31, 2002, 2001 and 2000, respectively, under the above agreements,
have been reclassified as long-term debt because they are to be renewed and
replaced with borrowings due beyond one year and into future periods.
Short-term borrowing activity including the amount reclassified as long-
term is summarized as follows:
(thousands) 2002 2001 2000
Short-term borrowings October 31 $129,000 $317,000 $330,070
Interest rate October 31 . . . . 5.9% 4.3% 8.4%
Average daily amount of short-term
borrowings outstanding during
year. . . . . . . . . . . . . . $201,775 $328,176 $270,604
Average* interest rate
during year . . . . . . . . . . 5.1% 6.7% 7.8%
Maximum amount of short-term
borrowings at any month end . . $339,000 $317,000 $330,070
*Computed by dividing interest incurred by average short-term borrowings
outstanding.
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Note 5 - Long-term debt:
Long-term debt consists of the following:
October 31
(thousands) 2002 2001 2000
Senior notes due through 2010
(5.05%-8.84%) - Note (a) . . . . $204,500 $249,500 $197,000
Revenue bonds payable through
2018 (floating rates, currently
1.90%-2.15%) - Note (b). . . . . 26,900 26,900 26,900
Senior subordinated notes due
2009 (10%) - Note (c). . . . . . 213,812 - -
Notes payable - banks -
Note 4 above . . . . . . . . . . 127,000 309,000 287,000
572,212 585,400 510,900
Less current installments. . . . 62,400 45,000 20,000
509,812 540,400 490,900
Fair value adjustments -
mark-to-market - Note (d). . . . 383 - -
Net long-term debt. . . . . . . . $510,195 $540,400 $490,900
Scheduled maturities
2004 $ -
2005 157,000
2006 85,500
2007 -
2008-2018 267,312
$509,812
Note (a) Covenants of the senior notes include tests of minimum net worth,
short-term borrowing, long-term borrowing, current ratio, fixed charge
coverage ratios and restrictions on payment of dividends. We have obtained
amendments from the holders of certain senior notes with respect to compliance
with covenants that require us to maintain a specified ratio of net income
available for fixed charges to fixed charges. The amendments reducing the
coverage requirements are effective for the quarter ending July 31, 2002
through the quarter ending April 30, 2003. In connection with the grant of
the amendments we agreed to pay certain fees.
At October 31, 2002, approximately $7.3 million of consolidated retained
earnings was unrestricted as to the payment of dividends.
Note (b) Primarily incurred upon the purchase of manufacturing equipment. At
October 31, 2002, $26,900,000 was secured by liens on the equipment.
Note (c) In January 2002, we closed an offering of $215 million 10% Senior
Subordinated Notes due 2009 (the "Notes") and entered into a new three-year
$250 million senior unsecured revolving credit facility. The proceeds of the
Notes and the initial borrowing under the new revolving credit facility were
used to repay and cancel our $320 million revolving credit facility, prepay
$25.0 million of 7.75% Series B Senior Notes due April 18, 2002, pay
transaction costs relating to the Notes and the new revolving credit facility
and to irrevocably place into an escrow account $20.5 million, the amount that
together with accrued interest, was sufficient to repay our $20.0 million
6.76% Senior Notes on August 15, 2002, at their maturity.
Note (d) In April 2002 we entered into two interest rate swap agreements (the
"Agreements") relating to $70 million of the Senior Subordinated Notes in an
effort to manage our exposure to fixed rate debt by converting a portion of
our outstanding debt from a fixed to variable interest rate. In October 2002,
we terminated the Agreements and received cash of $5.4 million resulting in a
deferred gain of $5.4 million. The deferred gain is included in other
Page 42
liabilities in the accompanying balance sheet and will reduce interest expense
over the term of the Senior Subordinated Notes. Simultaneously we entered
into two new interest rate swap agreements (the "New Agreements") with
notional amounts of $70 million which mature on January 15, 2009 and involve
the exchange of fixed interest rate payments for variable interest rate
payments without the exchange of the underlying principal amounts. Variable
rates are based on LIBOR and are reset on a semi-annual basis. The
differential between fixed and variable rates to be paid or received is
accrued as interest rates change in accordance with the New Agreements and
recognized as an adjustment to interest expense. The mark-to market
adjustment for the period October 2002 resulted in a derivative asset of $383
thousand, with a corresponding fair value adjustment to long-term debt.
Note 6 - Income taxes:
Provision (benefit) for taxes on income is made up of the following
components:
(thousands) 2002 2001 2000
Current:
Federal . . . . . . . . . . . . . . $(8,452) $(1,072) $ 3,497
State . . . . . . . . . . . . . . . (166) (89) 286
(8,618) (1,161) 3,783
Deferred:
Federal . . . . . . . . . . . . . . 6,752 13,672 16,603
State . . . . . . . . . . . . . . . 66 489 914
6,818 14,161 17,517
$(1,800) $13,000 $21,300
An analysis of the effective income tax rate as compared to the expected
federal income tax rate is as follows:
2002 2001 2000
Expected federal income tax rate . . 35% 35% 35%
Foreign Sales Corporation. . . . . . - - (1)
State income taxes less
federal income tax benefit. . . . . (2) 1 1
Credits. . . . . . . . . . . . . . . (70) - -
Other. . . . . . . . . . . . . . . . (17) (1) 1
(54)% 35% 36%
The deferred income tax liabilities (assets) recorded in the Consolidated
Balance Sheet as of October 31, are as follows:
(thousands) 2002 2001 2000
Deferred tax assets:
Alternative minimum tax . . . . . . $(17,344) $ (9,426) $ (9,901)
State credits and other assets. . . (6,595) (6,607) (6,930)
Total deferred tax assets. . . . . (23,939) (16,033) (16,831)
Deferred tax liabilities:
Depreciation/depletable assets. . . 180,697 171,124 163,972
Employee benefit plans. . . . . . . 30,831 25,678 19,304
Other liabilities . . . . . . . . . 288 290 453
Total deferred tax liabilities . . 211,816 197,092 183,729
Total deferred income taxes. . . . . $187,877 $181,059 $166,898
Current deferred income tax assets . $ (3,865) $ (3,888) $ (4,620)
Non-current deferred income tax
liability . . . . . . . . . . . . . $191,742 $184,947 $171,518
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Note 7 - Segment information:
We own and operate tree farms in Oregon and Washington which produce logs for
sale and operate a sawmill in Washington. Our pulp and paper mill at Longview,
Washington produces pulp which is manufactured into kraft paper and
containerboard. The raw material fibers come primarily from purchased wood
chips and sawdust with important contributions from fiber reclaimed from post-
consumer and post-industrial waste, purchased bleach pulp, and augmented by
log chipping operations owned by us and others. Our seventeen converting
plants in twelve states produce shipping containers and merchandise bags. The
tonnage of our paper and containerboard received at the converting plants
equals approximately 65% of the Longview mill production.
Included in sales to customers are export sales, principally to Japan, China
and Southeast Asia, of $93,528,000, $114,629,000 and $162,263,000 during 2002,
2001 and 2000, respectively, of which sales to Japan were $46,035,000,
$55,665,000 and $67,697,000, during those respective years. All sales are made
in U.S. dollars.
There are no intersegment sales as all manufacturing operations to produce
primary or converted products for sale are considered integrated from the
purchased wood to the sale of the finished product.
Identifiable assets are segregated or allocated to segments as follows:
1. Assets used wholly within a segment are assigned to that segment.
2. Assets used jointly by two segments are allocated to each segment on a
percentage determined by dividing total cost of product into cost of
product produced for each segment. Paper and paperboard assets of
$297,739,000, $309,823,000 and $264,497,000 have been allocated to
converted products at October 31, 2002, 2001 and 2000, respectively.
Power sales, depreciation, depletion and amortization and additions to capital
assets have been segregated and allocated similarly to the method used for
identifiable assets.
(thousands) 2002 2001 2000
Sales to customers (including
allocated power sales):
Timber . . . . . . . . . . . . . . . $ 172,178 $ 161,129 $161,586
Paper and paperboard . . . . . . . . 176,838 230,215 259,404
Converted products . . . . . . . . . 420,265 484,611 455,308
Total . . . . . . . . . . . . . . . 769,281 875,955 876,298
Income (loss) on sales
(including allocated power profits):
Timber . . . . . . . . . . . . . . . 71,212 65,238 69,438
Paper and paperboard . . . . . . . . (18,214) 2,173 6,472
Converted products . . . . . . . . . (12,721) 8,336 21,055
Interest expensed and other - net . (36,944) (38,080) (38,018)
Income before income taxes. . . . . 3,333 37,667 58,947
Identifiable assets at October 31:
Timber . . . . . . . . . . . . . . . 269,502 271,571 275,401
Paper and paperboard . . . . . . . . 332,456 330,712 363,855
Converted products . . . . . . . . . 704,484 722,165 637,434
Total . . . . . . . . . . . . . . . 1,306,442 1,324,448 1,276,690
Depreciation, depletion and
amortization:
Timber . . . . . . . . . . . . . . . 9,553 9,022 9,008
Paper and paperboard . . . . . . . . 18,500 17,976 19,749
Converted products . . . . . . . . . 47,730 44,568 38,625
Total . . . . . . . . . . . . . . . 75,783 71,566 67,382
Page 44
(thousands) 2002 2001 2000
Additions to capital assets:
Timber . . . . . . . . . . . . . . . 4,172 6,665 12,298
Paper and paperboard . . . . . . . . 11,948 23,647 27,184
Converted products . . . . . . . . . 27,846 89,319 66,692
Total . . . . . . . . . . . . . . . $ 43,966 $ 119,631 $ 106,174
Note 8 - Retirement and other postretirement benefits:
Retirement plans
We have two trusteed defined benefit pension programs which cover a majority
of employees who have completed one year of continuous service. The plans
provide benefits of a stated amount for each year of service with an option
for some employees to receive benefits based on an average earnings formula.
The change in benefit obligation is as follows:
Years ended October 31
(thousands) 2002 2001 2000
Change in benefit obligation
Benefit obligation at beginning
of year . . . . . . . . . . . . $337,033 $295,619 $233,330
Service cost . . . . . . . . . . 7,707 6,942 6,194
Interest cost. . . . . . . . . . 22,604 22,113 18,095
Amendments . . . . . . . . . . . 533 1,106 51,889
Change in assumptions. . . . . . 10,500 19,239 -
Actuarial (gain) loss. . . . . . (5,875) 4,215 (2,586)
Expected benefits paid . . . . . (17,543) (12,201) (11,303)
Benefit obligation at end
of year . . . . . . . . . . . . $354,959 $337,033 $295,619
The change in fair value of assets is as follows:
Years ended October 31
(thousands) 2002 2001 2000
Change in plan assets
Fair value of plan assets at
beginning of year . . . . . . . $433,525 $572,887 $466,611
Actual return (loss) on
plan assets . . . . . . . . . . (50,764) (121,824) 118,473
Employee contribution. . . . . . 3 5 4
Benefits paid. . . . . . . . . . (17,494) (17,543) (12,201)
Fair value of plan assets at
end of year . . . . . . . . . . $365,270 $433,525 $572,887
The funded status of the plan and pension asset recognized in the balance
sheet are summarized as follows:
October 31
(thousands) 2002 2001 2000
Funded status . . . . . . . . . . $ 10,311 $ 96,492 $277,268
Unrecognized net actuarial (gain)
loss . . . . . . . . . . . . . . 63,499 (45,749) (249,376)
Unrecognized prior service cost . 41,577 46,975 52,318
Unrecognized net asset at
transition . . . . . . . . . . . - (57) (868)
Pension asset recognized in the
consolidated balance sheet . . . $115,387 $ 97,661 $ 79,342
Page 45
Major assumptions used in the calculation are as follows:
Years ended October 31
(thousands) 2002 2001 2000
Discount rate for funded status . 6.75% 7.0% 7.5%
Discount rate for net periodic
pension cost . . . . . . . . . . 7.0% 7.5% 7.5%
Rate of compensation increase . . 4.75% 4.75% 4.75%
Expected long-term rate of return
on plan assets . . . . . . . . . 10.0% 10.0% 10.0%
For determining the net periodic pension income (cost) for fiscal 2003, an
expected long-term rate of return on plan assets of 9.0% will be used.
The components of net periodic pension income (cost) are
summarized as follows:
Years ended October 31
(thousands) 2002 2001 2000
Service cost - benefits earned
during the year. . . . . . . . . $ 7,708 $ 6,942 $ 6,194
Interest cost on benefit
obligation . . . . . . . . . . . 22,604 22,113 18,095
Expected (return) on plan assets. (49,279) (46,559) (39,803)
Recognized net actuarial (gain) . (4,633) (6,453) (4,879)
Amortization of prior service
cost . . . . . . . . . . . . . . 5,931 6,449 4,626
Amortization of net asset at
transition . . . . . . . . . . . (57) (811) (1,079)
Net periodic benefit (income) . . $(17,726) $(18,319) $(16,846)
Savings plans
Voluntary savings plans are maintained for all employees who have completed
one year of continuous service. The plans allow salary deferrals in
accordance with IRC section 401(k) provisions. Our contribution as a matching
incentive was $2,544,000, $2,399,000 and $1,689,000 during 2002, 2001 and
2000, respectively.
Postretirement benefits other than pensions
We provide postretirement health care insurance benefits for all salaried and
certain non-salaried employees and their dependents. Individual benefits
generally continue until age 65. We do not pre-fund these benefits, and as
such have no plan assets.
The change in the benefit obligation is as follows:
Years ended October 31
(thousands) 2002 2001 2000
Change in benefit obligation
Benefit obligation at beginning
of year . . . . . . . . . . . . $26,838 $20,827 $18,633
Service cost . . . . . . . . . . 1,422 985 807
Interest cost. . . . . . . . . . 2,573 1,767 1,434
Actuarial loss . . . . . . . . . 10,488 4,187 721
Benefits paid. . . . . . . . . . (1,220) (928) (768)
Benefit obligation at end of
year. . . . . . . . . . . . . . $40,101 $26,838 $20,827
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The funded status of the plan and postretirement liabilities recognized in
the balance sheet are summarized as follows:
October 31
(thousands) 2002 2001 2000
Funded status . . . . . . . . . . $(40,101) $(26,838) $(20,827)
Unrecognized net (gain) loss . . 9,730 (527) (4,714)
Unrecognized transition
obligation . . . . . . . . . . . 4,983 5,482 5,981
Accrued benefit cost. . . . . . . $(25,388) $(21,883) $(19,560)
The components of net periodic postretirement cost are summarized as
follows:
Years ended October 31
(thousands) 2002 2001 2000
Service cost - benefits earned
during the year. . . . . . . . . $ 1,422 $ 985 $ 807
Interest cost on benefit
obligation . . . . . . . . . . . 2,573 1,767 1,434
Amortization of transition
obligation . . . . . . . . . . . 499 499 499
Amortization of net (gain) loss . 231 - (138)
Net periodic benefit cost . . . . $ 4,725 $ 3,251 $ 2,602
The net periodic postretirement benefit cost was calculated using a health
care cost trend rate of 15% for the indemnity plan and 5.5% for the HMO plan.
The accrued postretirement benefit cost at October 31, 2002 was calculated
using a health care cost trend rate of 15% for the indemnity plan and 5.5% for
the HMO plan. The trend rate declines each year until the ultimate health care
cost trend rate of 5.5% is reached in the year 2009 for the indemnity plan.
The ultimate health care cost trend rate of 5.5% was reached in 2000 for the
HMO plan. A one percent increase in the health care cost trend rate assumption
has a $3,235,000 effect on the accumulated postretirement benefit obligation
as of October 31, 2002 and a $480,000 effect on the aggregate of the service
and interest cost components of the net periodic postretirement benefit cost.
A one percent decrease in the health care cost trend rate assumption has a
$(2,866,000) effect on the accumulated postretirement benefit obligation as of
October 31, 2002 and a $(413,000) effect on the aggregate of service and
interest cost components of the net periodic postretirement benefit cost. The
weighted-average discount rate used was 6.75% for 2002, 7.0% for 2001 and 7.5%
for 2000.
Note 9 - Commitments and contingencies:
Estimated costs to complete approved capital projects were approximately $23
million, $35 million and $106 million at October 31, 2002, 2001 and 2000,
respectively. There are various claims, lawsuits and pending actions against
us incident to our operations. It is our opinion that the ultimate resolution
of these matters will not have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
Note 10 - Fair value of financial instruments:
Accounts receivable, revenue bonds, notes payable to banks and senior
subordinated notes covered by the interest rate swap agreements approximate
fair value as reported in the balance sheet. The fair value of senior notes
and senior subordinated notes is estimated using discounted cash flow
analysis, based on our incremental borrowing rates for similar types of
borrowing arrangements. The fair value of our long-term debt exceeded the
stated value by approximately $5 million at October 31, 2002, approximated the
stated value at October 31, 2001, and the stated value exceeded the fair value
by approximately $8 million at October 31, 2000.
Page 47
Note 11 - Shareholder rights plan:
On January 26, 1999, our Board of Directors authorized a Shareholder Rights
Plan (the "Plan"). The Plan provided for a dividend distribution of one right
for each share of common stock to shareholders of record at the close of
business on March 1, 1999. With certain exceptions, the rights will become
exercisable only in the event that an acquiring party accumulates 10% or more
of our voting stock or a party announces an offer to acquire 10% or more of
the voting stock. The rights expire on March 1, 2009, if not previously
redeemed or exercised. Each right entitles the holder to purchase one-tenth
of one common share at a price of $5.00 ($50 per whole share), subject to
adjustment under certain circumstances. In addition, upon the occurrence of
certain events, holders of the rights will be entitled to purchase a defined
number of shares of an acquiring entity or our common shares at half their
then current market value. We will generally be entitled to redeem the rights
at $0.01 per right at any time until the tenth business day following the
acquisition of 10% or more, or an offer to acquire 10% or more, of our voting
stock.
Quarterly financial data (unaudited)
Fiscal Year Quarters Total
Fiscal
(thousands except per share) 1st 2nd 3rd 4th Year
2002
Net sales. . . . . . . . . . $177,555 $183,251 $193,172 $215,303 $769,281
Gross profit . . . . . . . . 16,604 25,130 35,011 37,508 114,253
Net income(loss).. . . . . . (5,986) 15 3,164 7,940 5,133
Net income (loss) per share. (0.12) - 0.06 0.16 0.10
2001
Net sales. . . . . . . . . . $219,559 $214,054 $220,478 $221,864 $875,955
Gross profit . . . . . . . . 41,347 34,599 42,382 32,314 150,642
Net income . . . . . . . . . 8,190 4,354 9,450 2,673 24,667
Net income per share . . . . 0.16 0.09 0.18 0.05 0.48
2000
Net sales . . . . . . . . . $205,446 $216,803 $220,257 $233,792 $876,298
Gross profit . . . . . . . . 33,959 46,781 42,653 42,670 166,063
Net income . . . . . . . . . 5,553 12,156 10,594 9,344 37,647
Net income per share . . . . 0.11 0.24 0.21 0.18 0.73
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no change of accountants or disagreements on any matter of
accounting principles, practices or financial statement disclosures required
to be reported under this item.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to our Directors and Section 16(a) beneficial
reporting compliance is incorporated herein by reference to the sections
titled "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" our Notice of Annual Meeting of Shareholders and Proxy
Statement that were filed pursuant to Regulation 14A within 120 days of
October 31, 2002.
Page 48
Item 11. Executive Compensation
Information with respect to Executive Compensation is incorporated herein by
reference to the section titled "Executive Compensation" in our Notice of
Annual Meeting of Shareholders and Proxy Statement that were filed pursuant to
Regulation 14A within 120 days of October 31, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
Information with respect to Security Ownership of Certain Beneficial Owners
and Management is incorporated herein by reference to the sections titled
"Voting Securities and Principal Holders" and "Election of Directors" in our
Notice of Annual Meeting of Shareholders and Proxy Statement that were filed
pursuant to Regulation 14A within 120 days of October 31, 2002.
Item 13. Certain Relationships and Related Transactions
Information with respect to Certain Relationships and Related Transactions is
incorporated herein by reference to the section titled "Executive
Compensation" in our Notice of Annual Meeting of Shareholders and Proxy
Statement that were filed pursuant to Regulation 14A within 120 days of
October 31, 2002.
Item 14. Controls and Procedures
We maintain a system of controls and procedures designed to provide reasonable
assurance as to the reliability of the financial statements and other
disclosures included in this annual report. Within 90 days before the filing
of this annual report, we performed an evaluation, under the supervision and
with the participation of our management, including our Chief Executive
Officer and Senior Vice President-Finance, of the effectiveness of the design
and operation of our disclosure controls and procedures. Based on that
evaluation, our management, including our Chief Executive Officer and Senior
Vice President-Finance, concluded that the disclosure controls and procedures
were effective, in all material respects, in timely alerting them to material
information relating to our and our consolidated subsidiaries required to be
included in our periodic reports filed pursuant to the Securities Exchange Act
of 1934. There have been no significant changes in our internal controls or
in other factors which could significantly affect internal controls subsequent
to the date we carried out our evaluation.
Our Chief Executive Officer and Senior Vice President-Finance do not expect
that our disclosure controls or our internal controls will prevent all error
and all fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of
the system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that we have detected all our control issues and instances of fraud, if any.
The design of any system of controls also is based partly on certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Page 49
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following financial statements, schedules and exhibits are filed as
part of this Form 10-K.
(1) Financial Statements:
See "Item 8. Financial Statements and Supplementary Data."
(b) Exhibits:
See "Index to Exhibits."
(c) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
Page 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LONGVIEW FIBRE COMPANY
By: L. J. McLAUGHLIN Date: January 28, 2003
L. J. McLAUGHLIN,
Senior Vice President-Finance,
Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
R. P. WOLLENBERG 1/28/03
R. P. WOLLENBERG,
Director
R. H. WOLLENBERG 1/28/03
R. H. WOLLENBERG,
President, Chief Executive Officer and Director
L. J. McLAUGHLIN 1/28/03
L. J. McLAUGHLIN,
Chief Financial Officer and Director
A. G. HIGGENS 1/28/03
A. G. HIGGENS,
Chief Accounting Officer
R. B. ARKELL 1/28/03
R. B. ARKELL,
Director
D. L. BOWDEN 1/28/03
D. L. BOWDEN,
Director
M. A. DOW 1/28/03
M. A. DOW,
Director
M. C. HENDERSON 1/28/03
M. C. HENDERSON,
Director
J. R. KRETCHMER 1/28/03
J. R. KRETCHMER,
Director
R. E. WERTHEIMER 1/28/03
R. E. WERTHEIMER,
Director
D. A. WOLLENBERG 1/28/03
D. A. WOLLENBERG,
Director
Page 51
302 CERTIFICATIONS:
I, R.H. Wollenberg, certify that:
1. I have reviewed this annual report on Form 10-K of Longview Fibre
Company;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
R. H. WOLLENBERG 1/28/03
R. H. WOLLENBERG,
President and Chief Executive Officer
Page 52
I, L.J. McLaughlin, certify that:
1. I have reviewed this annual report on Form 10-K of Longview Fibre
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
L. J. McLAUGHLIN 1/28/03
L. J. McLAUGHLIN,
Senior Vice President-Finance,
Secretary and Treasurer
Page 53
INDEX OF EXHIBITS
Document No.
3.1 Articles of Incorporation of Longview Fibre Company(a)
3.2 Bylaws of Longview Fibre Company(a)
4.1 Long-term debts that do not exceed 10% of the total assets of
the company, details of which will be supplied to the
Commission upon request:
Senior Notes due through 2010 (5.05%-8.84%) $205,500,000
Revenue Bonds payable through 2018 (floating rates, 1.90%
through 2.15% at October 31, 2002) $26,900,000
4.2 Indenture dated as of January 25,2002.(b)
4.3 Rights Agreement Dated as of March 1, 1999.(c)
4.4 Registration Rights Agreement dated January 25, 2002.(b)
10.1 Form of Termination Protection Agreement(d)(*)
10.2 Credit Agreement dated as of January 25,2002(b)
21.1 Subsidiaries
23.1 Consent of Independent Accountants
99.1 Salary Savings Plan - Trust Agreement(e)(*)
99.2 Hourly Savings Plan - Trust Agreement(e)
99.3 Branch Hourly Savings Plan - Trust Agreement(e)
99.4 Salary Savings Plan (*)
99.5 Salary Savings Plan - Amendment No. 1 (*)
99.6 Salary Savings Plan - Amendment No. 2 (*)
99.7 Hourly Savings Plan
99.8 Hourly Savings Plan - Amendment No. 1
99.9 Hourly Savings Plan - Amendment No. 2
99.10 Branch Hourly Savings Plan
99.11 Branch Hourly Savings Plan - Amendment No. 1
99.12 Branch Hourly Savings Plan - Amendment No. 2
99.13 Certification Pursuant to 18 U.S.C. Section 1350 dated January 28,
2003 signed by R. H. Wollenberg, Chief Executive Officer
99.14 Certification Pursuant to 18 U.S.C. Section 1350 dated January 28,
2003 signed by L. J. McLaughlin, Sr. Vice President-Finance,
Secretary and Treasurer
______________________________________________________________________________
(a) Incorporated by reference to company's Annual Report on Form 10-K for the
year ended October 31, 1990.
(b) Incorporated by reference to company's Quarterly Report on Form 10-Q for
the quarter ended January 31, 2002.
(c) Incorporated by reference to company's Current Report on Form 8-K dated
February 18, 1999.
(d) Incorporated by reference to company's Annual Report on Form 10-K for the
quarter ended October 31, 1994.
(e) Incorporated by reference to company's Annual Report on Form 10-K for the
year ended October 31, 2000.
(*) Indicates management contract or compensatory plan or arrangement.
Page 54