Pope Talbot (NYSE:POP)
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Pope & Talbot, Inc. (NYSE:POP) today reported a net loss
of $50.0 million for the year ended December 31, 2005, on revenues of
$848.8 million, compared with net income of $11.1 million for the year
ended December 31, 2004, on revenues of $762.7 million. The net loss
per share was $3.09 for 2005, compared with net income per diluted
share of $0.69 for 2004. The $50.0 million net loss included a $22.3
million expense related to a valuation allowance recorded against the
Company's U.S. deferred tax assets. The Company's operating
performance in 2005 was negatively impacted by lower market prices for
both pulp and lumber, a weaker U.S. dollar, and the continuation of
import duties on Canadian softwood lumber.
As discussed below, in connection with the valuation allowance,
the Company has determined that it has an internal control deficiency
that constitutes a "material weakness" as defined by the Public
Company Accounting Oversight Board's Auditing Standard No. 2. As also
discussed below, the opinion of the Company's independent registered
public accounting firm on the Company's 2005 financial statements
expresses substantial doubt about Pope & Talbot's ability to continue
as a going concern primarily due to recurring losses and financial
covenant compliance issues.
The Company also stated that it has reached agreements with its
Canadian and U.S. lenders granting certain waivers and amendments that
allow it to be in full compliance with its financial covenants under
the existing leases related to its Halsey pulp mill and the Canadian
and U.S. credit facilities as of March 31, 2006. As of March 31, 2006,
the Company has borrowing availability under its revolving credit
facilities of $29.9 million.
Michael Flannery, Chairman and Chief Executive Officer stated,
"While I continue to be pleased with ongoing operational improvements
at the Company's pulp and lumber mills, the financial results for 2005
are disappointing. Over the last year, the company has diversified its
customer base, reduced costs in several areas and improved
productivity. Recent strengthening in the NBSK pulp market is also
encouraging."
For the fourth quarter of 2005, the Company reported a net loss of
$33.6 million or $2.07 per share, compared with a net loss of $2.6
million, or $0.16 per share for the same quarter in 2004. Like the
full year, the quarterly results were heavily impacted by the
valuation allowance recorded against the Company's U.S. deferred tax
assets.
In regard to the covenant waivers, Mr. Flannery stated: "We are
pleased by the support our banks have shown in agreeing to these
waivers as we move forward with our plans to refinance and
recapitalize the business."
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Selected Statistics
Third Year ended
Fourth Quarter Quarter December 31,
----------------- -------- -----------------
2005 2004 2005 2005 2004
-------- -------- -------- -------- --------
Sales Volumes
(thousands):
Pulp (metric tons) 235,200 210,800 204,800 836,400 798,600
Lumber (thousand board
feet) 238,500 171,700 246,000 885,800 657,200
Production Volumes
(thousands):
Pulp (metric tons) 217,900 207,100 209,900 820,400 805,800
Lumber (thousand board
feet) 226,300 171,400 245,200 883,800 675,300
Average Price
Realizations:(A)
Pulp (metric tons) $ 517 $ 518 $ 512 $ 529 $ 541
Lumber (thousand board
feet) $ 391 $ 418 $ 390 $ 405 $ 442
Notes:
(A) Gross invoice price less trade discounts.
*T
Pulp
Revenues from the Company's Pulp business totaled $442.6 million
in 2005 compared with $432.5 million in 2004, an increase of two
percent. The increase related to an increase in volumes sold, offset
in part by lower prices in 2005. Pulp generated an operating loss
before corporate expenses, interest and income taxes of $13.6 million
in 2005, compared with operating income of $13.5 million in 2004.
EBITDA from the Company's pulp operations totaled $12.8 million in
2005 compared with $42.3 million in 2004. The average price realized
per metric ton sold during 2005 decreased two percent to $529 from
$541 in 2004, while pulp sales volume increased five percent.
Pulp cost of sales was $445.1 million in 2005, compared with
$407.0 million in 2004, an increase of nine percent. Per metric ton,
the average cost of pulp sold increased four percent in 2005 compared
with 2004. The Company estimates that the increase in the average
daily Canadian to U.S. dollar exchange rate from 2004 to 2005 resulted
in an approximately $22.8 million increase in pulp cost of sales, or a
five percent increase in the average cost per metric ton of pulp sold
in 2005. Excluding the effect of a weaker U.S. dollar, the average
cost per ton of pulp sold was one percent lower in 2005 compared with
2004, primarily as a result of lower fiber costs.
The wood chip supply availability in the northern interior of
British Columbia increased significantly in 2005. In the third
quarter, a revised chip pricing formula reduced prices by
approximately $25 U.S. per bone-dry unit, resulting in approximately
$3.8 million in lower chip costs for the Mackenzie pulp mill in the
second half of 2005.
In the fourth quarter of 2005, pulp revenues increased 16 percent,
or $16.9 million compared to the third quarter. The increase was
driven by a sales volume increase of 15 percent in combination with a
one percent increase in average price realized per metric ton sold.
Pulp cost of goods sold increased $19.8 million or 19 percent in
the fourth quarter compared with the third quarter of 2005. The
increase in cost of goods sold was primarily the result of the
increased sales volume, coupled with a weakening U.S. dollar which
increased cost of goods sold by approximately $2.2 million.
Wood Products
Revenues from the Company's Wood Products business totaled $406.2
million in 2005 compared with $330.1 million in 2004, a 23 percent
increase. The increase primarily related to higher volumes sold
resulting from the Fort St. James acquisition. The impact of higher
sales volumes was offset in part by lower lumber sales prices. The
average price realized per thousand board feet sold during the year
decreased eight percent to $405 from $442 in 2004.
Wood Products generated operating income before corporate
expenses, interest and income taxes of $2.9 million in 2005, compared
with $38.0 million in 2004. EBITDA from Wood Products totaled $13.2
million in 2005 compared with $45.3 million in 2004. The 2005 results
included $37.3 million of lumber import duties compared with $42.3
million of lumber import duties in 2004.
Lumber sales volume increased 35 percent to 885.8 million board
feet in 2005 from 657.2 million board feet in 2004. Revenues from the
sale of chips, logs and other increased $7.7 million in 2005 compared
with 2004, primarily due to an increase in the volume of chips sold of
which $3.3 million was from Fort St. James. The excess wood chip
supply availability in the northern interior of British Columbia and
the associated chip price reduction, decreased chip revenues at Fort
St. James by approximately $1.4 million in the second half of 2005.
Wood Products cost of sales was $397.2 million in 2005 compared
with $286.8 million in 2004, a 38 percent increase. Total cost of
sales comparisons were affected by the inclusion of the Fort St. James
sawmill in the 2005 amounts. Per thousand board feet, the average cost
of lumber sold in 2005 was four percent higher compared with 2004. The
lower lumber import duties rate in 2005, compared with 2004, decreased
the average cost per thousand board feet of lumber sold in 2005 by
five percent and all other costs increased nine percent. The Company
estimates that the increase in the average daily Canadian to U.S.
dollar exchange rate from 2004 to 2005 resulted in an approximately
$18.5 million increase in Wood Products cost of sales, or a five
percent increase in the average cost per thousand board feet of lumber
sold in 2005. The remaining increase in the average cost of lumber
sold as compared with 2004 primarily related to higher log costs and
to a lesser degree, higher freight costs.
Lumber production totaled 883.8 million board feet in 2005
compared with 675.3 million board feet in 2004. The year-over-year
increase in production was primarily due to the inclusion of the Fort
St. James sawmill acquired on April 25, 2005, which increased 2005
production by 177.4 million board feet.
In the fourth quarter of 2005, lumber revenues decreased three
percent, or $2.7 million compared with the third quarter. The decrease
was primarily driven by a three percent decrease in sales volume. The
average price realized per thousand board feet sold was $390 in the
third quarter and increased slightly to $391 in the fourth quarter.
Wood products cost of goods sold increased $0.8 million, primarily as
a result of the continued weakening of the U.S. dollar, which
increased lumber cost of goods sold by $1.8 million compared with the
third quarter of 2005, as well as $0.6 million of costs for the
downsizing of the Midway sawmill and other increases primarily
consisting of higher energy costs, offset in part by a $2.1 million
reduction in lumber import duties.
Exchange Rate
The average Canadian to U.S. dollar exchange rates used by the
Company to translate the results of operations of the Company's
Canadian subsidiaries were 0.83, 0.77 and 0.72 for the years 2005,
2004 and 2003, respectively. The Company estimates that the change in
the Canadian to U.S. dollar exchange rate from 2004 to 2005 increased
2005 cost of goods by approximately $41.3 million, while the change in
the Canadian to U.S. dollar exchange rate from 2003 to 2004 increased
2004 cost of goods by approximately $30.6 million. During the fourth
quarter, the average Canadian to U.S. dollar exchange rate increased
to 0.85, which increased cost of sales by $4.0 million compared with
the third quarter, and $6.3 million compared with the fourth quarter
of 2004.
Lumber Import Duties
With approximately 88 percent of the Company's current lumber
capacity located in British Columbia, the softwood lumber dispute
continues to have a significant impact on the results of operations
and cash flows from the Company's Wood Products business. Cash
deposits of duties began in May 2002, and the Company has deposited a
total of $123.1 million with respect to lumber imported into the U.S.
from May 22, 2002 to December 31, 2005. Lumber import duties totaled
$37.3 million in 2005. On December 13, 2005, the cash deposit duty
rate on the Company's lumber imports decreased from 20.15 percent to
10.81 percent, which will reduce our duty payments for 2006. During
the fourth quarter of 2005, lumber import duties totaled $8.3 million.
Gain on Timber Take-Back
In the fourth quarter of 2005, the Company recorded a $3.5 million
gain on the receipt of $4.0 million of compensation from British
Columbia for the previously-disclosed take-back of timber harvesting
rights under the Company's timber tenures, resulting from the
implementation of British Columbia's Forestry Revitalization Plan.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) costs totaled $39.2
million in 2005 compared with $34.2 million in 2004. The 2004 year
included $1.9 million in bad debt expense and $2.0 million of employee
incentive plan costs, and no such costs were incurred in 2005. After
adjusting for these 2004 expenses, 2005 SG&A expenses increased $8.9
million. This year-over-year increase is primarily due to $4.6 million
for financial consultants and professional services as well as legal
fees and costs associated with obtaining lease amendments and debt
covenant waivers, $2.1 million in wage related costs for general wage
increases and added positions, and $0.8 million in increased costs
associated with the Company's sales of accounts receivable.
Additionally, the Company estimates that SG&A increased $0.4 million
due to the weakening U.S. dollar.
Liquidity and Capitalization; Going Concern
The total debt to total capitalization ratio was 75 percent at
December 31, 2005 compared with 59 percent at December 31, 2004, and
66 percent on September 30, 2005. The increase in the debt ratio from
2004 to 2005 was due primarily to an increase in total debt of $96.8
million. The Company's primary cash requirements in 2005 included
$37.6 million for the purchase of the Fort St. James sawmill, $43.7
million for capital expenditures, $14.4 million for operating
activities and $3.9 million for the payment of cash dividends.
Stockholders' equity decreased $51.6 million, primarily due to the net
loss and dividends paid, which were partially offset by the change in
accumulated foreign currency translation and the issuance of shares
under stock plans. The increase in the debt ratio from September 30,
2005 to December 31, 2005 was due to a $35.3 million decrease in
stockholders' equity and an increase in total debt of $39.5 million.
Cash requirements in the fourth quarter of 2005 included $11.8 million
of capital expenditures, a $10.1 million seasonal increase in log
inventories at the Company's sawmills, and a $22.2 million net
reduction in accounts payable and other accrued liabilities due to
payment in the fourth quarter of accrued costs for the annual
maintenance shutdowns of the Mackenzie and Halsey pulp mills and
accrued interest on the outstanding 8 3/8% notes and debentures and
otherwise generally due to the timing of settlements of accounts
payable.
As of December 31, 2005, the Company would have been in violation
of two financial covenants under its Halsey pulp mill leases, except
that on December 28, 2005, the Company entered into amendments
pursuant to which the other parties to the Halsey leases waived
compliance with the covenants. The Halsey leases include early
repurchase options pursuant to which the Company may repurchase the
Halsey mill on January 2, 2007 for an aggregate repurchase price of
$59.1 million. Under the lease amendments signed on December 28, 2005,
the covenant waivers expire as of September 30, 2006 if the Company
hasn't given irrevocable notice of exercise of the early repurchase
options by that date. Accordingly, the Company faces likely defaults
if it does not refinance the $59.1 million repurchase price by January
2, 2007. The lease amendments also impose a new liquidity covenant
under which the Company must have cash balances plus borrowing
availability under credit facilities of at least $15 million as of the
end of each quarter. To meet this liquidity requirement at March 31,
2006, the Company expects to rely on borrowing availability under its
revolving credit agreement with a U.S. lender. Borrowing availability
under that credit agreement is dependent on compliance with quarterly
maximum leverage ratio and net worth covenants. The Company did not
expect to be in compliance with these covenants at March 31, 2006,
and, therefore has obtained a waiver of these covenants from the
lender. In addition, the Company and the lender agreed to modify these
covenants so that on June 30, 2006 and future quarterly compliance
dates, the Company will be required to have a maximum ratio of total
debt to total capitalization of 77.5 percent and a minimum
consolidated stockholders' equity of $95.0 million. On December 31,
2005, the Company had cash balances plus borrowing availability under
credit facilities of $31.4 million and consolidated stockholders'
equity of $112.0 million.
The Company's Canadian revolving credit agreement requires, among
other things, that the Company's Canadian subsidiaries maintain a
ratio of adjusted EBITDA to interest expense of at least 2-to-1
measured at the end of each quarter for the four quarter period then
ended. For the year ended December 31, 2005, this ratio for the
Canadian subsidiaries was 2.01-to-1, and the Company did not expect to
satisfy this covenant requirement for the period ending March 31,
2006. The Company has obtained a waiver of this covenant as of March
31, 2006 from its Canadian banks. The waiver was conditioned on the
Company's agreement to pledge its unencumbered Canadian sawmills as
additional security. In addition, the Canadian revolving credit
facility expires on July 29, 2006 and, if not renewed or repaid,
outstanding borrowings at that time will convert into two term loans
payable in one year.
The Company's recurring losses and inability to comply with
financial covenants, combined with uncertainty over the Company's
ability to refinance or renew maturing debt and comply with financial
covenants in future periods, all as discussed above, have caused the
Company's independent registered public accounting firm to express in
their opinion on the Company's 2005 financial statements substantial
doubt about the Company's ability to continue as a going concern.
To address its refinancing and existing covenant compliance
issues, the Company is in negotiations with certain institutional
lenders to refinance its Halsey pulp mill leases and existing Canadian
and U.S. revolving credit facilities. The Company expects that the new
credit facility will not include net worth or leverage covenants, but
will include minimum EBITDA covenants. The Company also expects more
of any refinanced debt to be term debt at long-term rates, and that
the average interest rate on any new debt will be substantially higher
than the average rate paid on the debt being refinanced. The Company
cannot provide any assurance that it will be successful in obtaining
new debt financing on acceptable terms or at all.
The Company will also consider possible asset sales to generate
cash and reduce debt, or potential equity issuances to generate cash
and improve the balance sheet. In considering alternatives, the
Company is also cognizant of the possibility of a negotiated
settlement of the Canada-U.S. softwood lumber dispute which could
result in the refund to the Company of a substantial portion of the
cash import duties deposited by the Company since 2002 ($123.1 million
as of December 31, 2005). There can be no assurance that the Company's
plans to ensure continuation as a going concern will be successful.
Valuation Allowance and Material Weakness
The Company is required under applicable accounting rules to
record a valuation allowance against deferred tax assets if the
Company is unable to determine that it is more likely than not that
the deferred tax assets will be realized. In prior years and quarters,
the Company has relied on tax planning strategies to support its
determination that it was more likely than not that U.S. federal and
state net operating loss carryforwards and other deferred tax assets
would be utilized before expiration. During the course of the
Company's 2005 audit, it was determined that the Company could no
longer conclude as of December 31, 2005 that tax planning strategies
would continue to be viable and prudent in light of year end losses
and preliminary indications of first quarter 2006 results.
Accordingly, the Company recorded a $24 million valuation allowance
against its U.S. deferred tax assets. Due to this material adjustment
resulting from the audit process, the Company has determined that it
has an internal control deficiency that constitutes a "material
weakness" as defined by the Public Company Accounting Oversight
Board's Auditing Standard No. 2. A material weakness is a significant
deficiency, or a combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the
financial statements will not be prevented or detected. Because of
this material weakness, management has concluded that the Company's
internal control over financial reporting was not effective as of
December 31, 2005.
Pope & Talbot, Inc. will be holding a conference call on Monday,
April 3, 2006, at 10:00 a.m. PST (1:00 p.m. EST.) The dial-in number
is 416-695-5259. The conference call will also be webcast
simultaneously on the Company's website: www.poptal.com.
Forward-Looking Statement
Statements in this press release or in other Company
communications may relate to future events or the Company's future
performance. Such statements are forward-looking statements and are
based on present information the Company has related to its existing
business circumstances. Investors are cautioned that such
forward-looking statements are subject to an inherent risk that actual
results may differ materially from such forward-looking statements.
Further, investors are cautioned that the Company does not assume any
obligation to update forward-looking statements based on unanticipated
events or changed expectations.
The Company's financial performance depends on operating
efficiencies and the prices it receives for its products, as well as
other factors such as foreign exchange fluctuations. Prices for the
Company's products are highly cyclical and have fluctuated
significantly in the past and may fluctuate significantly in the
future. A deterioration in pricing may result in the Company taking
downtime or other unanticipated actions at its manufacturing
facilities. The Company's sensitivity to these and other factors that
may affect future results are discussed in the Company's Annual Report
on Form 10-K and Quarterly Reports on Form 10-Q.
Pope & Talbot considers net income or loss before interest, income
taxes, depreciation and amortization ("EBITDA") to be a relevant and
meaningful indicator of earnings performance commonly used by
investors, financial analysts and others, in addition to and not in
lieu of generally accepted accounting principles (GAAP) results, to
evaluate companies in its industry and, as such, has included this
non-GAAP financial measure in its public statements.
Pope & Talbot is a North American forest products company. The
Company is based in Portland, Oregon and trades on the New York stock
exchange under the symbol POP. Pope & Talbot was founded in 1849 and
produces pulp and softwood lumber in the U.S. and Canada. Markets for
the Company's products include: the U.S.; Europe; Canada; South
America; Japan; and other Pacific Rim countries. For more information
on Pope & Talbot, Inc., please check the website: www.poptal.com.
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POPE & TALBOT, INC. AND SUBSIDIARIES
(Thousands except per share, unaudited)
CONSOLIDATED STATEMENTS OF INCOME
Third Year ended
Fourth Quarter Quarter December 31,
------------------ -------- ------------------
2005 2004 2005 2005 2004
-------- -------- -------- -------- --------
Revenues:
Pulp $121,699 $109,203 $104,833 $442,635 $432,525
Wood Products
Lumber 93,286 71,835 95,946 359,089 290,766
Chips, logs and
other 11,821 11,604 11,957 47,121 39,374
-------- -------- -------- -------- --------
Total Wood
Products 105,107 83,439 107,903 406,210 330,140
-------- -------- -------- -------- --------
Total
revenues 226,806 192,642 212,736 848,845 762,665
-------- -------- -------- -------- --------
Costs and expenses:
Pulp cost of sales 125,975 108,050 106,144 445,113 407,014
Wood Products cost
of sales 108,790 76,740 108,018 397,193 286,799
Gain on timber
take-back (3,451) - - (3,451) -
Selling, general
and
administrative 11,860 8,894 10,123 39,172 34,170
-------- -------- -------- -------- --------
Operating income
(loss) (16,368) (1,042) (11,549) (29,182) 34,682
Interest expense,
net 5,780 4,871 5,458 21,600 20,256
-------- -------- -------- -------- --------
Income (loss) before
income taxes (22,148) (5,913) (17,007) (50,782) 14,426
Income tax provision
(benefit) 11,406 (3,334) (8,185) (773) 3,299
-------- -------- -------- -------- --------
Net income (loss) $(33,554) $ (2,579) $ (8,822) $(50,009) $ 11,127
======== ======== ======== ======== ========
Net income (loss)
per common share:
Basic $ (2.07) $ (0.16) $ (0.54) $ (3.09) $ 0.70
======== ======== ======== ======== ========
Diluted $ (2.07) $ (0.16) $ (0.54) $ (3.09) $ 0.69
======== ======== ======== ======== ========
Average shares
outstanding:
Basic 16,227 16,189 16,226 16,208 15,902
Diluted 16,227 16,189 16,226 16,208 16,116
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
-------------------------------
2005 2004 2005
-------- -------- --------
Assets:
Current assets $218,049 $211,241 $227,401
Properties, net 386,401 340,038 384,027
Deferred income
taxes, net - - 3,217
Deferred tax
charge 7,562 - -
Other assets 18,641 19,348 20,361
-------- -------- --------
Total assets $630,653 $570,627 $635,006
======== ======== ========
Liabilities and
stockholders'
equity:
Current portion of
long-term debt $ 63,800 $ 5,605 $ 63,974
Other current
liabilities 105,363 107,285 127,096
Long-term debt,
excluding current
portion 268,200 229,634 228,539
Deferred income
tax liability,
net 9,042 2,522 -
Other long-term
liabilities 72,216 61,947 68,028
-------- -------- --------
Total
liabilities 518,621 406,993 487,637
Stockholders'
equity 112,032 163,634 147,369
-------- -------- --------
Total
liabilities and
stockholder's
equity $630,653 $570,627 $635,006
======== ======== ========
Total debt to total
capitalization 75% 59% 66%
======== ======== ========
SEGMENT INFORMATION
Third Year ended
Fourth Quarter Quarter December 31,
------------------ --------- ------------------
2005 2004 2005 2005 2004
-------- -------- -------- -------- --------
EBITDA:(A)
Pulp $ (496) $ 5,433 $ 2,658 $ 12,825 $ 42,342
Wood Products (2,065) 7,159 1,259 13,206 45,282
Gain on timber
take-back 3,451 - - 3,451 -
General Corporate (6,850) (4,585) (5,723) (20,534) (15,270)
-------- -------- -------- -------- --------
(5,960) 8,007 (1,806) 8,948 72,354
-------- -------- -------- -------- --------
Depreciation and
amortization:
Pulp $ 6,925 $ 6,687 $ 6,573 $ 26,429 $ 28,801
Wood Products 3,117 1,974 2,820 10,269 7,256
General Corporate 366 388 350 1,432 1,615
-------- -------- -------- -------- --------
10,408 9,049 9,743 38,130 37,672
-------- -------- -------- -------- --------
Operating income
(loss):
Pulp $ (7,421) $ (1,254) $ (3,915) $(13,604) $ 13,541
Wood Products (5,182) 5,185 (1,561) 2,937 38,026
Gain on timber
take-back 3,451 - - 3,451 -
General Corporate (7,216) (4,973) (6,073) (21,966) (16,885)
-------- -------- -------- -------- --------
Operating income
(loss) $(16,368) $ (1,042) $(11,549) $(29,182) $ 34,682
======== ======== ======== ======== ========
Additional
Information:
Lumber import
duties $ 8,300 $ 9,700 $ 10,400 $ 37,300 $ 42,300
Capital
expenditures 11,811 7,118 10,934 43,716 25,240
Capital
expenditures -
acquisition of
sawmill - - - 37,596 -
Notes:
(B) EBITDA equals net income (loss) before income taxes and net
interest expense, plus depreciation and amortization, and is
reconcilable to the Company's net income (loss) using the
depreciation and amortization, net interest expense and income tax
provision (benefit) numbers in the above table. The Company uses
EBITDA to evaluate the operating performance of its business on a
consolidated basis and for each of its operating segments. The
Company considers EBITDA to be a relevant and meaningful indicator
of earnings performance commonly used by investors, financial
analysts and others, in addition to and not in lieu of generally
accepted accounting principles (GAAP) results, to evaluate
companies in its industry. EBITDA is not a measure of liquidity
under GAAP and should not be considered as an alternative to cash
flow from operating activities.
*T