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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended April 30, 2004 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
Not Applicable
Former name, former address and former fiscal year, if changed since last
report
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
51,076,567 Common Shares were outstanding as of May 31, 2004
Page 1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheet (000 Omitted)
Apr. 30 Oct. 31 Apr. 30
2004 2003 2003
(Unaudited) (Unaudited)
ASSETS
Current assets:
Accounts and notes receivable $ 95,426 $ 99,754 $ 85,890
Allowance for doubtful accounts 1,350 1,350 1,350
Inventories, at lower of cost or market;
costs are based on last-in, first-out method
except for supplies at current averages
Finished goods 17,069 15,306 16,850
Goods in process 8,529 8,549 12,708
Raw materials and supplies 40,999 41,493 38,118
Other 6,726 7,109 14,105
Total current assets 167,399 170,861 166,321
Capital assets:
Buildings, machinery and equipment at cost 1,829,095 1,815,959 1,829,564
Accumulated depreciation 1,127,120 1,094,266 1,081,171
Costs to be depreciated in future years 701,975 721,693 748,393
Plant sites at cost 3,549 3,549 3,524
705,524 725,242 751,917
Timber at cost less depletion 198,529 185,216 186,781
Roads at cost less amortization 8,533 8,481 8,529
Timberland at cost 24,423 20,168 20,148
231,485 213,865 215,458
Total capital assets 937,009 939,107 967,375
Pension and other assets 141,430 145,436 137,736
$1,245,838 $1,255,404 $1,271,432
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Payable to bank resulting from
checks in transit $ 7,621 $ 11,190 $ 6,027
Accounts payable 58,461 53,132 45,538
Short-term borrowings 11,000 44,000 3,000
Payrolls payable 14,826 13,465 18,122
Other taxes payable 7,797 8,465 8,507
Current installments of long-term debt 30,000 - 50,000
Total current liabilities 129,705 130,252 131,194
Long-term debt 457,099 463,003 486,163
Deferred taxes-net 193,503 195,410 192,831
Other liabilities 36,560 34,432 31,363
Shareholders' equity:
Common stock, ascribed value $1.50 per share;
authorized 150,000,000 shares; issued
51,076,567 shares 76,615 76,615 76,615
Additional paid-in capital 3,306 3,306 3,306
Retained earnings 349,050 352,386 349,960
Total shareholders' equity 428,971 432,307 429,881
$1,245,838 $1,255,404 $1,271,432
The accompanying notes are an integral part of these financial statements.
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Consolidated Statement of Income (Unaudited)
(000 Omitted)
Three Months Ended Six Months Ended
April 30 April 30
2004 2003 2004 2003
Net sales:
Timber $ 61,373 $ 39,517 $ 95,883 $ 80,814
Paper and paperboard 54,404 47,531 96,771 95,536
Converted products 97,606 94,542 190,656 194,894
213,383 181,590 383,310 371,244
Cost of products sold, including
outward freight 173,934 157,008 329,787 316,903
Gross profit 39,449 24,582 53,523 54,341
Selling, administrative
and general expenses 20,874 17,599 40,311 34,625
Operating profit (loss):
Timber 31,875 16,172 45,532 33,201
Paper and paperboard (8,962) (3,578) (17,639) (6,636)
Converted products (4,338) (5,611) (14,681) (6,849)
18,575 6,983 13,212 19,716
Interest income 43 79 79 153
Interest expense (9,355) (10,946) (18,975) (21,878)
Miscellaneous 175 4,668 388 5,036
Income (loss) before income taxes 9,438 784 (5,296) 3,027
Provision (benefit) for taxes on income:
Current 95 8 (53) 31
Deferred 3,396 282 (1,907) 1,089
3,491 290 (1,960) 1,120
Net income (loss) $ 5,947 $ 494 $ (3,336) $ 1,907
Dollars per share:
Net income (loss) $ 0.12 $ 0.01 $ (0.07) $ 0.04
Dividends - 0.02 - 0.02
Average shares outstanding in the
hands of the public (000 omitted) 51,077 51,077 51,077 51,077
The accompanying notes are an integral part of these financial statements.
Page 3
Consolidated Statement of Cash Flows (Unaudited)
(000 Omitted)
Three Months Ended Six Months Ended
April 30 April 30
2004 2003 2004 2003
Cash provided by (used for) operations:
Net income (loss) $ 5,947 $ 494 $(3,336) $ 1,907
Charges to income (loss) not requiring
cash:
Depreciation 17,738 17,479 35,646 34,877
Depletion and amortization 2,189 1,386 3,522 3,333
Deferred taxes - net 3,396 282 (1,907) 1,089
(Gain) loss on disposition of
capital assets 80 (3,286) 45 (3,024)
Change in:
Accounts and notes receivable (11,221) 7,089 4,328 16,040
Taxes on income, refundable - 2,293 - 2,293
Inventories (2,402) 509 (1,249) 3,913
Other 2,138 (5,611) 383 (6,647)
Pension and other noncurrent assets 6,823 (1,346) 4,006 (1,634)
Accounts, payrolls and other taxes
payable 11,235 7,431 4,290 4,132
Other noncurrent liabilities 1,501 (89) 2,128 658
Cash provided by operations 37,424 26,631 47,856 56,937
Cash provided by (used for) investing:
Additions to: Plant and equipment (11,980) (10,089) (16,215) (19,091)
Timber and timberlands (18,619) (1,334) (21,193) (2,172)
Proceeds from sale of capital assets 203 7,699 293 7,995
Cash used for investing (30,396) (3,724) (37,115) (13,268)
Cash provided by (used for) financing:
Long-term debt (5,952) (12,952) 24,096 (37,305)
Short-term borrowings (4,000) (9,000) (33,000) 1,000
Payable to bank resulting from checks
in transit 1,220 3,272 (3,569) (1,437)
Accounts payable for construction 1,704 (3,205) 1,732 (4,905)
Cash dividends - (1,022) - (1,022)
Cash used for financing (7,028) (22,907) (10,741) (43,669)
Change in cash position - - - -
Cash position, beginning of period - - - -
Cash position, end of period $ - $ - $ - $ -
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest (net of amount capitalized) $ 2,284 $ 4,957 $17,617 $20,595
Income taxes 12 (2,218) 11 (2,228)
The accompanying notes are an integral part of these financial statements.
Page 4
Consolidated Statement of Shareholders' Equity (Unaudited)
(000 Omitted)
Three Months Ended Six Months Ended
April 30 April 30
2004 2003 2004 2003
Common stock:
Balance at beginning of period $ 76,615 $ 76,615 $ 76,615 $ 76,615
Balance at end of period $ 76,615 $ 76,615 $ 76,615 $ 76,515
Additional paid-in capital:
Balance at beginning of period $ 3,306 $ 3,306 $ 3,306 $ 3,306
Balance at end of period $ 3,306 $ 3,306 $ 3,306 $ 3,306
Retained earnings:
Balance at beginning of period $343,103 $350,488 $352,386 $349,075
Net income (loss) 5,947 494 (3,336) 1,907
Less cash dividends on common
stock - (1,022) - (1,022)
Balance at end of period $349,050 $349,960 $349,050 $349,960
Dividends paid per share $ - $ 0.02 $ - $ 0.02
Common shares:
Balance at beginning of period 51,077 51,077 51,077 51,077
Balance at end of period 51,077 51,077 51,077 51,077
The accompanying notes are an integral part of these financial statements.
Page 5
NOTE 1: The consolidated interim financial statements have been prepared by
the company, without audit and subject to year-end adjustment, in accordance
with generally accepted accounting principles, except that certain information
and footnote disclosure made in the latest annual report have been condensed
or omitted for the interim statements. Accordingly, these statements should
be read in conjunction with the company's latest annual report. Certain costs
of a normal recurring nature are estimated for the full year and allocated in
interim periods based on estimates of operating time expired, benefit
received, or activity associated with the interim period. The consolidated
financial statements reflect all adjustments which are, in the opinion of
management, necessary for fair presentation.
NOTE 2: In March 2004, we terminated our two interest rate swap agreements
related to $70 million of our Senior Subordinated Notes and received cash of
$2.0 million resulting in a deferred gain of $1.7 million. In April 2004, we
entered into two new interest rate swap agreements related to $70 million of
our Senior Subordinated Notes (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.
Total deferred gain on all previously terminated interest rate swap agreements
was $7.9 million and $4.9 million at April 30, 2004 and 2003, respectively.
The deferred gain is included in other long-term liabilities in the
accompanying balance sheet and will reduce interest expense over the term of
the Senior Subordinated Notes. Unrealized gains (losses) on outstanding
interest rate swaps was ($1.3) million and $1.3 million at April 30, 2004 and
2003, respectively, and are included in the accompanying balance sheet. There
is no ineffectiveness related to these interest rate swaps and therefore there
is no impact to the statement of operations.
NOTE 3:
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 components of net periodic pension income are summarized as follows:
Three Months Six Months
Ended April 30 Ended April 30
thousands 2004 2003 2004 2003
Service cost - benefits earned
during the year $ 2,256 $ 2,024 $ 4,513 $4,047
Interest cost on benefit obligation 5,987 5,807 11,975 11,615
Expected return on plan assets (11,308) (11,113) (22,617) (22,226)
Recognized net actuarial gain - (434) - (868)
Amortization of prior service cost 1,486 1,505 2,972 3,010
Net periodic income $(1,579) $(2,211) $(3,157) $(4,422)
We do not expect to make any contributions to our pension plans in 2004.
Page 6
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 $1,265,000 during the six month period ended April 30, 2004 and
we expect to contribute approximately $2,600,000 for the full fiscal year.
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. We paid $847,000 for these benefits during the six
month period ended April 30, 2004 and we expect to pay approximately
$1,750,000 for the full fiscal year.
The components of net periodic postretirement cost are summarized as follows:
Three Months Six Months
Ended April 30 Ended April 30
thousands 2004 2003 2004 2003
Service cost - benefits earned
during the year $ 317 $ 283 $ 633 $ 567
Interest cost on benefit obligation 574 501 1,148 1,002
Amortization of transition obligation 125 125 249 250
Amortization of net loss 11 - 22 -
Net periodic postretirement cost $ 1,027 $ 909 $ 2,052 $ 1,819
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CONSOLIDATED STATEMENT OF INCOME
THREE AND SIX MONTHS ENDED APRIL 30, 2004 COMPARED WITH
THREE AND SIX MONTHS ENDED APRIL 30, 2003
Net Sales - Second fiscal quarter 2004 net sales were $213.4 million, compared
with $181.6 million for the second fiscal quarter of 2003. This 17.5%
increase was attributed to an increase in timber net sales of $21.9 million,
or 55.3%, an increase in paper and paperboard net sales of $6.9 million, or
14.5%, and an increase in converted products net sales of $3.1 million, or
3.2%.
Cost of Products Sold - Second fiscal quarter 2004 cost of products sold was
$173.9 million, or 81.5% of net sales, compared with $157.0 million, or 86.5%
of net sales, for second fiscal quarter 2003. This decrease as a percentage of
net sales was partially due to an increase in net sales from increases in
volume, and log and lumber prices. In addition, logging costs decreased 3%
and labor cost per ton decreased 2.3% in our converting segment. This
decrease was offset in part by a 3% increase in fiber costs, low mill
utilization early in the quarter, and decreased pension income.
Our cost of products sold also included 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 $19.9 million for second fiscal quarter 2004 compared with $18.9
million for second fiscal quarter 2003.
Selling, General and Administrative Expenses - Second fiscal quarter 2004
selling, general and administrative expenses were $20.9 million, or 9.8% of
net sales, compared with $17.6 million, or 9.7% of net sales, for second
fiscal quarter 2003. As a percent of sales, the increase was primarily caused
by increased depreciation and other costs associated with the implementation
of our ERP project, and lower pension income.
Operating Profit (Loss) - Second fiscal quarter 2004 operating profit was
$18.6 million compared with operating profit of $7.0 million for the second
fiscal quarter 2003. See "Selected Segment Results" below.
Provision for Taxes on Income - Second fiscal quarter 2004 provision for
income taxes was $3.5 million reflecting a tax rate of 37.0%. Second fiscal
quarter 2003 provision for income taxes was $0.3 million reflecting a tax rate
of 37.0%.
Net Income (Loss) - For the reasons noted above, and a decrease in interest
expense of $1.6 million, the company earned net income of $5.9 million for the
second fiscal quarter 2004 compared with net income of $0.5 million for second
fiscal quarter 2003.
Page 8
Selected Segment Results
Timber Three Months Six Months
Ended April 30 Ended April 30
% %
2004 2003 Change 2004 2003 Change
Timber net sales, $ millions $61.4 $39.5 55.3 $95.9 $80.8 18.6
Timber operating profit,
$ millions 31.9 16.2 97.1 45.5 33.2 37.1
Logs, thousands of board
feet 85,972 63,156 36.1 134,724 130,506 3.2
Lumber, thousands of board
feet 29,544 23,812 24.1 55,629 43,490 27.9
Logs, $/thousand board feet $573 $504 13.7 $555 $512 8.4
Lumber, $/thousand board feet 410 324 26.5 379 322 17.7
Second fiscal quarter 2004 timber net sales were $61.4 million, compared with
$39.5 million for second fiscal quarter 2003. This 55.3% increase was due
primarily to increases in log and lumber volume of 36.1% and 24.1%,
respectively, and increases in log and lumber prices of 13.7% and 26.5%,
respectively. During the quarter we increased harvest levels to make up for
low harvest levels in the first fiscal quarter 2004 that resulted from severe
winter weather. We were able to sell the increased volume into the domestic
and export markets in the second fiscal quarter 2004 where demand and prices
improved. Strong U.S. lumber markets drove the increase in domestic demand
that resulted in the log and lumber price increases.
Second fiscal quarter 2004 export log sales were $17.1 million, or 27.9% of
timber net sales, compared with $9.1 million, or 22.9% of timber net sales,
for second fiscal quarter 2003. This increase was the result of increased log
export volume of 77.1% and log export prices of 6.8%. This improvement was
due to the improved Japanese economy and the relative strength of the Japanese
yen against the dollar.
Second fiscal quarter 2004 operating profit was $31.9 million compared with
$16.2 million for second fiscal quarter 2003. The primary reasons for this
97.1% improvement were increases in volume and price for our log and lumber
products, a 3.0% decrease in logging costs, and proportionately higher volume
sold in the export market where margins tend to be higher.
Year-to-date 2004 sales were $95.9 million compared with $80.8 million for
year-to-date 2003. This 18.6% increase was due to increases in log and lumber
volume of 3.2% and 27.9%, respectively, and improved log and lumber pricing of
8.4% and 17.7%, respectively. The improvement resulted from increased harvest
levels in the second fiscal quarter 2004 coupled with strong domestic and
export markets during the quarter. Year-to-date export sales were $25.6
million, or 26.7% of timber net sales, compared with $20.7 million or 25.6% of
timber net sales, for year-to-date 2003.
Year-to-date 2004 operating profit was $45.5 million compared to $33.2 million
for year-to-date 2003. The primary reasons for this 37.1% improvement were
increased volume and prices in both logs and lumber, proportionately higher
log volume sold in the export market and a 5% decrease in logging costs.
Page 9
Paper and Paperboard Three Months Six Months
Ended April 30 Ended April 30
% %
2004 2003 Change 2004 2003 Change
Paper and Paperboard net sales,
$ millions $ 54.4 $ 47.5 14.5 $ 96.8 $ 95.5 1.3
Paper and Paperboard operating
profit (loss), $ millions (9.0) (3.6) - (17.6) (6.6) -
Paper, tons 74,249 66,575 11.5 134,881 136,308 (1.0)
Paperboard, tons 31,786 23,071 37.8 51,677 42,822 20.7
Paper, $/ton FOB mill
equivalent $548 $565 (3.0) $549 $560 (2.0)
Paperboard, $/ton FOB mill
equivalent 337 338 (0.3) 338 341 (0.9)
Second fiscal quarter 2004 paper and paperboard net sales were $54.4 million,
compared with $47.5 million for second fiscal quarter 2003. This 14.5%
increase is primarily due to an 18.3% increase in paper and paperboard volume,
partially offset by decreases in paper and paperboard prices of 3.0% and 0.3%,
respectively. Average prices declined compared with year-ago levels due to
weak demand early in fiscal year 2004 and changes in our product mix. Demand
for domestic paper and paperboard increased during the quarter due to the
improved U.S. economy leading to price increases for certain grades in the
latter half of the quarter. Domestic paper and paperboard volume increased
34.6% and 126.6%, respectively.
Second fiscal quarter 2004 export sales in the paper and paperboard segment
were $15.3 million, or 28.1% of paper and paperboard net sales, compared with
$18.1 million, or 38.1% of paper and paperboard net sales, for second fiscal
quarter 2003. The export sales decrease was the result of a 29.5% decrease in
the volume of paper sold in the export market due to aggressive pricing
employed by sack kraft paper producers from Europe, despite the relative
strength of the EURO. Export linerboard volume decreased 11.6%, but was more
than offset by export sales of pulp in the second fiscal quarter. These sales
of pulp represented approximately 3.4% of paper and paperboard net sales in
the quarter.
Second fiscal quarter 2004 paper and paperboard operating loss was $9.0
million compared with an operating loss of $3.6 million for the second fiscal
quarter 2003. Paper and paperboard operating results were negatively affected
by the 3% decrease in paper prices, a 3% increase in fiber costs and low mill
utilization in the first half of the quarter, and high costs associated with
inventory carried over from the first quarter. Mill utilization improved
steadily from 64% in February to 83% in April, averaging 73% for the quarter
compared with 70% for second fiscal quarter 2003. We expect to operate at 80-
85% of capacity during the third fiscal quarter due to increased demand.
Price increases implemented in the second fiscal quarter should be fully in
place in the third fiscal quarter and additional price increases have been
announced for the third quarter. We started No. 4 paper machine in May to
meet peak seasonal demand. This machine had been idle for approximately two
years.
Year-to-date paper and paperboard sales were $96.8 million, compared with
$95.5 million for year-to-date 2003. Paper volume decreased 1.0% while
paperboard volume improved 20.7% for fiscal year-to-date 2004 compared to
2003. Average paper prices declined 2.0% and average paperboard prices
declined 0.9%. Demand was weak in both the domestic and export markets during
the first fiscal quarter of 2004, but domestic demand improved the latter half
of the second fiscal quarter 2004.
Year-to-date export sales in the paper and paperboard segment were $26.0
million or 26.9% of paper and paperboard net sales compared with $34.0 million
or 35.6% of paper and paperboard net sales for year-to-date 2003. Export
Page 10
paper volume decreased 33.9% and export paperboard volume decreased 4.5%.
Average export prices held steady. Export paper demand declined due to price
competition from sack kraft paper producers from Europe.
Year-to-date fiscal 2004 paper and paperboard operating loss was $17.6
million, compared with an operating loss of $6.6 million for the year-ago
period. The primary drivers of the increase in operating loss were low mill
utilization rates in the early part of the year driving fixed costs per unit
up, a 5% increase in fiber costs and lower labor productivity, particularly in
the first quarter.
Converted Products
Three Months Six Months
Ended April 30 Ended April 30
% %
2004 2003 Change 2004 2003 Change
Converted Products sales,
$ millions $ 97.6 $ 94.5 3.2 $190.7 $194.9 (2.2)
Converted Products
operating profit (loss),
$ millions (4.3) (5.6) - (14.7) (6.8) -
Converted Products, tons 122,708 117,637 4.3 238,677 242,516 (1.6)
Converted Products, $/ton $795 $804 (1.1) $799 $804 (0.6)
Second fiscal quarter 2004 converted products net sales were $97.6 million,
compared with $94.5 million for second fiscal quarter 2003. This 3.2%
increase was primarily due to an increase in volume of 4.3%, partially
offset by a 1.1% decline in average prices. The improvement in the U.S.
economy is the primary cause of the increase in demand. Second fiscal
quarter operating loss was $4.3 million, compared with an operating loss of
$5.6 million for second fiscal quarter 2003. Operating results were
favorably impacted by an improvement of 8.9% in labor productivity measured
by hours per ton of production, and by the increased volume.
Year-to-date fiscal 2004 converted product sales were $190.7 million, compared
with $194.9 million for year-to-date 2003. This 2.2% decrease was primarily
due to a 1.6% decrease in volume coupled with a 0.6% decrease in average price
compared with fiscal year-to-date 2003. The year-to-date volume decrease was
primarily the result of first fiscal quarter's weak demand.
The year-to-date fiscal 2004 converted products operating loss was $14.7
million, compared with a loss of $6.8 million for year-to-date fiscal 2003.
The primary driver of the increased operating loss year-to-date was the higher
cost of paper and paperboard supplied to our converting operations by our
Longview mill and third party suppliers in the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2004, our total borrowed debt of $498.1 million included long-
term debt of $457.1 million, current installments of long-term debt of $30.0
million and short-term borrowings of $11.0 million.
At April 30, 2004, we had $105.0 million outstanding under our $250 million
revolving credit facility, excluding letters of credit of $9.9 million. Also
outstanding at April 30, 2004, were various senior notes totaling $154.5
million, revenue bonds of $14.5 million and $214.1 million of senior
subordinated notes, net of original issuance discount. In addition, we had
$10 million outstanding on a $15 million uncommitted line of credit. As of
April 30, 2004, we had $140.1 million available under our bank lines of
credit. Our financing arrangements require us to be in compliance with
certain financial covenants, including minimum net worth, short- and long-term
borrowing ratio and fixed charge coverage ratio requirements and restrict our
payment of dividends. At April 30, 2004, we were in compliance with such
covenants.
Page 11
During the quarter we terminated our July 2003 fixed-to-floating interest rate
swaps to monetize the gain incurred on the contracts. The proceeds were used
to repay debt and will be recognized as a reduction of interest expense over
the remaining life of our senior subordinated notes. Subsequently, we entered
into two fixed-to-floating interest rate swaps for a total of $70.0 million of
the $215 million of our senior subordinated notes. The purpose of the swaps
is to manage our exposure to high fixed rate debt by converting a portion of
our outstanding debt from a fixed to a lower variable interest rate. The new
floating rate swaps have rates of approximately 7.43%. Previously we had
entered into other fixed-to-floating interest rate swaps that were
subsequently terminated to monetize the gain incurred due to lower interest
rates and changes in yield. In these instances, the proceeds were used to
repay debt and will be recognized as a reduction of interest expense over the
remaining life of the senior subordinated notes, which mature in 2009. A
deferred gain on all the terminated agreements of $7.9 million is included in
other liabilities at April 30, 2004.
Net cash provided by operations was $37.4 million in the second fiscal quarter
2004 and $26.6 million for the second fiscal quarter 2003. The primary reason
for the increase was the increase in net income.
Net cash used for investing was $30.4 million in the second fiscal quarter
2004 and $3.7 million in the second fiscal quarter 2003. Our capital
expenditures, including timberland acquisitions, were $30.6 million in the
second fiscal quarter 2004 and $11.4 million in the second fiscal quarter
2003. During the quarter we purchased approximately 14,000 acres of
timberland. Capital expenditures are expected to be $50 to $60 million for
fiscal year 2004 including expenditures for timberland purchases, plant and
equipment, and environmental compliance.
Net cash used for financing in the second fiscal quarter 2004 was $7.0 million
while net cash used for financing was $22.9 million for the second fiscal
quarter 2003. Borrowed debt decreased by $10.0 million during the second
fiscal quarter 2004 due to improved earnings.
Each quarter we determine the amount of our dividend based on, among other
things, operating results, current market conditions, debt levels and
covenants of financing agreements. Cash dividends were not paid in the second
fiscal quarter 2004. Cash dividends of $0.02 per share were declared and paid
in the second fiscal quarter 2003 in the amount of $1.0 million.
We believe that our cash flow generated from operations and available
borrowings under our revolving credit facility and our other line of credit
provide sufficient resources to fund operations and to meet our debt payment
obligations and foreseeable capital expenditure requirements.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements, including statements
concerning expected resources to fund operations, meet debt payment
obligations and foreseeable capital expenditures; anticipated pricing and
market conditions for the company's products, including expected realization
of announced domestic paper and paperboard price increases; expected capacity
utilization; foreseeable capital expenditures; and anticipated operational
benefits through improved mill 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, among
others, developments in the world, national, or regional economy or involving
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the company's customers or competitors affecting supply of or demand for the
company's products and energy; changes in product and energy prices; changes
in currency exchange rates between the U.S. dollar and the currencies of
important export markets; and unforeseen developments in the company's
business, including unforeseen capital requirements or reduced cash from
operations. The company does not intend to update forward-looking statements
should circumstances or the company's estimates or projections change.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We generally do not engage in commodity, currency or interest rate hedging
arrangements or engage in transactions involving derivatives, but during the
quarter we had in effect two interest rate swaps to obtain a lower effective
interest rate on our borrowings. See Note 2 to our financial statements 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.
ITEM 4. 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 quarterly 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 as of
April 30, 2004, the disclosure controls and procedures were effective, in all
material respects, in timely alerting them to material information relating to
us 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 changes in our internal controls over financial reporting that
occurred during the quarter ended April 30, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Our Chief Executive Officer and Senior Vice President-Finance do not expect
that our disclosure controls or our internal controls will prevent all errors
and all instances of 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In April 2004, we were served with a complaint filed in King County,
Washington Superior Court and entitled Betty Mae Crawford, et al. v. Longview
Fibre Company, and Saberhagen Holdings, Inc. In the complaint, plaintiffs
alleged that a former employee of the company was exposed to asbestos when he
worked at our Longview paper mill from 1946 to 1987. Although it is not
possible to predict with certainty the outcome of this matter, the plaintiffs'
claims in this case are substantially the same as those in the previously
reported Shellenbarger case, which was dismissed prior to trial and is
currently on appeal before the Washington State Court of Appeals. We
therefore, believe that the Crawford action will not result in our having
material liability, if any, for damages.
In the first calendar quarter of 2004, we received from the Washington State
Department of Ecology ("Ecology") Notices of Violation of our air permit
concerning the excess level of visible particulate, or opacity, from one of
our power boilers during November 2003 through January 2004. We report the
opacity level to the state monthly. In May 2004, we were assessed a penalty
of approximately $130,000 for the alleged violations. We have applied for
relief from most of the penalty and have made operational changes to address
the excess opacity.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Nothing to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders of Longview Fibre Company was
held on March 2, 2004 at which time the following three Class II
directors were elected:
CLASS II DIRECTORS
(Terms to Expire in 2007) Votes Cast
For Withheld
Robert E. Wertheimer 33,062,509 8,513,392
John R. Kretchmer 39,298,904 2,276,997
Robert A. Kirchner 39,908,136 1,667,765
The remaining directors of Longview Fibre Company are as follows:
CLASS III DIRECTORS
(Terms to Expire in 2005)
Richard P. Wollenberg
Robert B. Arkell
M. Alexis Dow
Michael C. Henderson
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CLASS I DIRECTORS
(Terms to Expire in 2006)
David A. Wollenberg
David L. Bowden
Richard H. Wollenberg
At the annual meeting, a shareholder proposal recommending or
requesting that the Longview Fibre Company Board of Directors take
the steps necessary to implement the proposal to split the Company
into 3 separate and distinct entities received the following vote:
Shareholder Proposal
For 2,668,969
Against 31,033,582
Abstain 1,038,167
Broker non-votes 6,835,183
ITEM 5. OTHER INFORMATION.
Nothing to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
The Exhibits to this report on Form 10-Q are listed on the
accompanying Exhibit Index.
(b) A Form 8-K was furnished on February 24, 2004 reporting
information under Items 7 and 12.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LONGVIEW FIBRE COMPANY
(Registrant)
L. J. McLAUGHLIN 06/14/04
L. J. McLAUGHLIN
Senior Vice President-Finance,
Secretary and Treasurer
A. G. HIGGENS 06/14/04
A. G. HIGGENS
Assistant Treasurer
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EXHIBIT INDEX
Exhibit No. Description
31.1 Section 302 Certification by R. H. Wollenberg, President and
Chief Executive Officer.
31.2 Section 302 Certification by L. J. McLaughlin, Sr. Vice
President-Finance, Secretary and Treasurer.
32.1 Section 1350 Certification by R. H. Wollenberg, President and
Chief Executive Officer.
32.2 Section 1350 Certification by L. J. McLaughlin, Sr. Vice
President-Finance, Secretary and Treasurer.
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