Perennial money-loser AbitibiBowater, North America's largest newsprint producer, finally figured out last year how to turn a profit. All it took was a bankruptcy reorganization.
The company recently reported 4th Quarter 2010 profit of $4.24 billion on sales of $1.27 billion, for an unheard-of profit margin of 333%. That's right, its profit was three times greater than its sales. (Let’s try that as a word problem for elementary school math students: “If you sold 10 apples for $1 each and made a profit of $33, how much did each apple cost?”)
Most of the gain was from accounting, not actual sales, though AbitibiBowater’s business did improve enough during the quarter that it recorded operating income of $11 million, versus a $43 million loss the previous year. (Those of you in the newsprint business may not understand the phrase “operating income”. It’s when your revenue actually exceeds the cost of making your products. Believe it or not, operating income is actually quite common in some industries.)
Most of the huge profit gain came from one-time events related to “fresh start accounting” upon the company’s emergence from bankruptcy protection, which “resulted in the Company becoming a new entity for financial reporting purposes,” according to the recently released annual report.
The biggest fresh-start item was a $3.448 billion “gain on extinguishment of liabilities subject to compromise”. Translation: “We stiffed our creditors big time.” (Warning: Do not try this at home. If you stop paying your mortgage, the bank will not want to hear about your resulting increase in profitability.)
The new AbitibiBowater also showed confidence by claiming an income tax benefit of $1.627 billion from “the reversal of valuation allowances against certain deferred tax assets.” Translation: “We built up a lot of tax credits that were worthless when there was no chance of us owing income taxes for the foreseeable future. But now that we expect to be profitable in future years, we will be able to use those credits to avoid paying taxes. Isn’t Chapter 11 wonderful?”
The company expects its future to be brighter than its recent past because it emerged from bankruptcy protection with “a more flexible, lower-cost operating platform” and debt of only $900 million instead of $6.2 billion.
It also sees opportunity in the growing newsprint markets of Asia, Latin America, and the Middle East because some of its mills “are on or near deep sea ports”. Translation: "We need to find more customers that pay in currency that is actually worth something, rather than American dollars."
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