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 September 30, 1997
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 November 6, 1997.
Class Outstanding at November 6, 1997
Common Stock, $1.00 Par Value 40,529,946 Shares
BOWATER INCORPORATED
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheet at September 30, 1997,
and December 31, 1996 3
Consolidated Statement of Operations for the Three
and Nine Months Ended September 30, 1997, and
September 30, 1996 4
Consolidated Statement of Capital Accounts
for the Nine Months Ended September 30, 1997 5
Consolidated Statement of Cash Flows for the
Nine Months Ended September 30, 1997, and
September 30, 1996 6
Notes to Consolidated Financial Statements 7-8
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
PART II OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART I
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, in thousands)
September 30, December 31,
1997 1996
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 105,549 $ 85,259
Marketable securities 276,558 345,398
Accounts receivable, net 189,635 185,724
Inventories (Note 2) 102,239 123,745
Other current assets 16,910 13,629
------------------- -------------------
Total current assets 690,891 753,755
------------------- -------------------
Timber and timberlands 396,372 395,675
Fixed assets, net 1,571,591 1,636,705
Other assets 78,834 79,409
=================== ===================
$ 2,737,688 $ 2,865,544
=================== ===================
LIABILITIES AND CAPITAL
Current liabilities:
Current installments of long-term debt $ 1,604 $ 1,604
Accounts payable and accrued liabilities (Note 3) 192,313 216,328
Income taxes payable 382 6,057
Dividends payable (Note 4) 8,644 29,892
------------------- -------------------
Total current liabilities 202,943 253,881
------------------- -------------------
Long-term debt, net of current installments 757,742 759,029
Other long-term liabilities 164,569 171,651
Deferred income taxes 343,903 358,858
Minority interests in subsidiaries 125,483 126,246
Commitments and contingencies (Note 5) - -
Redeemable LIBOR preferred stock (Note 6) - 24,746
Shareholders' equity:
Series C cumulative preferred stock 25,465 25,465
Common stock (Note 7) 44,887 43,994
Additional paid-in capital 561,748 531,598
Retained earnings 695,501 698,301
Equity adjustments (12,858) (12,370)
Loan to ESOT (4,969) (6,324)
Treasury stock, at cost (Note 8) (166,726) (109,531)
------------------- -------------------
Total shareholders' equity 1,143,048 1,171,133
=================== ===================
$ 2,737,688 $ 2,865,544
=================== ===================
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 Nine Months Ended
--------------------------------------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
-------------- -------------- --------------- -----------------
Net sales $ 378,631 $ 423,188 $ 1,083,480 $ 1,346,022
Cost of sales 276,950 296,270 829,723 853,708
Depreciation, amortization and cost of timber harvested 42,447 43,402 126,165 131,084
-------------- -------------- ------------- --------------
Gross profit 59,234 83,516 127,592 361,230
Selling and administrative expense 18,782 23,629 53,827 68,283
-------------- -------------- ------------- --------------
Operating income 40,452 59,887 73,765 292,947
Other expense / (income):
Interest income (5,518) (4,837) (15,664) (14,880)
Interest expense, net of capitalized interest 17,047 17,758 50,626 54,328
Gain on sale of timberlands (21) (1,152) (44) (77,853)
Other, net 428 (1,096) (67) (3,449)
-------------- -------------- ------------- --------------
11,936 10,673 34,851 (41,854)
-------------- -------------- ------------- --------------
Income before income taxes and minority interests 28,516 49,214 38,914 334,801
Provision for income taxes (Note 9) 10,551 18,209 14,399 123,877
Minority interests in net income of subsidiaries 1,180 2,738 948 25,409
-------------- -------------- ------------- --------------
Income before extraordinary charge 16,785 28,267 23,567 185,515
Extraordinary charge, net of taxes of $1,012 and
$2,234 , respectively. - (1,600) - (3,531)
-------------- -------------- ------------- --------------
Net income $ 16,785 $ 26,667 $ 23,567 $ 181,984
============== ============== ============= ==============
Earnings per common share - primary (Note 10):
Income before extraordinary charge $ 0.40 $ 0.65 $ 0.52 $ 4.28
Extraordinary charge - (0.04) - (0.08)
============== ============== ============= ==============
Net income $ 0.40 $ 0.61 $ 0.52 $ 4.20
============== ============== ============= ==============
Average common and common equivalent shares outstanding 41,012 41,756 40,659 42,463
============== ============== ============= ==============
Earnings per common share - fully diluted (Note 10):
Income before extraordinary charge $ 0.40 $ 0.64 $ 0.52 $ 4.19
Extraordinary charge - (0.04) - (0.08)
============== ============== ============= ==============
Net income $ 0.40 $ 0.60 $ 0.52 $ 4.11
============== ============== ============= ==============
Average common and common equivalent shares outstanding 41,012 42,714 40,733 43,356
============== ============== ============= ==============
See accompanying notes to consolidated financial statements.
4
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
Nine Months Ended September 30, 1997
(Unaudited, in thousands except per share amounts)
Redeemable Series C
LIBOR Cumulative Additional
Preferred Preferred Common Paid in Retained Equity Loan to Treasury
Stock Stock Stock Capital Earnings Adjustments ESOT Stock
-----------------------------------------------------------------------------------
Balance at December 31, 1996 $ 24,746 $ 25,465 43,994 $ 531,598 $ 698,301 $ (12,370) $ (6,324)$(109,531)
Net income - - - - 23,567 - - -
Dividends on common stock ($.60 per share) - - - - (24,055) - - -
Dividends on preferred stock:
LIBOR ($ .79 per share) - - - - (393) - - -
Series C ($6.30 per share) - - - - (1,665) - - -
Increase in stated value of LIBOR preferred stock 254 - - - (254) - - -
Redemption of LIBOR preferred stock (Note 6 ) (25,000) - - - - - - -
Common stock issued for exercise of stock options - - 893 22,540 - - - -
Tax benefit on exercise of stock options - - - 7,603 - - - -
Reduction in loan to ESOT - - - - - - 1,355 -
Purchase of common stock (Note 8) - - - - - - - (57,244)
Treasury stock used for employee benefit
and dividend reinvestment plans - - - 7 - - - 49
Foreign currency translation - - - - - (488) - -
==================================================================================
Balance at September 30, 1997 $ - $ 25,465 44,887 $ 561,748 $ 695,501 $ (12,858) $ (4,969)$(166,726)
==================================================================================
See accompanying notes to consolidated financial statements.
5
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
---------------------------------------
September 30, September 30,
1997 1996
-------------- ------------------
Cash flows from operating activities:
Net income $ 23,567 $ 181,984
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and cost of timber harvested 126,165 131,084
Deferred income taxes (1,556) 40,176
Minority interests 948 25,409
Gain from sale of timberlands (44) (77,853)
Extraordinary charge, net of taxes - 3,531
Change in working capital:
Accounts receivable, net (3,911) 31,460
Inventories 21,506 754
Accounts payable and accrued liabilities (23,030) (2,963)
Income taxes payable (11,379) (76,258)
Other, net (5,510) 3,154
-------------- ------------------
Net cash from operating activities 126,756 260,478
-------------- ------------------
Cash flows from investing activities:
Cash invested in fixed assets, timber and timberlands (70,643) (64,596)
Disposition of fixed assets, timber and timberlands 2,765 118,893
Cash from sale of (invested in ) marketable securities 68,840 (246,021)
-------------- ------------------
Net cash provided by (used for) investing activities 962 (191,724)
-------------- ------------------
Cash flows from financing activities:
Cash dividends, including minority interests (48,630) (59,668)
Purchase of common stock (Note 8) (57,244) (94,293)
Purchases/payments of long-term debt (1,342) (57,695)
Stock options exercised 23,433 11,185
Redemption of LIBOR preferred stock ( Note 6) (25,000) -
Other 1,355 1,280
-------------- ------------------
Net cash used for financing activities (107,428) (199,191)
-------------- ------------------
Net increase (decrease) in cash and cash equivalents 20,290 (130,437)
Cash and cash equivalents at beginning of year 85,259 264,571
-------------- ------------------
Cash and cash equivalents at end of period $105,549 $ 134,134
============== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest $ (46,025) $ (51,962)
Income taxes $ (27,333) $ (159,959)
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 sheets, and statements of operations, capital accounts and cash
flows 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 September 30, 1997, are not necessarily
indicative of the results to be expected for the full year.
2. The composition of inventories at September 30, 1997, and December 31,
1996, was as follows (in thousands):
September 30, December 31,
1997 1996
------------------- ----------------
(Unaudited)
At lower of cost or market:
Raw materials $ 13,499 $ 17,990
Work in process 2,723
3,077
Finished goods
33,079 47,577
Mill stores and other supplies
64,762 66,925
------------- ---------------------
114,063 135,569
------------- ---------------------
Excess of current cost over
LIFO inventory value
(11,824) (11,824)
============= =====================
$ 102,239 $ 123,745
============= =====================
3. During 1997, the Company paid $25.4 million pursuant to a long-term
incentive compensation plan accrued for the three year period ending
December 31, 1996.
4. In December 1996, the Board of Directors of Calhoun Newsprint Company (CNC)
declared a $40.0 million dividend. As a result, $19.6 million was paid to
the minority shareholder in January 1997. In the third quarter of 1997,
another dividend was paid in the amount of $1.3 million. In the first
quarter of 1996, a $29.4 million dividend was paid to the minority
shareholder.
5. 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.
6. On May 12, 1997, the company redeemed for cash all of the remaining
outstanding shares of LIBOR Preferred Stock, Series A, at its par value of
$50 per share.
7. On January 9, 1997, the Company converted all of the outstanding depositary
shares of its 7% PRIDES Series B Convertible Preferred Stock using Bowater
common stock at a conversion ratio of .82 of a common share for each
depositary share, resulting in the issuance of 4,012,765 common shares. The
Company reflected this transaction in the Consolidated Balance Sheet at
December 31, 1996.
7
BOWATER INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. During the first quarter of 1997, the Company purchased 1.4 million shares
of common stock at a cost of $57.2 million, completing the stock repurchase
program authorized in February 1996. Since the beginning of the program, 4
million shares were purchased at a total cost of $156 million. In the first
nine months of 1996, 2.5 million shares were purchased at a cost of $94.3
million.
9. The effective tax rate for the second quarter of 1997 and 1996, and the
first nine months of 1997 and 1996, was 37.0 percent.
10. The calculation of earnings per share for the three and nine months ended
September 30, 1997, includes a deduction of $.5 million and $2.3 million,
respectively, for any 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 three and nine months ended September 30, 1996, the
calculation of earnings per share included a deduction of $1.2 million and
$3.6 million, respectively, for the same items.
8
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Summary
The Company reported 1997 third quarter earnings of $17 million, or $.40 per
fully diluted share. This compares to net income of $27 million, or $.60 per
fully diluted share in the third quarter of 1996 and net income of $7 million,
or $.16 per fully diluted share in the second quarter of 1997. Included in net
income for the third quarter of 1996 was an extraordinary charge of $2 million,
or $.04 per fully diluted share, resulting from the open market purchase of
outstanding debt. Third quarter 1997 net sales were $379 million, compared to
$423 million for the third quarter of 1996 and $356 million for the second
quarter of this year. Selling prices for most of the Company's products, while
rising, are still below the levels of a year ago. This accounts for the majority
of the lower sales and profitability compared to 1996 results.
Product Line Information:
(Unaudited, $ in thousands)
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---------------- ----------------- ----------------- ----------------
Net sales:
Newsprint
$ 184,501 $ 201,413 $ 529,765 $ 662,285
Coated groundwood
83,725 84,053 240,233 275,899
Directory paper
43,678 45,497 131,823 140,456
Market pulp
47,260 46,098 138,568 114,871
Uncoated groundwood specialties
10,511 9,639 33,678 28,505
Lumber and other wood products
36,643 29,359 97,288 78,791
Communication papers (1)
- 40,393 - 135,656
Distribution costs
(27,687) (33,264) (87,875) (90,441)
================ ================= ================= ================
$ 378,631 $ 423,188 $ 1,083,480 $ 1,346,022
================ ================= ================= ================
Operating income
$ 40,452 $ 59,887 $ 73,765 $ 292,947
================ ================= ================= ================
(1) Communication papers were produced by Star Forms Incorporated which was sold
in November 1996.
9
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Three Months Ended September 30, 1997, versus September 30, 1996
For the third quarter of 1997, the Company's operating income of $40 million
decreased $19 million compared to the third quarter of 1996. Lower average
transaction prices for all of the Company's products except market pulp and
lumber caused operating income to decline.
Product Line Information
Although all Company operations are grouped in a single segment, market and
operating trends are discussed by major product. In general, the Company's
products are globally traded commodities. Pricing and the level of shipments of
these products will continue to be influenced by the balance between supply and
demand as affected by global economic conditions, changes in consumption and
capacity, the level of customer and producer inventories as well as fluctuations
in exchange rates.
Newsprint - The Company's newsprint average transaction price in the third
quarter of 1997 was 8 percent lower than the same period last year and 3 percent
higher than the prior quarter. The decrease in prices versus prior year was a
result of lower consumption and higher consumer and producer inventories during
1996. By the end of 1996, however, market conditions began to improve as
consumption increased and inventories held by U. S. daily newspapers and North
American producers declined compared to levels earlier in the year. In the first
quarter of 1997, the Company announced a $75 per metric ton domestic price
increase. This price increase is fully implemented; however, the average amount
realized was less than announced due to customer mix and the effect of lower
export price increases. Favorable market conditions continued in the third
quarter. U. S. dailies' newsprint consumption and total U. S. newsprint
consumption increased in the third quarter of 1997 compared to the third quarter
of 1996. Inventory levels at the end of the third quarter also improved. U. S.
dailies' newsprint inventory decreased compared to the third quarter of 1996,
while North American mill inventory levels decreased compared to the same
quarter and the second quarter of 1997. On October 1, 1997, the Company began
implementing a second domestic price increase of $35 per metric ton. As with the
previous price increase, this price increase will be phased in over several
months.
- ----------------- ---------------- ----------------
3rd Qtr. 1997
vs. 1996
Newsprint Increase/
Statistics Source (Decrease)
- ----------------- ---------------- ----------------
Canadian Pulp
and Paper
Total U. S. Association 2%
Consumption (CPPA)
- ----------------- ---------------- ----------------
U. S. Dailies'
Consumption CPPA 4%
- ----------------- ---------------- ----------------
Newspaper
U. S. Dailies' Association of
Inventory America (3)%
- ----------------- ---------------- ----------------
North American
Mill Inventories
CPPA (32)%
- ----------------- ---------------- ----------------
Coated Groundwood - The Company's coated groundwood average transaction price
declined 4 percent comparing the third quarter of 1997 to the same period last
year, but increased 9 percent versus the prior quarter. Tonnage shipments
increased slightly comparing the third quarter of 1997 to the third quarter of
1996. Throughout 1996, coated groundwood selling prices declined while producer
inventory levels surpassed historical levels, as customers reduced their
inventories from levels built up during 1995. Market conditions improved in the
first and second quarters of 1997 allowing the Company to implement two price
increases: up to $60 per ton for certain market segments effective April 1, and
between $50 and $80 per ton, depending upon market segment, for all domestic and
export customers effective July 1. Improved market conditions continued in the
third quarter of 1997. U. S. coated groundwood shipments and magazine
advertising pages increased in the third quarter compared to the same period
last year. U. S. coated groundwood mill inventory levels continued to improve in
the third quarter, decreasing significantly since the third quarter of 1996. On
October 1, 1997, the Company announced a third price increase of up to $40 per
ton for certain market segments, which it is currently implementing.
10
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- ----------------- ---------------- ----------------
3rd Qtr. 1997
vs. 1996
Coated Paper Increase/
Statistics Source (Decrease)
- ----------------- ---------------- ----------------
American
Forest and
U. S. Coated Paper
Groundwood Association 14%
Shipments (AF&PA)
- ----------------- ---------------- ----------------
Media Industry
Magazine Ad Newsletter 5%
Pages
- ----------------- ---------------- ----------------
U. S. Coated
Groundwood Mill
Inventories
AF&PA (57)%
- ----------------- ---------------- ----------------
Directory Paper - The Company's average transaction price for directory paper
decreased 12 percent in the third quarter of 1997 compared to the third quarter
of 1996, and decreased 5 percent compared to the second quarter of 1997. During
1996, demand in the directory paper market declined and prices decreased, with
conditions and pricing similar to those in the newsprint market. Lower prices
continued through the third quarter of 1997, since a large portion of the
Company's directory sales was based on contracts, the pricing of which was
determined during 1996. In addition, the Company sold lower priced, higher basis
weight directory paper in the third quarter of 1997 compared to the prior
quarter. The Company's shipments during the third quarter of 1997 increased 10
percent and 19 percent compared to the third quarter of 1996 and the second
quarter of 1997, respectively.
Market Pulp - The Company's market pulp average transaction price for the third
quarter of 1997 increased 11 percent compared to the third quarter of last year
and the second quarter of this year. NORSCAN (U.S., Canada, Finland, Norway and
Sweden producers) shipments of softwood pulp increased in the third quarter of
1997 compared to the year ago period. NORSCAN inventory levels of softwood pulp
at the end of the third quarter continued to decrease from levels earlier in the
year and compared to the end of September 1996. Favorable market conditions
enabled the Company to implement price increases during the first nine months of
1997, causing its average transaction price to rise approximately $35 per metric
ton since the end of 1996.
- -------------------- ----------- ------------------
3rd Qtr. 1997
Softwood vs. 1996
Market Pulp Increase/
Statistics Source (Decrease)
- -------------------- ----------- ------------------
NORSCAN Shipments
AF&PA 4%
- -------------------- ----------- ------------------
NORSCAN Inventories
AF&PA (7)%
- -------------------- ----------- ------------------
Lumber - The average transaction price for the Company's lumber products
increased 3 percent in the third quarter of 1997 compared to the year ago
period. The Company's shipment levels also increased slightly comparing the same
periods. Lumber prices increased significantly during 1996 due primarily to
record high U. S. housing starts of 1.5 million. The government estimate of U.
S. housing starts for the full year of 1997 stands at 1.4 million. In the first
half of 1997, prices continued to rise, but at a slower rate. In the third
quarter of 1997, prices in the U. S. lumber market began to decrease, as a slump
in the Japanese housing market forced producers to divert lumber to the U. S.
market, causing an oversupply.
Cost of Sales and Other Income and Expenses
Cost of sales decreased 7 percent in the third quarter of 1997 compared to the
third quarter of last year. This decrease was due to the absence of product
costs relating to the Company's subsidiary, Star Forms Incorporated (Star
Forms), which was sold in November of 1996, partially offset by higher costs
associated with planned maintenance. Comparing the same periods, selling and
administrative expenses decreased $5 million or 21 percent. This reduction was
also due to the sale of Star Forms. Interest expense for the third quarter of
1997 compared to the same period last year decreased due to lower average debt
balances, while interest income, comparing the same periods, increased due to
higher average investment balances. In the third quarter of 1996, the Company
sold approximately 1,700 acres of timberlands resulting in a pre-tax gain of $1
million.
11
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Nine Months Ended September 30, 1997, versus September 30, 1996
For the first nine months of 1997, the Company's operating income was $74
million, a decrease of $219 million compared to the first nine months of 1996.
This significant decrease is attributed to substantially lower average
transaction prices for all of the Company's products except market pulp and
lumber, partially offset by higher tonnage shipments.
Product Line Information
Newsprint - For the first nine months of 1997, the Company's newsprint average
transaction price decreased 22 percent compared to the same period last year.
During the second half of 1996, prices decreased due to lower demand brought on
by conservation measures taken by users in reaction to the record high prices
experienced in 1995. During the first nine months of 1997, however, total U. S.
newsprint consumption and U. S. dailies' newsprint consumption increased
compared to the same period in 1996. In addition, both U. S. dailies' newsprint
inventory and North American newsprint mill inventory levels at the end of
September 1997 were lower than September 1996 levels. These conditions enabled
the Company to announce two price increases in 1997, including an October price
increase of $35 per metric ton.
- ----------------- ---------------- ----------------
9 Mos. 1997
vs. 1996
Newsprint Increase/
Statistics Source (Decrease)
- ----------------- ---------------- ----------------
Total U. S.
Consumption CPPA 5%
- ----------------- ---------------- ----------------
U. S. Dailies'
Consumption CPPA 4%
- ----------------- ---------------- ----------------
Newspaper
U. S. Dailies' Association of
Inventory America (3)%
- ----------------- ---------------- ----------------
North American
Mill Inventories
CPPA (32)%
- ----------------- ---------------- ----------------
Coated Groundwood - The Company's coated groundwood average transaction price
decreased 23 percent during the first nine months of 1997 compared to the year
ago period, offset by higher shipments of 13 percent. In 1996, coated groundwood
prices declined as customers reduced their excessive inventory levels from 1995.
In 1997, demand increased. U. S. coated groundwood shipments increased during
the first nine months of 1997 compared to the prior year period and U. S. coated
groundwood mill inventory levels declined significantly. Since the beginning of
1997, the Company implemented two price increases causing its average
transaction price to increase approximately $100 per ton. A third price increase
of $40 per ton is currently being implemented for certain market segments.
- ----------------- ---------------- ----------------
9 Mos. 1997
vs. 1996
Coated Paper Increase/
Statistics Source (Decrease)
- ----------------- ---------------- ----------------
U. S. Coated
Groundwood
Shipments AF&PA 24%
- ----------------- ---------------- ----------------
Media Industry
Magazine Ad Newsletter 5%
Pages
- ----------------- ---------------- ----------------
U. S. Coated
Groundwood Mill
Inventories
AF&PA (57)%
- ----------------- ---------------- ----------------
Directory Paper - The Company's average transaction price for directory paper
decreased 12 percent in the first nine months of 1997 compared to the first nine
months of 1996, while shipments increased 7 percent. A large portion of the
Company's current directory paper sales was based on contracts completed in the
latter part of 1996, when prices had decreased from the high levels of 1995.
Market Pulp - The average transaction price for the Company's market pulp
increased 9 percent in the first nine months of 1997 compared to the first nine
months of 1996, while shipments increased 11 percent. NORSCAN softwood pulp
shipments also increased during this period compared to the same period last
year, while inventory levels decreased. As of September 30, 1997, the Company's
average transaction price increased approximately $30 per metric ton since the
end of 1996.
12
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- -------------------- ----------- ------------------
9 Mos. 1997 vs.
Softwood 1996
Market Pulp Increase/
Statistics Source (Decrease)
- -------------------- ----------- ------------------
- -------------------- ----------- ------------------
NORSCAN Shipments
AF&PA 8%
- -------------------- ----------- ------------------
- -------------------- ----------- ------------------
NORSCAN Inventories
AF&PA (7)%
- -------------------- ----------- ------------------
Lumber - The Company's average transaction price for its lumber products
increased 16 percent comparing the first nine months of 1997 to the first nine
months of last year. The lumber market continued its healthy pace from 1996 into
the first half of 1997, due to the high level of housing starts. In the third
quarter of 1997, however, prices began to decline as the supply of lumber
increased.
Cost of Sales and Other Income and Expenses
Cost of sales for the first nine months of 1997 was $24 million lower when
compared to the same period last year due to the absence of product costs
associated with Star Forms, offset by planned maintenance costs and higher
tonnage shipments. Selling and administrative expenses decreased $14 million
comparing the same periods. The majority of this decrease was also due to the
sale of Star Forms. Interest expense decreased comparing the same periods due to
lower average debt balances in 1997 versus 1996, while interest income increased
due to higher average investment balances. In the first nine months of 1996, the
Company sold 108,000 acres of timberlands resulting in a $78 million pre-tax
gain.
Liquidity and Capital Resources
The Company's cash, cash equivalents, and marketable securities balance at
September 30, 1997, totaled $382 million compared to $431 million at December
31, 1996, and $380 million at September 30, 1996. Aside from cash flow from
operations and capital expenditures, significant cash outflows since December
31, 1996, included the repurchase of 1.4 million common shares for $57 million,
three dividend payments to the minority shareholder of CNC totaling $21 million,
and the redemption of $25 million of the Company's remaining outstanding LIBOR
preferred stock. During the first nine months of 1997, the Company's operations
generated $127 million of cash compared to $260 million of cash during the first
nine months of 1996, a decrease of $133 million. This decrease was primarily the
result of a decrease in operating income of $219 million, offset in part by a
decrease in tax payments of $133 million. Tax payments were higher in 1996 due
to the higher level of income and the payment of the Company's 1995 tax
liability in the first quarter of 1996. In addition, other working capital needs
in 1997 were higher by $34 million, and payments for employee benefit
liabilities were higher by $12 million.
Cash flow from investing activities in the first nine months of 1997 of $1
million was $193 million higher than the first nine months of last year. Capital
expenditures for the first nine months of 1997 were $6 million higher compared
to the first nine months of 1996. The Company expects total capital expenditures
for 1997 to approximate $110 million, roughly the same as 1996 capital
expenditures of $107 million. In the first nine months of 1997, $69 million of
net cash flow was from the maturity of marketable securities versus a net
investment of $246 million in the first nine months of 1996. Also in the first
nine months of 1996, the Company sold timberlands resulting in proceeds of $119
million.
On September 17, 1997, the Company announced its plan to invest
approximately $180 million over the next two years to modernize its Calhoun,
Tennessee, newsprint facility. The plan calls for expansion of the Company's
thermomechanical pulp facility and conversion of an idle recovery boiler. Aside
from reducing operating costs, these changes will have a positive environmental
impact by utilizing old tires as fuel, which reduces landfill usage. The
Company's estimate of total capital expenditures for 1997 of $110 million
includes approximately $5 million relating to these two projects.
Cash flow used for financing activities was $92 million lower in the first
nine months of 1997 compared to the year ago period. The majority of this
decrease was due to debt repurchases in 1996 of approximately $55 million. Cash
dividends for the first nine months of 1997 and 1996 included payments to the
minority shareholder of CNC totaling $21 million and $29 million, respectively.
Also included in the first nine months of 1996 were cash dividends of $6 million
on the Company's 7%
13
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
PRIDES Series B Convertible Preferred Stock (PRIDES). On January 9, 1997, the
Company converted all of the outstanding depositary shares, each representing
one-fourth of a share of PRIDES, using Bowater common stock at a conversion
ratio of .82 of a common share for each depositary share. This resulted in the
issuance of 4,012,765 common shares.
On May 12, 1997, the Company redeemed for $25 million the remaining 500,000
outstanding shares of LIBOR Preferred Stock, Series A, at its par value of $50
per share, plus accrued and unpaid dividends. The LIBOR stock was subject to
mandatory redemption in 1998.
On February 10, 1997, the Company completed the repurchase of approximately
10 percent of its outstanding common stock as part of a previously announced
stock repurchase program. In total, the Company purchased 4 million shares at a
cost of $156 million. During the first quarter of 1997, the Company repurchased
1.4 million common shares at a cost of $57 million. In the first nine months of
1996, 2.5 million shares were purchased at a cost of $94 million. On November 6,
1997, the Company announced the adoption of a new stock repurchase program,
authorizing it to repurchase up to 10 percent of the company's outstanding
common stock in the open market subject to normal trading restrictions. The
Company continues to consider both internal and external investment
opportunities as well as additional debt reductions.
Organization
On July 23, 1997, the Company announced the reorganization of its U. S. and
Canadian forest and wood products operations into a new division called the
Forest Products Division. The consolidation of these operations will enable the
Company to explore new opportunities to improve returns on its forest products
assets. These opportunities include: optimizing the use of existing properties
by using wood to its highest value end-use; optimizing silviculture techniques
to match sustainable wood usage goals; selling certain non-strategic timberland
tracts, and studying organizational structures which could provide an enhanced
market valuation.
The Company also announced the consolidation of its newsprint and directory
paper businesses into one division called the Newsprint and Directory Division.
The combination of these businesses will enhance the Company's opportunities to
better serve its groundwood based customers while developing strategies for
improving financial returns.
Year 2000 Compliance
Since 1990, the Company has reengineered its major internally developed software
programs. During this effort, the Company examined potential problems arising
from the inability of certain application software programs to recognize the
year 2000. A formal review of all internally developed software is in progress
and will be completed by 1998. No major problems have been encountered to date.
In addition, all major third party licensed application software programs have
been reviewed and are either compliant or have released a compliant version to
which the Company will migrate in 1998. The costs associated with this project
are currently expected to be less than $1 million.
Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." The implementation
of this standard in the fourth quarter of 1997 will not impact the Company's
results of operations, but will result in a different calculation of basic
earnings per share versus primary earnings per share. Fully diluted earnings per
share will remain the same.
14
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 Employment Agreement, dated as of August 1, 1997, by and
between the Company and Arthur D. Fuller.
10.2 Change in Control Agreement, dated as of August 1, 1997, by
and between the Company and Arthur D. Fuller.
27.1 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K:
None
15
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 /s/ David G. Maffucci
David G. Maffucci
Senior Vice President and
Chief Financial Officer
By /s/ Michael F. Nocito
Michael F. Nocito
Vice President and Controller
Dated: November 13, 1997
16
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Employment Agreement, dated as of August 1, 1997, by and
between the Company and Arthur D. Fuller.
10.2 Change in Control Agreement, dated as of August 1, 1997, by
and between the Company and Arthur D. Fuller.
27.1 Financial Data Schedule (electronic filing only).