10-Q 1 body.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (x) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 Commission File Number 1-12545 Willamette Industries, Inc (Exact name of registrant as specified in its charter) State of Oregon 93-0312940 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1300 S.W. Fifth Avenue, Suite 3800, Portland, Oregon 97201 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (503) 227-5581 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, 50 cent par value: 109,637,957 at April 30, 2001. WILLAMETTE INDUSTRIES, INC. AND SUBSIDIARIES FORM 10-Q CONSOLIDATED BALANCE SHEETS PART I (dollar amounts, except per share amounts, in thousands) ITEM 1 March 31, December 31, 2001 2000 ---------- --------- ASSETS ------ Current assets: Cash $ 30,221 24,284 Accounts receivable, less allowance for doubtful accounts of $4,798 (2000 - $4,490) 461,291 459,591 Inventories (Note 2) 453,083 473,788 Prepaid expenses 34,838 35,154 --------- -------- Total current assets 979,433 992,817 Timber, timberlands and related facilities, net 994,396 1,014,285 Property, plant and equipment, at cost less accumulated depreciation of $2,760,972 (2000 - $2,714,536) 3,064,050 3,017,593 Other assets 92,636 92,975 --------- --------- $ 5,130,515 5,117,670 ========= ========== LIABILITIES AND STOCKHOLDERS'EQUITY ----------------------------------- Current liabilities: Current installments on long-term debt $ 4,879 5,499 Notes payable 106,000 122,000 Accounts payable, includes book overdrafts of $62,045 (2000 - $79,708) 220,798 253,292 Accrued payroll and related expenses 81,583 85,084 Accrued interest 26,743 33,910 Accrued expenses 81,938 77,754 Accrued income taxes 28,492 19,184 ---------- -------- Total current liabilities 550,433 596,723 Deferred income taxes 587,349 568,273 Other liabilities 21,850 28,705 Long-term debt, net of current installments 1,542,661 1,542,926 Stockholders' equity: Preferred stock, cumulative, $.50 par value. Authorized 5,000,000 shares - - Common stock, $.50 par value. Authorized 150,000,000 shares; issued 109,589,929 shares 54,795 54,709 (2000 - 109,417,087 shares) Capital surplus 235,236 229,598 Retained earnings 2,138,191 2,096,736 --------- --------- Total stockholders' equity 2,428,222 2,381,043 --------- --------- $ 5,130,515 5,117,670 ========= =========

2 WILLAMETTE INDUSTRIES, INC. AND SUBSIDIARIES FORM 10-Q CONSOLIDATED STATEMENTS OF EARNINGS PART I (amounts, except per share amounts, in thousands) ITEM 1 Three Months Ended March 31, ------------------------- 2001 2000 --------- ---------- Net sales $ 1,131,664 1,167,126 Cost of sales 939,036 942,963 --------- ---------- Gross profit 192,628 224,163 Selling and administrative expenses 66,962 64,709 Non-recurring and other (income) expense - net 1,144 486 --------- ---------- 124,522 158,968 Interest expense 26,511 28,733 --------- ---------- Earnings before provision for income taxes 98,011 130,235 Provision for income taxes 31,364 44,931 --------- ---------- Net earnings $ 66,647 85,304 ========= ========== Per share information: Earnings per share - basic $ 0.61 0.77 ========= ========== Earnings per share - diluted $ 0.61 0.76 ========= ========== Dividends $ 0.23 0.21 ========= ========== Weighted average shares outstanding: Basic 109,520 111,279 ========= ========== Diluted 110,138 111,784 ========= ==========

Per share earnings, both basic and diluted, are based on the weighted average number of shares outstanding. Diluted weighted average shares outstanding are calculated using the treasury stock method which assumes that all stock options with a market value greater than the grant price at the balance sheet date are exercised. 3 WILLAMETTE INDUSTRIES, INC. AND SUBSIDIARIES FORM 10-Q CONSOLIDATED STATEMENTS OF CASH FLOWS PART I (dollar amounts in thousands) ITEM 1 Three Months Ended March 31, -------------------------- 2001 2000 --------- -------- Cash flows from operating activities: Net earnings $ 66,647 85,304 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 65,221 60,256 Cost of fee timber harvested 12,349 9,819 Other amortization 4,230 4,558 Deferred income taxes 19,506 20,255 Changes in working capital items: Accounts receivable (1,700) (55,960) Inventories 20,181 8,157 Prepaid expenses and timber deposits 316 1,741 Accounts payable and accrued expenses (45,362) (5,423) Accrued income taxes 9,308 14,805 --------- -------- Net cash provided by operating activities 150,696 143,512 --------- -------- Cash flows from investing activities: Proceeds from sale of assets 10,740 - Expenditures for property, plant and equipment (112,128) (71,224) Expenditures for timber and timberlands - (2,226) Expenditures for roads and reforestation (4,471) (3,787) Other (2,541) 19,991 --------- -------- Net cash used in investing activities (108,400) (57,246) --------- -------- Cash flows from financing activities: Net change in operating lines of credit (16,000) 5,858 Debt borrowing 1,951 - Proceeds from sale of common stock 5,718 1,129 Repurchased common stock - (31,593) Cash dividends paid (25,192) (23,372) Payment on debt (2,836) (40,846) --------- -------- Net cash used in financing activities (36,359) (88,824) --------- -------- Net change in cash 5,937 (2,558) Cash at beginning of period 24,284 25,557 --------- -------- Cash at end of period $ 30,221 22,999 ========= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of amount capitalized) $ 33,678 39,258 ========= ======== Income taxes $ 2,550 9,871 ========= ========

4 WILLAMETTE INDUSTRIES, INC. AND SUBSIDIARIES FORM 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PART I March 31, 2001 ITEM 1 Note 1 The information furnished in this report reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. Note 2 The components of inventories are as follows (thousands of dollars): March 31, December 31, 2001 2000 ---------- ----------- Finished product $ 146,392 154,261 Work in progress 6,735 8,792 Raw materials 194,251 205,014 Supplies 105,705 105,721 --------- ---------- $ 453,083 473,788 ========= ========== Note 3 Sales and cost of sales for the three-month period ended March 31, 2000, have been reclassified to conform with Emerging Issues Task Force Issue #00-10, "Accounting for Shipping and Handling Fees and Costs." Certain other reclassifications have been made to prior year's data to conform with the 2001 presentation. Note 4 Non-recurring and other (income) expense - net for the three months ended March 31, 2001, includes a $5.3 million gain on the sale of non-strategic timberlands and a $6.0 million charge related to estimated hostile takeover defense costs. Other notes have been omitted pursuant to Rule 10-01(a)(5) of Regulation S-X. 5 FORM 10-Q PART I ITEM 2 WILLAMETTE INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION March 31, 2001 The company's three basic businesses - white paper, brown paper and building materials - are affected by changes in general economic conditions. White and brown paper sales and earnings tend to follow the general economy. Building materials activity is closely related to new housing starts, remodeling activity, and the availability and terms of financing for construction. All industry segments are influenced by global economic factors of supply and demand. In addition, the cost of wood and recycled fiber, basic raw materials for all segments, are sensitive to various supply and demand factors including environmental issues affecting supply. Three Months Ended March 31, ---------------------------- 2001 2000 --------- --------- Net Sales: White Paper $ 369,940 356,888 Brown Paper 436,629 418,580 Building Materials 325,095 391,658 --------- --------- $ 1,131,664 1,167,126 ========= ========= Operating Earnings: White Paper $ 40,763 58,280 Brown Paper 78,906 67,256 Building Materials 18,492 45,278 Corporate (12,495) (11,360) Non-recurring and other income (expense) - net (1,144) (486) --------- --------- $ 124,522 158,968 ========= ========= 6 RESULTS OF OPERATIONS First Quarter 2001 vs. First Quarter 2000 Consolidated net sales decreased 3.0% in the first quarter of 2001 compared with the first quarter of 2000. Operating earnings decreased 21.7% in the first quarter of 2001 compared with the first quarter of 2000, reflecting the marked change in the economic environment and building materials pricing from the first quarter of 2000 to the first quarter of 2001. White Paper White paper operating earnings declined 30.1% despite an increase in net sales of 3.7% in the first quarter of 2001 compared to the first quarter of 2000. Average selling prices and unit shipments changed in the first quarter of 2001 over the first quarter of 2000 as follows: Unit Average Net Shipments Selling Price --------- ------------- Forms (1.9%) 4.8% Cut sheets 11.8% 0.7% Fine paper (19.9%) 1.4% Bleached market pulp 75.5% (24.4%) Operating results in our white paper segment reflect the following developments: * Pricing for business forms remains solid, while volumes declined from the first quarter 2000 to the first quarter of 2001. * Solid increases in our cut sheet shipments, as a result of adding additional shifts at our Washington Courthouse, Ohio, Willcopy(R) facility, which started up in late 1999. * Lower external fine paper shipments due to further integration to our converted white paper products. * Higher bleached market pulp shipments as a result of the acquisition of the Port Wentworth mill, which commenced operations in September 2000. * Beginning in the fourth quarter of 2000, the Port Wentworth mill operated as a swing mill, producing both bleached hardwood market pulp as well as 7 softwood pulp. The production of softwood pulp for internal consumption has helped mitigate the impact of declining prices for hardwood market pulp and the rising cost of softwood pulp. The white paper segment was also impacted by unfavorable manufacturing cost variances. While our energy self-sufficiency helps insulate our white paper operations from rising energy costs, these costs and other increased manufacturing costs contributed to the decline in our gross profit margin for the white paper segment to 14.6% in the first quarter of 2001 compared to 19.9% in the same period in 2000. Brown Paper Brown paper operating earnings increased 17.3%, largely due to increases in net sales of 4.3% and decreases in old corrugated container costs (OCC) of 38.9% in the first quarter of 2001 compared to the first quarter of 2000. In the first quarter of 2001, increases in average selling prices for corrugated containers outweighed declines in unit shipments from the first quarter of 2000. Brown paper shipments and prices changed as follows: Unit Average Net Shipments Selling Price --------- ------------- Corrugated containers (0.5%) 5.3% Grocery bags (10.9%) (1.3%) Our brown paper business was impacted by the following: * Positive contributions from the operations of two converting operations and a small paper mill in Mexico, which were acquired by the company in May 2000. * Seasonally light domestic corrugated container shipments - declining 4.8% in the first quarter of 2001 compared to the first quarter of 2000 due to weakening economic conditions and "brown-outs" affecting our converting operations in California. * Stable selling price trends for the corrugated business. Overall, gross profit margins for the brown paper segment improved to 24.1% in the first quarter of 2001 compared to 22.2% in the first quarter of 2000. While there has been some slowdown of the general 8 economy coupled with higher energy costs, operating earnings in this business segment remained strong in the first quarter of 2001. Building Materials The building materials segment's results for the first quarter of 2001 continued to reflect the pricing pressure due to increased industry capacity and softened demand due to general economic factors. Sales declined 17.0% in the first quarter of 2001 compared with the first quarter of 2000 and operating earnings declined 59.2% over the same periods. In the first quarter of 2001, average selling prices and unit volumes changed from the first quarter of 2000 as follows: Unit Average Net Shipments Selling Price ---------- ------------- Lumber 13.3% (25.0%) Plywood (25.6%) (15.0%) Oriented strand board 7.6% (43.8%) Domestic particleboard (0.9%) (10.5%) International particleboard 14.5% (4.8%) Domestic MDF 1.6% (4.6%) International MDF (5.6%) (1.1%) The building materials segment was impacted by the following: * Overall declines in average selling prices from the first quarter of 2000 to the first quarter of 2001 reflecting the decline from peak prices in the third quarter of 1999 to current lows for lumber, plywood, OSB and domestic particleboard. We are hopeful that prices are at or near the bottom of the cycle. * Log costs declined 23.5% in the first quarter of 2001 compared with the first quarter of 2000 because of excellent dry weather logging conditions in Oregon, resulting in a higher fee cut, as well as lower purchased log costs. * Lower plywood volumes due to closures of two facilities during 2000. * Overall higher energy costs. 9 * Increased unit shipments of lumber, OSB and domestic composite boards in the first quarter of 2001 compared with the fourth quarter of 2000, indicating improved demand for these products despite uncertain economic conditions. As a result of the market pricing pressures, partially offset by lower log costs, the building materials segment's gross profit margin decreased to 10.3% in the first quarter of 2001 from 15.4% in the first quarter of 2000. Selling and administrative expenses increased $2.3 million, or 3.5%, in the first quarter of 2001 compared with the first quarter of 2000, primarily due to new operations. Our ratio of selling and administrative expenses to net sales increased to 5.9% for the first quarter of 2001 compared to 5.5% for the same period in 2000 due to lower net sales. Nonrecurring and other income (expense) - net for the first quarter of 2001 includes a gain on the sale of non-strategic timberlands of $5.3 million and a charge of $6.0 million for estimated costs to defend against the hostile takeover attempt by Weyerhaeuser Company. Interest expense of $26.5 million for the first quarter of 2001 was $2.2 million less than interest expense of $28.7 million for the first quarter of 2000. Interest expense declined mainly due to lower interest rates and higher capitalized interest. The company's effective interest rate decreased from 7.44% in the first quarter of 2000 to 7.03% in the first quarter of 2001. Capitalized interest was $2.9 million in the first quarter of 2001 versus $1.7 million for the same period in 2000. Financial Condition as of March 31, 2001 Liquidity and Capital Resources For the first three months of 2001, cash flows from operating activities were $150.7 million, representing an increase of 5.0% from the same period in 2000. The increase was primarily attributable to working capital items. 10 Net working capital increased to $429.0 million at March 31, 2001, compared with $396.1 million at December 31, 2000. Our total debt to capital ratio was 40.5% at March 31, 2001, down from 41.2% at December 31, 2000. The company believes it has the resources available to meet its short-term and long-term liquidity requirements. Resources include internally generated funds, short-term borrowing arrangements and the unused portion of the revolving loan available under a bank credit agreement. Capital Expenditures The company is continually making capital expenditures at its manufacturing facilities to improve fiber utilization, achieve labor efficiency and expand production. In the first three months of 2001, the company incurred $112.1 million in capital expenditures for property, plant and equipment and an additional $4.5 million for roads and reforestation. Major capital projects currently underway include: * the Eastern particleboard facility, with a scheduled startup in August 2001, * the Kingsport modernization, and * the Albany pulp mill modernization. Dividends In February 2001, the Board of Directors declared a quarterly cash dividend of $0.23 per share, a 9.5% increase over the previous quarterly rate. However, there is no assurance as to future dividends as they depend on earnings, capital requirements and financial condition. Environmental Compliance The company's operations are faced with increasingly stringent environmental regulations. The company is committed to complying with federal, state and local laws regarding environmental quality. The company believes it is in substantial compliance with these regulations. In April 1998, the U.S. Environmental Protection Agency (EPA) published the final rules regarding air and water quality known as the "cluster rules." Requirements for the first significant compliance date, April 11 2001, were met by all affected company mills through previously completed projects. Future projects have been planned to ensure compliance with all remaining cluster rule deadlines which continue through 2006. Forward-Looking Statements Statements contained in this report that are not historical in nature, including without limitation trends in pricing levels, adequacy of the company's liquidity resources and the impact of environmental regulations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual future results to differ materially from those projected. Such risks and uncertainties with respect to the company, in addition to those included with the forward-looking statements, include, but are not limited to, the effect of general economic conditions; the level of new housing starts and remodeling activity; the availability and terms of financing for construction; competitive factors including pricing pressures; the cost and availability of wood fiber; the effect of natural disasters on the company's timberlands; construction delays; risk of non-performance by third parties; and the impact of environmental regulations including the costs associated with complying with such regulations. In view of these uncertainties, investors are cautioned not to place undue reliance on such forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk No disclosure is required under this item. 12 FORM 10-Q PART II OTHER INFORMATION Item 1. Legal Proceedings In November 1998, the company received an information request from the EPA under Section 114 of the Clean Air Act (CAA) for information related to the company's Johnsonburg, Pennsylvania, pulp and paper mill. This request focused on compliance with regulations under the Prevention of Significant Deterioration (PSD) program under the CAA. Subsequently, on April 19, 1999, the company received a Notice of Violation (NOV) relating to the mill. The NOV alleges violations of the PSD permit program under the CAA relating to two plant modifications. In December 1999, the company received a demand letter from the EPA to correct the alleged violations contained in this NOV. Since that time, management has been meeting with federal and state officials to resolve the matters alleged in the NOV. In August 1999, the company received a Section 114 information request from the EPA relating to the company's paper mill in Campti, Louisiana. The company responded to the request in November 1999 and has met with state and federal officials regarding the Campti mill. Also, in March and November 1999, the company received Section 114 information requests from the EPA relating to the company's paper mills in Hawesville, Kentucky. In April 1999 and January 2000, the company provided the requested information to the EPA. In March 2000, the company received requests for information from the EPA under Section 114 of the CAA related to the Bennettsville, South Carolina, and Kingsport, Tennessee, fine paper mills. The company responded to the requests in June 2000 and has requested a meeting with the EPA to discuss the responses. The EPA issued supplemental requests for the Bennettsville mill in November 2000, the Kingsport mill in December 2000, and the Hawesville mill in January 2001. The company submitted responses to these supplemental requests during the first four months of 2001. 13 The company believes that the outcome of the foregoing proceedings and other proceedings to which the company is a party will not have a material adverse effect on the company's financial position. 14 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Exhibit 12 Ratio of Earnings to Fixed Charges. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. 15 SIGNATURE 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. WILLAMETTE INDUSTRIES, INC. By /s/ G. W. Hawley -------------------------- Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer) Date: May 10, 2001 16

WILLAMETTE INDUSTRIES INC 10-Q