UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 2002
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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
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(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 of each of the issuer's classes of
common stock, as of May 7, 2002.
Class Outstanding at May 7, 2002
------ --------------------------
Common Stock, $1.00 Par Value 55,173,206 Shares
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, 2002 Restated,
and December 31, 2001 Restated 3
Consolidated Statement of Operations for the Three
Months Ended March 31, 2002 Restated, and
March 31, 2001 4
Consolidated Statement of Capital Accounts
for the Three Months Ended March 31, 2002 Restated 5
Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 2002 Restated, and
March 31, 2001 6
Notes to Consolidated Financial Statements 7-13
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-19
3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II OTHER INFORMATION
Exhibits and Reports on Form 8-K 20
SIGNATURES 21
EXPLANATORY NOTE
Bowater announced on July 11, 2002, that as a result of a mathematical error in
a computer model used for calculating the gain on the sale of timberlands, the
company will reduce previously reported after tax gains on two timberland sales,
by $2.7 million, or $0.05 per diluted share, for the fourth quarter of 2001, and
by $2.1 million, or $0.04 per diluted share, for the first quarter of 2002,
representing approximately 5% of the total gain on each transaction. This
amendment includes in Item 1 of Part I such restated consolidated financial
statements for the three month period ended March 31, 2002 and the Consolidated
Balance Sheet at December 31, 2001, and other information in Item 2 of Part 1
relating to such consolidated financial statements. Information regarding the
effect of the restatement on Bowater's financial statements is included in
Note 2 of the notes to consolidated financial statements.
2
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED, IN MILLIONS OF US DOLLARS)
March 31, December 31,
2002 2001
(As Restated)(1) (As Restated)(1)
----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 14.7 $ 28.3
Marketable securities 1.8 2.1
Accounts receivable, net 383.8 367.0
Inventories 271.2 250.5
Other current assets 49.6 41.7
--------------- ---------------
Total current assets 721.1 689.6
--------------- ---------------
Timber and timberlands 198.6 227.7
Fixed assets, net 3,772.8 3,818.4
Goodwill 843.0 843.0
Other assets 180.4 182.3
--------------- ---------------
Total assets $ 5,715.9 $ 5,761.0
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 73.0 $ 73.0
Short-term bank debt 368.0 341.7
Accounts payable and accrued liabilities 363.4 437.9
Dividends payable 11.1 10.9
--------------- ---------------
Total current liabilities 815.5 863.5
--------------- ---------------
Long-term debt, net of current installments 1,823.5 1,828.0
Other long-term liabilities 359.9 362.3
Deferred income taxes 608.4 600.0
Minority interests in subsidiaries 80.1 85.2
Commitments and contingencies -- --
Shareholders' equity:
Common stock, $1 par value. Authorized 100,000,000 shares;
issued 66,774,407 and 66,323,992 shares at March 31, 2002
and December 31, 2001, respectively 66.8 66.3
Exchangeable shares, no par value. Unlimited shares
authorized; 1,698,523 and 2,008,588 outstanding at
March 31, 2002 and December 31, 2001, respectively 81.0 96.0
Additional paid-in capital 1,590.0 1,569.9
Retained earnings 836.6 837.8
Accumulated other comprehensive income (loss) (59.5) (61.6)
Treasury stock, at cost, 11,619,272 and 11,619,812 shares
at March 31, 2002 and December 31, 2001, respectively (486.4) (486.4)
--------------- ---------------
Total shareholders' equity 2,028.5 2,022.0
--------------- ---------------
Total liabilities and shareholders' equity $ 5,715.9 $ 5,761.0
=============== ===============
(1) See Note 2 of the accompanying notes to consolidated financial statements
regarding restatement of financial statements.
See accompanying notes to consolidated financial statements
3
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,
2002 2001
(As Restated)(1)
---------------- -----------------
Sales $ 624.2 $ 604.9
Cost of sales, excluding depreciation, amortization
and cost of timber harvested 470.6 376.0
Depreciation, amortization and cost of timber harvested 86.3 76.8
Distribution costs 56.5 39.9
Selling and administrative expense 35.5 16.8
Net gain (loss) on sale of assets 71.5 (5.8)
---------------- ----------------
Operating income 46.8 89.6
Other expense (income):
Interest income (1.0) (3.6)
Interest expense, net of capitalized interest 41.8 35.2
Other, net (0.1) (4.6)
---------------- ----------------
40.7 27.0
---------------- ----------------
Income before income taxes and minority interests 6.1 62.6
Provision for income tax expense (benefit) (2.5) 20.4
Minority interests in net income (loss) of subsidiaries (1.6) 4.5
---------------- ----------------
Net income 10.2 37.7
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 0.6 (2.3)
Unrealized gain (loss) on hedged transactions 1.5 (15.8)
Minimum pension liability adjustments - (0.2)
---------------- ----------------
Comprehensive income $ 12.3 $ 19.4
================ ================
Basic earnings per common share* $ 0.18 $ 0.73
================ ================
Diluted earnings per common share* $ 0.18 $ 0.72
================ ================
* Basic and diluted earnings per share are based on net income and do not
include any impact from "Other comprehensive income (loss)." See Note 9.
(1) See Note 2 of the accompanying notes to consolidated financial statements
regarding restatement of financial statements.
See accompanying notes to consolidated financial statements
4
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
For The Three Months Ended March 31, 2002
(Unaudited, in millions of US dollars except per-share amounts)
Accumulated
Additional Retained Other
Common Exchangeable Paid-in Earnings Comprehensive Treasury
Stock Shares Capital (As Restated)(1) Income (Loss) Stock
------ ------------ ---------- ---------------- ------------- --------
Balance at December 31, 2001 $ 66.3 $ 96.0 $ 1,569.9 $ 837.8 $ (61.6) $ (486.4)
Net income -- -- -- 10.2 -- --
Retraction of exchangeable shares
(310,065 common shares issued and
exchangeable shares retracted) 0.3 (15.0) 14.7 -- -- --
Dividends ($0.20 per share) -- -- -- (11.4) -- --
Foreign currency translation -- -- -- -- 0.6 --
Stock options exercised (140,350 shares) 0.2 -- 4.5 -- -- --
Tax benefit on exercise of stock options -- -- 0.9 -- -- --
Unrealized gain on hedged transactions -- -- -- -- 1.5 --
------ ------------ ---------- ---------------- ------------- --------
Balance at March 31, 2002 $ 66.8 $ 81.0 $ 1,590.0 $ 836.6 $ (59.5) $ (486.4)
====== ============ ========== ================ ============ ========
(1) See Note 2 of the accompanying notes to consolidated financial statements
regarding restatement of financial statements.
See accompanying notes to consolidated financial statements
5
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in millions of US Dollars)
Three Months Ended
--------------------------------------
March 31, March 31,
2002 2001
(As Restated)(1)
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10.2 $ 37.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and cost of
timber harvested 86.3 76.8
Deferred income taxes (3.3) (2.1)
Minority interests in net income (loss) of subsidiaries (1.6) 4.5
Net loss (gain) on sale of assets (71.5) 5.8
Payments on maturity of hedging contracts (4.0) (5.1)
Changes in working capital:
Accounts receivable, net (16.8) 66.1
Inventories (20.7) (15.8)
Accounts payable and accrued liabilities (36.6) (57.9)
Other, net (3.5) 1.4
---------------- ----------------
Net cash from (used for) operating activities (61.5) 111.4
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash invested in fixed assets, timber and timberlands (70.4) (68.3)
Disposition of assets, including timber and timberlands 16.1 -
Proceeds from the monetization of notes receivable 88.1 -
Cash invested in marketable securities (3.5) -
Cash from maturity of marketable securities 3.8 -
---------------- ----------------
Net cash from (used for) investing activities 34.1 (68.3)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends, including minority interests (14.8) (15.0)
Short-term financing 254.3 163.1
Short-term financing repayments (228.0) (195.7)
Purchases/payments of long-term debt (2.4) (0.2)
Stock options exercised 4.7 0.2
---------------- ----------------
Net cash from (used for) financing activities 13.8 (47.6)
---------------- ----------------
Net decrease in cash and cash equivalents (13.6) (4.5)
Cash and cash equivalents at beginning of year 28.3 20.0
---------------- ----------------
Cash and cash equivalents at end of period $ 14.7 $ 15.5
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, including capitalized interest of $1.5 and $3.0 $ 22.4 $ 35.2
Income taxes $ 1.0 $ 6.6
(1) See Note 2 of the accompanying notes to consolidated financial statements
regarding restatement of financial statements.
See accompanying notes to consolidated financial statements
6
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Bowater Incorporated and Subsidiaries as of March 31, 2002. The
consolidated statement of operations for the three-month period ended March
31, 2001 does not include the impact of the acquisition of Alliance Forest
Products Inc. (Alliance), which closed in September 2001. The consolidated
balance sheet as of March 31, 2002 and the related statements of
operations, capital accounts and cash flows for the three-month period then
ended are unaudited. 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, 2002 are not necessarily
indicative of the results to be expected for the full year. Certain
prior-year amounts in the financial statements and the notes have been
reclassified to conform to the 2002 presentation.
2. RESTATEMENT OF FINANCIAL STATEMENTS
On July 11, 2002, Bowater announced that as a result of a mathematical
error in a computer model used for calculating the gain on the sale of
timberlands, we will reduce previously reported after tax gains on two
timberland sales, by $2.7 million, or $0.05 per diluted share, for the
fourth quarter of 2001, and by $2.1 million, or $0.04 per diluted share,
for the three month period ended March 31, 2002, representing approximately
5% of the total gain on each transaction.
Additionally, we have reclassified $2.2 million of countervailing and
antidumping duties, which were imposed by the US International Trade
Commission on imports of Canadian softwood lumber, from a separate
component of sales, as initially accrued, to distribution costs.
The following table sets forth the adjustments to the consolidated
statement of operations for the three months ended March 31, 2002, and the
Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001. The
only financial statement line items included here are those that have been
restated from the originally reported amounts.
Consolidated Statement of Operations
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Three Months Ended
March 31, 2002
------------------------
As
Previously
(In millions) Reported As Restated
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Sales $ 622.0 $ 624.2
Distribution costs 54.3 56.5
Net gain (loss) on sale of assets 75.0 71.5
Operating income 50.3 46.8
Income before income taxes and minority interests 9.6 6.1
Provision for income tax expense (benefit) (1.1) (2.5)
Net income 12.3 10.2
Comprehensive income 14.4 12.3
Basic earnings per common share 0.22 0.18
Diluted earnings per common share 0.22 0.18
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Balance Sheet Data:
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As of As of
March 31, 2002 December 31, 2001
--------------------- -----------------
As As
(In millions) Previously As Previously As
Reported Restated Reported Restated
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Other assets $ 188.3 $ 180.4 $ 186.7 $ 182.3
Total assets 5,723.8 5,715.9 5,765.4 5,761.0
Deferred income taxes 611.5 608.4 601.7 600.0
Retained earnings 841.4 836.6 840.5 837.8
Total shareholders' equity 2,033.3 2,028.5 2,024.7 2,022.0
Total liabilities and
shareholders' equity 5,723.8 5,715.9 5,765.4 5,761.0
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7
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. NET GAIN ON SALE OF ASSETS
In January 2002, Bowater completed the sale of approximately 116,000 acres
of timberland for aggregate consideration of $104.2 million. We received
$5.1 million in cash after expenses, and $99.1 million in notes receivable.
In March 2002, we monetized the notes receivable of $99.1 million for net
cash proceeds of $88.1 million. These transactions resulted in a net
pre-tax gain of $70.4 million.
o The notes receivable were monetized through a bankruptcy-remote
limited liability company. The bankruptcy-remote subsidiary is a
qualified special purpose entity (QSPE) under Statement of Financial
Accounting Standards (SFAS) No. 140, and is not consolidated in
Bowater's financial statements.
o This QSPE has issued fixed rate senior secured notes totaling $89.2
million, which are secured by the notes receivable held by the QSPE.
The value of these senior secured notes are equal to approximately 90%
of the value of the notes receivable. The full principal amount of the
notes receivable is backed by a letter of credit issued by a third
party financial institution.
o Bowater retains an interest in the excess future cash flows of the
QSPE (cash received from notes receivable vs. cash paid out on the
senior secured notes). The retained interest of $7.1 million at March
31, 2002 is included in "Other assets" in the Consolidated Balance
Sheet. The principal variable in determining the fair value of future
expected excess cash flows of the retained interest is the discount
rate, as it consists of a note with a low level of credit risk,
contractually due in 15 years and not subject to prepayment. The
discount rate used for the note is 6.91%.
o We recorded a $3.9 million loss on the monetization of the notes
receivable, which was based on the difference in the original carrying
amount of the notes (allocated between the asset monetized and the
retained interest) and the fair value at the date of the monetization.
Also in the first quarter of 2002, Bowater sold approximately 2,700 acres
of other timberlands and recorded a net pre-tax gain of $1.1 million.
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 $5.8 million pre-tax charge.
4. ACQUISITION/DIVESTITURE-RELATED LIABILITIES
In connection with the Alliance acquisition, Bowater recorded employee
termination costs of approximately $17.0 million, which included
approximately $13.0 million of employee termination costs recorded in
connection with the permanent closing of a newsprint machine and other
assets at the Coosa Pines, Alabama facility. At December 31, 2001, the
remaining accrual was $15.5 million (net of exchange loss of $0.1).
Approximately $12.3 million was paid in the first quarter of 2002. The
remaining accrual, $3.2 million, is expected to be paid during 2002 and is
included in "Accounts payable and accrued liabilities," in the Consolidated
Balance Sheet.
5. DIVIDENDS TO MINORITY INTEREST SHAREHOLDER
During the first quarter of 2002, the Board of Directors of Calhoun
Newsprint Company (CNC) declared a $7.3 million dividend. As a result, $3.6
million was paid to the minority shareholder of CNC. In the first quarter
of 2001, the Board of Directors of CNC declared a $9.6 million dividend. As
a result, $4.7 million was paid to the minority shareholder.
6. COMMITMENTS AND CONTINGENCIES
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.
8
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. OTHER EXPENSE (INCOME)
"Other, net" in the Consolidated Statement of Operations includes the
following:
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Three Months Ended March 31
--------------------------------
(In millions) 2002 2001
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Foreign exchange (gain) loss $ (1.1) $ (4.8)
(Income) loss from joint venture 1.1 0.3
Miscellaneous items (0.1) (0.1)
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$ (0.1) $ (4.6)
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8. GOODWILL
Bowater adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on
January 1, 2002. Under SFAS No. 142, goodwill and intangible assets with
indefinite useful lives will no longer be amortized, but will be tested for
impairment at least on an annual basis in accordance with the provisions of
SFAS No. 142. We are currently evaluating our goodwill in accordance with
SFAS No. 142 to determine if any transitional impairment losses will be
required to be recognized as a cumulative effect of a change in accounting
principle. Because of the extensive effort needed to perform the
transitional goodwill impairment evaluation, it is not practicable to
reasonably estimate the impact of adopting SFAS No. 142 on our consolidated
financial statements. We will complete this assessment by June 30, 2002. As
of March 31, 2002, we had unamortized goodwill in the amount of $843.0
million and no intangible assets with indefinite useful lives (pending the
final valuation of the Alliance acquisition).
The reconciliation of net income and earnings per share, adjusted to
exclude goodwill amortization expense, net of tax, for the three months
ended March 31, 2001 is as follows:
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Three Months Ended March 31
-----------------------------
(In millions, except per-share amounts) 2002 2001
As Restated
---------------------------------------------------------------------------
Net Income:
Reported net income $ 10.2 $ 37.7
Goodwill amortization, net of tax -- 5.7
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Adjusted net income $ 10.2 $ 43.4
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Basic earnings per common share:
Reported basic earnings per common share $ 0.18 $ 0.73
Goodwill amortization, net of tax -- 0.11
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Adjusted basic earnings per common share $ 0.18 $ 0.84
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Diluted earnings per common share:
Reported diluted earnings per common share $ 0.18 $ 0.72
Goodwill amortization, net of tax -- 0.11
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Adjusted diluted earnings per common share $ 0.18 $ 0.83
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9
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is as follows:
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THREE MONTHS ENDED MARCH 31
----------------------------
2002 2001
(In millions, except per-share amounts) As Restated
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Basic Computation:
Basic income available to common shareholders $ 10.2 $ 37.7
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Basic weighted average shares outstanding 56.8 51.6
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Basic earnings per common share $ 0.18 $ 0.73
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Diluted Computation:
Diluted income available to common shareholders $ 10.2 $ 37.7
---------------------------------------------------------------------------
Basic weighted average shares outstanding 56.8 51.6
Effect of dilutive securities:
Options 0.4 0.5
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Diluted weighted average shares outstanding 57.2 52.1
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Diluted earnings per common share $ 0.18 $ 0.72
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10. FINANCIAL INSTRUMENTS
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; however, we do
have currency option contracts that are not accounted for as accounting
hedges. On the date into which the derivative contract is entered, we
designate the derivative as a cash flow hedge.
A significant portion of our operating expenses are paid in Canadian
dollars at our Canadian mill sites. To reduce our exposure to differences
in the United States and Canadian dollar exchange rate fluctuations, we
enter into and designate Canadian dollar forward contracts to hedge our
forecasted Canadian dollar cash outflows at certain of our Canadian mill
operations.
As of March 31, 2002, we recorded the change in value related to cash flow
hedges amounting to a loss of $25.5 million ($15.8 million, after tax) in
"Accumulated other comprehensive income (loss)." During the quarter ended
March 31, 2002, we reclassified $4.7 million ($2.9 million, after tax) from
"Accumulated other comprehensive income (loss)" to earnings, which was
offset by net gains on the items being hedged. We expect to reclassify a
$15.5 million loss ($9.6 million, after-tax) from "Accumulated other
comprehensive income (loss)" to earnings during the next twelve months as
the hedged items affect earnings.
We formally document all relationships between hedging instruments and
hedged items, as well as our risk-management objectives and strategies for
undertaking various hedge transactions. We link all hedges that are
designated as cash flow hedges to forecasted transactions. The maximum time
period we have hedged transactions is two years. We also assess, both at
the inception of the hedge and on an on-going basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items. When it is determined
that a derivative is not highly effective as a hedge, we discontinue hedge
accounting prospectively.
Information regarding our Canadian dollar contracts' notional amount,
carrying value, fair market value, and range of exchange rates of the
contracts is summarized in the table below. The notional amount of these
contracts represents the amount of foreign currencies to be purchased or
sold at maturity and does not represent our exposure on these contracts.
10
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
NET ASSET (LIABILITY)
--------------------- RANGE OF
NOTIONAL FAIR U.S.$/CDN$
AMOUNT OF CARRYING MARKET EXCHANGE
MARCH 31, 2002 (IN MILLIONS) DERIVATIVES AMOUNT VALUE RATES
---------------------------------------------------------------------------
Foreign Currency Exchange
Agreements
Buy Currency:
Canadian dollar
Due in 2002 $ 290.4 $ 14.4 $ 14.4 .6744-.6266
Due in 2003 336.6 8.3 8.3 .6560-.6200
Due in 2004 85.0 0.4 0.4 .6284-.6204
---------------------------------------------------------------------------
$ 712.0 $ 23.1 $ 23.1
---------------------------------------------------------------------------
Approximately $78.3 million of our long-term debt is denominated in
Canadian dollars. In order to reduce our exposure to exchange rate
fluctuations, we enter into Canadian dollar forward contracts with notional
amounts of approximately $100 million. These economic hedge contracts are
marked to market through earnings. The contracts are settled quarterly, and
gains or losses are included in "Other, net" in our Consolidated Statement
of Operations. During the first three months of 2002, we recorded gains of
approximately $0.1 million in our Consolidated Statement of Operations as a
result of these economic hedges. At March 31, 2002, our outstanding
Canadian dollar forward contracts had notional amounts of $100.0 million
and are due June 27, 2002. The fair value (liability) of the Canadian
dollar forward contract was less than $0.1 million at March 31, 2002.
Additionally, Alliance had Canadian dollar range forward contracts in place
to reduce the exposure to differences in the United States and Canadian
dollar exchange rate, as the majority of Alliance's sales were sold into
the United States and denominated in United States dollars. These Canadian
dollar range forward contracts are not accounted for as accounting hedges
under SFAS No. 133. Changes in the derivatives fair values are immediately
recognized in earnings and included in "Other, net" in our Consolidated
Statement of Operations. At March 31, 2002, these Canadian dollar range
forward contracts had notional amounts due in 2002 and 2003 of $96.0
million and $124.0 million, respectively. The fair value (liability) of the
Canadian dollar range forward contracts at March 31, 2002, was $1.0
million. We recorded losses of approximately $0.2 million for the three
months ended March 31, 2002.
The counterparties to our derivative financial instruments are substantial
and creditworthy multi-national financial institutions. Therefore, the risk
of counterparty nonperformance is considered to be remote.
11. SEGMENT INFORMATION
On September 24, 2001, Bowater completed the purchase of Alliance. As a
result of the acquisition, we have four reportable segments: the Newsprint
Division, the Coated and Specialty Papers Division, the Forest Products
Division and the Canadian Forest Products Division. Segment information for
the quarter ending March 31, 2001 has been reclassified to reflect the
change to four reportable segments.
The Newsprint Division operates seven manufacturing sites in the United
States, Canada and South Korea. The principal product at these
manufacturing sites is newsprint, but several of the sites also produce
market pulp and uncoated specialty papers. This Division is responsible for
the international marketing and sales of newsprint and selected uncoated
specialty papers.
The Coated and Specialty Papers Division operates a manufacturing site that
produces coated groundwood paper, newsprint, market pulp and uncoated
specialty papers, and two coating facilities, all located in the United
States. This Division is responsible for the marketing and sales of the
full spectrum of coated and uncoated specialty papers manufactured by
Bowater.
The Forest Products Division manages 1.1 million acres of timberland owned
or leased in the United States and the Canadian provinces of Ontario and
Nova Scotia and over 8.3 million acres of Crown-owned land in the province
of Ontario on which Bowater has cutting rights. The Division also operates
three softwood sawmills, supplies wood fiber to Bowater's pulp and paper
production sites and markets and sells timber and lumber in North America.
11
The Canadian Forest Products Division operates four paper manufacturing
sites in Canada. The Division manages 0.4 million acres of owned or leased
timberlands and over 24.4 million acres of Crown-owned land in the Canadian
provinces of Quebec and New Brunswick on which Bowater has cutting rights.
The Division also operates ten sawmills and one wood treatment plant,
supplies wood to four paper mills and ten sawmills, and is responsible for
the marketing and sales of Bowater's Canadian lumber production.
The Pulp Division markets and distributes market pulp produced at the
Calhoun, Tennessee; Catawba, South Carolina; Thunder Bay, Ontario; and
Coosa Pines, Alabama sites. Financial results for the production and sale
of market pulp are included in the Newsprint Division and the Coated and
Specialty Papers Division, depending upon which site manufactures the
product. The Pulp Division's administrative expenses are included in
"Corporate & other eliminations." Accordingly, no separate 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, 2002 and 2001:
------------------------------------------------------------------------------------------------------------------
Coated
and Canadian Special
THREE MONTHS ENDED Specialty Forest Forest Items Corporate/ Total
MARCH 31, 2002 Newsprint Papers Products Products As Other As
(Unaudited, in millions) Division Division Division Division Restated Eliminations Restated
------------------------------------------------------------------------------------------------------------------
Sales - including internal sales $ 329.7 $115.4 $ 21.9 $ 173.4 $ -- $ -- $ 640.4
Elimination of intersegment sales -- -- -- -- -- (16.2) (16.2)
------------------------------------------------------------------------------------------------------------------
Sales - external customers 329.7 115.4 21.9 173.4 -- (16.2) 624.2
------------------------------------------------------------------------------------------------------------------
Segment income (loss) (5.0) (5.9) 0.3 8.1 71.5 (22.2) 46.8
------------------------------------------------------------------------------------------------------------------
Total assets at 3/31/02 $3,058.3 $640.4 $ 237.3 $1,403.3 $ -- $376.6 $5,715.9
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Coated
and Canadian
Three Months Ended Specialty Forest Forest Corporate/
March 31, 2001 Newsprint Papers Products Products Special Other
(Unaudited, in millions) Division Division Division Division Items Eliminations Total
------------------------------------------------------------------------------------------------------------------
Sales - including internal sales $ 366.4 $138.7 $ 16.7 $ 98.8 $ -- $ -- $ 620.6
Elimination of intersegment sales -- -- -- -- -- (15.7) (15.7)
------------------------------------------------------------------------------------------------------------------
Sales - external customers 366.4 138.7 16.7 98.8 -- (15.7) 604.9
------------------------------------------------------------------------------------------------------------------
Segment income (loss) 61.1 18.5 (0.2) 21.0 (5.8) (5.0) 89.6
------------------------------------------------------------------------------------------------------------------
Total assets at 3/31/01 $2,676.6 $594.6 $ 396.1 $ 886.9 $ -- $359.8 $4,914.0
------------------------------------------------------------------------------------------------------------------
In January 2002, Bowater completed the sale of approximately 116,000 acres
of timberlands for aggregate consideration of $104.2 million, comprised of
approximately $5.1 million in cash and $99.1 million in a note receivable.
In March 2002, we monetized the $99.1 million note receivable for net cash
proceeds of $88.1 million. These transactions resulted in a net pre-tax
gain of $70.4 million. Also in the first quarter of 2002, we sold
approximately 2,700 acres of timberlands and recorded a net pre-tax gain of
$1.1 million.
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.
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.
12
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of "Accumulated Other Comprehensive Income (Loss)" in the
Consolidated Balance Sheet at March 31, 2002 and December 31, 2001 are as
follows:
---------------------------------------------------------------------------
(In millions) March 31, 2002 December 31, 2001
---------------------------------------------------------------------------
Pension plan additional minimum liabilities $ (57.4) $ (57.4)
Foreign currency translation (10.5) (11.1)
Unrealized loss on hedging transactions (20.8) (23.2)
Taxes 29.2 30.1
---------------------------------------------------------------------------
$ (59.5) $ (61.6)
---------------------------------------------------------------------------
13
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ORGANIZATION
Bowater is organized into five divisions: the Newsprint Division, the Coated and
Specialty Papers Division, the Pulp Division, the Forest Products Division and
the Canadian Forest Products Division. Except for the Pulp Division, each
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 other four divisions.
Information regarding the effect of the restatement on Bowater's financial
statements is included in Note 2 of the notes to consolidated financial
statements.
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/A for the year ended December 31, 2001, and
from time to time, in Bowater's other filings with the Securities and Exchange
Commission.
ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis of financial condition and results of
operations are based on our unaudited Consolidated Financial Statements included
herein. Our significant accounting policies are described in Note 1 to the
Consolidated Financial Statements in Bowater's annual report on Form 10-K/A for
the year ended December 31, 2001. Bowater's critical accounting policies are
described under the caption "Critical Accounting Policies and Estimates" in Item
7 of Bowater's annual report on Form 10-K/A for the year ended December 31,
2001.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates, assumptions and
judgments. Our estimates and assumptions are based on historical data and other
assumptions that we believe are reasonable in the circumstances. These estimates
and assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements. In addition, they affect the reported amounts of revenues and
expenses during the reporting period.
Our judgments are based on management's assessment as to the effect certain
estimates, assumptions, or future trends or events may have on the financial
condition and results of operations reported in our unaudited Consolidated
Financial Statements. It is important that the reader of our unaudited financial
statements understand that actual results could differ from these estimates,
assumptions and judgments.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002,
AS RESTATED,
VERSUS MARCH 31, 2001
The results of operations for the three-month period ended March 31, 2001 do not
include the impact of the acquisition of Alliance, which closed in September
2001.
For the first quarter of 2002, Bowater had operating income of $46.8 million
compared to $89.6 million for the first quarter of 2001. Operating income for
the first quarter of 2002 includes a gain on the sale of assets of $71.5 million
compared to a net loss on the sale of assets of $5.8 million for the first
quarter of 2001. Excluding these asset sales, operating income decreased $120.1
million. Lower transaction prices for newsprint ($81.7 million), coated and
specialty papers ($17.3 million) and market pulp ($31.3 million) and lower
shipments ($9.8 million). Selling, general and administrative expenses were also
higher in the first quarter of 2002 due to credits recognized for stock-based
compensation ($14.5 million) during the first quarter of 2001. These decreases
were offset partially by higher transaction prices for lumber ($1.5 million) and
timber ($1.9 million) and lower operating costs ($35.2 million), which includes
the amortization of goodwill. Operating costs were lower for the quarter due to
lower wood, fiber, chemical, fuel and maintenance costs.
14
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net income for the first quarter of 2002 was $10.2 million, or $0.18 per diluted
share, compared with net income of $37.7 million, or $0.72 per diluted share, in
the first quarter of 2001. Sales for the first quarter of 2002 were $624.2
million compared with $604.9 million for the first quarter of 2001.
PRODUCT LINE INFORMATION
Presented below is a discussion of each significant product line followed by a
discussion of the results of each of the reported divisions.
SALES BY PRODUCT
------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
(Unaudited, in millions) 2002 2001
------------------------------------------------------------
Sales:
Newsprint $ 290.7 $ 379.5
Market pulp 118.0 105.7
Coated and specialty papers 162.9 107.9
Lumber (1) 56.9 8.2
Other 11.9 44.6
Elimination of intersegment sales (16.2) (41.0)
-----------------------
Total sales $ 624.2 $ 604.9
------------------------------------------------------------
(1) Countervailing and antidumping duties of approximately $2.2 million for the
three months ended March 31, 2002 are included as a component of
distribution costs and are not presented as a separate component against
sales.
Newsprint: Bowater's average transaction price for newsprint was 24% lower in
the first quarter of 2002 compared to the first quarter of 2001 and 9% lower
compared to the fourth quarter of 2001. Our shipments increased 1% compared to
the first quarter of 2001, due primarily to the acquisition of Alliance. This
increase was partially offset by approximately 70,000 metric tons of market and
maintenance downtime in the first quarter of 2002 compared to approximately
46,000 metric tons of downtime during the first quarter of 2001. We plan to take
23,000 metric tons of maintenance downtime in the second quarter of this year
and we will continue to match our production to our orders. Our newsprint
inventory increased approximately 27,000 metric tons compared to the end of the
first quarter of 2001. Inventories have increased due to the acquisition of
Alliance and in order to service our customers in Europe. Total United States
demand and consumption of newsprint declined in the first quarter of 2002
compared to same period a year ago. Aggregate North American mill and customer
inventories were 11% lower at March 31, 2002 compared to March 31, 2001.
Market Pulp: Bowater's average transaction price for market pulp in the first
quarter of 2002 decreased 23% compared to the first quarter of 2001 and
increased slightly compared to the fourth quarter of 2001. We announced a price
increase of $30 per metric ton, effective May 1, 2002. Our shipments increased
46% compared to the same period last year, primarily as a result of the
acquisition of Alliance and less downtime (approximately 40,000 metric tons)
taken in the first quarter of 2002 compared to the first quarter of 2001. An
additional 18,000 metric tons of maintenance downtime is planned for the second
quarter of 2002. Our market pulp inventories increased over the quarter to end
the quarter with 19 days of supply. NORSCAN producers (United States, Canada,
Finland, and Sweden) took market-related downtime resulting in a 90% operating
rate for the first quarter of 2002. Consequently, NORSCAN inventories decreased
in March by 117,000 metric tons, to end the quarter at 1.7 million metric tons,
or 29 days of supply.
Coated and Specialty Papers: Bowater's average transaction price for coated and
specialty papers was 20% lower in the first quarter of 2002 compared to the
first quarter of 2001 and 7% lower compared to the fourth quarter of 2001. Our
coated and specialty papers shipments increased 84% compared to the same period
last year, due primarily to the acquisition of Alliance. US magazine advertising
pages declined compared to the first quarter of 2001 and catalog mailings
(measured by Standard A mail weight) decreased compared to the same period last
year.
The Division's Nuway coating facility in Covington, Tennessee commenced
operations during the first quarter of 2002. The annual capacity of this
facility is approximately 95,000 short tons of coated paper, which will consume
approximately 70,000 metric tons of newsprint capacity.
Lumber: Bowater's average transaction price for lumber products increased 10% in
the first quarter of 2002 compared to the first quarter of 2001. Our lumber
shipments increased significantly in the first quarter of 2002 compared to the
first quarter of 2001 due to the acquisition of Alliance. US housing starts in
the first quarter were strong, increasing 5% in the first quarter of 2002
compared to the same period last year.
15
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On May 2, 2002, the US International Trade Commission (ITC) determined that
Canadian imports of softwood lumber threaten to injure the US softwood lumber
industry. Following the affirmative finding of threat of material injury, we
anticipate that in May 2002 the ITC will issue a notification of its finding to
the US Department of Commerce, and that the Commerce Department will issue
orders applicable to softwood lumber imported into the United States from
Canada, imposing antidumping duties of 8.43% and countervailing duties,
applicable to softwood lumber imported from all provinces except Nova Scotia and
New Brunswick, of 18.79%. These duties will be payable in cash. The final amount
and effective date of countervailing and antidumping duties that may be assessed
on Canadian softwood lumber exports to the U.S. cannot be determined at this
time and will depend on determinations yet to be made by the ITC and any
reviewing courts, North American Free Trade Agreement or World Trade
Organization panels to which those determinations may be appealed. Through the
first quarter of 2002, Bowater had accrued approximately $7.9 million in
anticipation of these duties for periods prior to April 2002 and any adjustments
resulting from a change in the countervailing and antidumping duty rates will be
made prospectively.
DIVISIONAL PERFORMANCE
On September 24, 2001, Bowater completed the purchase of Alliance. As a result
of the acquisition, we have four reportable segments: the Newsprint Division,
the Coated and Specialty Papers Division, the Forest Products Division and the
Canadian Forest Products Division. Segment information for the three-month
period ending March 31, 2001, has been reclassified to reflect the change to
four reportable segments.
SALES BY DIVISION (1)
--------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------
(In millions) 2002 2001
--------------------------------------------------------------
Newsprint Division $ 329.7 $ 366.4
Coated and Specialty Papers Division 115.4 138.7
Forest Products Division 21.9 16.7
Canadian Forest Products Division (2) 173.4 98.8
Corporate & eliminations (16.2) (15.7)
------------------------
Total sales $ 624.2 $ 604.9
--------------------------------------------------------------
OPERATING INCOME (LOSS) BY DIVISION (1)
--------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
(In millions) AS RESTATED
--------------------------------------------------------------
Newsprint Division $ (5.0) $ 61.1
Coated and Specialty Papers Division (5.9) 18.5
Forest Products Division 0.3 (0.2)
Canadian Forest Products Division 8.1 21.0
Special items 71.5 (5.8)
Corporate & eliminations (22.2) (5.0)
------------------------
Total operating income $ 46.8 $ 89.6
--------------------------------------------------------------
(1) Financial results for the production and sale of market pulp are included in
the Newsprint Division or the Coated and Specialty Papers 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."
(2) Countervailing and antidumping duties of approximately $2.2 million for the
three months ended March 31, 2002 are included as a component of
distribution costs and are not presented as a separate component against
sales.
Newsprint Division: The results for this Division for the first three months of
2002 include the Coosa Pines, Alabama facility, acquired as part of the
acquisition of Alliance. Sales for the Division decreased $36.7 million, from
$366.4 million for the first quarter of 2001 to $329.7 million for the first
quarter of 2002. This decrease is primarily the result of lower shipments of
newsprint ($36.7 million) and lower transaction prices for newsprint ($53.2
million), market pulp ($23.9 million) and uncoated specialty paper ($4.9
million). These decreases were partially offset by the addition of the Coosa
Pines, Alabama facility and higher shipments of uncoated specialty paper ($8.3
million) and market pulp ($6.3 million). See the previous discussion of product
line results.
Operating income for the first quarter of 2002 decreased $66.1 from $61.1
million for the first quarter of 2001 to an operating loss of $5.0 million for
the first quarter of 2002. Lower shipments ($5.3 million, primarily newsprint)
and lower transaction prices for newsprint ($53.2 million), market pulp ($23.9
million) and uncoated specialty paper ($4.9 million) account for the majority of
this decrease. These decreases were partially offset by lower operating costs
($19.3 million) due to lower maintenance, fiber and wood costs, and a favorable
Canadian dollar exchange rate compared to the same period of 2001.
16
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Coated and Specialty Papers Division: Sales for the Division decreased $23.3
million, from $138.7 million for the first quarter of 2001 to $115.4 million for
the first quarter of 2002. This decrease was primarily due to lower transaction
prices for coated and specialty papers ($17.9 million), market pulp ($7.9
million) and newsprint ($6.2 million). Increased shipments ($8.7 million,
primarily coated and specialty papers and market pulp) partially offset this
decrease. See the previous discussion of product line results.
Operating income decreased $24.4 million from $18.5 million for the first
quarter of 2001 to an operating loss of $5.9 million for the first quarter of
2002. This decrease was primarily the result of lower transaction prices for
coated and specialty papers ($17.9 million), market pulp ($7.9 million) and
newsprint ($6.2 million). Lower operating costs ($8.0 million) as a result of
lower fiber and wood costs and lower chemical and fuel costs partially offset
this decrease.
Forest Products Division: Sales for the Division increased $5.2 million, from
$16.7 million for the first quarter of 2001 to $21.9 million for the first
quarter of 2002. This increase is primarily the result of higher lumber
transaction ($1.5 million) and timber transaction prices ($1.9 million) and
higher lumber shipments ($7.0 million). This increase was partially offset by
lower timber shipments ($5.8 million). See the previous discussion of product
line results.
Operating income for the Division increased $0.5 million from an operating loss
of $0.2 million for the first quarter of 2001 to operating income of $0.3
million for the first quarter of 2002. This increase was due primarily to higher
lumber ($1.5 million) and timber ($1.9 million) transaction prices and lower
operating costs ($3.7 million), partially offset by lower timber shipments ($5.8
million). Operating costs for the Division were lower in the first quarter of
2002 compared to the same period last year due to a charge for pine beetle
damage incurred in the first quarter of 2001 and lower labor and silviculture
expenses in the first quarter of 2002.
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. For the first quarter of 2002, Bowater did not incur any charges
related to pine beetle damage. If these conditions continue, we may incur
additional charges related to beetle damage. During the first quarter of 2001,
we recorded a charge of $2.1 million for damages.
Canadian Forest Products Division: This Division was formed as a result of the
Alliance acquisition. In addition to the Alliance facilities in Canada, several
existing facilities owned by Bowater were transferred to this Division. Sales
for the Division increased $74.6 million, from $98.8 million for the first
quarter of 2001 to $173.4 million for the first quarter of 2002. This increase
is primarily the result of the acquisition of Alliance in September 2001,
partially offset by lower newsprint transaction prices ($22.3 million).
Operating income decreased $12.9 million, from $21.0 million for the first
quarter of 2001 to $8.1 million for the first quarter of 2002. This decrease was
primarily the result of lower newsprint transaction prices ($22.3 million,
partially offset by lower manufacturing costs ($8.4 million) and the acquisition
of Alliance.
Special Items: In January 2002, Bowater completed the sale of approximately
116,000 acres of timberlands for aggregate consideration of $104.2 million,
comprised of approximately $5.1 million in cash and $99.1 million in notes
receivable. In March 2002, we monetized the $99.1 million notes receivable for
net cash proceeds of $88.1 million. These transactions resulted in a net pre-tax
gain of $70.4 million. Also in the first quarter of 2002, we had other asset
sales resulting in a pre-tax gain of $1.1 million. In April 2001, Bowater
reached a final settlement in connection with the sale of GNP to Inexcon. As a
result, we recognized a pre-tax charge of $5.8 million in the first quarter of
2001.
Corporate & Eliminations: The elimination of intersegment sales increased $0.5
million, comparing the first quarter of 2002 to the first quarter of 2001.
Corporate expenses increased $17.2 million due primarily to benefits recognized
for stock-based compensation ($14.5 million) during the first quarter of 2001.
INTEREST AND OTHER INCOME AND EXPENSES
Interest expense increased $6.6 million from $35.2 million for the first quarter
of 2001 to $41.8 million for the first quarter of 2002. This increase was
attributable to an increase in debt associated with the acquisition of Alliance.
Interest income decreased $2.6 million from $3.6 million for the first quarter
of 2001 to $1.0 million for the first quarter of 2002. This decrease is due
primarily to the sale of a note receivable in June 2001.
17
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Also in the first quarter of 2002, Bowater recorded a foreign exchange gain of
$1.1 million compared to a gain of $4.8 million in the first quarter of 2001.
The majority of our exchange gain (loss) amounts is attributable to the
revaluation of unhedged foreign denominated liabilities into United States
dollars.
Bowater's effective tax rate for the first quarter of 2002 was (41.0)% versus
32.6% for the prior year's first quarter. The lower rate in 2002 was primarily
the result of a one-time tax benefit arising from an IRS settlement ($2.8
million) and an on-going tax benefit ($3.8 million) related to our $600 million
notes financing transaction completed in the fourth quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
Bowater's cash and cash equivalents decreased to $14.7 million at March 31,
2002, from $28.3 million at December 31, 2001. We used cash from operations of
$61.5 million, generated $34.1 million of cash from investing activities, and
generated $13.8 million of cash from financing activities.
CASH FROM OPERATING ACTIVITIES:
During the first three months of 2002, Bowater's operations used $61.5 million
of cash compared to the generation of $111.4 million of cash during the first
three months of 2001, a decrease of $172.9 million. Lower operating income
($120.1 million, excluding gain on asset sales) and higher working capital needs
($66.4 million) accounted for the majority of the decrease in 2002. Operating
cash flows for the first quarter of 2002 include the activity of the Alliance
operations.
CASH FROM INVESTING ACTIVITIES:
Cash generated from investing activities during the first three months of 2002
totaled $34.1 million, compared with cash used of $68.3 million during the first
three months of 2001. The first quarter of 2002 includes the net cash proceeds
of $88.1 million from the monetization of a note receivable and $16.1 million
from the sale of assets. Capital expenditures increased $2.1 million for the
first quarter of 2002 compared to the first quarter of 2001.
CASH FROM FINANCING ACTIVITIES:
Cash generated from financing activities was $13.8 million for the first three
months of 2002 compared to $47.6 million of cash used during the first three
months of 2001. During the first three months of 2002, Bowater received proceeds
of $26.4 million (net of payments of $228.0 million) from its short-term credit
facilities. In the first three months of 2001, we paid $32.6 million (net of
proceeds of $163.1 million) under our short-term credit facilities. Also in the
first three months of 2002, we made payments on long-term borrowings amounting
to $2.4 million compared with payments of $0.2 million during the first three
months of 2001.
Cash dividends paid in the first three months of 2002 decreased $0.2 million
from the prior year period.
CREDIT ARRANGEMENTS:
Bowater has available credit facilities with various banks that provide for
borrowings up to $900.0 million. The credit facilities consist of a $450.0
million 364-day credit facility, a $350.0 million five-year facility and a
$100.0 million 364-day credit facility of a wholly-owned subsidiary, Bowater
Canadian Forest Products Inc. At March 31, 2002, $368.0 million was outstanding
under these facilities and approximately $67.3 million outstanding letter of
credit agreements, of which $21.0 million was committed against our credit
facilities.
In April 2002, Bowater entered into a commitment for a $300.0 million three-year
term loan and a $500.0 million three-year revolving credit facility. Bowater
expects to close on these commitments in May 2002. The new three-year term loan
and credit facility will be used to refinance the current $350.0 million
five-year facility and the $450.0 million 364-day credit facility. The $300.0
million three-year term loan requires annual repayments of $60.0 million at the
end of year one, $60.0 million at the end of year two and $180.0 million at the
end of year three. The $500.0 million revolving credit facility is due three
years from the effective date of the agreement.
Bowater believes that cash generated from operations and access to our credit
facilities will be sufficient to provide for our anticipated requirements for
working capital, contractual obligations and capital expenditures for the next
12 months.
OFF-BALANCE SHEET ARRANGEMENTS
A detailed discussion of our off-balance sheet arrangements is included under
the caption "Off-Balance Sheet Arrangements," in Item 7 of our annual
18
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
report on Form 10-K/A for the year ended December 31, 2001.
In January 2002, Bowater sold approximately 116,000 acres of timberlands for
aggregate consideration of $104.2 million, comprised of approximately $5.1
million in cash and $99.1 million in notes receivable. In March 2002, we
monetized the notes receivable using a qualified special purpose entity (QSPE)
set up in accordance with the Financial Accounting Standards Board's SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and received net cash proceeds of $88.1 million.
These transactions resulted in a net pre-tax gain of $70.4 million. The QSPE is
not consolidated with Bowater in Bowater's financial statements. The business
purpose of the QSPE is to hold the notes receivable and issue debt securities to
third parties. The value of these debt securities is equal to approximately 90%
of the value of the notes receivable. The full principal amount of the notes
receivable is backed by a letter of credit issued by a third party financial
institution. As of March 31, 2002, Bowater's retained interest in the QSPE is
$7.1 million. As of March 31, 2002, the QSPE had total assets of $100.1 million
and total obligations of $89.2 million.
ACCOUNTING STANDARDS
Bowater adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January
1, 2002. Under SFAS No. 142, goodwill and intangible assets with indefinite
useful lives will no longer be amortized, but will be tested for impairment at
least on an annual basis in accordance with the provisions of SFAS No. 142. In
connection with SFAS No. 142's transitional goodwill impairment evaluation,
Bowater is required to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption. We are currently
evaluating our goodwill and, in accordance with SFAS No. 142, have six months to
determine if any transitional impairment losses will be required to be
recognized as a cumulative effect of a change in accounting principle. Because
of the extensive effort needed to perform the transitional goodwill impairment
evaluation, it is not practicable to reasonably estimate the impact of adopting
SFAS No. 142 on our consolidated financial statements. We will complete this
assessment by June 30, 2002. As of March 31, 2002, we had unamortized goodwill
in the amount of $843.0 million and no intangible assets with indefinite useful
lives (pending the final valuation of the Alliance acquisition).
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligation." This Statement requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. Bowater will adopt the Statement
effective January 1, 2003, and is currently assessing the impact on its
operations.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," that is applicable to financial statements
issued for fiscal years beginning after December 15, 2001 (January 2002 for
Bowater). The FASB's new rules on asset impairment supersede FASB SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and provide a single accounting model for long-lived assets to
be disposed of. Bowater adopted the Statement effective January 1, 2002, and
does not expect this standard to have a material impact on future financial
statements or results of operations.
ITEM 3. MARKET RISK
Bowater's market risk disclosure included in its 2001 Form 10-K/A, Part II, Item
7A, is still applicable as of March 31, 2002. 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/A.
19
BOWATER INCORPORATED AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
Exhibit No. Description
----------- -----------
10.1 * Amendment No. 1 dated December 12, 2001 to the Bowater
Incorporated Equalization Benefits Plan effective
February 26, 1999.
10.2 * Amendment No. 2 dated May 3, 2002 to the Bowater
Incorporated Retirement Plan for Outside Directors as
Amended and Restated February 26, 1999.
10.3 * Amendment No. 1 dated November 1, 2001 to the Bowater
Incorporated Deferred Compensation Plan for Outside
Directors.
12.1 Statement regarding Computation of Ratio of Earnings to
Fixed Charges.
-------------------
* Previously filed.
(b) Reports on Form 8-K:
None
20
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
Executive Vice President and
Chief Financial Officer
By /s/ Michael F. Nocito
-----------------------------
Michael F. Nocito
Vice President and Controller
Dated: August 14, 2002
21
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
10.1* Amendment No. 1 dated December 12, 2001 to the Bowater Incorporated
Equalization Benefits Plan effective February 26, 1999.
10.2* Amendment No. 2 dated May 3, 2002 to the Bowater Incorporated
Retirement Plan for Outside Directors as Amended and Restated
February 26, 1999.
10.3* Amendment No. 1 dated November 1, 2001 to the Bowater Incorporated
Deferred Compensation Plan for Outside Directors.
12.1 Statement regarding Computation of Ratio of Earnings to Fixed
Charges.
------------
* Previously filed.
22