UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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 1-8712
BOWATER INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 62-0721803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 East Camperdown Way, P.O. Box 1028, Greenville, SC 29602
(Address of principal executive offices) (Zip Code)
(803) 271-7733
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of May 3, 1995.
Class Outstanding at May 3, 1995
Common Stock, $1.00 Par Value 37,202,657 Shares
BOWATER INCORPORATED
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheet at March 31, 1995
and December 31, 1994 3
Consolidated Statement of Operations for the
Three Months Ended March 31, 1995 and
April 2, 1994 4
Consolidated Statement of Capital Accounts
for the Three Months Ended March 31, 1995 5
Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 1995 and April
2, 1994 6
Notes to Consolidated Financial Statements 7-8
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
PART II OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
(2)
PART I BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In Thousands)
March 31, December 31,
1995 1994
ASSETS
Current assets:
Cash $ 7,991 $ 10,783
Marketable securities, at cost which approximates market 29,363 143,985
Accounts receivable, net 206,447 197,473
Inventories 157,802 151,097
Deferred income taxes 5,717 5,717
Other current assets 4,814 4,770
Total current assets 412,134 513,825
Timber and timberlands 426,431 426,354
Fixed assets, net 1,758,104 1,785,046
Intangible assets 54,098 54,721
Other assets 70,953 71,416
$ 2,721,720 $ 2,851,362
LIABILITIES AND CAPITAL
Current liabilities:
Current instalments of long-term debt $ 1,604 $ 1,604
Accounts payable and accrued liabilities 174,777 184,766
Income taxes payable 24,098 13,966
Dividends payable 10,395 10,276
Total current liabilities 210,874 210,612
Long-term debt, net of current instalments 934,653 1,116,887
Other long-term liabilities 159,951 157,936
Deferred income taxes 276,170 261,923
Minority interests in subsidiaries 144,080 142,087
Commitments and contingencies (See note 4.)
Redeemable LIBOR preferred stock 74,524 74,492
Shareholders' equity:
Series B convertible preferred stock 111,333 111,333
Series C cumulative preferred stock 81,892 81,892
Common stock 37,417 37,121
Additional paid-in capital 343,653 336,990
Retained earnings 373,436 344,852
Equity adjustment from foreign currency translation (5,294) (3,410)
Loan to ESOT (9,377) (9,643)
Treasury stock, at cost (11,592) (11,710)
Total shareholders' equity 921,468 887,425
$ 2,721,720 $2,851,362
See accompanying notes to consolidated financial statements.
(3)
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands Except Per Share Amounts)
Three Months Ended
March 31, April 2,
1995 1994
Net sales $ 449,478 $ 308,892
Cost of sales 284,777 262,908
Depreciation, amortization and cost of timber harvested 44,638 42,161
Gross profit 120,063 3,823
Selling and administrative expense 22,810 18,563
Operating income (loss) 97,253 (14,740)
Other expense (income):
Interest income (1,849) (1,296)
Interest expense 23,304 24,919
Other, net (1,016) 109
20,439 23,732
Income (loss) before income taxes and minority interests 76,814 (38,472)
Provision for income taxes 29,577 (14,425)
Minority interests in net income (loss) of subsidiaries 2,184 (2,607)
Income (loss) before extraordinary charge 45,053 (21,440)
Extraordinary charge, net of taxes of $3,808 (6,084) ---
Net income (loss) $ 38,969 $ (21,440)
Earnings (loss) per common and common equivalent share:
Income (loss) before extraordinary charge $ 1.02 $ (0.67)
Extraordinary charge (0.15) ---
Net income (loss) $ 0.87 $ (0.67)
Average common and common equivalent shares outstanding 41,531 36,459
Earnings (loss) per common share - assuming full dilution:
Income (loss) before extraordinary charge $ 0.99 $ (0.67)
Extraordinary charge (0.14) ---
Net income (loss) $ 0.85 $ (0.67)
Average common and common equivalent shares outstanding 42,735 36,459
See accompanying notes to consolidated financial statements.
(4)
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
Three Months Ended March 31, 1995
(Unaudited)
(In Thousands Except Per Share Amounts)
Series A Series B Series C Equity
LIBOR Convertible Cumulative Additional Adjustment -
Preferred Preferred Preferred Common Paid in Retained Foreign Loan to Treasury
Stock Stock Stock Stock Capital Earnings Currency ESOT Stock
Balance at December 31, 1994 $74,492 $111,333 $81,892 $37,121 $336,990 $344,852 $(3,410) $(9,643) $(11,710)
Net income - - - - - 38,969 - - -
Dividends on common stock($.15 per share) - - - - - (5,518) - - -
Dividends on preferred stock
LIBOR ($.69 per share) - - - - - (1,035) - - -
Series B ($1.65 per share) - - - - - (2,013) - - -
Series C ($2.10 per share) - - - - - (1,785) - - -
Increase in stated value of LIBOR
preferred stock 32 - - - - (32) - - -
Common stock issued for exercise
of stock options - - - 296 6663 - - - -
Reduction in loan to ESOT - - - - - - - 266 -
Treasury stock used for employee
benefit and dividend reinvestment
plans - - - - - (2) - - 118
Foreign currency translation - - - - - - (1,884) - -
Balance at March 31, 1995 $74,524 $111,333 $81,892 $37,417 $343,653 $373,436 $(5,294) $(9,377) $(11,592)
See accompanying notes to consolidated financial statements.
(5)
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
March 31, April 2,
1995 1994
Cash flow from (used for) operating activities:
Operating income (loss) $ 97,253 $ (14,740)
Depreciation, amortization and cost of timber harvested 44,638 42,161
Changes in working capital:
Receivables (8,974) 21,876
Inventories (6,705) (19,579)
Accounts payable and accrued liabilities (9,910) (7,923)
Other working capital (45) 3,282
Interest paid, net of capitalized interest (18,815) (18,267)
Interest received 1,849 1,296
Income taxes paid (1,387) (28,072)
Other income (expense), net (680) 809
97,224 (19,157)
Cash flow from (used for) investing activities:
Cash invested in fixed assets, timber and
timberlands (21,869) (26,671)
Disposition of fixed assets, timber and timberlands 1,233 878
(20,636) (25,793)
Cash flow from (used for) financing activities:
Issuance of Series B & C preferred stock, net of issuance costs 0 193,567
Cash dividends, including minority interests (10,052) (12,337)
Payments of long term debt (191,101) (405)
Stock options exercised 6,959 373
Other 192 406
(194,002) 181,604
Increase (decrease) in cash and marketable securities (117,414) 136,654
Cash and marketable securities:
Beginning of year 154,768 81,666
End of period $ 37,354 $ 218,320
See accompanying notes to consolidated financial statements.
(6)
BOWATER INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) The accompanying consolidated financial statements include the
accounts of Bowater Incorporated and Subsidiaries (the Company).
The consolidated balance sheet as of March 31, 1995 and the related
consolidated statements of operations, capital accounts and cash
flows for the interim periods ended March 31, 1995 and April 2, 1994
are unaudited. However, in the opinion of Company management, all
adjustments (consisting of normal recurring adjustments) necessary
for fair presentation of the interim financial statements have been
made. The results of the interim period ended March 31, 1995 are
not necessarily indicative of the results to be expected for the
full year.
(2) The composition of inventories at March 31, 1995 and December 31,
1994 was as follows (in thousands):
March 31, 1995 December 31, 1994
(Unaudited)
At lower of cost or market:
Raw materials $ 45,857 $ 37,597
Work in process 3,242 3,333
Finished goods 42,228 38,971
Mill stores and other supplies 81,419 80,723
172,746 160,624
Excess of current cost over
LIFO inventory value (14,944) (9,527)
$157,802 $151,097
(3) The Company's marketable securities are recorded at cost which
approximates market value. The securities are all investment grade
with maturities of fewer than 90 days and the Company has the intent
and ability to hold these securities until maturity.
(4) The Company is involved in various litigation relating to contracts,
commercial disputes, tax, environmental issues, workers'
compensation and other matters. The Company's management is of the
opinion that the ultimate disposition of these matters will not have
a material adverse effect on the Company's operations or its
financial condition taken as a whole.
(5) The calculation of earnings per share for the quarter ended March
31, 1995 includes a deduction of $2,852,000 for the dividend
requirements of the Company's LIBOR and Series C preferred stock and
the amortization of the difference between the net proceeds from the
LIBOR preferred stock and its mandatory redemption value. For the
quarter ended April 2, 1994, the calculation of loss per share
included a deduction of $3,038,000 for the same items, plus the
dividend requirements of the Company's Series B preferred stock.
The shares of Series B preferred stock are common stock equivalents.
However, due to the loss incurred in the first quarter of 1994, the
effect was antidilutive.
(7)
BOWATER INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Total interest expense during the first three months of 1995 and
1994 was $23,399,000 and $24,999,000 respectively. In 1995 and
1994, $95,000 and $80,000 of interest expense was capitalized,
respectively.
(7) On February 24, 1995, the Company commenced an offer to repurchase
its outstanding 8.5% Notes due December 15, 2001 having a face value
of $200 million. On March 7, 1995, the Company completed the offer
repurchasing approximately $182 million of the $200 million
principal amount of Notes previously outstanding. As a result, the
Company recorded an extraordinary charge of $6.1 million, net of
taxes of $3.8 million, for the premium and expenses relating to the
repurchase. On a fully diluted basis, the earnings per share effect
was $.14.
(8)
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Summary
Net income for the first quarter of 1995 totaled $39.0 million,
or $.85 per fully diluted share, on net sales of $449.5 million.
Included in net income for the quarter was an extraordinary charge of
$6.1 million, or $.14 per fully diluted share, for premium and expenses
related to the repurchase of approximately $182 million of the $200
million outstanding 8.5% Notes due December 15, 2001. For the first
quarter of 1994, the Company incurred a net loss of $21.4 million, or
$.67 per share, on net sales of $308.9 million.
Product Line Information:
(Unaudited, $ in thousands)
Quarter Ended
March 31, April 2,
1995 1994
Net sales:
Newsprint $168,513 $138,293
Directory and uncoated
specialties 45,376 40,098
Coated paper 95,272 73,635
Pulp 56,736 21,958
Communication papers 67,067 45,383
Lumber, stumpage and
other products 41,429 21,993
Distribution costs (24,915) (32,468)
$449,478 $308,892
Operating income (loss) $ 97,253 $(14,740)
In the first quarter of 1995, the Company changed its
classification of mill handling expenses. These expenses are now
classified as a cost of sale. In the first quarter of 1994, the Company
classified these expenses as a distribution cost. For comparison
purposes, the first quarter 1994 amount for the line entitled
"Distribution costs" would be approximately $3.2 million lower. Prior
year financial statements have not been restated due to the prospective
nature of the change.
(9)
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Three Months Ended March 31, 1995 versus April 2, 1994
For the first quarter of 1995, the Company's operating income of
$97.3 million improved $112.0 million compared to the first quarter of
1994. Selling prices for all of the Company's major products increased
significantly in the first quarter of 1995 compared to the first quarter
of 1994. A detailed review of the Company's major product lines for the
first quarter of 1995 follows.
The Company's average transaction price for newsprint in the first
quarter of 1995 increased 28 percent compared to the same period last
year. During 1994, most North American newsprint producers, including
the Company, reduced the discounts allowed off list price by
approximately 20 percent or $137 per metric ton. These price increases
were a result of several conditions: The economic recovery taking place
in many countries around the world has led to increased demand; customer
inventory levels were low in 1994 and the first quarter of 1995, and the
supply of newsprint during 1994 and the first quarter of 1995 did not
increase. In the first quarter of 1995, the Company announced a
reduction in discounts allowed off list price and a list price increase,
effective May 1, 1995, totaling $125 per metric ton. Other North
American newsprint producers announced similar increases in the first
quarter of 1995.
During the first quarter of 1995, the Company's coated groundwood
paper average transaction prices increased 24 percent from the first
quarter of 1994. Effective October 1, 1994, the Company, along with
other coated groundwood producers, increased the list price of its
coated groundwood paper by $70 per short ton and on January 1, 1995,
reduced the discounts allowed off list price amounting to approximately
$100 per short ton. Low customer inventories coupled with strong demand
led to the price increases. Strong demand was evidenced by a 10 percent
increase in magazine advertising pages comparing the first quarter of
1995 to the first quarter of 1994. These market conditions enabled the
Company and other coated groundwood producers to implement an additional
list price increase of $100 per short ton, effective April 1, 1995.
Average transaction prices for market pulp also increased in the
first quarter of 1995. The Company's average transaction prices
increased nearly 89 percent compared to the first quarter of 1994. The
Company, along with other major producers of market pulp, increased
prices by $60 per metric ton on January 1, 1995 and an additional $75
per metric ton on March 1, 1995. The impetus for these price increases
came from several sources: NORSCAN (U.S., Canada, Finland, Norway, and
Sweden) shipments of softwood market pulp increased 3.6 percent during
the first three months of 1995 compared to the same period last year;
NORSCAN inventory levels at the end of March, 1995, decreased 16.8
percent compared to March, 1994 levels, and there was limited new market
pulp expansion in the first quarter of 1995, coupled with a worldwide
economic expansion, especially in the Far East and Europe. These
conditions created a supply/demand balance which allowed for price
increases. A third price increase of $85 per metric ton ($100 export)
has been announced by major pulp producers, effective June 1, 1995.
(10)
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The Communication Papers Division operating results increased in the
first quarter of 1995 compared to the same period last year. Higher
average transaction prices and a higher volume of converted papers sold
in the first quarter of 1995, compared to the same period last year,
contributed to the increase.
Sales of the Company's lumber and stumpage products increased in the
first quarter of 1995 compared to the first quarter of 1994 due mainly
to a larger volume of product sold. Lumber prices remained stable and
in some cases decreased due to the slowdown in the housing market, while
stumpage prices increased.
Cost Reductions
The Company's variable costs for the first three months of 1995
increased compared to the first three months of 1994, due to increases
in commodity related raw material costs. Controllable fixed costs,
however, decreased comparing these same periods. The first quarter 1995
operating results benefited from cost reduction programs the Company
implemented over the past two years. Continuing these programs in the
second quarter of 1995, the Company recently announced a further
reduction in employment levels of approximately 20 percent of the
salaried workforce or 350 positions companywide. As a result of the
personnel reductions, the Company will record a pretax charge of
approximately $24 million ($.34 per fully diluted share after tax) in
the second quarter of 1995. In addition, the Company plans to continue
considering opportunities for asset monetization during the balance of
1995, including nonstrategic timberlands, the Company's Communication
Papers Division, and possibly other assets.
Income Taxes
The effective tax rate for the first quarter of 1995 was 38.5
percent versus 37.5 percent for the first quarter of 1994.
Liquidity and Capital Resources
The Company's operations generated $97.2 million of cash in the
first quarter of 1995 compared to using $19.2 million in the same
quarter of last year. This improvement came from several sources, the
most significant of which was the $112 million improvement in operating
income. In addition, tax payments in the first quarter were $27 million
lower than the same quarter last year which included a tax assessment of
$29.4 million paid in 1994 for previous tax years. Off-setting this was
cash required for working capital which increased $28.0 million over the
same quarter in 1994. This increase is a combination of a higher level
of customer receivables offset by lower inventory levels, both of which
reflect the impact of improved business conditions on pricing and sales
for the Company's products.
(11)
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The Company anticipates that the improvement in cash flow from
operations experienced in the first quarter will continue and will
exceed its capital spending and dividend requirements for 1995.
Capital spending in the first quarter of 1995 was $4.8 million below
spending levels in 1994. The largest single capital expenditure in 1995
will be $14 million to complete a new effluent treatment facility at
Bowater's Mersey mill. The Company expects total capital expenditures for
1995 to approximate $110 million and to be funded from internal cash flow.
In the first quarter of 1995, the Company prepaid approximately $182
million of its 8 1/2% notes due 2001 having a face value of $200
million. The transaction was accomplished using cash on hand at the
beginning of the year and cash generated during the quarter. As a
result of this transaction, cash and marketable securities fell from
$154.7 million at the beginning of the year to $37.4 million at the end
of the quarter. The Company intends to reduce debt further in 1995;
however, the amount and timing of additional debt reductions are subject
to, among other factors, the strength of the Company's cash flow.
(12)
BOWATER INCORPORATED AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits (numbered in accordance with Item 601 of
Regulation S-K):
Exhibit No. Description
10.1 Cancellation of Severance Agreement and Modification of
Employment Agreement dated as of March 1, 1995, by and
between the Company and John C. Davis.
10.2 Cancellation of Severance Agreement and Modification of
Employment Agreement dated as of March 1, 1995, by and
between the Company and David E. McIntyre.
10.3 Cancellation of Severance Agreement and Modification of
Employment Agreement and Addendum dated as of February 23,
1995, by and between the Company and Phillip A. Temple.
10.4 Employment Agreement and Severance Agreement, each dated
as of April 1, 1995, by and between the Company and E.
Patrick Duffy.
10.5 Letter agreement dated May 1, 1995, by and between the
Company and H. David Aycock.
27.1 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K:
None.
(13)
BOWATER INCORPORATED AND SUBSIDIARIES
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.
BOWATER INCORPORATED
By R. C. Lancaster
R. C. Lancaster
Senior Vice President and
Chief Financial Officer
By M. F. Nocito
M. F. Nocito
Vice President - Controller
Dated: May 12, 1995
(14)