LONGVIEW FIBRE CO - 10-Q Quarterly Report

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 January 31, 2005

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)

(360) 425-1550
(Registrant's telephone number including area code)

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.

	Three Months Ended
	January 31
(thousands except per share)	2005			2004
Net sales
Timber	$	43,367		$	34,510
Paper and paperboard		71,304			42,367
Converted products		109,409			93,050
		224,080			169,927

Cost of products sold, including outward freight		188,214			155,853
Gross profit		35,866			14,074

Selling, administrative and general expenses		21,747			19,437

Operating profit (loss)
Timber		19,455			13,657
Paper and paperboard		(2,873	)		(8,677	)
Converted products		(2,463	)		(10,343	)
		14,119			(5,363	)

Interest income		44			36
Interest expense		(9,329	)		(9,620	)
Miscellaneous		423			213
Income (loss) before taxes		5,257			(14,734	)

Provision (benefit) for taxes
Current		142			(148	)
Deferred		1,803			(5,303	)
		1,945			(5,451	)

Net Income (loss)	$	3,312		$	(9,283	)

Earnings per share
Net income (loss)	$	0.06		$	(0.18	)

Average shares outstanding in the hands of the public		51,077			51,077

	Jan. 31		Oct. 31		Jan. 31
	2005		2004		2004
(dollars in thousands except per share)	(Unaudited)				(Unaudited)
ASSETS
Current assets:
Accounts and notes receivable	$	108,652	$	111,723	$	84,205
Allowance for doubtful accounts		1,350		1,350		1,350
Inventories, at lower cost or market; costs are based on last-in,
first-out method except for supplies at current averages
Finished goods		18,186		21,791		15,820
Goods in process		11,886		16,275		9,160
Raw materials and supplies		46,920		45,457		39,215
Other		8,980		7,800		8,864
Total current assets		193,274		201,696		155,914
Capital assets:
Buildings, machinery and equipment at cost		1,832,588		1,828,195		1,819,667
Accumulated depreciation		1,153,093		1,139,390		1,111,677
Costs to be depreciated in future years		679,495		688,805		707,990
Plant sites at cost		3,549		3,549		3,549
		683,044		692,354		711,539
Timber at cost less depletion		196,304		196,440		186,032
Roads at cost less amortization		8,557		8,631		8,378
Timberlands at cost		24,598		24,598		20,671
		229,459		229,669		215,081
Total capital assets		912,503		922,023		926,620
Pension and other assets		147,488		147,211		148,728
	$	1,253,265	$	1,270,930	$	1,231,262

Current liabilities:
Payable to bank resulting from checks in transit	$	8,255	$	12,370	$	6,401
Accounts payable		56,067		66,063		44,574
Short-term borrowings		20,000		10,000		15,000
Payrolls payable		16,946		15,897		14,869
Other taxes payable		9,173		9,100		8,702
Current installments of long-term debt		-		30,000		30,000
Total current liabilities		110,441		143,430		119,546
Long-term debt		452,179		442,148		463,526
Deferred taxes - net		206,586		204,783		190,107
Other liabilities		38,115		36,915		35,059
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 shares		76,615		76,615		76,615
Additional paid-in capital		3,306		3,306		3,306
Retained earnings		366,023		363,733		343,103
Total shareholders' equity		445,944		443,654		423,024
	$	1,253,265	$	1,270,930	$	1,231,262

	Three Months Ended
	January 31
(thousands)	2005			2004
Cash provided by (used for) operations:
Net income (loss)	$	3,312		$	(9,283	)
Charges to income (loss) not requiring cash:
Depreciation		17,619			17,908
Depletion and amortization		2,790			1,333
Deferred taxes - net		1,803			(5,303	)
(Gain) loss on disposition of capital assets		204			(35	)

Change in:
Accounts and notes receivable		3,071			15,549
Inventories		6,531			1,153
Other		(1,180	)		(1,755	)
Pension and other noncurrent assets		(277	)		(2,817	)
Accounts, payrolls and other taxes payable		(8,890	)		(6,945	)
Other noncurrent liabilities		184			627
Cash provided by operations		25,167			10,432

Cash provided by (used for) investing:
Additions to: Plant and equipment		(9,440	)		(4,235	)
Timber and timberlands		(2,593	)		(2,574	)
Proceeds from sale of capital assets		940			90
Cash used for investing		(11,093	)		(6,719	)

Cash provided by (used for) financing:
Long-term debt		(18,953	)		30,048
Short-term borrowings		10,000			(29,000	)
Payable to bank resulting from checks in transit		(4,115	)		(4,789	)
Accounts payable for construction		16			28
Cash dividends		(1,022	)		-
Cash used for financing		(14,074	)		(3,713	)

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)	$	15,998		$	15,333
Income taxes		68			(1	)

	Three Months Ended
	January 31

(thousands except per share)	2005			2004
COMMON STOCK:
Balance at beginning of period	$	76,615		$	76,615
Balance at end of period	$	76,615		$	76,615

ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period	$	3,306		$	3,306
Balance at end of period	$	3,306		$	3,306

RETAINED EARNINGS:
Balance at beginning of period	$	363,733		$	352,386
Net income (loss)		3,312			(9,283	)
Less cash dividends on common stock		(1,022	)		-
Balance at end of period	$	366,023		$	343,103

DIVIDENDS PAID PER SHARE:	$	0.02		$	-

COMMON SHARES:
Balance at beginning of period		51,077			51,077
Balance at end of period		51,077			51,077

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.

	Three Months
	Ended January 31
thousands	2005			2004
Service cost - benefits earned
during the year	$	2,470		$	2,257
Interest cost on benefit obligation		6,097			5,988
Expected return on plan assets		(10,958	)		(11,309	)
Amortization of prior service cost		1,469			1,486
Net periodic (income)	$	(922	)	$	(1,578	)

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 $636,000 during the three month period ended January 31, 2005 and we expect to contribute approximately $2.6 million for the full fiscal year.

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 $472,000 for these benefits during the three-month period ended January 31, 2005 and we expect to pay approximately $2.0 million for the full fiscal year.

NOTE 3: 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 Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities”. 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 ended January 31, 2005 and 2004.

Total deferred gain on all terminated interest rate swap agreements relating to our senior subordinated notes was $6.64 million and $6.61 million at January 31, 2005 and 2004, 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, which mature in 2009. The mark-to-market adjustment for the outstanding interest rate swaps resulted in a derivative liability of $1.1 million at January 31, 2005 and a derivative asset of $0.5 million at January 31, 2004, with a corresponding adjustment to long-term debt. See Note 4.

NOTE 4: Subsequent event - In February 2005, we terminated our two interest rate swap agreements and paid cash of $1.0 million resulting in a deferred loss of $1.1 million, which taken alone would increase our interest expense. However, this deferred loss will be netted with deferred gains on prior interest rate swap terminations and will be included in Other liabilities in the balance sheet. The resulting net gain will reduce interest expense over the remaining term of the senior subordinated notes, which mature in 2009.

Net Sales - First fiscal quarter 2005 net sales were $224.1 million, compared with $169.9 million for the first fiscal quarter of 2004. This 31.9% increase was attributed to an increase of 25.7% in timber segment sales, a 68.3% increase in the paper and paperboard segment sales, and a 17.6% increase in converted products sales. See “Selected Segment Results” below.

Cost of Products Sold - First fiscal quarter 2005 cost of products sold was $188.2 million, or 84.0% of net sales, compared with $155.9 million, or 91.7% of net sales, for first fiscal quarter 2004. This decrease as a percentage of net sales was primarily due to a 20.9% decrease in total energy cost per ton of production at the paper mill, a 15.1% and 14.0% decrease in labor costs per ton of production at the paper mill and the converting plants, respectively, and an 80.4% utilization rate at the paper mill in the first fiscal quarter of 2005, compared with 62.4% in the first fiscal quarter of 2004. This decrease was offset in part by a 14.9% increase in total logging costs and reduced pension income. Pension income has a positive effect on cost of products sold in all of our segments by reducing our accrued labor obligations. Total fiber costs remained flat.

Selling, General and Administrative Expenses - First fiscal quarter 2005 selling, general and administrative expenses were $21.7 million, or 9.7% of net sales, compared with $19.4 million, or 11.4% of net sales, for first fiscal quarter 2004. The primary reason for this decrease percentage of net sales was an increase in net sales due to pricing and volume increases, partially offset by increased salaries, consulting costs and less pension income. See “Selected Segment Results” below.

Operating Profit (Loss) - First fiscal quarter 2005 operating profit was $14.1 million compared with operating loss of $5.4 million for the first fiscal quarter 2004. This increase in operating profit was attributed to an increase of 42.5% in the timber segment, an improvement of 66.9% in the paper and paperboard segment, and a 76.2% improvement in the converted products segment. See “Selected Segment Results” below.

	Fiscal Quarter Ended
	January 31				Percentage
	2005		2004		Increase/(Decrease)
Timber net sales, $ millions	$	43.4	$	34.5		25.7
Timber operating profit, $ millions		19.5		13.7		42.5

Logs, thousands of board feet		63,445		48,752		30.1
Lumber, thousands of board feet		18,023		26,085		(30.9	)
Logs, $/thousand board feet	$	587	$	524		12.0
Lumber, $/thousand board feet		339		343		(1.2	)

First fiscal quarter 2005 timber net sales were $43.4 million, compared with $34.5 million for first fiscal quarter 2004. This 25.7% increase was due primarily to an increase in log volume of 30.1% and an increase in log prices of 12.0%, partially offset by a decrease in lumber volume of 30.9% along with a decrease in lumber prices of 1.2%. Strong demand and favorable weather conditions resulted in log volume increases compared to first fiscal quarter 2004, which was adversely affected by severe winter weather. First quarter harvest levels are inline with our target sales levels of 240 to 250 million board feet for fiscal year 2005. The lumber decreases reflected our decision to optimize our total returns and discontinue the processing of logs into lumber at a third party sawmill in Oregon.

First fiscal quarter 2005 domestic log sales increased 78.9% on a 50.1% volume increase and 19.1% price increase from year ago-levels due to the strong housing market. First fiscal quarter 2005 export sales in the timber segment were $6.2 million, or 14.2% of timber net sales, compared with $8.3 million, or 24.1%, for first fiscal quarter 2004. Export log sales declined 24.6% on a 29.7% volume decline, partially offset by a 7.3% increase in average prices. The volume decline was primarily the result of less volume of export quality logs harvested in the first fiscal quarter of 2005 and the selling of certain export quality logs in the strong domestic market.

	Fiscal Quarter Ended
	January 31						Percentage
	2005			2004			Increase/(Decrease)
Paper and Paperboard net sales,
$ millions	$	71.3		$	42.4			68.3
Paper and Paperboard operating
Profit (loss), $ millions		(2.9	)		(8.7	)		-

Paper, tons		93,348			60,632			54.0
Paperboard, tons		43,036			19,891			116.4
Paper, $/ton FOB mill equivalent	$	549		$	550			(0.2	)
Paperboard, $/ton FOB mill equivalent		350			340			2.9

First fiscal quarter 2005 paper and paperboard net sales were $71.3 million, compared with $42.4 million for first fiscal quarter 2004. Paper net sales in the first fiscal quarter 2005 increased 58.1% to $56.0 million from $35.4 million in the prior year period. Paperboard net sales in the first fiscal quarter 2005 increased 120.1% to $15.3 million from $7.0 million in the prior year period. The increased sales were primarily due to a 54.0% and 116.4% increase in paper and paperboard volume, respectively, and an increase in average paperboard price of 2.9%. Paper prices remained flat. The paper volume increase was the result of the general economic improvement in the U.S. market and the company enjoying an increased share of the lightweight bag paper market as some competitors changed from lightweight paper to paperboard production. The increase in lightweight bag paper sales caused average paper sales price, from what we would have otherwise experienced, to decline due to the relative lower price of these grades of paper. The paperboard volume increase was primarily due to our decision to produce and sell roll pulp to paperboard producers in Asia, with approximately 14,000 tons sold in first fiscal quarter 2005, compared with no sales in first fiscal quarter 2004. The balance of the increased volume was from linerboard sales resulting from the improved economy.

Domestic paper net sales increased 65.7% on a 62.8% volume increase. Domestic paperboard net sales increased 54.5% as volume increased 35.6% and average prices improved 14.7%. Export sales in the paper and paperboard segment were $19.2 million, or 27.0% of paper and paperboard net sales, compared with $10.7 million, or 25.3%, for first fiscal quarter 2004. Export paper sales grew 29.2% on 24.8% higher volume and 2.8% higher average price. Export paperboard sales increased 189.1% as volume grew 192.3%. The primary reason for the volume increases in export sales were the new sales of roll pulp and increased linerboard sales in the export market.

First fiscal quarter 2005 paper and paperboard operating loss was $2.9 million, compared with an operating loss of $8.7 million for first fiscal quarter 2004. Operating results were positively affected by lower paper mill energy costs per ton of production, down 20.9% compared with first fiscal quarter 2004, and decreased labor costs per ton of production, down 15.1%. Higher mill utilization of 80.4% compared with first fiscal quarter 2004 of 62.4% also positively contributed to operating results. During the quarter, we continued to fully curtail two of our twelve paper machines and partially curtailed another in order to match incoming orders with production.

First fiscal quarter 2005 operating loss was $2.5 million, compared with an operating loss of $10.3 million for first fiscal quarter 2004. Operating results were positively affected by the price and volume improvement and by a 14.0% decrease in labor costs per ton of product produced. The average mill cost of paperboard supplied to our converting plants decreased by 9.1% for first fiscal quarter 2005, as compared with first fiscal quarter 2004; however, outside purchased paperboard increased approximately 15%, resulting in a 0.9% net increase in the cost of paperboard provided to our converting plants.

At January 31, 2005, we had $115.0 million outstanding under our $250 million revolving credit facility, excluding letters of credit of $9.9 million. Also outstanding at January 31, 2005, were various senior notes totaling $124.5 million, revenue bonds of $14.5 million and senior subordinated notes of $214.2 million, net of original issuance discount. In addition, we had $5.0 million outstanding on a $15 million uncommitted line of credit. As of January 31, 2005, we had approximately $135.0 million available under our bank lines of credit. During the quarter, we paid off a $30 million senior note from borrowings under our revolving credit facility. At current interest rates, we estimate the annual savings from paying off this high rate senior note with LIBOR based borrowings to be over $1 million. 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 January 31, 2005, we were in compliance with such covenants.

Net cash used for investing was $11.1 million in the first fiscal quarter 2005 and $6.7 million in the first fiscal quarter 2004. Our capital expenditures, including timberland acquisitions, were $12.0 million in the first fiscal quarter 2005, compared with $6.8 million in the first fiscal quarter 2004. Capital expenditures are expected to be approximately $40 to $50 million for fiscal year 2005 including expenditures for timberland purchases, plant and equipment, and environmental compliance.

Net cash used for financing in the first fiscal quarter 2005 was $14.1 million while net cash used for financing was $3.7 million for the first fiscal quarter 2004. Borrowed debt decreased by $9.0 million during the first fiscal quarter 2005 due to improved earnings. Borrowed debt increased by $1.0 million during the first fiscal quarter 2004 from the previous quarter due partially to reduced cash from operations offset in part by modest capital expenditures.

Each quarter we determine the amount of our dividend, if any, based on, among other things, operating results, current market conditions, debt levels and covenants of financing agreements. A cash dividend of $0.02 per share was declared and paid in the first fiscal quarter 2005 in the aggregate amount of $1.0 million. Cash dividends were not paid in the first fiscal quarter of 2004.

In February 2005, we terminated our two interest rate swap agreements and paid cash of $1.0 million resulting in a deferred loss of $1.1 million, which taken alone would increase our interest expense. However, this deferred loss will be netted with deferred gains on prior interest rate swap terminations and will be included in Other liabilities in the balance sheet. The resulting net deferred gain will reduce interest expense over the remaining term of the underlying senior subordinated notes, which mature in 2009.

This Form 10-Q contains forward-looking statements, including statements concerning expected log sales volume; expected capital expenditures; expected interest savings; and anticipated cost of and availability of cash flow and financing to fund operations, meet debt payment obligations and for planned capital expenditure requirements.

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.

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 Notes 3 and 4 to our financial statements for a more detailed discussion of our interest rate swaps. The swaps were terminated in February 2005. 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.

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 January 31, 2005, the disclosure controls and procedures were effective.

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.

ITEM 1. LEGAL PROCEEDINGS.

As we have reported from time to time since 2002, we have been, and currently are, named a defendant in a number of asbestos-related lawsuits in Madison County, Illinois and St. Louis, Missouri, along with numerous other defendants. In each of the lawsuits, the plaintiff alleges asbestos-related injuries from exposure to the defendants’ asbestos products, as well as exposure to asbestos while working on certain of the defendants' premises. At least one lawsuit alleges the plaintiff worked at our premises for unidentified contractors. In all other respects the claims are not specific as to what, if any, contacts the plaintiffs had with us or our manufacturing plants or products. None of the claims specifies damages sought from us individually, but each plaintiff alleges a general jurisdictional amount against all defendants.

In the past, we have been routinely dismissed from these types of actions without any payment or liability to the plaintiffs. The process by which the plaintiffs in these actions file claims have led, and we believe will continue to lead, to additional similar lawsuits. We believe we will likely again be dismissed as a defendant, without prejudice, from these suits.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES 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.

ITEM 6. EXHIBITS.

The Exhibits to this report on Form 10-Q are listed on the accompanying 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.

	Fiscal Quarter Ended
	January 31						Percentage
	2005			2004			Increase/(Decrease)
Converted Products sales, $ millions	$	109.4		$	93.1			17.6
Converted Products operating
profit (loss), $ millions		(2.5	)		(10.3	)		-

Converted Products, tons		132,111			115,969			13.9
Converted Products, $/ton	$	828		$	802			3.2