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, 1996
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)
(864) 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 April 9, 1996.
Class Outstanding at April 9, 1996
Common Stock, $1.00 Par Value 37,723,940 Shares
BOWATER INCORPORATED
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheet at March 31, 1996
and December 31, 1995 3
Consolidated Statement of Operations for the
Three Months Ended March 31, 1996 and
March 31, 1995 4
Consolidated Statement of Capital Accounts
for the Three Months Ended March 31, 1996 5
Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 1996 and March
31, 1995 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,
1996 1995
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents (Note 2) $ 345,713 $ 264,571
Accounts receivable, net 212,149 241,847
Inventories (Note 3) 194,042 154,662
Other current assets 13,408 12,943
-------------- ---------------
Total current assets 765,312 674,023
-------------- ---------------
Timber and timberlands 392,268 430,400
Fixed assets, net 1,680,572 1,711,003
Intangible assets, net 22,547 23,733
Other assets 67,539 69,006
============== ===============
$ 2,928,238 $ 2,908,165
============== ===============
LIABILITIES AND CAPITAL
Current liabilities:
Current installments of long-term debt $ 1,600 $ 1,600
Accounts payable and accrued liabilities 184,909 189,424
Income taxes payable 50,353 85,472
Dividends payable 10,463 8,826
-------------- ---------------
Total current liabilities 247,325 285,322
-------------- ---------------
Long-term debt, net of current installments 815,187 816,532
Other long-term liabilities 186,489 181,411
Deferred income taxes 351,183 329,101
Minority interests in subsidiaries 137,534 150,768
Commitments and contingencies (Note 4)
Redeemable LIBOR preferred stock 49,651 49,619
Shareholders' equity:
Series B convertible preferred stock 111,333 111,333
Series C cumulative preferred stock 25,465 25,465
Common stock 39,743 39,501
Additional paid-in capital 416,069 410,007
Retained earnings 643,361 541,205
Equity adjustments (12,918) (13,128)
Loan to ESOT (7,613) (8,033)
Treasury stock, at cost (Note 5) (74,571) (10,938)
-------------- ---------------
Total shareholders' equity 1,140,869 1,095,412
============== ===============
$ 2,928,238 $ 2,908,165
============== ===============
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, March 31,
1996 1995
------------ --------------
Net sales $ 468,883 $ 449,478
Cost of sales 260,006 284,777
Depreciation, amortization and cost of timber harvested 45,205 44,638
------------ --------------
Gross profit 163,672 120,063
Selling and administrative expense 20,951 22,810
------------ --------------
Operating income 142,721 97,253
Other expense (income):
Interest income (4,852) (1,849)
Interest expense, net of capitalized interest (Note 6) 18,347 23,304
Gain on sale of timberlands (Note 7) (74,863) (364)
Other, net (434) (652)
------------ --------------
(61,802) 20,439
------------ --------------
Income before income taxes and minority interests 204,523 76,814
Provision for income taxes (Note 8) 75,674 29,577
Minority interests in net income of subsidiaries 15,944 2,184
------------ --------------
Income before extraordinary charge 112,905 45,053
Extraordinary charge, net of taxes of $3,808 - (6,084)
------------ --------------
Net income $ 112,905 $ 38,969
============ ==============
Earnings per common and common equivalent share (Note 9):
Income before extraordinary charge $ 2.59 $ 1.02
Extraordinary charge - (0.15)
============ ==============
Net income $ 2.59 $ 0.87
============ ==============
Average common and common equivalent shares outstanding 43,208 41,531
============ ==============
Earnings per common share - assuming full dilution (Note 9):
Income before extraordinary charge $ 2.53 $ 0.99
Extraordinary charge - (0.14)
============ ==============
Net income $ 2.53 $ 0.85
============ ==============
Average common and common equivalent shares outstanding 44,089 42,735
============ ==============
See accompanying notes to consolidated financial statements.
(4)
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
Three Months Ended March 31, 1996
(Unaudited, in thousands except per share amounts)
Series A Series B Series C
LIBOR Convertible Cumulative Additional
Preferred Preferred Preferred Common Paid in Retained Equity Loan to Treasury
Stock Stock Stock Stock Capital Earnings Adjustments ESOT Stock
---------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $49,619 $111,333 $ 25,465 $39,501 $410,007 $ 541,205 $ (13,128) $(8,033) (10,938)
Net income -- -- -- -- -- 112,905 -- -- --
Dividends on common stock($.20 per
share) -- -- -- -- -- (7,551) -- -- --
Dividends on preferred stock:
LIBOR ($0.60 per share) -- -- -- -- -- (600) -- -- --
Series B ($1.65 per share) -- -- -- -- -- (2,011) -- -- --
Series C ($2.10 per share) -- -- -- -- -- (555) -- -- --
Increase in stated value of LIBOR
preferred stock 32 -- -- -- -- (32) -- -- --
Common stock issued for exercise
of stock options -- -- -- 242 6,062 -- -- -- --
Reduction in loan to ESOT -- -- -- -- -- -- -- 420 --
Purchase of common stock -- -- -- -- -- -- -- -- (63,638)
Treasury stock used for employee
benefit and dividend
reinvestment plans -- -- -- -- -- -- -- -- 5
Foreign currency translation -- -- -- -- -- -- 210 -- --
------- -------- --------- ------- -------- --------- --------- ------- -------
Balance at March 31, 1996 $49,651 $111,333 $ 25,465 $39,743 $416,069 $ 643,361 $ (12,918) $(7,613) (74,571)
======= ======== ========= ======= ======== ========= ========= ======= =======
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, March 31,
1996 1995
----------------- --------------------
Cash flows from operating activities:
Net income $ 112,905 $ 38,969
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and cost of timber harvested 45,205 44,638
Deferred income taxes 22,039 14,250
Minority interests 15,944 2,184
Gain from sale of timberlands (74,863) (364)
Extraordinary charge, net of taxes -- 6,084
Change in working capital:
Accounts receivable, net 29,698 (8,974)
Inventories (39,380) (6,705)
Accounts payable and accrued liabilities (6,456) (9,910)
Income taxes payable (33,284) 13,940
Other, net 6,659 3,112
------- --------
Net cash provided by operating activities 78,467 97,224
------- --------
Cash flows from investing activities:
Cash invested in fixed assets, timber and timberlands (14,404) (21,869)
Disposition of fixed assets, timber and timberlands 113,714 1,233
------- -------
Net cash from (used in) investing activities 99,310 (20,636)
------- -------
Cash flows from financing activities:
Cash dividends, including minority interests (Note 10) (38,249) (10,052)
Purchase of common stock (63,638) --
Payments of long-term debt (1,419) (191,101)
Other 6,671 7,151
------- --------
Net cash used in financing activities (96,635) (194,002)
------- --------
Net increase(decrease) in cash and cash equivalents $ 81,142 $(117,414)
Cash and cash equivalents at beginning of year 264,571 154,768
-------- ---------
Cash and cash equivalents at end of period $345,713 $37,354
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest $(15,508) $(18,815)
Income taxes $(86,919) $(1,387)
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, 1996 and the related consolidated statements
of operations, capital accounts and cash flows for the interim periods
ended March 31, 1996 and March 31, 1995 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, 1996 are not necessarily indicative of the results to be
expected for the full year.
2) Cash and cash equivalents generally consist of cash and short-term
investment grade marketable securities. Such investments are stated at cost,
which approximates fair market value, and are considered cash equivalents
for purposes of reporting cash flows.
3) The composition of inventories at March 31, 1996 and December 31, 1995 was
as follows (in thousands):
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
At lower of cost or market:
Raw materials $ 35,894 $ 39,520
Work in process 2,775 3,014
Finished goods 89,642 48,854
Mill stores and other supplies 80,156 81,301
-------- --------
208,467 172,689
Excess of current cost over
LIFO inventory value (14,425) (18,027)
-------- --------
$194,042 $154,662
======== ========
4) The Company is involved in various legal proceedings relating to contracts,
commercial disputes, taxes, environmental issues, employment and workers'
compensation claims, and other matters. The Company's management believes
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) On February 9, 1996, the Company announced that its Board of Directors
authorized the repurchase of up to 10 percent of the Company's outstanding
common stock within the next twelve months. During the first quarter of
1996, the Company repurchased 1.6 million shares at a total cost of
$63,638,000, representing 4.2 percent of the common shares outstanding at
December 31, 1995. The shares were recorded at cost in the Shareholders'
equity section of the Consolidated Balance Sheet at March 31, 1996.
6) Total interest expense for the first quarter of 1996 was $18,347,000 versus
$23,304,000 for the first quarter of 1995. The $4,957,000 savings is a
result of the two debt retirements the Company completed during 1995,
causing a lower level of borrowings outstanding in 1996 versus 1995.
(7)
BOWATER INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7) During the first quarter of 1996, the Company sold approximately 104,000
acres of timberlands located in Alabama and South Carolina with proceeds of
$113,714,000 and a pre-tax gain of $74,863,000 or $.84 per fully diluted
share, after tax.
8) The effective tax rate for the first quarter of 1996 was 37.0 percent versus
38.5 percent for the first quarter of 1995.
9) The calculation of earnings per share for the quarters ended March 31,
1996 and March 31, 1995, includes a deduction of $1,187,000 and
$2,852,000, respectively, 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. The decrease in the amount of dividends in the first
quarter of 1996 versus the first quarter of 1995 is a result of the
partial redemption of Series C preferred stock completed in late 1995.
10) On January 4, 1996, the Board of Directors of Calhoun Newsprint Company
(CNC) declared a $60,000,000 dividend. As a result, $29,400,000 was paid to
the minority shareholder on January 5, 1996.
(8)
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Summary
Earnings for the first quarter of 1996 totaled $75.9 million, or $1.69
per fully diluted share, before a $37.0 million after tax gain, or $.84 per
fully diluted share, realized on the sale of approximately 104,000 acres of
timberlands located in Alabama and South Carolina. This compares to net income
of $45.1 million, or $.99 per fully diluted share, for the same period last
year, before an extraordinary after tax charge of $6.1 million, or $.14 per
fully diluted share for premium and expenses related to the repurchase of
outstanding debt. Net sales for the first quarter of 1996 totaled $468.9
million, compared to $449.5 million for the comparable quarter of 1995.
Product Line Information:
(Unaudited, $ in thousands)
Quarter Ended
March 31, March 31,
1996 1995
Net sales:
Newsprint $235,683 $168,513
Directory and uncoated
groundwood specialties 59,783 45,376
Coated groundwood 98,755 95,272
Pulp 18,576 56,736
Communication papers 50,973 67,067
Lumber, stumpage and
other products 28,382 41,429
Distribution costs (23,269) (24,915)
$468,883 $449,478
Operating income $142,721 $ 97,253
(9)
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Three Months Ended March 31, 1996 versus March 31, 1995
For the first quarter of 1996, the Company's operating income of $142.7
million improved $45.4 million compared to the first quarter of 1995. This
positive variation is primarily attributable to higher selling prices in the
Company's three principal products; newsprint, coated groundwood paper, and
directory. These price gains were partially offset by significantly lower market
pulp selling prices and volume, when compared to the first quarter of 1995.
Average transaction prices for newsprint increased 39 percent in the
first quarter of 1996 compared to the same period last year and increased
slightly from 1995 fourth quarter levels. Strong foreign market demand, coupled
with a lack of significant capacity growth allowed for several price increases
during 1995. Despite growth in the world market, consumption of newsprint by U.
S. daily newspapers declined 4 percent in 1995 compared to 1994 and 10 percent
during the first two months of 1996 compared to the same period in 1995. In
addition, inventory levels of U. S. daily newspaper publishers increased to a 55
day supply at the end of February, 1996 compared to a 38 day supply at the end
of February, 1995. Excessive publisher inventories and weak consumption led the
Company to cancel its April 1 newsprint price increase and second quarter
newsprint pricing is experiencing downward pressure. Future newsprint price
changes will depend on global economic conditions, which influence demand, and
capacity changes.
During 1995, the Company was able to increase its coated groundwood
paper prices. This was based on strong demand, as evidenced by increases in U.
S. magazine advertising pages in 1995 compared to 1994, and a lack of
significant new capacity in North America. First quarter 1996 average
transaction prices were 23 percent higher than the year ago period; however,
they were slightly lower than the fourth quarter of 1995 prices. Demand for
coated groundwood papers has weakened in the first quarter of 1996, as customers
appear to be reducing inventories and consumption. U. S. coated groundwood paper
shipments during January and February of 1996 were 19 percent lower than the
first two months of 1995. Coated groundwood paper pricing for the second quarter
of 1996 continues to weaken as customers continue to decrease inventories.
The profitability of the Company's market pulp product line is dependent
upon global economic conditions and the worldwide demand for paper. In 1995,
many countries experienced healthy economies coupled with moderate pulp capacity
expansions and improved paper demand. These conditions enabled the Company to
implement several price increases during 1995. In the fourth quarter of 1995, as
demand for many paper grades began to decrease, the demand for market pulp
declined. This weakening in demand impacted first quarter 1996 prices. The
Company's average transaction prices for the first quarter of 1996 decreased 27
percent compared to last year's first quarter and 41 percent compared to the
fourth quarter of 1995. The Company's tonnage
(10)
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Three Months Ended March 31, 1996 versus March 31, 1995
shipments of market pulp in the first quarter of 1996 were 55 percent lower than
the year ago period resulting in significantly higher Company inventories. On
average, prices in the near term are expected to be lower than the first
quarter; however, if the current level of demand is sustained, shipments are
expected to increase and inventories should decline. As a world traded
commodity, pulp price movements generally are a function of global demand from
non-integrated consumers and the available supply.
The Communication Papers Division operating results decreased in the
first quarter of 1996 compared to the first quarter of 1995. While average
transaction prices increased slightly comparing these periods, higher raw
material costs and lower tonnage shipments offset the transaction price gains.
Beginning April 1, the Company proceeded to close three of the eight
manufacturing facilities of the Communication Papers Division. The current
production levels from these sites will be completely met by the remaining
facilities.
Operating results for the Company's directory products increased in the
first quarter of 1996 compared to the first quarter of 1995. The Company
implemented a January, 1996 price increase for directory paper. Average
transaction prices for directory were 33 percent higher in the first quarter of
1996 compared to the first quarter of 1995.
Operating results for the Company's lumber products were lower in the
first quarter of 1996 versus the first quarter of 1995 due to the decline in
lumber prices throughout 1995, which continued into the first quarter of 1996.
Lumber prices are still depressed due to fewer housing starts in 1995 and the
first quarter of 1996, versus 1994. Stumpage operating results for the first
quarter of 1996 also decreased, compared to the year ago period. Shipments, and
to a lesser degree, transaction prices, declined.
Liquidity and Capital Resources
During the first quarter of 1996, the Company's operations generated
$78.5 million of cash compared to $97.2 million of cash during the first quarter
of 1995, a decrease of $18.7 million. This decrease arose primarily as a result
of significantly higher tax payments of $85.5 million, as the Company settled
the majority of its 1995 tax liability of $73.5 million, that it was able to
defer during 1995. Reducing the effects of this were higher operating income of
$45.5 million; higher interest income of $3.0 million due to increased cash
balances; lower interest paid of $3.3 million resulting from debt prepayments
completed in 1995; and lower working capital of $7.2 million.
(11)
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
Capital expenditures for the first quarter of 1996 decreased $7.5
million compared to the first quarter of 1995. The decrease reflects the
completion of two large projects in 1995, specifically, a new waste treatment
plant at the Company's Mersey Operation and a new lime kiln at the Company's
Catawba mill. The Company expects total capital expenditures for 1996 to
approximate $170 million and will fund these expenditures from internal cash
flow.
In the first quarter of 1996, the Company sold approximately 104,000
acres of timberlands located in Alabama and South Carolina resulting in proceeds
of $113.7 million. The Company expects to close on the sale of additional
timberlands in the second quarter that will generate proceeds of approximately
$26 million.
On January 4, 1996, the Board of Directors of CNC (a joint venture in
which the Company owns 51 percent) declared a $60.0 million dividend. As a
result, $29.4 million was paid to the minority shareholder on January 5, 1996.
This transaction accounted for the large increase in cash dividends in the first
quarter of 1996 versus the same period last year. In February, 1996, the Company
announced a 33 percent increase in its quarterly common dividend from $.15 per
share to $.20 per share, effective with the April 1, 1996, dividend payment.
On February 9, 1996, the Company's Board of Directors authorized
management to repurchase up to 10 percent of the Company's outstanding common
stock within the next twelve months. During the first quarter, the Company
repurchased 1.6 million shares at a cost of $63.6 million representing 4.2
percent of the common shares outstanding at December 31, 1995. In the first
quarter of 1995, the Company similarly reduced its capital by repurchasing $182
million of its 8.5% Notes due December, 2001, at a total cost of $191.1 million.
Depending on cash availability, its alternative uses, and the general level of
interest rates, the Company may, through various means, repurchase additional
debt during 1996.
As a result of the foregoing, cash and cash equivalents increased $81.1
million since December 31, 1995, bringing the first quarter's balance to $345.7
million. This compares to a decrease in cash and cash equivalents in the
previous year quarter of $117.4 million, resulting in a first quarter balance of
$37.4 million.
(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
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 D. G. Maffucci
D. G. Maffucci
Senior Vice President -
Chief Financial Officer and
Treasurer
By M. F. Nocito
M. F. Nocito
Vice President - Controller
Dated: April 23, 1996
(14)