1
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, 2001
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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
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(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
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(Address of principal executive offices) (Zip Code)
(864) 271-7733
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(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 CORPORATE ISSUERS
Indicate the number of shares outstanding (and held by non-affiliates) of
each of the issuer's classes of common stock, as of May 9, 2001.
Class Outstanding at May 9, 2001
----- --------------------------
Common Stock, $1.00 Par Value 50,380,514 Shares
2
BOWATER INCORPORATED
I N D E X
Page
Number
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PART I FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheet at March 31, 2001,
and December 31, 2000 3
Consolidated Statement of Operations for the Three
Months Ended March 31, 2001, and
March 31, 2000 4
Consolidated Statement of Capital Accounts
for the Three Months Ended March 31, 2001 5
Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 2001, and
March 31, 2000 6
Notes to Consolidated Financial Statements 7-11
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
3
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED, IN MILLIONS OF US DOLLARS)
March 31, December 31,
2001 2000
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 15.5 $ 20.0
Marketable securities 0.4 0.4
Accounts receivable, net 314.7 380.8
Inventories 177.7 161.9
Other current assets 37.5 52.5
----------------- -----------------
Total current assets 545.8 615.6
----------------- -----------------
Timber and timberlands 261.5 265.2
Fixed assets, net 2,970.8 2,981.1
Notes receivable 147.0 147.1
Goodwill 860.8 866.8
Other assets 128.1 128.3
----------------- -----------------
$ 4,914.0 $ 5,004.1
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 142.7 $ 141.4
Short-term bank debt 452.4 485.0
Accounts payable and accrued liabilities 253.7 314.7
Dividends payable 10.3 10.3
----------------- -----------------
Total current liabilities 859.1 951.4
----------------- -----------------
Long-term debt, net of current installments 1,296.4 1,304.7
Other long-term liabilities 325.5 319.2
Deferred income taxes 504.3 508.1
Minority interests in subsidiaries 121.6 123.6
Commitments and contingencies - -
Shareholders' equity:
Common stock 62.0 61.9
Exchangeable shares 59.6 63.5
Additional paid-in capital 1,371.7 1,367.1
Retained earnings 837.1 809.6
Accumulated other comprehensive income (loss) (36.3) (18.0)
Treasury stock, at cost (487.0) (487.0)
----------------- -----------------
Total shareholders' equity 1,807.1 1,797.1
----------------- -----------------
$ 4,914.0 $ 5,004.1
================= =================
See accompanying notes to consolidated financial statements
3
4
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, IN MILLIONS OF US DOLLARS EXCEPT PER SHARE AMOUNTS)
Three Months Ended
--------------------------------------
March 31, March 31,
2001 2000
----------------- ------------------
Sales $ 604.9 $ 562.9
Cost of sales 376.0 361.4
Depreciation and amortization 76.8 71.8
Distribution costs 39.9 42.4
Selling and administrative expense 16.8 32.8
Net gain (loss) on sale of assets (5.8) 3.2
----------------- ------------------
Operating income 89.6 57.7
Other expense (income):
Interest income (3.6) (3.7)
Interest expense, net of capitalized interest 35.2 31.8
Other, net (4.6) 1.0
----------------- ------------------
27.0 29.1
----------------- ------------------
Income before income taxes and minority interests 62.6 28.6
Provision for income tax expense 20.4 12.1
Minority interests in net income (loss) of subsidiaries 4.5 (0.7)
----------------- ------------------
Net income 37.7 17.2
Other comprehensive income (loss):
Foreign currency translation adjustments (2.3) -
Unrealized gain (loss) on hedged transactions, net of taxes (15.8) -
Minimum pension liability adjustments, net of taxes (0.2) -
----------------- ------------------
Comprehensive income $ 19.4 $ 17.2
================= ==================
Basic earnings per common share*: $ 0.73 $ 0.32
================= ==================
Diluted earnings per common share*: $ 0.72 $ 0.32
================= ==================
* Basic and diluted earnings per share are based on net income and do not
include any impact from "Other comprehensive income (loss)." See Footnote 8.
See accompanying notes to consolidated financial statements
4
5
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED, IN MILLIONS OF US DOLLARS EXCEPT PER SHARE AMOUNTS)
Accumulated
Additional Other
Common Exchangeable Paid-in Retained Comprehensive Treasury
Stock Shares Capital Earnings Income (Loss) Stock
------- ------------ ---------- -------- ------------- --------
Balance at December 31, 2000 $ 61.9 $ 63.5 $ 1,367.1 $ 809.6 $ (18.0) $(487.0)
Net income - - - 37.7 - -
Retraction of exchangeable shares 0.1 (3.9) 3.8 - - -
Dividends ($0.20 per share) - - - (10.2) - -
Stock options exercised - - 0.2 - - -
Tax benefit on exercise of stock options - - 0.1 - - -
Stock option compensation - - 0.5 - - -
Pension plan additional minimum liability - - - - (0.2) -
Unrealized gain (loss) on hedged
transactions - - - - (15.8) -
Foreign currency translation adjustment - - - - (2.3) -
------- ------------ ---------- -------- ------------- --------
Balance at March 31, 2001 $ 62.0 $ 59.6 $ 1,371.7 $ 837.1 $ (36.3) $(487.0)
======= ============ ========== ======== ============= ========
See accompanying notes to consolidated financial statements
5
6
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN MILLIONS OF US DOLLARS)
Three Months Ended
-----------------------------------
March 31, March 31,
2001 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37.7 $ 17.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 76.8 71.8
Deferred income taxes (2.1) 7.6
Minority interests in net income (loss) of subsidiaries 4.5 (0.7)
Net loss (gain) on sale of assets 5.8 (3.2)
Changes in working capital:
Accounts receivable, net 66.1 (10.6)
Inventories (15.8) (9.6)
Accounts payable and accrued liabilities (61.5) (18.1)
Income taxes payable 3.6 5.7
Other, net (3.7) 6.3
-------------- --------------
Net cash from operating activities 111.4 66.4
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash invested in fixed assets, timber and timberlands (68.3) (58.3)
Disposition of fixed assets, timber and timberlands - 5.2
Cash paid on maturity of economic hedging contracts - (5.6)
Cash invested in marketable securities - (49.4)
Cash from maturity of marketable securities - 51.1
-------------- --------------
Net cash used for investing activities (68.3) (57.0)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends, including minority interests (15.0) (16.9)
Purchase of common stock - (20.7)
Short-term financing 163.1 108.4
Short-term financing repayments (195.7) (48.1)
Long-term financing - 0.4
Purchases/payments of long-term debt (0.2) (30.7)
Stock options exercised 0.2 0.8
Other - 0.5
-------------- --------------
Net cash used for financing activities (47.6) (6.3)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (4.5) 3.1
Cash and cash equivalents at beginning of year 20.0 24.7
-------------- --------------
Cash and cash equivalents at end of period $ 15.5 $ 27.8
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of capitalized interest of $3.0 and $0.5 $ 35.2 $ 21.1
Income taxes $ 6.6 $ -
See accompanying notes to consolidated financial statements
6
7
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements include the accounts of
Bowater Incorporated and Subsidiaries as of March 31, 2001. The
consolidated balance sheets, statements of operations, capital accounts and
cash flows are unaudited. However, in the opinion of our 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, 2001 are not necessarily
indicative of the results to be expected for the full year.
2. In April 2001, Bowater reached a final settlement of certain matters
regarding the sale of Great Northern Paper Inc. (GNP) to Inexcon Maine,
Inc. (Inexcon). As a result, we recognized a charge of $3.6 million, after
tax, or $.07 per diluted share.
During the first quarter of 2000, we sold fixed assets resulting in a
pre-tax gain of $3.2 million ($2.0 million, after tax), or $.04 per diluted
share.
3. Restructuring and environmental liabilities were recorded in connection
with the acquisition of Avenor Inc., the related closure of the Gold River
pulp mill and the sale of the Dryden white paper mill. During the first
quarter of 2001, we made payments against the reserves of $0.3 million and
reduced the reserves by $0.5 million due to foreign exchange.
As of March 31, 2001, the remaining accrual for the above items is $17.0
million. Of this remaining accrual, $3.6 million is included in "Accounts
payable and accrued liabilities" and $13.4 million is included in "Other
long-term liabilities" in the Consolidated Balance Sheet. As of March 31,
2001, the cash requirements related to these liabilities are expected to be
$3.6 million during the balance of 2001 and $13.4 million related to
environmental matters in 2002 and beyond.
4. During the first quarter of 2001, the Board of Directors of Calhoun
Newsprint Company (CNC) declared a $9.6 million dividend. As a result, $4.7
million was paid to the minority shareholder. In the first quarter of 2000,
the Board of Directors of CNC declared a dividend of $12.5 million,
resulting in a payment of $6.1 million to the minority shareholder.
5. Bowater is involved in various legal proceedings relating to contracts,
commercial disputes, taxes, environmental issues, employment and workers'
compensation claims, and other matters. We periodically review the status
of these proceedings with both inside and outside counsel. Our management
believes that the ultimate disposition of these matters will not have a
material adverse effect on our operations or our financial condition taken
as a whole.
6. No stock purchases were made in the first quarter of 2001 under the stock
repurchase program authorized in May 1999. Under this current program,
Bowater purchased a total of 3.2 million shares of its common stock at a
total cost of $155.5 million. During the first quarter of 2000, we
purchased 432,500 shares of our common stock for $20.7 million under a
stock repurchase program authorized in May 1999.
7. "Other, net" in the Consolidated Statement of Operations includes the
following:
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THREE MONTHS ENDED
---------------------------------
March 31, March 31,
(In millions) 2001 2000
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Foreign exchange (gain) loss $ (4.8) $ 0.5
Miscellaneous items 0.2 0.5
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$ (4.6) $ 1.0
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7
8
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. The calculation of basic and diluted earnings per share is as follows:
----------------------------------------------------------------------------
THREE MONTHS ENDED
----------------------------------
(In millions, except per share amounts) March 31, 2001 March 31, 2000
----------------------------------------------------------------------------
Basic Computation:
Net income $ 37.7 $ 17.2
----------------------------------
Basic income available to common
shareholders $ 37.7 $ 17.2
----------------------------------
Basic weighted average shares
outstanding 51.6 53.3
----------------------------------
Basic earnings per common share $ 0.73 $ 0.32
----------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
THREE MONTHS ENDED
----------------------------------
(In millions, except per share amounts) March 31, 2001 March 31, 2000
----------------------------------------------------------------------------
Diluted Computation:
Diluted income available to common
shareholders $ 37.7 $ 17.2
----------------------------------
Basic weighted average shares
outstanding 51.6 53.3
Effect of dilutive securities:
Options 0.5 0.5
----------------------------------
Diluted weighted average shares
outstanding 52.1 53.8
----------------------------------
Diluted earnings per common share $ 0.72 $ .32
----------------------------------
----------------------------------------------------------------------------
8
9
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Segment Information:
Bowater has three reportable segments: the Newsprint Division, the Coated
Paper Division and the Forest Products Division.
* The Newsprint Division is responsible for the manufacturing operations
of eight sites in the United States, Canada and South Korea. It is
also responsible for the worldwide marketing of newsprint and uncoated
groundwood specialties.
* The Coated Paper Division is responsible for one manufacturing site
that produces coated groundwood paper, newsprint, market pulp and
uncoated groundwood specialties and operates a coating facility, both
in the United States. This Division is responsible for the worldwide
marketing and sales of coated groundwood paper.
* The Forest Products Division operates three sawmills and manages 1.8
million acres of owned and leased timberlands in the United States and
Canada, as well as 14.1 million acres of Crown-owned land in Canada on
which we have cutting rights. This Division sells wood fiber to the
Newsprint and Coated Paper Divisions, as well as markets and sells
timber and lumber to third parties in North America.
The Pulp Division has marketing and sales responsibility for all of our
market pulp products; however, the financial results from these sales are
included in both the Newsprint Division and the Coated Paper Division,
depending upon which site manufactures the product. The Pulp Division's
administrative expenses are included in "Corporate & other eliminations."
Accordingly, no results are reported for this Division.
The following tables summarize information about segment profit and loss
and segment assets for the three months ended March 31, 2001 and 2000:
(Unaudited, in millions)
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Coated Forest Corporate/
THREE MONTHS ENDED Newsprint Paper Products Other Other
MARCH 31, 2001 Division Division Division Items Eliminations Total
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Sales-including internal sales $ 454.5 $ 138.7 $ 94.5 $ - $ - $ 687.7
Elimination of intersegment sales - - - - (82.8) (82.8)
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Sales - external customers 454.5 138.7 94.5 - (82.8) 604.9
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Segment income (loss) 76.2 21.1 0.8 (5.8) (2.7) 89.6
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Total assets at 3/31/01 $ 3,447.8 $ 594.6 $ 511.8 $ - $ 359.8 $ 4,914.0
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Coated Forest Corporate/
THREE MONTHS ENDED Newsprint Paper Products Other Other
MARCH 31, 2000 Division Division Division Items Eliminations Total
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Sales-including internal sales $ 402.8 $ 133.8 $ 119.6 $ - $ - $ 656.2
Elimination of intersegment sales - - - - (93.3) (93.3)
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Sales - external customers 402.8 133.8 119.6 - (93.3) 562.9
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Segment income (loss) 38.6 25.0 13.1 3.2 (22.2) 57.7
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Total assets at 3/31/00 $3,095.5 $ 498.4 $ 514.0 $ - $ 437.2 $4,545.1
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In April 2001, Bowater reached a final settlement in connection with the
sale of GNP to Inexcon. As a result, we recognized a $5.8 million pre-tax
charge in the first quarter of 2001. For the first quarter of 2000, the
other item relates to a pre-tax gain on sale of fixed assets of $3.2
million
The line entitled "Segment income (loss)" in the preceding tables is equal
to "Operating income" as presented in our Consolidated Statement of
Operations. In addition, none of the income/loss items following "Operating
income" in our Consolidated Statement of Operations are allocated to our
segments, since they are reviewed separately by Bowater's management. These
items include, but are not limited to, interest income and expense,
provision for income tax expense, and minority interests in net income
(loss) of subsidiaries.
9
10
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Effective January 1, 2001, Bowater adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments and hedging activities
and requires that we record all derivatives as either assets or liabilities
in the balance sheet at fair value. There were no transition amounts
recorded upon the adoption of SFAS 133.
Bowater utilizes certain derivative instruments to enhance its ability to
manage risk relating to cash flow exposure. Derivative instruments are
entered into for periods consistent with related underlying cash flow
exposures and do not constitute positions independent of those positions.
We do not enter into contracts for speculative purposes. On the earlier of
the date into which the derivative contract is entered or the date of
transition, we designate the derivative as a cash flow hedge.
A significant portion of our operating expenses is paid in Canadian dollars
at our Canadian mill sites. To limit our exposure to differences in the US
and Canadian dollar exchange rate fluctuations, we enter into and designate
Canadian dollar forward and range forward contracts to hedge certain of our
forecasted Canadian dollar cash outflows at the Canadian mill operations.
Changes in the derivative fair values that are designated, effective and
qualify as cash flow hedges will be deferred and recorded as a component of
"Accumulated other comprehensive income (loss)" until the underlying
transaction is recorded in earnings. When the hedged item affects earnings,
gains or losses are reclassified from "Accumulated other comprehensive
income (loss)" to the Consolidated Statement of Operations on the same line
as the underlying transaction (cost of sales). The ineffective portion of a
hedging derivative's change in fair value is recognized immediately in
earnings.
During the quarter, we recorded the change in value related to cash flow
hedges amounting to a loss of $25.3 million ($15.9 million, after tax) in
"Accumulated other comprehensive income (loss)." Of this amount, $0.2
million ($0.1 million, after tax) was reclassified from "Accumulated other
comprehensive income (loss)" to earnings, which was offset by net gains on
the items being hedged. During the quarter, with the exception of the time
value element of the hedging instruments, amounts related to the
ineffectiveness of our hedging instruments were insignificant. We expect to
reclassify a $15.0 million loss ($9.5 million, after-tax) from "Accumulated
other comprehensive income (loss)" to earnings during the next twelve
months as the hedged items affects earnings.
We formally document all relationships between hedging instruments and
hedged items, as well as our risk-management objectives and strategies for
undertaking various hedge transactions. We link all hedges that are
designated as cash flow hedges to forecasted transactions. The maximum time
period we have hedged transactions is two years. We also assess, both at
the inception of the hedge and on an on-going basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items. The change in the time
value of the contracts is reported in earnings as exchange gain (loss) and
amounted to a loss of $1.2 million ($0.9 million, after tax) in the first
quarter of 2001. When it is determined that a derivative is not highly
effective as a hedge, we discontinue hedge accounting prospectively.
At March 31, 2001, we had $684.0 million of Canadian dollar contracts.
Information regarding the carrying value, fair market value, and range of
exchange rates of the contracts is summarized in the table below:
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(In millions) Notional Liability Range Of
----------------------------------- Amount of --------------------------------- US$/Canadian$
Foreign Currency Exchange Derivatives Carrying Fair Exchange Rates
Agreements Amount Market Value
---------------------------------------------------------------------------------------------------------
Buy Currency:
---------------------------------------------------------------------------------------------------------
Canadian dollar
---------------------------------------------------------------------------------------------------------
Due in 2001 $ 286.0 $ 11.1 $ 11.1 .7207 - .6400
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Due in 2002 343.0 11.8 11.8 .6745 - .6346
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Due in 2003 55.0 1.2 1.2 .6560 - .6495
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Total $ 684.0 $ 24.1 $ 24.1 .7207 - .6346
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10
11
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We also enter into certain commodity forward contracts that are not
designated as accounting hedges. These derivative instruments are primarily
intended to reduce volatility of prices for old newsprint and magazines.
During the quarter, an after tax loss of $0.3 million was recognized in
earnings relating to these derivatives. At March 31, 2001, we had commodity
forward contracts with a notional amount of 30,000 tons of old newspapers
and old magazines, a carrying value of $0.3 million and a fair market value
of $0.3 million. These commodity forward contracts are due in 2001.
11. In the Consolidated Balance Sheet as of March 31, 2001, the line entitled
"Accumulated other comprehensive income (loss)" includes $(25.1) million
for cash flow hedges, $(17.2) million for pension plan additional minimum
liabilities, $(10.1) million for foreign currency translation, and $16.1
million for taxes.
12. Certain prior-year amounts in the financial statements and the notes have
been reclassified to conform to the 2001 presentation.
13. During the first quarter of 2001, Bowater recognized a charge of $2.1
million due to pine beetle damage to its woodlands. The continuing drought
is the U.S. Southeast is contributing to conditions that allow the southern
pine beetle to flourish and expand the range of its infestation. We have
incurred charges aggregating approximately $9 million over the past three
quarters as a result of beetle damage. If there is no change in conditions,
we may incur additional beetle damage.
14. In April 2001, Bowater announced the signing of a definitive agreement by
which Bowater will acquire all of the outstanding shares of Alliance Forest
Products Inc. (Alliance). Under the terms of the agreement, Bowater will
pay C$13.00 in cash plus 0.166 shares of Bowater stock for each Alliance
common share. Using the average trading price for twenty days prior to the
agreement, the implied per share value would be C$26 for each Alliance
common share. Alliance shareholders may choose to receive shares of Bowater
common stock or Canadian-listed shares of a Bowater Canadian subsidiary,
which are exchangeable, on a one-for-one basis, at any time into Bowater
shares. The exchangeable shares have voting and dividend rights
substantially equivalent to those of Bowater common shares. The aggregate
value of the transaction, including assumed debt, is approximately C$1.2
billion (U.S. $770 million). The boards of directors of both companies have
approved the transaction. The transaction is expected to close in June 2001
and is subject to approval by Alliance's shareholders and appropriate court
and regulatory authorities.
11
12
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ORGANIZATION
Bowater is organized into four divisions: the Newsprint Division, the Coated
Paper Division, the Pulp Division and the Forest Products Division. Each
division, with the exception of the Pulp Division, is responsible for the sales
and marketing of distinct product lines and the operation of certain
manufacturing sites. The Pulp Division is primarily a marketing and distribution
division. Therefore, Bowater's financial results are collected, analyzed and
reported through the Newsprint, Coated Paper and Forest Products Divisions.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
Statements in this report that are not reported financial results or other
historical information are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. They include, for example,
statements about our business outlook, assessment of market conditions,
strategies, future plans, future sales, prices for our major products, inventory
levels, capital spending and tax rates. These forward-looking statements are not
guarantees of future performance. They are based on management's expectations
that involve a number of business risks and uncertainties, any of which could
cause actual results to differ materially from those expressed in or implied by
the forward-looking statements. The risks and uncertainties relating to the
forward-looking statements in this report include those described under the
caption "Cautionary Statement Regarding Forward-Looking Information" in
Bowater's annual report on Form 10-K for the year ended December 31, 2000, and
from time to time, in Bowater's other filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001, VERSUS
MARCH 31, 2000
For the first quarter of 2001, Bowater had operating income of $89.6 million,
compared to $57.7 million for the first quarter of 2000. Operating income for
the first quarter of 2001 includes a net loss on sale of assets of $5.8 million
compared to a net gain on sale of assets of $3.2 million for the first quarter
of 2000. Excluding these asset sales, operating income increased $40.9 million.
Higher transaction prices for newsprint, coated groundwood paper and uncoated
groundwood specialties account for the majority of this increase. Higher
operating costs as a result of maintenance and market-related downtime and
higher fuel and chemicals costs were partially offset by a favorable Canadian
dollar exchange rate and credits recognized for our stock-based compensation
programs.
Net income for the first quarter of 2001 was $37.7 million, or $0.72 per
diluted share, compared with net income of $17.2 million, or $0.32 per diluted
share, in the first quarter of 2000. Sales for the first quarter of 2001 were
$604.9 million compared with $562.9 million for the first quarter of 2000 and
$658.0 million for the fourth quarter of 2000.
Presented below is a discussion of each significant product line followed by
a discussion of the results of each of the reported divisions.
PRODUCT LINE INFORMATION
SALES BY PRODUCT
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THREE MONTHS ENDED
MARCH 31,
--------------------------
(Unaudited, in millions) 2001 2000
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Sales:
Newsprint $ 379.5 $ 307.1
Market pulp 105.7 135.9
Coated groundwood 78.9 73.9
Uncoated groundwood specialties 29.1 19.7
Lumber, timber and other wood
products 94.5 119.6
Elimination of intersegment sales (82.8) (93.3)
--------------------------
Total sales $ 604.9 $ 562.9
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12
13
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Newsprint Bowater's average transaction price for newsprint was 20% higher in
the first quarter of 2001 compared to the first quarter of 2000 and 4% higher
compared to the fourth quarter of 2000. Pricing for newsprint in our offshore
markets increased at the beginning of the first quarter. In March 2001, we
implemented a $50 per metric ton domestic price increase. Subsequently, we
decided to change the price increase prospectively, to $25 per metric ton rather
than the $50 per metric ton, effective May 1, 2001. Our shipments increased 3%
compared to the first quarter of 2000, due primarily to the acquisition of
Newsprint South, Inc. (Grenada operations) in August 2000. This increase was
partially offset by approximately 36,000 metric tons of market-related downtime
in the first quarter of 2001. An additional 24,000 metric tons of market-related
downtime will be taken in the second quarter of this year. Our newsprint
inventory was slightly higher compared to the end of the first quarter of 2000.
As the United States economy weakened in the first quarter, total United States
demand and consumption of newsprint declined. Newspaper advertising lineage
declined for the first two months of 2001 compared to the same period a year
ago. North American mill inventories and United States customer inventories of
newsprint increased in March of 2001 compared to March of 2000.
Market Pulp Bowater's average transaction price for market pulp in the first
quarter of 2001 decreased 5% compared to the first quarter of 2000 and 13%
compared to the fourth quarter of 2000. Our shipments decreased 21% compared to
the same period last year, primarily as a result of approximately 45,000 metric
tons of downtime taken in the first quarter of 2001. An additional 30,000 metric
tons of market-related downtime is planned for the second quarter of 2001. Our
market pulp inventories increased slightly over the quarter to end the quarter
with 27 days of supply. World pulp markets continued to weaken during the first
quarter. Weak demand from North America and Asia coupled with inventory
de-stocking in the European market kept shipment levels low. NORSCAN producers
(United States, Canada, Finland, and Sweden) took market-related downtime
resulting in an 85% operating rate for the first quarter of 2001. Consequently,
NORSCAN inventories decreased in March by 97,000 metric tons, but increased over
the quarter by 144,000 metric tons to end the quarter at 1.9 million metric
tons, or 36 days of supply.
Coated Groundwood Bowater's coated groundwood average transaction price in the
first quarter of 2001 increased 3% compared to the first quarter of 2000. Our
coated groundwood shipments increased 4% compared to the same period last year.
Magazine advertising pages declined compared to the first quarter of 2000 and
catalog mailings (measured by Standard A mail weight) were unchanged compared to
the same period last year. Inventories at United States coated groundwood mills
as of March 31, 2001, were at normal levels, compared to the low levels at March
2000.
Lumber Bowater's average transaction price for lumber products declined 22% in
the first quarter of 2001 compared to the first quarter of 2000. Overall, prices
were stable from the fourth quarter of 2000 with some improvement seen during
the first quarter. By the end of the quarter, the price of structural framing
lumber improved 20% from its low in January. Our lumber shipments decreased 38%
in the first quarter of 2001 compared to the first quarter of 2000.
Market-related downtime taken at our Maniwaki Sawmill and the startup process at
the Oakhill Sawmill contributed to the reduction. Housing starts in the first
quarter were stronger than expected at just over 1.6 million units on a
seasonally adjusted annual basis; however, actual housing starts were 4% below
the same period of 2000.
Timber Bowater's average transaction price for timber decreased 9% in the first
quarter of 2001 compared to the first quarter 2000. Our timber shipments
decreased 17% in the first quarter of 2001 compared to the same period last
year. The decline in sales volume is mainly attributable to the weak timber
markets in the U.S. Southeast as a result of downtime taken by manufacturers.
DIVISIONAL PERFORMANCE
SALES BY DIVISION (1)
------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------
(In millions) 2001 2000
------------------------------------------------------------
Newsprint Division $ 454.5 $ 402.8
Coated Paper Division 138.7 133.8
Forest Products Division 94.5 119.6
Corporate & eliminations (82.8) (93.3)
-------------------------
Total sales $ 604.9 $ 562.9
------------------------------------------------------------
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BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING INCOME (LOSS) BY DIVISION (1)
------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
--------------------------
(In millions) 2001 2000
------------------------------------------------------------
Newsprint Division $ 76.2 $ 38.6
Coated Paper Division 21.1 25.0
Forest Products Division 0.8 13.1
Other items (5.8) 3.2
Corporate & eliminations (2.7) (22.2)
--------------------------
Total operating income $ 89.6 $ 57.7
------------------------------------------------------------
(1) Financial results for the production and sale of market pulp are included in
the Newsprint Division or the Coated Paper Division, depending upon which
site manufactures the product. The Pulp Division is responsible for the
marketing and distribution of the product, and its administrative expenses
are included in "Corporate & eliminations."
Newsprint Division: Sales for the Division increased 13%, from $402.8 million
for the first quarter of 2000 to $454.5 million for the first quarter of 2001.
This increase is primarily the result of higher average transaction prices for
newsprint and uncoated groundwood specialties and the inclusion of the Grenada
operations, purchased in August 2000. This increase was partially offset by
lower average transaction prices for market pulp. See the previous discussion of
product line results.
Operating income for the first quarter of 2001 increased $37.6 million
compared with operating income of $38.6 million for the first quarter of 2000.
Higher prices for newsprint and uncoated groundwood specialties account for the
majority of this increase. Operating costs for the division increased in the
first quarter of 2001 due to maintenance and market-related downtime and higher
prices for fuel and chemicals. This increase was partially offset by a favorable
Canadian dollar exchange rate.
Coated Paper Division: Sales for the Division increased $4.9 million, from
$133.8 million for the first quarter of 2000 to $138.7 million for the first
quarter of 2001, due to higher average transaction prices for newsprint, coated
groundwood paper and uncoated groundwood specialties. See the previous
discussion of product line results.
Operating income decreased $3.9 million from $25.0 million for the first
quarter of 2000 to $21.1 million for the first quarter of 2001. This decrease
was primarily the result of higher operating costs due to market-related
downtime and higher prices for chemicals and fuel. This decrease was partially
offset by higher transaction prices for newsprint, coated groundwood paper and
uncoated groundwood specialties.
Forest Products Division: Sales for the Division decreased 21%, from $119.6
million for the first quarter of 2000 to $94.5 million for the first quarter of
2001. This decrease is primarily the result of lower lumber and timber
transaction prices and shipments. See the previous discussion of product line
results.
Operating income for the Division decreased $12.3 million for the first
quarter of 2001 compared to the first quarter of 2000, due primarily to lower
lumber and timber transaction prices and shipments. Operating costs for the
Division were higher in the first quarter of 2001 compared to the same period
last year due to a charge for pine beetle damage and the startup of the recently
modernized Oakhill sawmill, offset partially by lower wood cost at the sawmills.
The continuing drought in the U.S. Southeast is contributing to conditions
that allow the southern pine beetle to flourish and expand the range of its
infestation. Bowater has incurred charges aggregating approximately $9 million
over the past three quarters as a result of beetle damage. If there is no change
in conditions, we may incur additional beetle damage.
Other Items: In April 2001, Bowater reached a final settlement in connection
with the sale of GNP to Inexcon. As a result, we recognized a charge of $3.6
million, after tax ($5.8 million pre-tax), in the first quarter of 2001. During
the first quarter of 2000, we sold fixed assets resulting in a pre-tax gain of
$3.2 million.
Corporate & Eliminations: The elimination of intersegment sales decreased $10.5
million, comparing the first quarter of 2001 to the first quarter of 2000.
Corporate expenses decreased $19.5 million primarily due to credits recognized
for stock-based compensation.
INTEREST AND OTHER INCOME AND EXPENSES
Interest expense for the first quarter 2001 increased $3.4 million over the same
period in 2000. This increase was attributable to higher borrowings on our
credit facility due to the acquisition of the Grenada operations in August 2000.
Comparing the same
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BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
periods, interest income levels remained relatively the same at $3.6 million in
2001 versus $3.7 million in the prior year.
Also in the first quarter of 2001, Bowater recorded a foreign exchange gain
of $4.8 million versus a foreign exchange loss of $0.5 million during the first
quarter of 2000. The majority of our exchange gain (loss) amounts is
attributable to the effects of functional currency exchange and the change in
currency exchange rates during the respective quarters.
Bowater's effective tax rate for the first quarter of 2001 was 32.6% versus
42.3% for the prior year's first quarter. The lower rate in 2001 was the result
of benefits related to foreign currency exchange.
LIQUIDITY AND CAPITAL RESOURCES
Bowater's cash and cash equivalents decreased to $15.5 million at March 31,
2001, from $20.0 million at December 31, 2000. We generated cash from operations
of $111.4 million, used $68.3 million of cash for investing activities, and used
$47.6 million of cash for financing activities. There were no other significant
cash transactions aside from cash flow from operations, capital expenditures,
dividends and changes in short-term borrowings during the first quarter of 2001.
CASH FROM OPERATING ACTIVITIES:
During the first three months of 2001, Bowater's operations generated $111.4
million of cash compared to $66.4 million of cash during the first three months
of 2000, an increase of $50.1 million. Higher operating income and lower working
capital needs accounted for the increase in 2001. Operating cash flows for the
first quarter of 2001 include the activity of the Grenada operations, which was
acquired in August 2000.
CASH FROM INVESTING ACTIVITIES:
Cash used for investing activities in the first three months of 2001 totaled
$68.3 million, compared with $57.0 million during the first three months of
2000. Capital expenditures were $10.0 million higher than the previous year due
primarily to the construction of a new fiber line at our Catawba location.
In the first three months of 2001, Bowater paid $5.1 million on the maturity
of Canadian dollar hedging contracts compared to $5.6 million in the first three
months of last year. We had no marketable securities transactions in the first
quarter of 2001 compared with net proceeds of $1.7 million in the first quarter
of 2000.
CASH FROM FINANCING ACTIVITIES:
Cash used for financing activities was $47.6 million for the first three months
of 2001 compared with $6.3 million used during the first three months of 2000.
During the three months of 2001, Bowater paid $32.6 million (net of proceeds of
$163.1 million) from its short-term credit facilities. In the first three months
of 2000, we had net proceeds from our short-term credit facilities of $60.3
million. Also in the first three months of 2001, we made payments on long-term
borrowings amounting to $0.2 million. During the first three months of the prior
year, we repurchased a portion of our 9.25% Debentures due 2002 for $20.8
million. Other payments on our long-term borrowings during the first quarter of
2000 were $9.9 million for a total of $30.7 million.
Cash dividends paid in the first three months of 2001 decreased $1.9 million
from the prior year period primarily due to lower dividend payments to the
minority shareholder of Calhoun Newsprint Company.
During 1999, the Board of Directors authorized a new stock repurchase
program allowing us to buy back up to 5.5 million shares of our outstanding
common stock. During the first three months of 2000, we purchased 0.4 million
shares at a cost of $20.7 million. Since the beginning of the program, we
purchased 3.2 million shares at a total cost of $155.5 million.
We continually consider various options for the use of our cash, including
internal capital investments, share repurchases, investments to grow our
businesses and additional debt reductions.
PENDING TRANSACTION
In April 2001, Bowater announced the signing of a definitive agreement by which
Bowater will acquire all of the outstanding shares of Alliance Forest Products
Inc. (Alliance). Under the terms of the agreement, Bowater will pay C$13.00 in
cash plus 0.166 shares of Bowater stock for each Alliance common share. Using
the average trading price for twenty days prior to the agreement, the implied
per share value would be C$26 for each Alliance common share. Alliance
shareholders may choose to receive shares of Bowater common stock or
Canadian-listed shares of a Bowater Canadian subsidiary, which are exchangeable,
on a one-for-one basis, at any time into Bowater shares. The
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BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
exchangeable shares have voting and dividend rights substantially equivalent to
those of Bowater common shares. The definitive agreement provides for a
termination fee of U.S. $20 million (C$31.5 million) payable by Alliance under
certain circumstances, and Alliance has agreed not to solicit or encourage any
competing offers.
The aggregate value of the transaction, including assumed debt, is
approximately C$1.2 billion (U.S. $770 million). The boards of directors of both
companies have approved the transaction.
Concurrent with the acquisition, Bowater expects to restructure its debt
portfolio by reducing its bank lines, arranging for bridge financing and
refinancing the bridge facility with long-term notes or bonds.
Alliance is an integrated company specializing in timber harvesting and
forest management, as well as in the production and sale of newsprint, uncoated
groundwood papers, pulp, lumber and related products. Alliance has operations in
Canada and the United States. If the acquisition is consummated, Bowater will
increase its annual newsprint, coated and specialty papers capacity to
approximately 4.6 million metric tons. Annual lumber capacity will also increase
to 1.0 billion board feet.
The transaction is expected to close in June 2001 and is subject to approval
by Alliance's shareholders and appropriate court and regulatory authorities.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended. This Standard requires a public company to
recognize all derivatives as either assets or liabilities in the Statement of
Financial Position and measure those instruments at fair value. Bowater adopted
this Standard on January 1, 2001.
In September 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Bowater is
required to adopt this Standard on April 1, 2001, and will account for
transactions relating to the Standard in accordance with its provisions. The
Standard is applicable only to transactions occurring after the adoption date;
however, certain disclosure requirements were effective as of December 31, 2000.
ITEM 3. MARKET RISK
Bowater's market risk disclosure included in its 2000 Form 10-K, Part II, Item
7A, is still applicable as of March 31, 2001. We have updated the disclosure
concerning our Canadian dollar forward and range forward contracts, which is
included in Footnote 10 in this Form 10-Q.
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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
----------- -----------
2.1 Arrangement Agreement dated as of April 1, 2001, by
and between the Company and Alliance Forest Products
Inc.
(b) Reports on Form 8-K:
On April 4, 2001, the Company filed a Current Report on Form
8-K dated April 2, 2001, reporting under Item 5 the issuance
of a press release announcing the signing of a definitive
agreement by which the Company will acquire all of the
outstanding shares of Alliance Forest Products Inc.
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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: May 14, 2001
18
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INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
2.1 Arrangement Agreement dated as of April 1, 2001, by
and between the Company and Alliance Forest Products
Inc.