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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2004
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to _________________
Commission file number: 1-13923
WAUSAU-MOSINEE PAPER CORPORATION
(Exact name of registrant as specified in charter)
WISCONSIN 39-0690900
(State of incorporation) (I.R.S. Employer Identification
Number)
100 PAPER PLACE
MOSINEE, WISCONSIN 54455-9099
(Address of principal executive office)
Registrant's telephone number, including area code: 715-693-4470
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 report), 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 ____
The number of common shares outstanding at October 31, 2004 was 51,685,251.
WAUSAU-MOSINEE PAPER CORPORATION
AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Condensed Consolidated Statements of
Operations, Three Months and Nine Months Ended
September 30, 2004 (unaudited) and
September 30, 2003 (unaudited) 1
Condensed Consolidated Balance
Sheets, September 30, 2004 (unaudited)
and December 31, 2003 (derived from
audited financial statements) 2
Condensed Consolidated Statements
of Cash Flows, Nine Months
Ended September 30, 2004 (unaudited)
and September 30, 2003 (unaudited) 3
Notes to Condensed Consolidated
Financial Statements (unaudited) 3-9
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 6. Exhibits 18
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Wausau-Mosinee Paper Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands, except per share data) 2004 2003 2004 2003
NET SALES $ 262,428 $ 249,529 $ 778,352 $ 732,188
Cost of products sold 229,983 221,090 691,073 657,774
GROSS PROFIT 32,445 28,439 87,279 74,414
Selling and administrative expenses 17,158 16,426 55,796 50,089
OPERATING PROFIT 15,287 12,013 31,483 24,325
Interest expense (2,608) (2,537) (7,685) (7,608)
Other income (expense), net 191 18 483 19
EARNINGS BEFORE INCOME TAXES 12,870 9,494 24,281 16,736
Provision for income taxes 4,762 3,513 8,984 6,192
NET EARNINGS $ 8,108 $ 5,981 $ 15,297 $ 10,544
NET EARNINGS PER SHARE-BASIC $ 0.16 $ 0.12 $ 0.30 $ 0.20
NET EARNINGS PER SHARE-DILUTED $ 0.16 $ 0.12 $ 0.29 $ 0.20
Weighted average shares outstanding-basic 51,680,686 51,552,250 51,653,843 51,546,462
Weighted average shares outstanding-diluted 51,980,190 51,664,539 51,904,856 51,639,898
Dividends declared per common share $ 0 $ 0 $ 0.17 $ 0.17
See Notes to Condensed Consolidated Financial Statements.
1
Wausau-Mosinee Paper Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) SEPTEMBER 30, December 31,
2004 2003
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 55,035 $ 36,305
Receivables, net 97,812 81,300
Refundable income taxes 2,400 1,668
Inventories 115,340 115,835
Deferred income taxes 12,312 12,616
Other current assets 2,711 3,694
Total current assets 285,610 251,418
Property, plant and equipment, net 541,528 565,722
Other assets 41,917 40,960
TOTAL ASSETS $869,055 $858,100
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 114 $ 112
Accounts payable 68,744 55,368
Accrued and other liabilities 54,860 59,524
Total current liabilities 123,718 115,004
Long-term debt 161,544 162,174
Deferred income taxes 115,012 115,879
Postretirement benefits 57,062 54,197
Pension 32,578 40,829
Other noncurrent liabilities 20,595 19,701
Total liabilities 510,509 507,784
Stockholders' equity 358,546 350,316
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $869,055 $858,100
See Notes to Condensed Consolidated Financial Statements.
2
Wausau-Mosinee Paper Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
(Dollars in thousands) 2004 2003
Net cash provided by operating activities $47,102 $27,864
Cash provided by (used in) investing activities:
Capital expenditures (16,579) (16,794)
Acquisition of business 0 (8,511)
Proceeds on sale of property, plant and equipment 43 11
(16,536) (25,294)
Cash provided by (used in) financing activities:
Payments under capital lease obligation (83) (71)
Dividends paid (13,166) (13,144)
Proceeds from stock option exercise 1,413 167
(11,836) (13,048)
Net increase (decrease) in cash and cash equivalents 18,730 (10,478)
Cash and cash equivalents, beginning of period 36,305 23,383
Cash and cash equivalents, end of period $55,035 $12,905
Interest-net of amount capitalized $10,568 $10,505
Income taxes paid 7,701 4,129
Noncash investing and financing activities: A capital lease obligation of $336
was recorded in the second quarter of 2003 when the Company entered into a
lease for new equipment.
See Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. The condensed consolidated financial statements include the results of
Wausau-Mosinee Paper Corporation and our consolidated subsidiaries.
All significant intercompany transactions have been eliminated. The
accompanying condensed financial statements, in the opinion of
management, reflect all adjustments, which are normal, and recurring in
nature and which are necessary for a fair statement of the results for
the periods presented. Results for the interim period are not
necessarily indicative of future results. In all regards, the
financial statements have been presented in accordance with accounting
principles generally accepted in the United States of America. Refer
to notes to the financial statements, which appear in the Annual Report
on Form 10-K for
3
the year ended December 31, 2003, for the Company's accounting
policies, which are pertinent to these statements.
Note 2. During the second quarter of 2003, the Company's Towel & Tissue Group,
reached a settlement of all claims of the parties in a patent
litigation matter. As a result of the settlement, the Company
recognized $4.2 million in pre-tax income (reduction of cost of sales)
as a fee for licensing certain patented dispenser technologies.
Note 3. Effective March 3, 2003, the Company acquired certain assets of a
laminated papers producer for approximately $8.5 million in cash. The
acquisition was accounted for as a purchase business combination and,
accordingly, the purchase price has been allocated using the fair
values of the acquired receivables, inventory, machinery and equipment,
and identifiable intangible assets. No goodwill was recorded as a
result of this acquisition. The pro forma disclosures required under
Statement of Financial Accounting Standard (SFAS) No. 141 "Business
Combinations" have not been presented, as the impact of this
acquisition does not materially impact the results of operations.
Note 4. Net earnings include provisions, or credits, for stock incentive plans
calculated by using the average price of the Company's stock at the
close of each calendar quarter as if all grants under such plans had
been exercised on that day. For the three months ended September 30,
2004, the credit for incentive plans on a pretax basis was $175,000.
For the three months ended September 30, 2003, the provision for
incentive plans on a pretax basis was $577,000. On a pretax basis for
the nine months ended September 30, 2004 and 2003, provisions of
$1,992,000 and $991,000, respectively, were recognized as stock
incentive plan expense.
As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company continues to measure compensation cost for
stock-option plans using the "intrinsic value based method" prescribed
under APB No. 25, "Accounting for Stock Issued to Employees."
4
Pro forma net earnings and earnings per share had the Company elected to
adopt the fair-value based method" of SFAS No. 123 are as follows:
(Dollars in thousands, except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
Net earnings, as reported $ 8,108 $ 5,981 $ 15,297 $ 10,544
Add: Total stock-based employee
compensation expense (credit)
under APB No. 25, net of
related tax effects (110) 364 1,255 625
Deduct: Total stock-based
compensation (expense) credit
determined under fair-value
based method for all awards,
net of related tax effects 27 (417) (1,458) (744)
Proforma $ 8,025 $ 5,928 $ 15,094 $ 10,425
Earnings per share - basic:
As reported $ 0.16 $ 0.12 $ 0.30 $ 0.20
Pro forma $ 0.16 $ 0.11 $ 0.29 $ 0.20
Earnings per share - diluted:
As reported $ 0.16 $ 0.12 $ 0.29 $ 0.20
Pro forma $ 0.15 $ 0.11 $ 0.29 $ 0.20
Note 5. Basic and diluted earnings per share are recognized as follows:
(Dollars in thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
Net earnings $ 8,108 $ 5,981 $ 15,297 $ 10,544
Basic weighted average common
shares outstanding 51,680,686 51,552,250 51,653,843 51,546,462
Dilutive securities:
Stock options 299,504 112,289 251,013 93,436
Dilutive weighted average common
shares outstanding 51,980,190 51,664,539 51,904,856 51,639,898
Net earnings per share-basic $ 0.16 $ 0.12 $ 0.30 $ 0.20
Net earnings per share-diluted $ 0.16 $ 0.12 $ 0.29 $ 0.20
5
For the three months ended September 30, 2004, options for 288,586
shares were excluded from the diluted EPS calculation because the
options were antidilutive. For the three months ended September 30,
2003, options for 842,255 shares were excluded from the diluted EPS
calculation because the options were antidilutive. For the nine months
ended September 30, 2004 and 2003, 395,622 shares and 826,922 shares,
respectively, were excluded from the diluted EPS calculation because the
options were antidilutive.
Note 6. Accounts receivable consisted of the following:
(Dollars in thousands) SEPTEMBER 30,December 31,
2004 2003
Trade $ 98,963 $82,142
Other 1,098 1,086
100,061 83,228
Less: Allowances (2,249) (1,928)
$ 97,812 $81,300
Note 7. The various components of inventories were as follows:
(Dollars in thousands) SEPTEMBER 30,December 31,
2004 2003
Raw Materials $ 32,906 $ 27,282
Finished Goods and Work in Process 80,092 83,757
Supplies 27,961 27,920
Subtotal 140,959 138,959
Less: LIFO Reserve (25,619) (23,124)
Net inventories $115,340 $115,835
Note 8. The accumulated depreciation on fixed assets was $682,102,000 as of
September 30, 2004, and $652,990,000 as of December 31, 2003. The
provision for depreciation, amortization and depletion for the nine
months ended September 30, 2004 and September 30, 2003 was $44,852,000
and $45,693,000, respectively.
6
Note 9. The components of net periodic benefit costs recognized in the
Condensed Consolidated Statements of Operations for the three months
Ended September 30, 2004 and 2003, are as follows:
(Dollars in thousands) Other
Post-retirement
Pension Benefits Benefits
2004 2003 2004 2003
Service cost $ 1,730 $ 1,380 $ 466 $ 503
Interest cost 2,491 2,330 1,183 1,392
Expected return on plan assets (2,503) (2,051) 0 0
Amortization of:
Prior service cost 549 484 (899) (90)
Actuarial loss 419 188 371 224
Transition (asset) (12) (48) 0 0
Settlement 30 0 0 0
Net periodic benefit cost $ 2,704 $ 2,283 $ 1,121 $ 2,029
The components of net periodic benefit costs recognized in the Condensed
Consolidated Statements of Operations for the nine months ended September
30, 2004 and 2003, are as follows:
(Dollars in thousands) Other
Post-retirement
Pension Benefits Benefits
2004 2003 2004 2003
Service cost $ 5,170 $ 4,138 $ 1,808 $ 1,511
Interest cost 7,337 6,988 4,229 4,035
Expected return on plan assets (7,508) (6,167) 0 0
Amortization of:
Prior service cost 1,524 1,454 (1,073) (268)
Actuarial loss 1,258 562 1,265 674
Transition (asset) (38) (142) 0 0
Settlement 30 248 0 0
Net periodic benefit cost $ 7,773 $ 7,081 $ 6,229 $ 5,952
On December 8, 2003, the President signed into law the Medicare
Prescription Drug Improvement and Modernization Act of 2003 (the Act).
The Act introduces a prescription drug benefit under Medicare as well
as a federal subsidy to sponsors of retiree health care benefit plans
that override a benefit that is at least actuarially equivalent to
Medicare.
In June 2004, the FASB issued FSP 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. The FSP provides guidance on the accounting
for the effects of the Act for employers that sponsor postretirement
health care plans that provide prescription drug benefits. The FSP
also requires those employers to provide
7
certain disclosures regarding the effect of the federal subsidy
provided by the Act. The Company adopted the provisions of the FSP on
July 1, 2004. The impact of the adoption of the FSP resulted in a
reduction in the accumulated post-retirement benefit obligation of $5.9
million and a reduction in the net periodic benefit cost for the
three-months ended September 30, 2004, of $250,000.
The company previously disclosed in its consolidated financial
statements for the year ended December 31, 2003, that it expected to
contribute $21.2 million to its pension plans in 2004. As of September
30, 2004, the Company expects to contribute $20.1 million to its
pension plans in 2004. Of this total, $16.8 million of contributions
have been made as of September 30, 2004. The Company expects to
contribute an additional $3.3 million by December 31, 2004.
Note 10. Interim Segment Information
FACTORS USED TO IDENTIFY REPORTABLE SEGMENTS
The Company's operations are classified into three principal reportable
segments: Printing & Writing, Specialty Products, and Towel & Tissue,
each providing different products. Separate management of each segment
is required because each business unit is subject to different
marketing, production, and technology strategies.
PRODUCTS FROM WHICH REVENUE IS DERIVED
Printing & Writing produces a broad line of premium printing and
writing grades at manufacturing facilities in Brokaw, Wisconsin and
Groveton, New Hampshire. Printing & Writing also includes converting
facilities, which produce wax-laminated roll wrap and related specialty
finishing and packaging products, and a converting facility, which
converts printing and writing grades. Specialty Products produces
specialty papers at its manufacturing facilities in Rhinelander,
Wisconsin;
Mosinee, Wisconsin; and Jay, Maine. Towel & Tissue produces a complete
line of towel and tissue products that are marketed along with soap and
dispensing systems for the "away-from-home" market. Towel & Tissue
operates a paper mill in Middletown, Ohio, and a converting facility in
Harrodsburg, Kentucky.
8
RECONCILIATIONS
The following are reconciliations to corresponding totals in the
accompanying consolidated financial statements:
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) 2004 2003 2004 2003
Net sales external customers
Printing & Writing $102,590 $104,105 $303,872 $301,940
Specialty Products 101,351 90,191 308,053 272,350
Towel & Tissue 58,487 55,233 166,427 157,898
$262,428 $249,529 $778,352 $732,188
Operating profit
Printing & Writing $ 5,124 $ 5,265 $ 9,646 $ 9,455
Specialty Products 5,204 2,444 12,030 4,020
Towel & Tissue 7,855 7,619 21,287 20,022
Total reportable segment
operating profit 18,183 15,328 42,963 33,497
Corporate & eliminations (2,896) (3,315) (11,480) (9,172)
Interest expense (2,608) (2,537) (7,685) (7,608)
Other income (expense), net 191 18 483 19
Earnings before income taxes $ 12,870 $ 9,494 $ 24,281 $ 16,736
(Dollars in thousands) SEPTEMBER 30, December 31,
2004 2003
Segment Assets
Printing & Writing $281,032 $283,711
Specialty Products 328,160 334,079
Towel & Tissue 165,639 165,199
Corporate & Unallocated* 94,224 75,111
$869,055 $858,100
* Segment assets do not include intersegment accounts receivable, cash,
deferred tax assets and certain other assets, which are not
identifiable with segments.
Note 11. Subsequent Event
On October 21, 2004, the Company purchased the assets of a specialty
manufacturer of high-quality uncoated freesheet paper for $9.6 million in cash.
The mill has production capacity of 170,000 tons and will complement the
existing Printing & Writing business segment. The acquisition will be accounted
for as a purchase business combination and, accordingly, the purchase price
will be allocated using the fair values of the acquired land, buildings, and
machinery and equipment.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The gradual improvement in market conditions experienced in each of the
Company's business segments during the first half of 2004 continued in the
third quarter for the Specialty Products and Towel & Tissue segments, while the
uncoated freesheet market that impacts the Printing & Writing business slowed
with volumes declining from prior year levels. As a result, the Company's
Specialty Products and Towel & Tissue business segments experienced both
increased sales and shipments in the third quarter of 2004 compared to the
third quarter of 2003, while the Printing & Writing business experienced
declines in both net sales and shipments for the same quarter-over-quarter
comparison. Increased fiber-related and natural gas costs unfavorably impacted
the current quarter in comparison to the same quarter last year. Through the
first nine months of 2004, sales from new products developed within the
previous three years accounted for nearly 40% of the Company's consolidated net
sales, exceeding the Company's internal target of 25%; operating efficiencies
increased more than the Company's target of 1% as compared to last year; and
continued progress was made toward achieving the Company's cost reduction goal
of 2% of prior year cost of sales. In addition, during the third quarter of
2004 the Company announced an agreement to purchase the assets of an uncoated
freesheet mill for $9.6 million. The mill has production capacity of 170,000
tons and will complement the existing Printing & Writing business segment. The
transaction was completed on October 21, 2004. The Company is targeting a mid-
November start-up of the mill's largest paper machine, capable of producing up
to 90,000 tons per year of premium printing and writing paper. No timetable
has been established for the start-up of the mill's second paper machine.
OPERATIONS REVIEW
Net Sales
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) 2004 2003 2004 2003
Net sales $262,428 $249,529 $778,352 $732,188
Percent increase/(decrease) 5% (1%) 6% 2%
For the three months ended September 30, 2004, consolidated net sales for the
Company were $262.4 million compared to $249.5 million for the same three-month
period in 2003, an increase of 5%. Company-wide shipments in the third quarter
of 2004 were 213,293 tons, a 1% decline from the 215,430 tons shipped in the
third quarter of 2003. Third quarter 2004 average selling price increased
nearly 6%, or approximately $15 million, as compared to the same period in 2003
with product mix enhancements accounting for nearly half of the average selling
price increase.
For the nine months ended September 30, 2004 and 2003, consolidated net sales
were $778.4 million and $732.2 million, respectively, representing a 6%
improvement year-over-year. Year-
10
to-date shipments through September 30, 2004, improved to 649,858 tons, an
increase of 2% over the 637,600 tons reported for the same year-to-date period
of 2003. During the first nine months of 2004, average selling price improved
approximately 4%, with product mix enhancements accounting for most of the
increase. Together, product pricing and product mix changes accounted for
approximately $29 million of the consolidated net sales improvement.
Third quarter net sales and shipments for Printing & Writing decreased 1% and
5%, respectively, as compared to the third quarter of 2003. Net sales declined
to $102.6 million in 2004 from $104.1 million reported for the same three-month
period in 2003 while shipments declined quarter-over-quarter from the 95,164
tons in 2003 to 90,030 tons in 2004. Average net selling price improved
approximately 4% over the third quarter of 2003, with sales mix accounting for
the majority of the increase as the volume of higher-margin premium printing
and writing papers and consumer products increased 9% and 15%, respectively,
quarter-over-quarter. Lower overall shipments were principally due to
inconsistent demand and competitive market conditions for paper mill packaging
products, while reduced shipments to paper merchants and converters also
contributed to the year-over-year decline. Market demand remained similar to
prior year with pricing competitive as the fourth quarter began.
Printing & Writing net sales for the first nine months of 2004 improved 1% to
$303.9 million compared to $301.9 million in the first nine months of 2003,
while shipments declined slightly to 273,151 tons from 274,567 tons shipped in
the first nine months of 2003. Average selling price improved approximately 1%
year-over-year with sales mix enhancement driving the improvement as real
selling prices declined in the first nine months of 2004.
Specialty Products' net sales improved 12% in the three months ended September
30, 2004 over the three months ended September 30, 2003. Net sales were $101.4
million compared to $90.2 million for the third quarters of 2004 and 2003,
respectively. Shipments improved to 83,804 tons in the third quarter of 2004
compared to 80,988 tons in 2003. Average net selling price increased more than
8% in the third quarter of 2004 compared to the third quarter of 2003, with
product selling price increases resulting, in part, from the pass-through of
increased fiber costs accounting for nearly three-quarters of the improvement.
For the first nine months of 2004, Specialty Products' net sales were $308.1
million compared to $272.4 million in the same period of 2003, an increase of
13%. Shipment volume increased 5% year-over year with 263,115 tons shipped in
2004 and 251,314 tons shipped in 2003. Average selling price improvement of 7%
year-over-year was driven by actual product pricing improvements of 5% and
product mix enhancements of 2%.
Towel & Tissue net sales increased to $58.5 million in the third quarter of
2004, compared with $55.2 million in the same period last year. Shipment
volume increased slightly with 39,459 tons shipped in the third quarter of 2004
compared to 39,278 tons shipped in the third quarter of 2003. Average selling
price improved by nearly 5% with actual product selling prices increasing 3%
and product mix improving approximately 2%.
Year-to-date net sales for Towel & Tissue were $166.4 million in 2004 compared
to $157.9 million in 2003. Year-to-date shipments increased 2% to 113,592 tons
in 2004 versus 111,719
11
tons shipped in 2003. The "away-from-home" segment of the towel and tissue
market grew approximately 2% during the nine months of 2004 compared with the
same period in 2003. Average net selling price increased 4%, with an
improvement in product mix driving the majority of the increase.
Gross Profit
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) 2004 2003 2004 2003
Gross profit on sales $32,445 $28,439 $87,279 $74,414
Gross profit margin 12% 11% 11% 10%
Gross profit for the three months ended September 30, 2004, was $32.4 million
compared to $28.4 million for the three months ended September 30, 2003. Gross
profit margins increased slightly compared to those reported in the same period
last year as increases in energy and fiber-related prices were offset by
improvement in average selling price, operational efficiency gains and cost-
reduction efforts. In total, natural gas prices increased 14% resulting in
additional cost of $1.1 million in the third quarter of 2004 compared to the
third quarter of 2003. Compared to the third quarter of 2003, market pulp
prices were higher by $56 per air-dried metric ton, or approximately $5.5
million, wastepaper prices increased $1.5 million, or 44%, and linerboard
increased $1.1 million, or approximately 20%, quarter-over-quarter.
Year-to-date, gross profit margins improved to $87.3 million, or 11% of net
sales in 2004 compared to $74.4 million, or 10% of net sales in 2003. As in
the quarterly comparison, improvements in average selling price, operational
efficiency gains and cost-reduction efforts more than offset unfavorable fiber-
related and energy costs that negatively impacted the gross profit margin year-
over-year. Year-over-year, market pulp prices increased nearly 10% or $13.2
million and natural gas costs increased approximately 2% or $0.5 million. In
the nine months ended September 30, 2003, the Company recognized $4.2 million
of income as a fee for licensing certain patented dispenser technologies,
favorably impacting gross profit margin in that period.
The list price of northern bleached softwood kraft decreased $30 per air-dried
metric ton during the third quarter with another $30 per air-dried metric
decline occurring early in the fourth quarter. During this period, the list
price of most other market pulps has moved lower by lesser amounts. Some
market pulp producers have announced a $30 per air-dried metric ton price
increase targeted for late in the fourth quarter.
Printing & Writing's gross profit for the third quarter of 2004 and 2003 was
10% of net sales, and on a year-to-date basis, gross profit was 9% for both
nine-month periods of 2004 and 2003. As discussed in the consolidated gross
margin comparisons, in both the quarter-over-quarter and year-over-year
periods, increases in average net selling price combined with cost-reduction
efforts offset unfavorable pricing in both natural gas and market pulp.
The Specialty Products' average selling price increase, improved operations and
cost-reduction efforts offset the unfavorable impacts of energy and market pulp
to report improved year-over-
12
year gross profit margins of 10% in the third quarter of 2004 compared to 8% in
the third quarter of 2003. Similarly, year-to-date margins improved to 9% in
2004 from 6% in 2003.
The gross profit margin for Towel & Tissue improved to 21% in the third quarter
of 2004 from 20% in the third quarter of 2003. Increased average selling price
and improved operations drove the improvement in gross margin on a quarter-
over-quarter basis. Year-to-date gross margins remained constant at 20% of net
sales in both 2004 and 2003. 2003 results include a favorable $4.2 million
settlement of a patent litigation matter.
Consolidated order backlogs increased to approximately 46,300 tons at September
30, 2004, from approximately 33,400 tons at September 30, 2003. Backlog tons
at September 30, 2004 represent $57.3 million in sales compared to $37.8
million in sales at September 30, 2003. Improvements in customer backlog were
evident in Specialty Products and Towel & Tissue, while Printing & Writing
declined slightly. Printing & Writing's backlog tons declined from 10,800 tons
as of September 30, 2003, to 10,400 tons at September 30, 2004. Specialty
Products' backlog tons improved to 31,000 tons at the end of the third quarter
of 2004 compared to 20,100 tons at the end of the third quarter of 2003. Towel
& Tissue experienced an increase in backlogs with 4,900 tons and 2,500 tons
reported at the end of the third quarter of 2004 and 2003, respectively. The
change in customer order backlogs does not necessarily indicate business
conditions as a large portion of orders are shipped directly from inventory
upon receipt and do not impact backlog numbers.
Selling and Administrative Expenses
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) 2004 2003 2004 2003
Selling and administrative expense $17,158 $16,426 $55,796 $50,089
Percent increase 4% 22% 11% 6%
As a percent of net sales 7% 7% 7% 7%
Selling and administrative expenses in the third quarter of 2004 were $17.2
million compared to $16.4 million in the same period of 2003. Incentive
compensation programs based on the market price of the Company's stock resulted
in a credit of $0.2 million for the three months ended September 30, 2004
compared to a provision of $0.6 million for the three months ended September
30, 2003. Costs increasing quarter-over quarter included fringe benefit
expenses, particularly health-care costs, relocation and recruiting expenses,
and consulting expenses related to the Companies compliance work associated
with Section 404 of the Sarbanes-Oxley Act.
For the nine months ended September 30, 2004, selling and administrative
expenses were $55.8 million compared to $50.1 million in the first nine months
of 2003. Expense recognized for stock-incentive based programs for the nine
months ended September 30, 2004 and 2003, was $2.0 million and $1.0 million,
respectively. As in the quarter-over-quarter comparison, other costs
increasing include fringe benefit expenses, particularly health-care costs,
relocation and recruiting expenses, and consulting expenses related to the
Company's compliance work associated with Section 404 of the Sarbanes-Oxley
Act.
13
Other Income and Expense
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) 2004 2003 2004 2003
Interest expense $2,608 $2,537 $7,685 $7,608
Other income (expense), net 191 18 483 19
Interest expense was similar between comparable periods of 2004 and 2003.
Quarter-over-quarter, interest expense of $2.6 million was recorded in the
third quarter of 2004 compared to $2.5 million in the third quarter of 2003.
Interest expense was $7.7 million and $7.6 million for the nine months ended
September 30, 2004 and 2003, respectively. Long-term debt was $161.5 million
and $162.4 million at September 30, 2004 and 2003, respectively. Long-term
debt at December 31, 2003, was $162.2 million. Interest expense is expected to
remain similar between 2004 and 2003 for the balance of the year. Other income
is higher in 2004 and 2003 in both the quarterly and year-to-date comparisons
due to interest income as a result of higher cash and cash equivalent balances
year-over-year.
Income Taxes
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) 2004 2003 2004 2003
Provision for income taxes $4,762 $3,513 $8,984 $6,192
Effective tax rate 37% 37% 37% 37%
The effective tax rates for the periods presented are indicative of the
Company's normalized tax rate. The effective rate for 2004 is expected to
remain at 37%.
On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was
signed into law. The Act contains $137 billion in tax cuts over a ten year
period beginning in 2005, which are mainly U.S. manufacturing businesses and
multinational companies. The Company has not yet completed its assessment of
how the Act might impact its future results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows and Capital Expenditures
Nine Months Ended September 30,
(Dollars in thousands) 2004 2003
Cash provided by operating activities $47,102 $27,864
Capital expenditures 16,579 16,794
For the nine months ended September 30, 2004, cash provided by operating
activities was $47.1 million compared to cash provided by operations for the
nine months ended September 30, 2003, of $27.9 million. The improvement in
cash flows provided by operating activities year-over-year
14
is primarily attributable to increased accounts payable levels and current year
earnings, offset by increased customer receivables and higher income tax
payments.
In 2004, the Company has continued to limit capital spending to necessary
maintenance-related and high-return capital projects. Capital spending for the
first nine months of 2004 was $16.6 million compared to $16.8 million during
the first nine months of 2003. Total capital spending in 2004 is expected to
be comparable to 2003 capital spending of $24 million, or less than one-half
the Company's rate of depreciation, depletion and amortization.
For the first nine months of 2004, capital expenditures for projects with total
spending expected to exceed $1.0 million were $1.2 million in Printing &
Writing as part of a capital project to expand premium papers production
capabilities at the Brokaw mill and $1.3 million for a digester replacement at
the Brokaw mill. In Towel & Tissue, project spending included $0.2 million on
a screw press project, $0.3 million on production equipment, and $3.2 million
for various converting lines.
The balance of spending during the first nine months of 2004 was related to
projects that individually are expected to cost less than $1.0 million. These
expenditures included approximately $5.1 million for essential non or low-
return projects, and approximately $5.3 million on projects expected to provide
a return on investment that exceeds the Company's cost of capital.
For 2003, capital expenditures for projects with total spending expected to
exceed $1.0 million were $2.9 million in Printing & Writing as part of a
capital project to expand premium papers production capabilities and $0.3
million for a digester replacement at the Brokaw mill. In addition, $0.4
million was spent on a process control system computer replacement at the
Groveton mill. At Towel & Tissue, $2.0 million was spent on a screw press
project and $1.8 million was spent for various converting lines.
The balance of spending for the first nine months of 2003 was related to
projects that individually are expected to cost less than $1.0 million. These
expenditures included approximately $6.3 million for essential non-or low-
return projects, and approximately $3.1 million on projects expected to provide
a return on investment that exceeds the Company's cost of capital.
On October 21, 2004, the Company purchased the assets of a specialty
manufacturer of high-quality uncoated freesheet paper for $9.6 million in cash.
The acquisition will be accounted for as a purchase business combination and,
accordingly, the purchase price will be allocated using the fair values of the
acquired land, buildings, and machinery and equipment.
Effective March 3, 2003, the Company acquired certain assets of a laminated
papers producer for approximately $8.5 million in cash. The acquisition is
being accounted for as a purchase business combination and, accordingly, the
purchase price has been allocated using the fair values of the acquired
receivables, inventory, machinery and equipment, and identifiable intangible
assets.
15
Debt and Equity
SEPTEMBER 30, December 31,
(Dollars in thousands) 2004 2003
Short-term debt $ 114 $ 112
Long-term debt 161,544 162,174
Total debt 161,658 162,286
Stockholders' equity 358,546 350,316
Total capitalization 520,204 512,602
Long-term debt/capitalization ratio 31% 32%
As of September 30, 2004, there was no significant change in total debt as
compared to December 31, 2003.
On August 31, 2004, the Company replaced its $150 million unsecured revolving
credit agreement that was scheduled to expire on December 10, 2004 with a four-
year, $100 million unsecured revolving credit agreement with four participating
banks. Under the new facility, the Company may elect the base for interest
from either domestic or offshore rates. In addition, the facility provides for
sublimits of $50 million for the issuance of standby letters of credit and $10
million for certain short-term bid loans among the bank group. The Company
pays the banks a facility fee under this agreement based on quarterly
debt/capitalization ratios.
On September 30, 2004, the Company had approximately $100 million available
borrowing capacity under the bank facility. The Company's cash position and
borrowing capacity is expected to provide sufficient liquidity to support
operations, meet capital spending requirements and fund dividend payments to
shareholders.
Dividends
On June 14, 2004, the Board of Directors declared a quarterly cash dividend of
$0.085 per common share. The dividend was paid on August 16, 2004, to
shareholders of record on August 1, 2004. On October 22, 2004, the Board of
Director's declared a cash dividend in the amount of $0.085 per share. The
dividend is payable on November 15, 2004, to shareholders of record on November
1, 2004.
16
INFORMATION CONCERNING FORWARD LOOKING STATEMENTS
This report contains certain of management's expectations and other forward-
looking information regarding the Company pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. While the
Company believes that these forward-looking statements are based on reasonable
assumptions, such statements are not guarantees of future performance, and all
such statements involve risk and uncertainties that could cause actual results
to differ materially from those contemplated in this report. The assumptions,
risks, and uncertainties relating to the forward-looking statements in this
report include general economic and business conditions, changes in the prices
of raw materials or energy, competitive pricing in the markets served by the
Company as a result of economic conditions, overcapacity in the industry and
the demand for paper products, manufacturing problems at Company facilities and
various other risks and assumptions. These and other assumptions, risks, and
uncertainties are described under the caption "Cautionary Statement Regarding
Forward-Looking Information" in Item 1 of the Company's Annual Report on Form
10-K for the year ended December 31, 2003, and from time to time, in the
Company's other filings with the Securities and Exchange Commission. The
Company assumes no obligation to update or supplement forward-looking
statements that become untrue because of subsequent events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the information provided in response to
Item 7A of the Company's Form 10-K for the year ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, under the
supervision, and with the participation, of the Company's President and Chief
Executive Officer and the Chief Financial Officer, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based upon,
and as of the date of such evaluation, the President and Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective in all material respects. There have
been no significant changes in the Company's internal controls or in other
factors during the period covered by this report which could significantly
affect internal controls, nor were there any significant deficiencies or
material weaknesses identified which required any corrective action to be
taken.
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K
4.1 Credit Agreement dated August 31, 2004 among the Company and Bank of
America, N.A., M&I Marshall & Ilsley Bank, Harris Trust and Savings
Bank, and Wells Fargo Bank, National Association
10.1 Standard Form of Performance Unit Grant Agreement
10.2 Standard Form of Non-Qualified Performance Stock Option Agreement
10.3 Standard Form of Non-Qualified Stock Option Agreement
10.4 Standard Form of Non-Qualified Stock Option Agreement for Directors
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley
Act of 2002
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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.
WAUSAU-MOSINEE PAPER CORPORATION
November 9, 2004 SCOTT P. DOESCHER
Scott P. Doescher
Senior Vice President-Finance,
Secretary and Treasurer
(On behalf of the Registrant and as
Principal Financial Officer)
19
EXHIBIT INDEX
TO
FORM 10-Q
OF
WAUSAU-MOSINEE PAPER CORPORATION
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. Section 232.102(d))
The following exhibits are filed as part of this report:
4.1 Credit Agreement dated August 31, 2004 among the Company and Bank of
America, N.A., M&I Marshall & Ilsley Bank, Harris Trust and Savings
Bank, and Wells Fargo Bank, National Association
10.1 Standard Form of Performance Unit Grant Agreement
10.2 Standard Form of Non-Qualified Performance Stock Option Agreement
10.3 Standard Form of Non-Qualified Stock Option Agreement
10.4 Standard Form of Non-Qualified Stock Option Agreement for Directors
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley
Act of 2002
20