Latest SEC Filing by RPP / 99 MAY 14May 14, 1999
REPAP ENTERPRISES INC (RPAPF)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL REVIEW (IN CANADIAN DOLLARS UNLESS OTHERWISE NOTED)
Results of Operations
Repap Enterprises recorded a net loss of $9.3 million ($0.01 per share) for the first quarter ended
March 31, 1999, compared with a net income of $17.3 million ($0.02 per share) in the first quarter
of 1998. The first quarter of 1998 included a net gain on discontinued operations of $18.1 million.
Shipments in the Company's three product lines were as follows:
First Quarter %
1998 1999 Change
Coated paper (000 tons) 112 117 +4.5%
Kraft pulp (000 metric tons) 13 23 +76.9%
Lumber (mmfbm) 12 11 -8.3%
Revenues from operations for the first quarter of 1999 were $162.7 million, down slightly from
revenues of $163.3 million in the first quarter of 1998 and down 9% from revenues of $178.8 million
in the fourth quarter of 1998.
Revenues from coated paper were $142.6 million, down $5.6 million or 4% from the first quarter of
1998 revenues of $148.2 million reflecting mainly the impact of lower pricing resulting from weak
paper markets, offset partially by a weaker Canadian dollar and increased shipments.
Revenues from pulp for the first quarter of 1999 were $15.5 million, up $5.6 million or 5.7% from
the first quarter of 1998 revenues of $9.9 million reflecting the impact of higher shipments and a
weaker Canadian dollar, offset partly by lower prices.
Revenues from lumber were $4.6 million in the first quarter of 1999, essentially flat with revenues of
$5.2 million in the same period of 1998.
Cost of sales were $99.6 million in the first quarter of 1999 compared to $95.0 million in the first
quarter of 1998, an increase of $4.6 million or 4.8%. The increase in costs is due to the impact of
increased shipments of coated paper and kraft pulp, offset in part by the benefit of increased
productivity and lower costs in the Company's pulp and paper operations.
Selling, general and administrative expenses decreased by $0.3 million to $7.6 million in the first
quarter of 1999 from $7.9 million in the first quarter of 1998, reflecting mainly the benefits of
downsizing of the corporate office.
Repap Enterprises' operating profit, before depreciation and amortization, and excluding non-cash
hedged foreign exchange adjustments, ("EBITDA") was $39.0 million for the first quarter of 1999
compared to an operating profit of $45.2 million in the first quarter of 1998 and to an operating
profit of $43.8 million in the fourth quarter of 1998. The decrease of $6.2 million from the first
quarter of 1998 reflects the impact of lower prices for coated paper and pulp, which was partially
offset by the benefit of increased shipments and lower cost of manufacturing.
Depreciation and amortization increased by $1.1 million to $17.2 million in the first quarter of 1999
from $16.1 million in the corresponding quarter of 1998. The increase is due primarily to higher
amortization of deferred foreign exchange losses on long-term debt, resulting from a weaker
Canadian dollar.
Interest expense in the first quarter of 1999 was $28.1 million compared to $26.5 million in the first
quarter of 1998, reflecting lower borrowings at the holding company level, offset in part by the
effects of a weaker Canadian dollar.
Liquidity and Capital Resources
Repap generated $9.3 million in cash from operations in the first quarter of 1999 compared to a
cash generation of $16.4 million in the same quarter of 1998. Non-cash working capital changes
generated cash of $8.1 million compared with a cash generation of $22.8 million in 1998. The cash
generated from operations after working capital in the quarter was used primarily to finance capital
expenditures of $4.8 million and to reduce borrowings under the revolving credit facility by $9.1
million. At March 31, 1999, borrowings under the Repap New Brunswick revolving credit facility
totaled $67.5 million and unutilized availability was approximately $21.6 million. Repap New
Brunswick is a direct wholly owned subsidiary of the Company. Repap Enterprises also had cash on
hand of $9.9 million at March 31, 1999.
During the second quarter of 1999, the Company has debt servicing requirements of approximately
$48 million, of which $28 million relates to a semi-annual interest payment on the 10 5/8% Second
Priority Senior Secured Notes. This payment was made on April 15, 1999. The balance of
approximately $20 million relates primarily to a semi-annual interest payment on the 9% First Priority
Senior Secured Notes and to a quarterly interest payment on the First Priority Floating Rate Senior
Secured Loans. These payments are due in June.
In addition to these debt servicing requirements, the Company also has a principal maturity of $10
million due May 22, 1999 under the terms of Repap New Brunswick's revolving credit facility. The
Company is reviewing certain alternatives with the objective of refinancing or replacing the $10
million facility. The Company can give no assurances as to whether it will be successful in refinancing
or replacing the facility.
Year 2000 Computer Issue
The Company, as well as its customers and suppliers and the financial institutions and governmental
entities with which it deals (collectively, "Third Parties"), utilize information systems that will be
affected by the date change to the year 2000. Many of these systems, if not modified or replaced,
will be unable to properly recognize and process date-sensitive information before, on and after
January 1, 2000.
State of Readiness
In 1997, the Company formalized its Year 2000 preparation efforts by appointing a project team
consisting of management, operations and information systems personnel to assess the impact of the
Year 2000 issue on its operations, develop plans to address the issue and implement compliance.
The project team also developed plans to seek information regarding and to assess the Year 2000
compliance status and remediation efforts of major Third Parties. Repap's information systems
consist of business information and process control systems. The business information systems
support financial and administrative processes such as order management and product tracking,
maintenance and materials management, personnel, payroll, accounts payable and accounts
receivable. The process control systems are used primarily in manufacturing operations; they include
information technology systems as well as embedded technology, such as chips embedded in various
machine components. With respect to the business information systems, the inventorying of
computers and the analysis of compliance have been completed. The Company has elected to
replace non-compliant information systems for order management and process information history.
Although no assurances can be given, the replacement systems are expected to be operational by
September 1999. The programming and testing of most other information systems is on target for
completion by the end of May 1999. With respect to the process control systems, Repap has
completed the inventorying of its control systems as well as remediation to its main control systems.
Repap expects to complete all remaining control systems by June 1999. Repap expects to complete
comprehension testing to confirm its remediation work by October 1999. This schedule assumes
timely assistance by the vendors of certain systems in the remediation of those systems. The vendors
of those systems that are essential to the Company's operations have provided or agreed to provide
the necessary assistance.
The Year 2000 issue also will impact the information systems of Third Parties. The Company,
through meetings in some cases and written requests in others, is in the process of seeking to
ascertain and assess the progress of major Third Parties in identifying and addressing problems with
respect to the Year 2000 issue. Many of these Third Parties have indicated that they expect to
successfully address the issue in a timely fashion. Some others, however, have not yet provided
information regarding their state of readiness or have provided responses deemed unsatisfactory by
the Company. Repap will continue to seek and to assess information regarding Year 2000
compliance by major Third Parties.
Estimated Cost of Remediation
Repap currently estimates total expenditures of approximately $6 million, of which approximately
$1.6 million has been expended as of March 31, 1999, to make the required Year 2000
modifications and replacements to its own systems. All of these costs are being funded through
internal cash flow or vendor financing. The estimated total cost does not include any expenditures
that may be incurred in connection with the implementation of contingency plans, discussed below.
The Risks to the Company of not being Year 2000 Compliant
The Company currently believes that it will be able to modify or replace its own affected systems in a
timely fashion so as to minimize detrimental effects on its operations, subject to timely assistance by
the vendors of certain process control systems. Repap has received written assurances regarding
Year 2000 compliance from some, but not all, Third Parties with respect to their own systems and is
not in a position to reliably predict whether Third Parties will experience remediation problems. If the
Company or major Third Parties fail to successfully address the Year 2000 issue, there could be a
material adverse impact on the business and results of operations of the Company. For example,
while the Company self-generates approximately 31% of its electrical power requirements, it
purchases the balance from outside sources. If the electrical power grid is disrupted as the result of
Year 2000 systems failures, the Company might have to curtail production until the grid is restored.
If the Company or a major Third Party fails to successfully address these issues the Company may
have to take steps that could adversely and temporarily impact its ability to produce product,
process orders and deliver finished products to customers on a timely basis. In the event of Year
2000 disruptions in the operations of the Company's customers, the Company may experience
increased levels of inventories and receivables.
Contingency Plans
To date, the Company's Year 2000 efforts have been devoted primarily to the readiness program
described above. Repap has not yet developed contingency plans to address and mitigate the
potential risks associated with the most reasonably likely worst-case scenario. Repap expects to
have such plans in place by September 1999. Such plans may include, among other things, seeking
alternative sources of supply, stockpiling raw materials and increasing inventory levels. Repap's Year
2000 program is an ongoing process. Estimates of remediation costs and completion dates as well as
projections of the possible effects of any non- compliance are subject to change.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Currency The profitability level of Repap's Canadian operations is sensitive to fluctuations in foreign
exchange rates as most of their revenues are derived in US dollars. A US$0.01 variation in exchange
rates affects Repap's cash flow by approximately $3.8 million. The competitiveness of Repap's
operations in world markets depends on the relative strength of the currency in the countries of
competitive producers. Repap actively hedges its future revenue streams to protect against foreign
exchange exposure with the use of forward contracts of varying terms not normally exceeding one
year. The objective of the hedging program is to manage the risk of adverse cash flow due to
fluctuations in foreign currencies against the Canadian dollar. The percentage of transaction exposure
hedged is generally between 20 percent and 80 percent, after taking into account the amounts of US
dollars required under Repap's revenue-stream hedging practices.
At March 31, 1999, approximately 97% of Repap's consolidated borrowings of approximately
Cdn.$1.2 billion were in US dollars.
Repap is naturally hedged against the exchange risk associated with holding US dollar debt. Since
most of Repap's products are sold in US dollars, it is highly likely that future US dollar revenue
streams will be more than enough to accommodate any US dollar principal repayment as it falls due.
Repap has chosen to issue primarily US dollar denominated debt because of this nature hedge and
to take advantage of interest rates available on US dollar denominated debt which have, at times,
been significantly less than corresponding rates on Canadian dollar-denominated debt.
Accordingly, effective July 1, 1992, Repap designated future US dollar revenue streams as effective
hedges against currency risks related to US dollar debt borrowings. Designation of revenues as a
hedge results in exchange gains and losses on debt being deferred without amortization until
repayment. At maturity, any exchange adjustment is included with revenues, recognizing that Repap
has realized equal and offsetting exchange adjustments in the period the debt is repaid.
Revenues in the first quarter of 1999 were reduced by $1.2 million as a result of the application of
this accounting method. As at December 31, 1998, approximately $42.2 million of hedged currency
exchange losses remained on the balance sheet, and are expected to reduce revenues by the
following non-cash currency exchange adjustments:
Revenue reduction resulting from
non-cash currency adjustments:
Year (millions of dollars)
---- ---------------------
1999 $ 5.7
2000 22.4
Thereafter 15.3
-----
Total $43.4
In April 1995, Repap and Repap New Brunswick refinanced the majority of their US dollar
long-term debt with US dollar denominated senior secured notes issued by Repap New Brunswick.
The revenue streams which had been identified as an effective hedge in connection with scheduled
US dollar principal repayments on the old debt continue; however, to constitute an effective hedge
against accumulated exchange losses at the time of refinancing, as it remains highly likely that such
revenue streams will be earned as anticipated in the relevant future periods.
Under generally accepted accounting principals in the United States ("US GAAP"), any change in
currency fluctuations is immediately recognized in income. The total amount of the above-mentioned
non-cash currency adjustments to future revenues has already been charged to income under US
GAAP. Accordingly, any reduction in revenues and income of future years resulting from these
currency adjustments under Canadian GAAP will be added back in the reconciliation of revenues
and income under US GAAP. (See Note 22 to the Company's Consolidated Financial Statements).
Interest Rates The Company's variable-rate debt from continuing operations, totalling $0.3 billion, is
subject to fluctuations in Canadian, US and LIBOR lending rates. A 1% change in interest rates
affects Repap's cash flow by approximately $2.6 million.
Environmental Concerns and Regulations The forest products industry is subject to evolving
environmental legislation, regulations and standards from various levels of governments which impose
effluent and emission standards and other requirements on Repap's operations. Future capital
investments may be required to meet legislation, regulations and standards as they evolve. In addition
to regulatory pressure, market pressures may influence product evolution. Repap's ability to continue
to address changing market needs could require additional capital investments as well as additional
investments in product and process development.