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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 July 31, 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 August 31, 2004
Page 1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheet (000 Omitted)
Jul. 31 Oct. 31 Jul. 31
2004 2003 2003
(Unaudited) (Unaudited)
ASSETS
Current assets:
Accounts and notes receivable $ 100,998 $ 99,754 $ 90,857
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 17,745 15,306 14,736
Goods in process 12,532 8,549 7,769
Raw materials and supplies 44,589 41,493 40,389
Other 7,673 7,109 9,192
Total current assets 182,187 170,861 161,593
Capital assets:
Buildings, machinery and equipment at cost 1,837,752 1,815,959 1,832,788
Accumulated depreciation 1,139,783 1,094,266 1,095,882
Costs to be depreciated in future years 697,969 721,693 736,906
Plant sites at cost 3,549 3,549 3,524
701,518 725,242 740,430
Timber at cost less depletion 198,331 185,216 187,114
Roads at cost less amortization 8,374 8,481 8,353
Timberland at cost 24,486 20,168 20,239
231,191 213,865 215,706
Total capital assets 932,709 939,107 956,136
Pension and other assets 142,918 145,436 143,786
$1,257,814 $1,255,404 $1,261,515
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Payable to bank resulting from
checks in transit $ 8,765 $ 11,190 $ 10,136
Accounts payable 56,378 53,132 45,168
Short-term borrowings 11,000 44,000 26,000
Payrolls payable 16,040 13,465 14,571
Other taxes payable 9,858 8,465 9,979
Current installments of long-term debt 30,000 - 20,000
Total current liabilities 132,041 130,252 125,854
Long-term debt 452,819 463,003 478,898
Deferred taxes-net 198,021 195,410 192,730
Other liabilities 38,057 34,432 35,350
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 356,955 352,386 348,762
Total shareholders' equity 436,876 432,307 428,683
$1,257,814 $1,255,404 $1,261,515
The accompanying notes are an integral part of these financial statements.
Page 2
Consolidated Statement of Operations (Unaudited)
(000 Omitted)
Three Months Ended Nine Months Ended
July 31 July 31
2004 2003 2004 2003
Net sales:
Timber $ 54,446 $ 40,066 $150,329 $120,880
Paper and paperboard 63,949 53,237 160,720 148,773
Converted products 102,091 100,962 292,747 295,856
220,486 194,265 603,796 565,509
Cost of Products sold, including
outward freight 178,457 165,164 508,244 482,067
Gross profit 42,029 29,101 95,552 83,442
Selling, administrative
and general expenses 20,848 18,672 61,159 53,297
Operating profit (loss):
Timber 24,911 14,882 70,443 48,083
Paper and paperboard (1,382) (2,950) (19,021) (9,586)
Converted products (2,348) (1,503) (17,029) (8,352)
21,181 10,429 34,393 30,145
Interest income 48 119 127 272
Interest expense (9,201) (11,062) (28,176) (32,940)
Miscellaneous 520 233 908 5,269
Income (loss) before income taxes 12,548 (281) 7,252 2,746
Provision (benefit) for taxes on income:
Current 125 (3) 72 28
Deferred 4,518 (101) 2,611 988
4,643 (104) 2,683 1,016
Net income (loss) $ 7,905 $ (177) $ 4,569 $ 1,730
Dollars per share:
Net income (loss) $ 0.15 $ - $ 0.09 $ 0.03
Dividends - 0.02 - 0.04
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 Nine Months Ended
July 31 July 31
2004 2003 2004 2003
Cash provided by (used for)
operations:
Net income (loss) $ 7,905 $ (177) $ 4,569 $ 1,730
Charges to income (loss) not
requiring cash:
Depreciation 17,587 17,793 53,233 52,670
Depletion and amortization 2,693 1,639 6,215 4,972
Deferred taxes - net 4,518 (101) 2,611 988
(Gain) loss on disposition of
capital assets 502 164 547 (2,860)
Change in:
Accounts and notes receivable (5,572) (4,967) (1,244) 11,073
Taxes on income, refundable - - - 2,293
Inventories (8,269) 4,782 (9,518) 8,695
Other (947) 4,913 (564) (1,734)
Pension and other
noncurrent assets (1,488) (7,306) 2,518 (8,940)
Accounts, payrolls and other
taxes payable 1,278 (1,635) 5,568 2,497
Other noncurrent liabilities 169 2,930 2,297 3,588
Cash provided by operations 18,376 18,035 66,232 74,972
Cash provided by (used for)
investing:
Additions to: Plant and equipment (14,810) (6,654) (31,025) (25,745)
Timber and timberlands (2,426) (1,897) (23,619) (4,069)
Proceeds from sale of capital assets 754 194 1,047 8,189
Cash used for investing (16,482) (8,357) (53,597) (21,625)
Cash provided by (used for)
financing:
Long-term debt (2,952) (34,952) 21,144 (72,257)
Short-term borrowings - 23,000 (33,000) 24,000
Payable to bank resulting from
checks in transit 1,144 4,109 (2,425) 2,672
Accounts payable for construction (86) (814) 1,646 (5,719)
Cash dividends - (1,021) - (2,043)
Cash used for financing (1,894) (9,678) (12,635) (53,347)
Change in cash position - - - -
Cash position, beginning of period - - - -
Cash position, end of period $ - $ - $ - $ -
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest (net of amount
capitalized) $16,326 $16,115 $33,943 $36,710
Income taxes 81 (86) 92 (2,314)
The accompanying notes are an integral part of these financial statements.
Page 4
Consolidated Statement of Shareholders' Equity (Unaudited)
(000 Omitted)
Three Months Ended Nine Months Ended
July 31 July 31
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 $ 76,615
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 $349,050 $349,960 $352,386 $349,075
Net income (loss) 7,905 (177) 4,569 1,730
Less cash dividends on common
stock - (1,021) - (2,043)
Balance at end of period $356,955 $348,762 $356,955 $348,762
Dividends paid per share $ - $ 0.02 $ - $ 0.04
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 that are, in the opinion of
management, necessary for fair presentation.
NOTE 2: We use derivative financial instruments that are designated as hedges
of the fair value of long-term debt and meet the shortcut method requirements
under FAS 133. Interest rate swap agreements are used as part of our program
to manage the fixed and floating interest rate mix of our total debt portfolio
and related overall cost of borrowing by replacing fixed rate debt with
floating rate debt. The interest rate swap agreements involve the periodic
exchange of payments without the exchange of the notional amount upon which
the payments are based. The changes in fair values of the interest rate swap
agreements are exactly offset by changes in the fair value of the underlying
long-term debt, therefore the adjustments are recorded on the balance sheet
and do not impact income. Unrealized gains and losses are recorded as current
or non-current assets or liabilities on the balance sheet based on the
classification of the underlying debt. No ineffectiveness has been recorded
to net income related to interest rate swaps designated as fair value hedges
for the fiscal quarters and nine months ended July 31, 2004 and 2003.
Total deferred gain on all terminated interest rate swap agreements relating
to our Senior Subordinated Notes was $7.5 million and $7.3 million at July 31,
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 losses on
outstanding interest rate swaps was $1.3 million and $1.1 million at July 31,
2004 and 2003, respectively, and are included in the accompanying balance
sheet within Other long-term liabilities.
NOTE 3:
Retirement plans
We have two trusteed defined benefit pension programs which cover a majority
of our 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 Nine Months
Ended July 31 Ended July 31
thousands 2004 2003 2004 2003
Service cost - benefits earned
during the year $ 2,256 $ 2,024 $ 6,769 $6,071
Interest cost on benefit obligation 5,987 5,807 17,962 17,422
Expected return on plan assets (11,308) (11,113) (33,925) (33,339)
Recognized net actuarial gain - (434) - (1,302)
Amortization of prior service cost 1,486 1,505 4,458 4,515
Net periodic (income) $(1,579) $(2,211) $(4,736) $(6,633)
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 $1,871,000 during the nine month period ended July 31, 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 $1,300,000 for these benefits during the
nine month period ended July 31, 2004 and we expect to pay approximately
$1,760,000 for the full fiscal year.
The components of net periodic postretirement cost are summarized as follows:
Three Months Nine Months
Ended July 31 Ended July 31
thousands 2004 2003 2004 2003
Service cost - benefits earned
during the year $ 317 $ 283 $ 950 $ 850
Interest cost on benefit obligation 574 501 1,722 1,503
Amortization of transition obligation 125 125 374 375
Amortization of net loss 11 - 33 -
Net periodic postretirement cost $ 1,027 $ 909 $ 3,079 $ 2,728
NOTE 4:
Reclassifications
Prior year amounts have been reclassified to conform to current year
classifications. These reclassifications have no impact upon net income or
shareholders' equity.
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE AND NINE MONTHS ENDED JULY 31, 2004 COMPARED WITH
THREE AND NINE MONTHS ENDED JULY 31, 2003
Net Sales - Third fiscal quarter 2004 net sales were $220.5 million, compared
with $194.3 million for third fiscal quarter of 2003. This 13.5 % increase
resulted from an increase in timber net sales of $14.4 million, or 35.9%,
paper and paperboard net sales of $10.7 million, or 20.1%, and converted
product net sales of $1.1 million, or 1.1%.
Cost of Products Sold - Third fiscal quarter 2004 cost of products sold was
$178.5 million, or 80.9% of net sales, compared with $165.2 million, or 85.0%
of net sales, for third fiscal quarter 2003. Cost of products sold were
positively affected by a 15% decrease in total energy costs per ton of
production at the paper mill, improved labor productivity demonstrated by a
10.6% decrease in labor cost per ton of primary production, and a 1.5%
decrease in labor cost per ton of converting production.
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 $19.0 million for third fiscal quarter 2004 compared with $18.4
million for third fiscal quarter 2003.
Selling, General and Administrative Expenses - Third fiscal quarter 2004
selling, general and administrative expenses were $20.8 million, or 9.5% of
net sales, compared with $18.7 million, or 9.6% of net sales, for third fiscal
quarter 2003. Selling, general and administrative expenses decreased as a
percent of sales due to higher sales, although overall selling, general and
administrative expenses increased primarily due to increased wages and
associated fringes, depreciation, and other costs associated with the
implementation of our ERP system, and legal and audit expenses.
Operating Profit (Loss) - Third fiscal quarter 2004 operating profit was $21.2
million compared with operating profit of $10.4 million for the third fiscal
quarter 2003. See "Selected Segment Results" below.
Provision for Taxes on Income - Third fiscal quarter 2004 provision for income
taxes was $4.6 million reflecting a tax rate of 37%. Third fiscal quarter
2003 provision for income taxes was $(0.1) million reflecting a tax rate of
37%.
Net Income (Loss) - For the reasons noted above, and a decrease in interest
expense of $1.9 million, the company had net income of $7.9 million for the
third fiscal quarter 2004 compared with a net loss of $0.2 million for third
fiscal quarter 2003.
Page 8
Selected Segment Results
Timber Three Months Nine Months
Ended July 31 Ended July 31
% %
2004 2003 Change 2004 2003 Change
Timber net sales, $ millions $ 54.4 $ 40.1 35.9 $150.3 $120.9 24.4
Timber operating profit,
$ millions 24.9 14.9 67.4 70.4 48.1 46.5
Logs, thousands of board
feet 72,373 61,612 17.5 207,097 192,118 7.8
Lumber, thousands of board
feet 25,574 26,443 (3.3) 81,203 69,933 16.1
Logs, $/thousand board feet $582 $506 15.0 $565 $510 10.8
Lumber, $/thousand board feet 482 336 43.5 411 327 25.7
Third fiscal quarter 2004 timber net sales were $54.4 million, compared with
$40.1 million for third fiscal quarter 2003. This 35.9% increase was due
primarily to an increase in log volume of 17.5% and increases in log and
lumber prices of 15.0% and 43.5%, respectively, partially offset by a 4.7%
reduction in domestic lumber volume. Lumber volume was down primarily due to
sawmill shutdowns for scheduled capital projects in the third fiscal quarter
2004. Increases in net sales were driven by the continuing strength of the
U.S. housing market and favorable harvest conditions. With the strong U.S.
housing market, domestic log prices and volume were up 20.5% and 24.4%,
respectively, for our third fiscal quarter 2004 compared with the third fiscal
quarter 2003.
Third fiscal quarter 2004 export sales were $12.2 million, or 22.3% of timber
net sales, compared with $11.1 million, or 27.7% of timber net sales for third
fiscal quarter 2003. This increase was the result of an increase in log
export price of 8.4%, partially offset by a 0.4% reduction in export log
volume. Log export prices increased as a result of the dollar remaining
relatively weak compared to the yen during the fiscal quarter.
Third fiscal quarter 2004 operating profit was $24.9 million, compared with
$14.9 million for the third fiscal quarter 2003. The primary reasons for this
67.4% increase were the log volume increase, higher log and lumber prices and
a 6% decrease in logging costs, partially offset by the domestic lumber volume
decrease and higher depletion costs.
Year-to-date 2004 timber sales were $150.3 million compared with $120.9
million for year-to-date 2003. This 24.4% increase was primarily due to
increases in log volume of 7.8% and log prices of 10.8%, in addition to a
16.1% increase in lumber volume and a 25.7% increase in lumber prices. The
year-to-date increases in log and lumber volume reflect the continuing
strength of the U.S. housing market. Year-to-date 2004 export sales were
$37.8 million, or 25.1% of timber net sales, compared with $31.8 million, or
26.3% of timber net sales, for year-to-date 2003.
Year-to-date 2004 timber operating profit was $70.4 million compared with
$48.1 million for year-to-date 2003. The primary reasons for this 46.5%
increase were the volume and price increases for both logs and lumber and a 5%
decrease in logging costs, partially offset by higher depletion costs.
Page 9
Paper and Paperboard Three Months Nine Months
Ended July 31 Ended July 31
% %
2004 2003 Change 2004 2003 Change
Paper and Paperboard net sales,
$ millions $ 63.9 $ 53.2 20.1 $160.7 $ 148.8 8.0
Paper and Paperboard operating
profit (loss), $ millions (1.4) (3.0) - (19.0) (9.6) -
Paper, tons 83,839 74,918 11.9 218,720 211,226 3.5
Paperboard, tons 35,583 19,379 83.6 87,260 62,201 40.3
Paper, $/ton FOB mill
equivalent $572 $579 (1.2) $558 $567 (1.6)
Paperboard, $/ton FOB mill
equivalent 345 347 (0.6) 341 343 (0.6)
Third fiscal quarter 2004 paper and paperboard net sales were $63.9 million,
compared with $53.2 million for third fiscal quarter 2003. This 20.1%
increase is primarily due to a 26.6% increase in paper and paperboard volume,
partially offset by decreases in paper and paperboard prices of 1.2% and 0.6%,
respectively. The strengthening of the U.S. economy during the quarter drove
the improved demand. The average price for paper and paperboard was
negatively affected by selling proportionately more lower priced corrugated
medium and pulp than year ago levels. Although average prices for the third
fiscal quarter 2004 were below year ago levels, paper and paperboard prices
have improved from the second fiscal quarter 2004 levels by $24 per ton and $8
per ton, respectively.
Third fiscal quarter 2004 export sales in the paper and paperboard segment
were $16.7 million, or 26.1% of paper and paperboard net sales, compared with
$13.4 million, or 25.1%, for third fiscal quarter 2003. This increase as a
percentage of segment net sales was primarily the result of a 4.7% increase in
export paperboard prices, partially offset by a 3.3% decline in export paper
prices.
Third fiscal quarter 2004 paper and paperboard operating loss was $1.4
million, compared with an operating loss of $3.0 million for the third fiscal
quarter 2003. Operating results were positively affected by our mill
operating at 83% of capacity as compared with 68% in the third fiscal quarter
2003, resulting in a 10.6% decrease in labor costs per ton of paper and
paperboard produced. We expect to operate at 85 to 90% of capacity during the
fourth fiscal quarter due to increased demand. Operating results were also
positively affected by our on-going energy conservation efforts and by
strategically utilizing our various fuel sources to mitigate increases in
natural gas costs, which resulted in a 15% decrease in total energy cost per
ton of production. Our business process improvement initiatives to improve
mill optimization, improve customer service and lower our procurement costs
have contributed favorably to the results.
Year-to-date 2004 paper and paperboard sales were $160.7 million, compared
with $148.8 million for year-to-date 2003. This 8.0% increase was the result
of a 3.5% increase in paper volume and a 40.3% increase in paperboard volume,
partially offset by decreases in paper and paperboard prices of 1.6% and 0.6%,
respectively.
Year-to-date 2004 export sales in the paper and paperboard segment were $42.7
million, or 26.6% of paper and paperboard net sales, compared with $47.4
million, or 31.8% of paper and paperboard net sales, for year-to-date 2003.
Export paper volume decreased 24.1% while export paperboard volume increased
17.6%. Export paper prices decreased 0.6% but export paperboard prices
increased 2.3% compared to year-ago levels. Improved demand for our
paperboard products and the continuing weak U.S. dollar were the drivers for
the improvement.
Page 10
Year-to-date 2004 paper and paperboard operating loss was $19.0 million,
compared with an operating loss of $9.6 million for year-to-date 2003. The
increase in year-to-date operating loss was primarily the result of low
machine operating rates for the first half of fiscal 2004, driving fixed costs
per unit up, and higher fiber costs of 4% compared with year-to-date fiscal
2003.
Converted Products
Three Months Nine Months
Ended July 31 Ended July 31
% %
2004 2003 Change 2004 2003 Change
Converted Products sales,
$ millions $102.1 $101.0 1.1 $292.7 $295.9 (1.1)
Converted Products
operating profit (loss),
$ millions (2.3) (1.5) - (17.0) (8.4) -
Converted Products, tons 125,813 124,586 1.0 364,490 367,102 (0.7)
Converted Products, $/ton $812 $811 0.1 $803 $806 (0.4)
Third fiscal quarter 2004 converted products net sales were $102.1 million,
compared with $101.0 million for third fiscal quarter 2003. This 1.1%
improvement was primarily due to a 1.0% increase in volume in addition to a
0.1% increase in price. Demand for our products increased modestly as the
U.S. economy showed signs of improvement.
Third fiscal quarter 2004 operating loss was $2.3 million, compared with an
operating loss of $1.5 million for third fiscal quarter 2003. The primary
reason for the decrease in operating results was a 3.4% increase in the cost
of purchased paperboard used by our converting segment, partially offset by a
labor productivity gain of 1.5% in the segment. Operating results were
favorably impacted by our business process improvement initiative to improve
customer service and lower procurement costs.
Year-to-date fiscal 2004 converted product sales were $292.7 million, compared
with $295.9 million for year-to-date 2003. This 1.1% decrease was primarily
due to a 0.7% decrease in volume coupled with a 0.4% decrease in price. The
year-to-date fiscal 2004 decreases in volume and price were due mainly to
reduced demand in the first part of the fiscal year caused by the slow U.S.
economy. Sequentially, however, volume and price were up 2.5% and 2.1% from
second fiscal quarter 2004 to third fiscal quarter 2004 reflecting the
strengthening U.S. economy. Year-to-date 2004 operating loss was $17.0
million, compared with $8.4 million for year-to-date 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 the Longview mill in the
first two fiscal quarters 2004 and an increased percentage of higher cost
paperboard coming from third party suppliers. The average cost of paper and
paperboard supplied to our converting plants increased 5.1% for year-to-date
2004, compared with year-to-date 2003. Year-to-date results were favorably
impacted by our business process improvement initiatives.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2004, our total borrowed debt was $495.1 million including long-
term debt of $454.1 million, current installments of long-term debt of $30.0
million and short-term borrowings of $11.0 million.
At July 31, 2004, we had $107.0 million outstanding under our $250 million
revolving credit facility, excluding letters of credit of $9.9 million. Also
outstanding at July 31, 2004, were various senior notes totaling $154.5
million, revenue bonds of $14.5 million and $214.1 million of senior
Page 11
subordinated notes, net of original issuance discount. In addition, we had
$5.0 million outstanding on a $15 million uncommitted line of credit. As of
July 31, 2004, we had $143.1 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, long-term borrowing ratio
and fixed charge coverage ratio and restrict our payment of dividends. At
July 31, 2004, we were in compliance with such covenants.
In the second fiscal quarter 2004, we entered into two fixed-to-floating
interest rate swaps for a total of $70 million of the $215 million principal
amount of our 10% Senior Subordinated Notes due 2009. 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 floating rate swaps have rates of approximately 8.15% at July 31,
2004 versus fixed rates of 10%. 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 those
instances, the proceeds were used to repay debt and the gain was deferred and
is being recognized as a reduction of interest expense over the remaining life
of the senior subordinated notes, which mature in 2009. A deferred gain on
terminated interest rate swap agreements of $7.5 million is included in Other
liabilities on the balance sheet at July 31, 2004.
Net cash provided by operations was $18.4 million in the third fiscal quarter
2004 and $18.0 million for the third fiscal quarter 2003. The primary reason
for this modest increase was the increase in net income, offset by cash used
for increased working capital.
Net cash used for investing was $16.5 million in the third fiscal quarter 2004
and $8.4 million in the third fiscal quarter 2003. Our capital expenditures,
including timberland acquisitions, were $17.2 million in the third fiscal
quarter 2004, including $14.8 million in plant and equipment additions and
$2.4 million in timber and timberland additions, and $8.6 million in the third
fiscal quarter 2003. Capital expenditures are expected to be $60 to $65
million for fiscal year 2004 including expenditures for timberland purchases,
plant and equipment, and environmental compliance.
Net cash used for financing in the third fiscal quarter 2004 was $1.9 million
while net cash used for financing was $9.7 million for the third fiscal
quarter 2003. Borrowed debt decreased by $3.0 million during the third fiscal
quarter 2004 due to improved earnings. Borrowed debt decreased by $12.0
million during the third fiscal quarter 2003 due partially to continued
reduced capital expenditures and the monetization of the previous interest
rate swap.
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 third
fiscal quarter 2004. Cash dividends of $0.02 per share were declared and paid
in the third 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 costs and results of planned capital expenditure projects;
expected capacity utilization and anticipated cost of and availability of cash
flow and financing to fund operations, meet debt payment obligations and for
planned capital expenditure requirements.
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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
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; capital project delay, cost overruns or unforeseen
maintenance on capital assets or advantageous capital acquisitions; changes in
currency exchange rates between the U.S. dollar and the currencies of
important export markets; weather; labor disputes; unforeseen adverse
developments involving environmental matters or other legal proceedings or the
assertion of additional claims; 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. The
company does not undertake any obligation to update forward-looking statements
should circumstances or the company's estimates or projections change.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Our derivative activities are primarily limited to interest rate swaps.
During the quarter we had in effect two interest rate swaps on a portion of
our debt, to hedge exposure of our fixed rate debt. 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. The fair market value of long-term fixed interest rate debt is subject
to interest rate risk as well. Generally, the fair market value of fixed rate
debt will increase as interest rates fall and decrease as interest rates rise.
The interest rate changes affect the fair market value but do not impact
earnings or cash flows.
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 July
31, 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.
We are in the process of implementing a new company-wide Enterprise Resource
Planning System (ERP) with integrated point solution software. During the
quarter we implemented a log accounting point solution and an upgrade to the
ERP system. As a result, we have updated our internal controls as necessary
to accommodate the modifications to our business processes and accounting
procedures. There have not been any other significant changes in our internal
controls over financial reporting during the most recent quarter that have
materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
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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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Our paper mill discharges process water and storm water in the Columbia
River pursuant to a National Pollutant Discharge Elimination Permit
("Permit") issued by the State of Washington pursuant to the federal and
state Clean Water Act. During June 2004, the paper mill experienced several
simultaneous equipment failures which resulted in a series of events causing
excursions in excess of the effluent limits in the Permit. This
noncompliance event was reported to the Washington State Department of
Ecology ("DOE"). To date, DOE has not initiated any enforcement action
associated with this noncompliance; however, we expect to receive a notice
of violation and penalty in the near future. We have conducted a detailed
review of the facts and circumstances regarding the causes of the
noncompliance. We have repaired the malfunctioning equipment and intend to
undertake appropriate equipment and system modifications.
We have participated 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. On
August 30, 2004, the arbitrator issued a net award in favor of us and the
public utility district of approximately $1.5 million, subject to certain
adjustments downward, the magnitude of which will be determined in
supplemental proceedings during the next few months. We do not believe
these adjustments will have a material financial impact on us.
As we previously reported, we received from the Washington State Department of
Ecology ("DOE") 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. In third fiscal quarter 2004, we were
assessed a penalty of $130,014 which was paid in August 2004.
ITEM 2. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS.
Nothing to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report.
ITEM 5. OTHER INFORMATION
Nothing to report.
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ITEM 6. EXHIBITS.
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.
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 09/14/04
L. J. McLAUGHLIN
Senior Vice President-Finance,
Secretary and Treasurer
A. G. HIGGENS 09/14/04
A. G. HIGGENS
Assistant Treasurer
EXHIBIT INDEX
Exhibit No. Description
31.1 Rule 13a-14(a)/15d-14(a) Certification by R. H. Wollenberg,
President, CEO and Chairman.
31.2 Rule 13a-14(a)/15d-14(a) Certification by L. J. McLaughlin,
Sr. Vice President-Finance, Secretary and Treasurer.
32.1 Section 1350 Certification by R. H. Wollenberg,
President, CEO and Chairman.
32.2 Section 1350 Certification by L. J. McLaughlin,
Sr. Vice President-Finance, Secretary and Treasurer.
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