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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Powerstar Intl | TSXV:SLA | TSX Venture | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
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INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX:IFP.A)
reported a net loss of $8.1 million, or $0.17 per share, for the third quarter
of 2008, compared to loss of $1.6 million or $0.03 per share in the third
quarter of 2007.
The loss for the quarter includes $2.5 million ($1.7 million after-tax, or $0.04
per share) in accelerated depreciation and impairment charges related to the
Company's Adams Lake sawmill which was indefinitely curtailed in early October.
The existing Adams Lake sawmill is scheduled to close permanently early next
year when the new Adams Lake sawmill, which has been under construction since
the third quarter of 2007, is completed.
Interfor's results for the third quarter reflect lower earnings from the
Company's B.C. coastal operations. Markets for cedar and hemlock specialities
tailed off considerably towards the end of the quarter impacting operating
results and inventory carrying values. The drop in results for the Coast was
offset in part by improved performance by the Company's operations in the B.C.
Interior and the U.S. Pacific Northwest which benefited from higher prices and
improved operating rates in the first two months of the quarter. However, the
sharp drop in lumber prices in September eroded some of the gains achieved in
prior months.
In spite of the weak market environment, EBITDA remained positive for the third
quarter at $0.7 million, compared to $8.9 million in the corresponding period in
2007.
In the quarter, SPF 2X4 prices increased to US$262 per mfbm from US$232 per mfbm
in the previous quarter, and the Random Length's Composite Index increased to
US$274 per mfbm from US$266 per mfbm in the second quarter. However, by the end
of September, SPF 2X4 had dropped to US$220 per mfbm, the lowest level since
early May, and the RLCI had dropped to below US$260 per mfbm.
Cash generated from operations in the third quarter was $2.9 million before
changes in working capital were considered.
Capital spending in the quarter amounted to $28.3 million including $17.8
million in the new Adams Lake sawmill and $2.8 million in other high-return
discretionary projects.
On September 30, 2008, Interfor completed the previously-announced acquisition
of Portac, Inc.'s ("Portac") sawmill and related operations on the Olympic
Peninsula in Washington State, for total consideration of US$32.2 million. The
transaction was financed from the Company's lines of credit.
After taking account of capital spending and the Portac acquisition, the Company
ended the quarter with net debt of $137.8 million, or 25.4% of invested capital.
During the quarter the Company extended the maturity date for its U.S.
non-revolving line of credit to September 2010. This, coupled with the previous
extension of the revolving term credit line to April 2011, provides the Company
with ample liquidity to meet expected requirements.
The financial crisis gripping the global economy has had a material effect on
credit availability and construction activity and has resulted in sharply lower
prices for most product lines in recent weeks. In all likelihood, it will take
some months for markets to stabilize and a clear direction to emerge. In light
of this uncertainty the Company's focus is on cash management, as operations
balance production against sales and reduce capital spending. Construction at
Adams Lake will continue as planned.
FORWARD LOOKING STATEMENTS
This press release contains statements that are forward-looking in nature. Such
statements involve known and unknown risks and uncertainties that may cause the
actual results of the Company to be materially different from those expressed or
implied by those forward-looking statements. Such risks and uncertainties
include, among others: general economic and business conditions, product selling
prices, raw material and operating costs, changes in foreign-currency exchange
rates and other factors referenced herein and in the Company's Annual Statutory
Report.
ABOUT INTERFOR
Interfor is one of the Pacific Northwest's largest producers of quality wood
products. The Company has operations in British Columbia, Washington and Oregon,
including two sawmills in the Coastal region of British Columbia, three in the
B.C. Interior, one in Washington and two in Oregon. Additional information
relating to the Company and its operations, including Interfor's Annual
Statutory Information for 2007, can be found on its website at www.interfor.com
and or on SEDAR at www.sedar.com.
There will be a conference call on Friday, October 24, 2008 at 8:00 AM (Pacific
Time) hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose of
reviewing the Company's release of its Third Quarter, 2008 Financial Results.
The dial-in number is 1-866-400-3310. The conference call will also be recorded
for those unable to join in for the live discussion, and will be available until
November 7, 2008. The number to call is 1-866-245-6755 Passcode 685481.
International Forest Products Limited
Third Quarter Report
For the three and nine months ended September 30, 2008
Management's Discussion and Analysis
Dated as of October 22, 2008
This Management's Discussion and Analysis ("MD&A") provides a review of
Interfor's financial performance for the three and nine months ended September
30, 2008 relative to 2007, the Company's financial condition and future
prospects. The MD&A should be read in conjunction with the interim Consolidated
Financial Statements for the three and nine months ended September 30, 2008 and
2007, and Interfor's Annual Information Form, Consolidated Financial Statements
and Annual MD&A for the years ended December 31, 2007 and 2006 filed on SEDAR at
www.sedar.com. The financial information contained in this MD&A has been
prepared in accordance with Canadian generally accepted accounting principles
("GAAP"). In this MD&A, reference is made to EBITDA and Adjusted EBITDA. EBITDA
represents earnings before interest, taxes, depletion, amortization,
restructuring costs, other foreign exchange gains and losses, and write-downs of
property, plant, equipment and timber ("asset write-downs"). Adjusted EBITDA
represents EBITDA adjusted for U.S. duty refunds, net, and other income. The
Company discloses EBITDA as it is a measure used by analysts and Interfor's
management to evaluate the Company's performance. As EBITDA is a non-GAAP
measure, it may not be comparable to EBITDA calculated by others. In addition,
as EBITDA is not a substitute for net earnings, readers should consider net
earnings in evaluating the Company's performance.
Unless otherwise noted, all financial references in this MD&A are in Canadian
dollars.
References in this MD&A to "Interfor" and the "Company" mean International
Forest Products Limited, together with its subsidiaries.
Forward Looking Statements
This report contains statements that are forward looking in nature. Such
statements involve known and unknown risks and uncertainties that may cause the
actual results of the Company to be materially different from those expressed or
implied by those forward looking statements. Such risks and uncertainties
include, among others: general economic and business conditions, product selling
prices, raw material and operating costs, changes in foreign currency exchange
rates and other factors referenced herein and in the Company's Annual Report.
Review of Operating Results
Overview
Interfor recorded a net loss of $8.1 million, or $0.17 per share. The net loss
for the same quarter in 2007 was $1.6 million, or $0.03 per share. For the nine
months ended September 30, 2008, the Company reported a net loss of $38.7
million, or $0.82 per share, compared to a net loss of $4.4 million, or $0.09
per share for the first nine months of 2007.
Despite the continued deterioration in U.S. housing markets and unprecedented
turmoil in financial markets, EBITDA remained positive for the third quarter and
first nine months of 2008 at $0.7 million and $11.7 million, respectively,
compared to $8.9 million and $36.4 million for the corresponding periods in
2007. Adjusted EBITDA for the third quarter and first nine months of 2008 was
$0.1 million and $10.6 million respectively, compared to $7.2 million and $30.6
million for the same periods in 2007.
Before restructuring costs, foreign exchange gains (losses) and other one-time
items, the Company's net loss for the third quarter, 2008, was $7.7 million
after-tax, or $0.16 per share, as compared to a loss of $2.2 million after-tax,
or $0.05 per share in the third quarter, 2007. The losses for the first nine
months of 2008, adjusted for restructuring costs, foreign exchange gains
(losses) and other one-time items totalled $14.1 million after-tax, or $0.30 per
share, as compared to $2.4 million after-tax, or $0.05 per share for the first
nine months of 2007.
Included in the third quarter results of 2008 were $2.5 million ($1.7 million
after-tax, or $0.04 per share) in accelerated depreciation and impairment
charges related to the old Adams Lake sawmill which was indefinitely curtailed
in early October in preparation for completion of the new mill.
Significant declines in overall U.S. construction spending, the tightening of
availability of housing loans in the U.S., and sharply declining lumber prices
in September directly impacted Interfor's loss in the third quarter, 2008. In
comparison to the same periods of the previous year, depressed prices and a
weaker U.S. dollar impacted sales realizations and inventory valuations in the
third quarter and first nine months of 2008. Seasonally adjusted U.S. housing
starts in September 2008 were down 31.1% year-over-year.
North American structural lumber prices, which had strengthened in the second
quarter and in the first two months of the third quarter, dropped sharply in
September 2008, significantly impacting inventory valuations and sales
realizations. Production in the Company's commodity operations was proactively
curtailed throughout the first three quarters of 2008, and prices justified most
mills operating on a one shift basis throughout the third quarter as steps were
taken to manage inventory levels and working capital.
Specialty markets experienced some softening of prices, but this impact was
mitigated by a change in product mix which allowed continued profitability for
specialty operations through the third quarter, 2008.
In the third quarter of 2008 the Company experienced significant mill
curtailments for all manufacturing sites, impacting sales, cost structures and
comparisons to the prior year. The third quarter of 2007 was also impacted by
significant mill curtailments in Canada due to the United Steelworks Union's
("USW") strike action at the Company's B.C. coastal manufacturing operations
which commenced in late July, 2007.
Sales
Lumber shipments were down 63.8 million board feet, or 32.5%, for the third
quarter of 2008 compared to the same quarter of 2007, and down 339.1 million
board feet, or 47.8% for the first nine months of 2008 compared to the first
nine months of 2007, reflecting lower operating rates and the permanent closure
of Queensboro. Unit lumber sales values increased by $80 per mfbm, or 16.7%, for
the quarter and $113 per mfbm, or 22.1%, for the first nine months of 2008
relative to the same periods in 2007, as a result of a change in the sales mix
to a higher percentage of higher-value specialty product. The Canadian dollar
was virtually unchanged on average, relative to its U.S. counterpart in the
third quarter, 2008 as compared to the third quarter of 2007, and up 9 cents on
average, or 7.9%, for the first nine months of 2008 as compared to the same
period in 2007. The latter half of September, 2008 started to see some
significant weakening in the Canadian dollar and it closed at $US : $1.0642 CAD
on September 30, 2008.
In comparison to the same periods of 2007, log sales were down $1.6 million, or
5.2%, for the third quarter, but up slightly by $2.4 million, or 2.8%, in the
first nine months of 2008, with higher sales volumes of lower quality logs to
meet demand for pulp logs and manage inventories. The continued mill
curtailments and falling markets impacted the demand for logs and log prices
declined throughout the third quarter, 2008. On the B.C. Coast, the average
sales price declined by $24 per cubic metre in the third quarter of 2008, as
compared to the third quarter of 2007 and $20 per cubic metre in the first nine
months of 2008, as compared to the same period for 2007.
Pulp chip and other by-product revenues for the third quarter of 2008 were down
$1.1 million, or 11.4%, compared to the third quarter of 2007, and down $21.3
million, or 49.5%, for the first nine months of 2008 compared to the first nine
months of 2007, with sales volumes down significantly due to the mill
curtailments. Relative to the same periods in 2007, average chip prices
increased $5 per mfbm, or 11.6%, for the third quarter of 2008, and decreased $6
per mfbm, or 12.3%, for the first nine months of 2008.
Operating Costs
Third quarter, 2008, production costs were down $17.8 million, or 14.0% compared
to the same period in 2007 primarily as a result of the more extensive
curtailments and the permanently closed Queensboro operation. Production costs
for the first nine months of 2008 were down $123.1 million, or 27.7% compared to
the same period in 2007 primarily as a result of decreased production.
Lumber production was down 39 million board feet, or 21.2% for the third
quarter, 2008 compared to the third quarter, 2007, and down 326 million board
feet, or 46.2% for the first nine months of 2008, compared to the same periods
in 2007, substantially as a result of market curtailments and the permanently
closed Queensboro operation.
Compared to the same periods in 2007, B.C. log production increased by 99,500
cubic metres, or 25.0%, in the third quarter of 2008 and 197,200 cubic metres,
or 14.1%, in the first nine months of 2008, with a substantial portion harvested
through heli-logging which resulted in higher logging costs. Export taxes
totalled $1.0 million for the third quarter, 2008, compared to $1.8 million for
the third quarter, 2007 and $3.1 million for the first nine months of 2008,
compared to $7.9 million for the first nine months of 2007. These declines were
due to a drop of 18 million board feet in shipments to the U.S. for the third
quarter, 2008, and 97 million board feet for the first nine months of 2008
compared to the same periods of the previous year. The Canada/U.S. lumber export
tax remained at 15% through the first nine months of 2008.
Selling and administrative costs for the third quarter of 2008 remained constant
compared to the third quarter of 2007, as did the costs for the first nine
months of 2008 compared to the same period of 2007. The Company recorded long
term incentive compensation ("LTIC") recovery of $0.7 million for the third
quarter of 2008, reflecting a decline in the Company's share price over the
period, as compared to a recovery of $4.2 million for the third quarter of 2007.
For the first nine months of 2008, a year-to-date decline in the share price
resulted in an LTIC recovery of $1.1 million, compared to an expense of $0.5
million for the first nine months of 2007.
Amortization and depletion expense for the third quarter of 2008 was similar to
the same quarter of 2007 as both periods experienced mill curtailments - 2008
due to severe market conditions and 2007 due to USW strike action. Amortization
and depletion expense were down $6.5 million, or 16.3% for the first nine months
of 2008, compared to the same period of 2007, primarily as a result of lower
operating rates for the mills and the permanent shutdown of the Queensboro
sawmill.
Restructuring costs totalled $1.3 million in the third quarter of 2008, compared
to no restructuring costs recorded in the third quarter of 2007. In light of the
drastic decline in lumber prices, the old Adams Lake sawmill was indefinitely
curtailed and an impairment charge was taken on the remaining assets.
Restructuring costs for the first nine months of 2008 total $36.5 million,
compared to $1.6 million for the same period of 2007. The permanent closure of
the Queensboro sawmill located in New Westminster, B.C., following more than a
year of continuous curtailment, resulted in severance costs of $3.9 million,
site remediation costs of $1.0 million and a write-down of $29.8 million to
adjust the carrying value of plant and equipment at the site to expected
recovery amounts for total restructuring expense related to Queensboro of $34.7
million. Equipment at the site is in process of being redeployed to other
Company sites or sold. The site is being actively cleared, with all equipment
and buildings to be removed or demolished by early in 2009.
The Queensboro site is being actively marketed by Cushman & Wakefield LePage,
and proceeds are expected to more than offset the writedown taken for the
permanent closure. The Queensboro assets have been classified as held for sale
on the Balance Sheet as the expectation is that the property will sell shortly
after the site has been cleared.
Interest, Other Foreign Exchange Gain (Loss), Other Income
For the third quarter of 2008, net interest expense was $1.5 million, compared
to the net interest income of $0.2 million in the same quarter of 2007. For the
first nine months of 2008, net interest expense was $2.7 million, compared to
the net interest income of $1.5 million for the corresponding period in 2007.
Investment of significant cash balances retained from the U.S. duty refunds
received in late 2006, generated interest income in the first three quarters of
2007. These cash balances have since been drawn down and in 2008 the Company had
net borrowings of $95.1 million on its Revolving Line as it financed the P&T and
Portac asset acquisitions and construction of the new Adams Lake sawmill. Other
foreign exchange gains were negligible for the three months ended September 30,
2008 and for the first nine months of 2008. This compares to a loss of $0.6
million for the third quarter of 2007, and a loss for the first nine months of
2007 of $7.1 million, which arose from the impact of the stronger CAD$ on $U.S.
cash balances held after receipt of the U.S. duty refund.
The Company reported $0.6 million in Other income from the disposal of a timber
licence and surplus property, plant and equipment for the third quarter of 2008
compared to $0.5 million generated from the disposal of surplus property, plant
and equipment and $1.4 million as additional compensation for timber takeback
under the Forest Revitalization Act for the third quarter of 2007. For the first
nine months of 2008, the Company reported Other income of $1.2 million, as
compared to $5.8 million for the first nine months of 2007.
Cash Flow and Financial Position
During the third quarter the Company used $13.9 million in cash to fund
operations, after changes in working capital, compared to cash used of $0.6
million for the third quarter of 2007, which was impacted by cash generated on
the drawdown of accounts receivable due to the USW strike.
For the nine months ended September 30, 2008 the Company generated $16.3 million
cash from operations compared to cash used of $35.2 million in the first nine
months of 2007. The increase was principally the result of the payment in 2007
of the Softwood Lumber Agreement special charge liability of $24.4 million and
income tax of $23.3 million and, in 2008, the working capital required by the
addition of the Kootenay mills, and significantly lower earnings. This was
offset in part by the drawdown of accounts receivable due to the USW strike in
2007, and, in 2008, less working capital utilization due to curtailments and
receipt of income tax refunds of $13.3 million in the first nine months of 2008.
Capital expenditures for the third quarter of 2008 were $28.3 million, excluding
changes in amounts accrued, and $63.0 million year-to-date (Quarter 3, 2007 -
$25.2 million; first nine months, 2007 - $58.4 million). Spending in the current
quarter consisted of $17.8 million on the new Adams Lake sawmill, $2.8 million
on other high-return discretionary projects, $0.6 million on maintenance
projects, $0.9 on land development at Queensboro to prepare the site for sale
and $6.2 million on roads. Construction of the new sawmill at Adams Lake remains
on budget and on schedule for start-up in the fourth quarter of 2008.
On September 30, 2008, the Company concluded the acquisition of the Beaver
sawmill, Forks planer mill and related inventories. To acquire these assets, the
Company paid US$32.2 million. See "Acquisition of Portac, Inc. Assets" below for
further discussion.
At September 30, 2008, net drawings under the Revolving Line totalled $95.1
million, including $17.7 million utilized to fund the acquisition of the
Kootenay mills (see "Acquisition of Pope and Talbot, Inc. Sawmill Assets"
below), $45.4 million to fund the new sawmill construction at Adams Lake and
US$30.2 million to fund the Beaver and Forks acquisition. At September 30, 2007
there were no drawings under this Revolving Line.
There were no shares purchased under the Company's Normal course Issuer Bid in
the third quarter of 2008 or the first nine months of 2008 (Quarter 3, 2007 -
505,500 Class A shares at a cost of $3.8 million; first nine months of 2007 -
1,220,100 Class A shares at a cost of $9.8 million), and 12,400 Class A shares
issued for $0.1 million under the Company's share option plan (Quarter 3, 2007 -
10,000 Class A shares for negligible proceeds; first nine months of 2007 -
189,280 Class A shares for proceeds of $0.9 million).
The Company's net debt increased to $137.8 million or 25.4% of invested capital
at September 30, 2008, as compared to a net cash balance of $18.7 million or
(4.4%) of invested capital at September 30, 2007. The increase in net debt in
the third quarter of 2008 was mainly due to the acquisition of the Portac assets
discussed below and the funding of the Adams Lake project. At September 30,
2008, the Company's available credit under its various operating lines and term
lines totalled approximately $78.4 million.
Selected Quarterly Financial Information
Quarterly Earnings
Summary(4) 2008 2007 2006
------------------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
------------------------------------------------------
(millions of dollars except share and per share amounts)
Sales - Lumber 73.4 82.2 76.2 70.7 93.2 143.0 127.5 120.5
- Logs 28.8 25.7 30.9 35.6 30.3 33.2 19.4 32.6
- Wood chips
and other
by-products 8.9 7.4 5.5 7.2 10.0 17.1 16.0 12.1
- Other 0.9 2.1 1.8 1.9 2.0 2.1 1.7 9.3
------------------------------------------------------
Total Sales 112.0 117.4 114.4 115.4 135.5 195.4 164.6 174.5
------------------------------------------------------
Operating earnings
(loss) before
U.S. duty refunds,
net, restructuring
costs and asset
write-downs (12.8) (11.8) (1.3) (15.3) (4.6) (3.5) (1.8) (2.4)
Operating earnings
(loss) (14.1) (44.8) (3.5) (15.7) (4.6) (4.9) (2.1) 94.5
Net earnings (loss) (8.1) (29.4) (1.1) (8.9) (1.6) (3.4) 0.6 77.2
Net earnings
(loss) per share
- basic (0.17) (0.62) (0.02) (0.19) (0.03) (0.07) 0.01 1.60
- diluted (0.17) (0.62) (0.02) (0.19) (0.03) (0.07) 0.01 1.58
EBITDA(3) 0.7 2.5 8.5 (4.6) 8.9 14.5 13.0 115.0
Cash flow from
operations per
share(1) 0.06 (0.06) 0.22 (0.06) 0.10 0.12 0.37 1.82
Shares outstanding
- end of period
(millions)(2) 47.1 47.1 47.1 47.1 47.1 47.6 47.8 48.1
- weighted average
(millions) 47.1 47.1 47.1 47.1 47.4 47.8 48.0 48.2
Adjusted EBITDA(3) 0.1 1.9 8.5 (4.7) 7.2 12.6 10.8 11.5
1. Cash generated from operations before taking account of changes in
operating working capital.
2. As at October 22, 2008, the number of shares outstanding by class are:
Class A Subordinate Voting shares - 46,101,476, Class B Common shares
- 1,015,779, Total - 47,117,255.
3. EBITDA represents earnings before interest, taxes, depletion,
amortization, restructuring costs, other foreign exchange gains and
losses, and asset write-downs. The Company discloses EBITDA as it is a
measure used by analysts to evaluate the Company's performance. As
EBITDA is a non-GAAP measure, it may not be comparable to EBITDA
calculated by others. In addition, as EBITDA is not a substitute for
net earnings, readers should consider net earnings in evaluating the
Company's performance. Adjusted EBITDA represents EBITDA adjusted for
U.S. duty refunds, net, and other income.
4. Amounts may not add due to rounding. EBITDA and Adjusted EBITDA can be
calculated from the Statements of Operations as follows:
2008 2007 2006
------------------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
------------------------------------------------------
(millions of dollars)
Net earnings (loss) (8.1) (29.4) (1.1) (8.9) (1.6) (3.4) 0.6 77.2
Add: Income taxes
(recovery) (5.2) (14.6) (2.5) (7.1) (1.8) (4.5) (0.3) 38.5
Interest expense
(income) 1.5 0.8 0.4 0.2 (0.1) (0.5) (0.9) 0.5
Interest income on
U.S. duty refund,
net of special
charge - - - - - - - (12.7)
Depletion and
amortization 11.3 13.1 9.1 10.7 11.7 16.2 12.2 13.6
Other foreign
exchange (gains)
losses - (0.4) 0.4 0.2 0.7 5.3 1.1 (2.1)
Restructuring costs,
asset write-downs
and other 1.3 33.0 2.2 0.3 - 1.4 0.3 -
------------------------------------------------------
EBITDA 0.7 2.5 8.5 (4.6) 8.9 14.5 13.0 115.0
Deduct:
U.S. duty
refunds, net - - - - - - - 96.9
Other income 0.6 0.6 - 0.2 1.7 1.9 2.2 6.6
------------------------------------------------------
Adjusted EBITDA 0.1 1.9 8.5 (4.7) 7.2 12.6 10.8 11.5
------------------------------------------------------
Volume and Price Statistics 2008 2007 2006
---------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
---------------------------------------
Lumber
sales (million fbm) 132 125 113 161 196 270 244 225
Lumber
production (million fbm) 148 128 104 150 187 269 249 222
(1)
Log
sales(2) (thousand cubic metres) 372 312 399 382 315 319 207 381
Log
production
(2) (thousand cubic metres) 501 679 411 373 401 626 366 616
Average
selling
price -
lumber(3) ($/thousand fbm) $555 $658 $672 $441 $476 $530 $522 $534
Average
selling
price -
logs(2) ($/cubic metre) $ 70 $ 79 $ 75 $ 91 $ 95 $101 $ 91 $ 85
Average
selling
price -
pulp chips ($/thousand fbm) $ 48 $ 47 $ 41 $ 37 $ 43 $ 54 $ 56 $ 49
1. Excludes lumber produced on a custom cutting basis for customers
who have previously purchased the logs
2. B.C. operations
3. Gross sales before duties and export taxes
Quarterly trends normally reflect the seasonality of the Company's operations.
Logging operations are seasonal due to a number of factors including weather,
ground conditions and fire season woods closures. Generally, the Company's
logging divisions experience higher production levels in the latter half of the
first quarter, throughout the second and third quarters and in the first half of
the fourth quarter. Sawmill operations are less seasonal than logging operations
but do depend on the availability of logs from the logging operations. In
addition, the market demand for lumber and related products is generally lower
in the first quarter due to reduced construction activity, which increases
during the spring, summer and fall.
Excluding the impact of the U.S. duty refunds in the fourth quarter of 2006, the
decrease in operating earnings for the fourth quarter of 2006 through the second
quarter of 2008 related primarily to weak U.S. structural lumber markets, and
the stronger Canadian dollar. For the third and fourth quarters of 2007, strike
action also contributed to lower reported operating earnings. For the second
quarter of 2008, the permanent closure of the Queensboro sawmill site had a
significant impact on operating results, and the acquisition of the curtailed
Grand Forks and Castlegar mills and seasonal build-up of log inventories had a
lesser impact.
The third quarter of 2008 started with a slight improvement in prices as North
American mill curtailments in previous quarters impacted the supply of lumber.
Prices declined over the quarter, and sharply in September with continuing
deterioration in U.S. housing markets contributing to lower operating rates and
lumber sales realizations for whitewood products. A shift in sales mix towards
higher value cedar and specialty products served to lessen the impact of
declining markets.
Acquisition of Pope and Talbot, Inc. Sawmill Assets
On April 30, 2008, the Company concluded the acquisition of the Castlegar, B.C.
and Grand Forks, B.C. sawmills, related timber harvesting rights and other
related assets from Pope and Talbot, Inc. ("P&T") for $49.7 million, including
transaction costs. At acquisition, a portion of the purchase price paid had been
placed in escrow, pending final determination of the purchase adjustments and
the obtaining of certain authorizations in accordance with the P&T Asset
Purchase Agreement. Because the amount to be released to the Company from escrow
funds could not be determined until the Company had reached an agreement with
P&T, no amounts were recorded at acquisition. Any release of escrow funds to the
Company would result in a decrease to the purchase price recorded.
On October 20, 2008, the Company reached an agreement with Pricewaterhouse
Coopers Inc., in its capacity as the Receiver of P&T, to settle all outstanding
claims. This agreement is subject to U.S. Bankruptcy Court approval. Upon
receipt of Court approval, the Company will adjust the purchase price to reflect
the net amount to be received from escrow funds, estimated to be US$6.6 million.
These adjustments will be reflected in the financial statements as a refinement
of the purchase price allocation. There may be further refinement of fair value
allocations over the fourth quarter, 2008, as final determinations of fair
values of the assets acquired and liabilities assumed are made.
Acquisition of Portac, Inc. Assets
On September 30, 2008, the Company completed the acquisition of a sawmill,
planer mill and inventories from Portac, Inc. ("Portac"), a subsidiary of Mitsui
U.S., Inc. To acquire these assets, the Company paid US$32.2 million, of which
US$1.5 million was funded through a deposit held in escrow, and US$30.2 million
was financed through its Revolving Line and the balance of US$0.5 million
through cash on hand.
Amounts paid in US$ were translated to CAD$ at the September 30, 2008 rate of
CAD$1.0642: US$1.00. The total consideration and purchase price allocation are
preliminary and subject to adjustment in accordance with the Portac Asset
Purchase Agreement and further refinement of fair value allocations. The Company
does not expect any significant change to the initial purchase price allocation.
The assets, which are located on the Olympic Peninsula in Washington State, have
been renamed "Beaver Division" and are being operated by Interfor's U.S.
subsidiary, Interfor Pacific Inc.
The Portac acquisition is in keeping with the Company's strategy of diversifying
its geographic base and is an excellent fit with existing Interfor operations at
Port Angeles, producing dimension products and small timbers in lengths up to 20
feet to complement Interfor's product mix and presence in the Puget Sound
market. The Portac acquisition brings Interfor's production capacity in the U.S.
Pacific Northwest to 615 million board feet on an annual basis.
Agreement to Purchase Kamloops Timber Tenure
On February 18, 2008, the Company reached an agreement to acquire a timber
tenure in the Kamloops region currently owned by Weyerhaeuser Company Limited
having an Allowable Annual Cut (AAC) of approximately 356,000 cubic metres. The
tenure will strengthen the Company's long term timber supply for the new Adams
Lake sawmill and will help to offset anticipated declines in future supply as a
result of the Mountain Pine Beetle infestation.
The Company continues to await regulatory approval on this transaction, but
expects it to close before the end of 2008.
Accounting Policy Changes
On December 1, 2006, the Accounting Standards Board of the Canadian Institute of
Chartered Accountants ("CICA") issued four new accounting standards, Handbook
Section 1535, Capital Disclosures, Handbook Section 3031, Inventories, Handbook
Section 3862, Financial Instruments - Disclosures, and Handbook Section 3863,
Financial Instruments - Presentation. The Company has adopted these new
standards effective January 1, 2008. The adoption of these new standards had no
financial impact on the consolidated financial statements.
Section 1535 specifies the disclosure of the Company's objectives, policies and
processes for managing capital, including a description of what components of
liabilities and shareholders' equity the Company defines as capital and their
balances; and the nature of any externally imposed capital restrictions, how
those are managed, and the consequence of any non-compliance, if any.
Section 3031 provides significantly more guidance of the measurement of
inventories, with an expanded definition of cost, and the requirement that
inventory must be measured at the lower of cost and net realizable value. In
addition, the section has additional disclosure requirements, including
accounting policies, carrying values, and the amount of any inventory
writedowns.
Sections 3862 and 3863 replaced Handbook Section 3861, Financial Instruments -
Disclosure and Presentation, revising and enhancing its disclosure requirements
to provide additional information on the nature and extent of risks arising from
financial instruments to which the Company is exposed and how it manages those
risks.
Seaboard Shipping Company Limited ("Seaboard"), an equity investment of the
Company, recently adopted the deferral method of accounting for dry-dock
activities whereby actual costs incurred are deferred and amortized on a
straight-line basis over the period until the next scheduled dry-dock activity.
Previously, dry-dock activities were accounted for using the accrue-in-advance
method. In accordance with CICA Handbook Section 1506, Accounting Changes,
Seaboard adopted this policy retrospectively, resulting in the restatement of
prior years' investment in Seaboard.
As the investment in Seaboard is accounted for using the equity method, the
Company has recorded its $2.4 million share of the impact of the restatement as
an increase in the carrying value of its investment in Seaboard and an increase
in retained earnings. There was no effect on net earnings (loss) previously
reported for any of the periods presented.
Future Accounting Policy Changes
In 2007, the Canadian Accounting Standards Board announced that Canadian
generally accepted accounting principles ("Canadian GAAP") will cease to exist
for all publicly accountable enterprises targeted for fiscal years commencing
January 1, 2011. From that date onward, publicly traded companies and certain
other publicly accountable enterprises will be required to report under
International Financial Reporting Standards ("IFRS"). The impact of the
transition to IFRS on the Company's consolidated financial statements has not
been determined.
In February, 2008, the CICA issued a new accounting standard, Handbook Section
3064, Goodwill and Intangible Assets. This section replaces CICA Handbook
Section 3062, Goodwill and Intangible Assets, and establishes revised standards
for the recognition, measurement, presentation and disclosure of goodwill and
intangible assets. The new standard also provides guidance for the treatment of
various preproduction and start-up costs and requires that these costs be
expensed as incurred. This standard will be applicable to the Company for annual
and interim accounting periods beginning on January 1, 2009.
The Company is still evaluating the impact of this standard on its consolidated
financial statements.
Controls and Procedures
There were no changes in the Company's internal controls over financial
reporting ("ICFR") during the quarter ended September 30, 2008 that have
materially affected, or are reasonably likely to materially affect, the
Company's ICFR.
Critical Accounting Estimates
There were no material changes to the Company's critical accounting estimates
during the quarter ended September 30, 2008. For a full discussion of critical
accounting estimates, please refer to the Company's discussion in its Annual
MD&A for the year ended December 31, 2007 as filed on SEDAR at www.sedar.com.
Outlook
The outlook for wood products demand in the U.S. is deteriorating rapidly from
an already weak level as a result of turmoil in global financial markets, and
its effect on credit availability for businesses and loan availability for
housing. Lumber prices have collapsed in recent weeks, with limited activity.
The inventory of unsold homes in the U.S. currently represents an estimated
eleven month supply, and is expected to increase in coming months due to an
increase in anticipated foreclosures and reduced sales activity resulting from
credit restrictions and stricter lending standards.
Concerns over the health of the global economy continue to impact currency
markets, and the CAD$ versus the US$ has experienced a significant weakening
since September 30, declining by 13 cents relative to the US$ by mid October.
The Company's focus is on cash management, as operations curtail production as
necessary to manage working capital and significantly reduce capital spending
with the exception of completion of the new sawmill at Adams Lake.
Additional Information
Additional information relating to the Company and its operations can be found
on its website at www.interfor.com and in the Annual Information Form and on
SEDAR at www.sedar.com. Interfor's trading symbol on the Toronto Stock Exchange
is IFP.A.
E. Lawrence Sauder, Chairman
Duncan K. Davies, President and Chief Executive Officer
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
(thousands of Canadian dollars except earnings per share)
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Sales $ 111,953 $ 135,560 $ 343,731 $ 495,618
Costs and expenses:
Production 108,882 126,645 320,733 443,820
Selling and
administration 4,309 4,203 13,313 13,139
Long term incentive
compensation
expense (recovery) (720) (4,231) (1,081) 522
Export taxes 998 1,776 3,114 7,947
Amortization of
plant and equipment 5,910 7,504 17,362 23,355
Depletion and
amortization of timber,
roads and other 5,419 4,232 16,207 16,757
--------------------------------------------------------------------------
124,798 140,129 369,648 505,540
--------------------------------------------------------------------------
Operating loss before
restructuring costs (12,845) (4,569) (25,917) (9,922)
Restructuring costs
(note 10) (1,269) - (36,518) (1,640)
--------------------------------------------------------------------------
Operating loss (14,114) (4,569) (62,435) (11,562)
Interest expense
on long-term debt (1,324) (694) (2,542) (2,218)
Other interest
income (expense) (156) 879 (125) 3,763
Other foreign
exchange gain (loss) 34 (638) 28 (7,115)
Other income (note 9) 604 1,680 1,163 5,811
Equity in earnings of
investee companies 1,625 10 2,900 377
--------------------------------------------------------------------------
783 1,237 1,424 618
--------------------------------------------------------------------------
Loss before
income taxes (13,331) (3,332) (61,011) (10,944)
Income taxes (recovery):
Current (5,416) (1,980) (12,856) (3,605)
Future 231 200 (9,494) (2,955)
--------------------------------------------------------------------------
(5,185) (1,780) (22,350) (6,560)
--------------------------------------------------------------------------
Net loss $ (8,146) $ (1,552) $ (38,661) $ (4,384)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net earnings (loss) per
share, basic and
diluted (note 11) $ (0.17) $ (0.03) $ (0.82) $ (0.09)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the nine months ended September 30, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
(thousands of Canadian dollars) 9 Months 9 Months
Sept. 30, Sept. 30,
2008 2007
--------------------------------------------------------------------------
Retained earnings, beginning of year,
as restated (note 2(d)) $ 170,584 $ 183,905
Net loss (38,661) (4,384)
--------------------------------------------------------------------------
Retained earnings, end of period $ 131,923 $ 179,521
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and nine months ended September 30, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
(thousands of Canadian dollars)
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings (loss) $ (8,146) $ (1,552) $ (38,661) $ (4,384)
Items not involving cash:
Amortization of plant
and equipment 5,910 7,504 17,362 23,355
Depletion and
amortization of timber,
roads and other 5,419 4,232 16,207 16,757
Future income
taxes (recovery) 231 200 (9,494) (2,955)
Other assets 339 135 42 1,330
Reforestation liability (1,161) (344) (3,752) 920
Other long-term
liabilities (576) (880) (692) 827
Share of earnings
net (in excess) of
cash distributions
of investee company (1,625) (10) (2,900) 3,992
Write-down of plant
and equipment 1,243 - 30,993 -
Foreign exchange loss
(gain) on translation
of long term debt 1,876 (2,471) 2,551 (5,971)
Other (627) (1,837) (1,249) (6,009)
--------------------------------------------------------------------------
2,883 4,977 10,407 27,862
Cash generated from
(used in) operating
working capital:
Accounts receivable 4,808 24,049 6,001 14,942
Inventories (3,531) (7,065) (281) (9,656)
Prepaid expenses (140) (609) (1,308) (3,250)
Accounts payable and
accrued liabilities (12,394) (14,635) 2,370 (32,428)
Income taxes (5,481) (7,294) (854) (32,699)
--------------------------------------------------------------------------
(13,855) (577) 16,335 (35,229)
Investing activities:
Additions to property,
plant and equipment (20,199) (14,847) (45,810) (33,293)
Additions to deferred
start-up costs - - - (959)
Additions to logging
roads and timber (6,167) (10,321) (14,064) (24,140)
Proceeds on disposal
of property, plant,
equipment, timber
and roads 1,110 1,598 1,975 7,984
Acquisitions (note 5) (34,511) - (83,929) -
Deposit held in escrow
for acquisition - - 8,943 -
Investments and
other assets (1,795) (309) (1,732) (875)
--------------------------------------------------------------------------
(61,562) (23,879) (134,617) (51,283)
Financing activities:
Repurchase of share
capital (note 8) - (3,849) - (9,846)
Issuance of share
capital (note 8) 56 43 56 892
Increase (decrease)
in bank indebtedness 4,716 - 5,398 (582)
Additions to
long-term debt 67,139 - 134,064 -
Repayments of
long-term debt - - (38,925) -
--------------------------------------------------------------------------
71,911 (3,806) 100,593 (9,536)
Foreign exchange
gain (loss) on
cash and cash
equivalents held
in a foreign currency (44) (70) (106) 383
--------------------------------------------------------------------------
Decrease in cash and
cash equivalents (3,550) (28,332) (17,795) (95,665)
Cash and cash equivalents,
beginning of period 3,550 81,838 17,795 149,171
--------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ - $ 53,506 $ - $ 53,506
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Supplementary disclosures
Cash interest
paid (received) $ 1,480 $ (185) $ 2,667 $ (1,545)
Cash income taxes
paid (received) 1,129 5,484 (12,207) 28,734
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
Sept. 30, 2008 and 2007 and December 31, 2007 (unaudited)
--------------------------------------------------------------------------
(thousands of Canadian dollars) Sept. 30, Dec. 31, Sept. 30,
2008 2007 2007
--------------------------------------------------------------------------
re-stated re-stated
note 2(d) note 2(d)
Assets
Current assets:
Cash and cash equivalents $ - $ 17,795 $ 53,506
Deposit (note 5) - 8,761 -
Accounts receivable 31,576 37,172 34,357
Income taxes recoverable 10,680 8,838 5,073
Inventories (note 6) 89,636 76,429 88,339
Prepaid expenses 8,595 6,267 7,186
Future income taxes 4,521 3,083 2,727
--------------------------------------------------------------------------
145,008 158,345 191,188
Investments and other
assets (note 2(d)) 16,449 12,270 11,013
Property, plant and equipment,
net of accumulated amortization 354,229 300,150 293,666
Timber and logging roads, net of
accumulated depletion and amortization 96,253 55,050 54,800
Goodwill and other intangible assets 13,078 13,078 13,128
Future income taxes 12,831 7,000 5,233
Long-lived assets held for sale 13,430 3,239 3,239
--------------------------------------------------------------------------
$ 651,278 $ 549,132 $ 572,267
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 7(a)) $ 5,398 $ - $ -
Accounts payable and accrued
liabilities 68,630 49,999 61,608
Future income taxes - - 3
--------------------------------------------------------------------------
74,028 49,999 61,611
Reforestation liability,
net of current portion 16,354 11,874 14,130
Long-term debt (note 7(b)) 132,386 34,696 34,818
Other long-term liabilities 12,415 8,859 9,429
Future income taxes 11,568 13,080 11,546
Shareholders' equity:
Share capital (note 8)
Class A subordinate voting shares 284,500 284,444 284,444
Class B common shares 4,080 4,080 4,080
Contributed surplus 5,408 5,408 5,408
Accumulated other comprehensive
income (loss) (21,384) (33,892) (32,720)
Retained earnings (note 2(d)) 131,923 170,584 179,521
--------------------------------------------------------------------------
404,527 430,624 440,733
--------------------------------------------------------------------------
$ 651,278 $ 549,132 $ 572,267
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Commitment and Contingencies (notes 16 and 17)
Subsequent event (note 5(a))
See accompanying notes to consolidated financial statements.
On behalf of the Board:
E.L. Sauder H.C. Kalke
Chairman Director
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
(thousands of Canadian dollars)
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Net loss $ (8,146) $ (1,552) $ (38,661) $ (4,384)
Other comprehensive
income (loss), net of
income taxes (recovery):
Net change in unrealized
foreign currency
translation gains
(losses) 8,270 (11,321) 12,508 (26,359)
--------------------------------------------------------------------------
Other comprehensive
income (loss) 8,270 (11,321) 12,508 (26,359)
--------------------------------------------------------------------------
Comprehensive
income (loss) $ 124 $ (12,873) $ (26,153) $ (30,743)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the nine months ended September 30, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
(thousands of Canadian dollars) 9 Months 9 Months
Sept. 30, Sept. 30,
2008 2007
--------------------------------------------------------------------------
Accumulated other comprehensive loss,
beginning of year $ (33,892) $ (6,361)
Other comprehensive income (loss) 12,508 (26,359)
--------------------------------------------------------------------------
Accumulated other comprehensive loss,
end of period $ (21,384) $ (32,720)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
INTERNATIONAL FOREST PRODUCTS LIMITED
Notes to Unaudited Interim Consolidated Financial Statements
(Tabular amounts expressed in thousands except per share amounts)
Three and nine months ended September 30, 2008 and 2007 (unaudited)
1. Significant accounting policies:
These unaudited interim consolidated financial statements include the accounts
of International Forest Products Limited and its subsidiaries (collectively
referred to as "Interfor" or the "Company"). These interim consolidated
financial statements do not include all disclosures required by Canadian
generally accepted accounting principles for annual financial statements, and
accordingly, these interim consolidated financial statements should be read in
conjunction with Interfor's most recent audited annual consolidated financial
statements. These interim consolidated financial statements follow the same
accounting policies and methods of application used in the Company's audited
annual consolidated financial statements as at and for the year ended December
31, 2007, except for the new accounting policies adopted subsequent to that
date, as discussed in Note 2.
2. Adoption of changes in accounting policies:
The Canadian Institute of Chartered Accountants ("CICA") issued four new
accounting standards, which have been adopted, together with the change in
accounting policy of an investee company, on January 1, 2008. These changes are
described as follows:
(a) Capital disclosures:
CICA Handbook Section 1535, Capital Disclosures, specifies the disclosure of the
Company's objectives, policies and processes for managing capital, including: a
description of what components of liabilities and shareholders' equity the
Company defines as capital, and their balances; and the nature of any externally
imposed capital restrictions, how those are managed, and the consequence of any
non-compliance, if any. Refer to Note 14 for additional disclosures.
(b) Inventories:
CICA Handbook Section 3031, Inventories, provides significantly more guidance on
the measurement of inventories, with an expanded definition of cost, and the
requirement that inventory must be measured at the lower of cost and net
realizable value. In addition, the section has additional disclosure
requirements, including accounting policies, carrying values, and the amount of
any inventory writedowns.
Lumber inventories are valued at the lower of cost and net realizable value on a
specific product basis. Cost is determined as the weighted average of cost of
production on a three month rolling average, lagged by one month and adjusted
for exceptional costs, as in the case of a curtailment.
Log inventories are valued at the lower of cost and net realizable value on a
specific boom basis where logs are in boom form, or in aggregate on a species
and sort basis where the logs do not exist in boom form. Cost for internally
produced log inventories is determined as the weighted average of cost of
logging on a twelve month rolling average, lagged by one month and adjusted for
exceptional costs, as in the case of a curtailment. Log inventories purchased
from external sources are costed at acquisition cost. Net realizable value of
logs is based on either replacement cost or, for logs for which have been
committed to processing into lumber, on estimated net realizable value after
taking into consideration costs of completion and sale.
The adoption of this new standard had no financial effect on adoption on the
comparative consolidated financial statements of the Company. Refer to Note 6
for additional disclosures.
(c) Financial instruments - Disclosure and Presentation:
CICA Handbook Section 3862, Financial Instruments - Disclosures, and Section
3863, Financial Instruments - Presentation, replace Handbook Section 3861,
Financial Instruments - Disclosure and Presentation, revising and enhancing
disclosure requirements to provide additional information on the nature and
extent of risks arising from financial instruments to which the Company is
exposed and how it manages those risks. Refer to note 15 for additional
disclosures.
(d) Equity investment:
Seaboard Shipping Company Limited ("Seaboard"), an equity investment of the
Company, recently adopted the deferral method of accounting for dry-dock
activities whereby actual costs incurred are deferred and amortized on a
straight-line basis over the period until the next scheduled dry-dock activity.
Previously, dry-dock activities were accounted for using the accrue-in-advance
method. In accordance with CICA Handbook Section 1506, Accounting Changes,
Seaboard adopted this policy retrospectively, resulting in the restatement of
prior years' results. As the investment in Seaboard is accounted for using the
equity method, the Company has recorded its share of the impact of the
restatement as follows:
-------------------------------------------------------------------------
As previously
reported Adjustment As adjusted
-------------------------------------------------------------------------
Consolidated Statement of
Retained Earnings for the
nine months ended September
30, 2007:
Retained earnings, beginning $ 181,477 $ 2,428 $ 183,905
Consolidated Balance Sheet as
at September 30, 2007:
Investments and other assets 8,585 2,428 11,013
Retained earnings, ending 177,093 2,428 179,521
Consolidated Balance Sheet as
at December 31, 2007:
Investments and other assets 9,842 2,428 12,270
Retained earnings, ending 168,156 2,428 170,584
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The restatement has not affected net earnings (loss) previously reported for any
of the periods presented in the Statement of Operations.
3. Comparative figures:
Certain of the prior period's figures have been reclassified to conform to the
presentation adopted in the current year.
4. Seasonality of operating results:
The Company operates in the solid wood business which includes logging and
manufacturing operations. Logging activities vary throughout the year due to a
number of factors including weather, ground and fire season conditions.
Generally, the Company operates the bulk of its logging divisions in the latter
half of the first quarter, throughout the second and third quarters and in the
first half of the fourth quarter. Manufacturing operations are less seasonal
than logging operations but do depend on the availability of logs from the
logging operations and from third party suppliers. In addition, the market
demand for lumber and related products is generally lower in the first quarter
due to reduced construction activity which increases during the spring, summer
and fall.
5. Acquisitions:
In the second and third quarters of 2008, the Company completed two
acquisitions, the details of which are more fully described in notes 5(a) and
5(b) below.
The purchase price of each of these acquisitions has been allocated on a
preliminary basis to the fair value of assets acquired and related liabilities
arising from the transactions, based on management's best estimates and taking
into account all available information to September 30, 2008. As updated
information is available, further analysis may result in a further refinement
and revision to the values attributable to assets and liabilities arising on
these acquisitions.
These acquisitions have been accounted for using the purchase method and the
purchase price is allocated as follows:
-------------------------------------------------------------------------
Beaver and
Kootenay Forks
acquisition acquisition Total
-------------------------------------------------------------------------
(note 5(a)) (note 5(b))
Net assets acquired:
Current assets $ 9,253 $ 3,611 $ 12,864
Property, plant and equipment 23,567 30,629 54,196
Timber and logging roads 43,554 - 43,554
-------------------------------------------------------------------------
76,374 34,240 110,614
Liabilities assumed:
Current liabilities (12,738) - (12,738)
Reforestation and other
long-term obligations (12,481) - (12,481)
Future income taxes (1,466) - (1,466)
-------------------------------------------------------------------------
$ 49,689 $ 34,240 $ 83,929
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash consideration funded by:
Cash on hand $ 22,973 $ 500 $ 23,473
Deposit held in escrow 9,007 1,601 10,608
Revolving Line 17,709 32,139 49,848
-------------------------------------------------------------------------
$ 49,689 $ 34,240 $ 83,929
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Kootenay operations acquisition from Pope and Talbot, Inc.:
On November 19, 2007, the Company and Pope and Talbot, Inc. ("P&T") entered into
an Asset Purchase Agreement ("P&T APA"), as amended, for the acquisition of two
southern B.C. interior sawmills and their related timber tenures and one sawmill
in Spearfish, South Dakota. Subsequently, the Company assigned the right to
purchase the Spearfish, South Dakota sawmill to Neiman Enterprises, Inc.
("Neiman"), a company based in Wyoming. The Company paid a US$8,800,000
interest-bearing deposit held in escrow in respect of the transaction.
On April 30, 2008, the Company concluded the acquisition of the Castlegar, B.C.
and Grand Forks, B.C. ("Kootenay operations") sawmills, related timber
harvesting rights and other related assets and assumption of liabilities and
Neiman concluded their acquisition of the Spearfish sawmill and related assets.
To acquire these assets, the Company paid $49,689,000, of which $9,007,000 was
funded through the deposit held in escrow, $17,709,000 was financed through the
Revolving Line, and the balance of $22,973,000 through cash on hand. Amounts
paid in US$ were translated to CAD$ at the April 29, 2008 rate of CAD$1.0119 :
US$1.00.
The total consideration and purchase price allocation are preliminary and
subject to adjustment in accordance with the P&T APA and further refinement of
fair value allocations. A portion of the consideration paid has been placed in
escrow, pending final determination of the purchase price adjustments and
obtaining of certain authorizations in accordance with the P&T APA. Because the
amount to be released to the Company from escrow funds could not be determined
until the Company had reached an agreement with P&T, no amounts were recorded at
acquisition. Any release of escrow funds to the Company would result in a
decrease to the purchase price recorded.
On October 20, 2008, the Company reached an agreement with Pricewaterhouse
Coopers Inc., in its capacity as the Receiver of P&T, to settle all outstanding
claims. This agreement is subject to U.S. Bankruptcy Court approval. Upon
receipt of Court approval, the Company will adjust the purchase price to reflect
the net amount to be received from escrow funds, estimated to be US$6.6 million.
These adjustments will be reflected in the financial statements as a refinement
of the purchase price allocation. There may be further refinement of fair value
allocations over the fourth quarter, 2008, as final determinations of fair
values of the assets acquired and liabilities assumed are made.
The assets acquired include manufacturing facilities, timber harvesting rights
and working capital. The Company assumed certain liabilities of P&T including
pension and other employee related liabilities. P&T compensated the Company for
the future management of certain of these liabilities, including forestry
related obligations, resulting in the transfer of portions of these liabilities
to the Company at acquisition closing. Results of the operations of the acquired
facilities have been included in the Statement of Operations of the Company
commencing May 1, 2008.
(b) Beaver and Forks operations acquisition from Portac, Inc.:
On July 24, 2008, the Company entered into an Asset Purchase Agreement ("Portac
APA") with Portac, Inc., a subsidiary of Mitsui U.S., Inc., to acquire its
operations on the Olympic Peninsula in Washington State. The assets include a
sawmill and planer mill and working capital. This acquisition completed on
September 30, 2008.
To acquire these assets, the Company paid US$32,179,000, of which US$1,505,000
was funded through the deposit held in escrow, and US$30,200,000 was financed
through the Revolving Line, and the balance of US$474,000 through cash on hand.
Amounts paid in US$ were translated to CAD$ at the September 30, 2008 rate of
CAD$1.0642 : US$1.00.
The total consideration and purchase price allocation are preliminary and
subject to adjustment in accordance with the Portac APA and further refinement
of fair value allocations, but the Company does not expect any significant
change to the initial purchase price allocation.
The assets, which are located on the Olympic Peninsula in Washington State, have
been renamed "Beaver Division" and are being operated by Interfor's U.S.
subsidiary, Interfor Pacific Inc. Results of operations of the acquired facility
will be included in the Statement of Operations of the Company commencing
October 1, 2008.
6. Inventories:
-------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
2008 2007 2007
-------------------------------------------------------------------------
Logs $ 56,321 $ 53,631 $ 65,325
Lumber 26,290 18,588 17,976
Other 7,025 4,210 5,038
-------------------------------------------------------------------------
$ 89,636 $ 76,429 $ 88,339
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Inventory expensed in the period includes production costs, amortization of
plant and equipment, and depletion and amortization of timber, roads and other.
The inventory writedown in order to record inventory at the lower of cost and
net realizable value at September 30, 2008 was $18,130,000 (December 31, 2007 -
$16,019,000; September 30, 2007 - $14,388,000).
7. Cash, bank indebtedness and long-term debt:
(a) Bank indebtedness:
-------------------------------------------------------------------------
Canadian U.S.
Operating Operating
September 30, 2008 Facility Facility Total
-------------------------------------------------------------------------
Available line of credit $ 100,000 $ 10,642 $ 110,642
Maximum borrowing available 63,674 7,728 71,402
Unused portion of line 55,211 3,343 58,554
Outstanding letters of credit
included in line utilization 5,160 128 5,288
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September 30, 2007
-------------------------------------------------------------------------
Available line of credit $ 40,000 $ 9,948 $ 49,948
Maximum borrowing available 40,000 9,948 49,948
Unused portion of line 34,707 9,829 44,536
Outstanding letters of credit
included in line utilization 5,293 119 5,412
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In the second quarter of 2008, the Company renewed its existing Canadian
operating line of credit ("Operating Line"). The terms and conditions of this
line remain unchanged except for the maximum operating credit available which
was increased from $40,000,000 to $100,000,000 and an increase in the interest
rate margins. The Operating Line matures on April 24, 2009.
The Operating Line can be drawn in CAD$ or US$, and bears interest at bank prime
plus a margin depending upon a financial ratio or, at the Company's option, at
rates for Bankers' Acceptances or LIBOR based loans. Borrowing levels under the
line are subject to a borrowing base calculation dependent on certain accounts
receivable and inventories. The Operating Line is secured by a general security
agreement which includes a security interest in all accounts receivable and
inventories, and mortgage security on sawmills and charges against timber
tenures. The Operating Line is subject to certain financial covenants including
a minimum working capital requirement and a maximum ratio of total debt to total
capitalization.
In the second quarter of 2008, there was an increase to the interest rate
margins in the U.S. operating line of credit ("U.S. Line") and in the third
quarter, 2008, the maturity was extended to April 24, 2009. The Company has
provided a parent guarantee on the line. The U.S. Line is secured by a security
interest in the accounts receivable and inventories of the U.S. operating
subsidiary.
(b) Long-term debt:
On April 25, 2008, the Company renewed its existing Canadian revolving term line
of credit ("Revolving Line"), increasing it from $10,000,000 to $115,000,000.
The terms and conditions of this line remain unchanged except for an increase in
the interest rate margins and an extension of the maturity date to April 24,
2011. The Revolving Line can be drawn in CAD$ or US$ and bears interest at bank
prime plus a margin depending upon a financial ratio or, at the Company's
option, at rates for Bankers' Acceptances or LIBOR based loans.
To fund the Kootenay and Beaver acquisitions and the Adams Lake sawmill capital
project, the Company utilized the Revolving Line and as at September 30, 2008,
the Line was drawn by US$30,200,000 revalued at the September 30, 2008 exchange
rate to $32,139,000, and $63,000,000 for total drawings of $95,139,000 (December
31, 2007 - $nil; September 30, 2007 - $nil).
The U.S. dollar non-revolving term line (the "Non-Revolving Line") remains fully
drawn at US$35,000,000 (December 31, 2007 - US$35,000,000; September 30, 2007 -
US$35,000,000) and was revalued at the quarter-end exchange rate to $37,247,000
(December 31, 2007 - $34,696,000; September 30, 2007 - $34,818,000). Effective
September 1, 2008, the maturity date of the Non-Revolving Line was extended to
September 1, 2010. The Non-Revolving Line bears interest at rates based on bank
prime plus a premium depending upon a financial ratio or, at the Company's
option, at rates for LIBOR based loans. The foreign exchange loss of $2,552,000
(September 30, 2007 - $5,593,000 gain) arising on revaluation of the
Non-Revolving Line for the nine months ended September 30, 2008 was recognized
in Other foreign exchange gain (loss) on the Statement of Operations.
Both of the term lines are secured by a general security agreement which
includes a security interest in all accounts receivable and inventories and
mortgage security on all sawmills and charges against all timber. The lines are
subject to certain financial covenants including a minimum working capital
requirement and a maximum ratio of total debt to total capitalization.
Minimum principal amounts due on long-term debt within the next five years are
follows:
-------------------------------------------------------------------------
2009 $ -
2010 37,247
2011 95,139
2012 -
2013 -
-------------------------------------------------------------------------
$ 132,386
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. Share capital:
On November 9, 2006, the Company commenced a normal course issuer bid ("NCIB
05") to acquire up to 2,366,000 Class A Subordinate Voting shares ("Class A
Shares"). NCIB 05 terminated on November 8, 2007. On January 3, 2008, the
Company commenced a normal course issuer bid ("NCIB 06") to acquire up to
1,300,000 Class A shares (representing approximately 2.8% of the outstanding
Class A shares) through the facilities of the Toronto Stock Exchange. Purchases
are made at market prices with a maximum of two percent of the outstanding
shares being purchased in any 30-day period. The shares are cancelled as
purchased. NCIB 06 will terminate no later than January 7, 2009.
As the Company acquired Class A shares, the shares were cancelled. The excess of
the cost of the shares over the assigned value has been charged to contributed
surplus. The Company also issued Class A shares as previously granted share
options were exercised. There were no changes to the Class B shares.
The transactions in share capital are described below:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Acquisitions under
normal course issuer bid
Number of shares
purchased and cancelled - 505,500 - 1,220,100
Cost $ - $ 3,849 $ - $ 9,846
Excess of cost of
shares over assigned
value charged to
contributed surplus - 729 - 2,312
Shares issued on
exercise of options
Number of shares 12,400 10,000 12,400 189,280
Proceeds $ 56 $ 43 $ 56 $ 892
--------------------------------------------------------------------------
--------------------------------------------------------------------------
9. Other income:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Gain on disposal of
surplus plant and
equipment, timber,
and other $ 627 $ 478 $ 718 $ 4,650
Gain on settlement
of timber takeback - 1,350 531 1,350
Other (expense) (23) (148) (86) (189)
--------------------------------------------------------------------------
$ 604 $ 1,680 $ 1,163 $ 5,811
--------------------------------------------------------------------------
--------------------------------------------------------------------------
In the first quarter of 2008, the Company disposed of surplus equipment,
generating a gain of $28,000. In the second quarter of 2008, the Company
received compensation through the Forest Revitalization Act for obsolete
infrastructure due to the timber takeback. This, coupled with additional sales
of surplus equipment generated a gain of $595,000 and sales proceeds of
$837,000. Additional surplus equipment, and a timber licence were sold in the
third quarter, 2008, for sales proceeds of $1,110,000 and a gain of $627,000.
In the first, second and third quarters of 2007, the Company disposed of surplus
property, plant and equipment as well as its interest in Tree Farm Licence 54.
These dispositions combined to generate sales proceeds of $6,625,000 and a gain
of $4,650,000. Under the terms of the Forest Revitalization Act, the company
received $1,350,000 in additional compensation for lost infrastructure and road
construction costs resulting from the 2003 legislated takeback of certain
logging rights on the B.C. Coast, recorded as proceeds on the disposal of roads
in the third quarter of 2007.
10. Restructuring costs and write-downs of plant and equipment:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Plant and equipment
write-downs $ 1,243 $ - $ 30,993 $ -
Severance and other
restructuring costs 26 - 4,499 1,263
Other - - 1,026 377
--------------------------------------------------------------------------
$ 1,269 $ - $ 36,518 $ 1,640
--------------------------------------------------------------------------
--------------------------------------------------------------------------
During the first quarter of 2008, the Company recorded severance costs of
$2,240,000, as it permanently closed its Albion remanufacturing operation
located in Maple Ridge, B.C., and also offered voluntary severance to hourly
workers at its idled Queensboro sawmill located in New Westminster, B.C. In the
second quarter of 2008, the Queensboro sawmill was permanently closed following
more than one year of curtailment, and further voluntary and permanent shutdown
severance and remediation costs totalling $3,259,000 were recorded, together
with an impairment charge of $29,750,000 on the plant and equipment.
In the third quarter, 2008, due to deteriorating market conditions, the Company
indefinitely curtailed the old Adams Lake sawmill and recorded an impairment
charge of $1,243,000 on the plant and equipment. Additional severance costs of
$26,000 were also recorded in the quarter.
During the second quarter of 2007, the Company recorded net severance costs of
$1,013,000, bringing total severance costs to $1,263,000 for the nine months
ended September 30, 2007. In addition, the Company recorded $377,000 for logging
phase contractor buyouts and other restructuring.
11. Net earnings (loss) per share:
--------------------------------------------------------------------------
3 Months Sept. 30, 2008 3 Months Sept. 30, 2007
-------------------------- --------------------------
Net Net
earnings Per earnings Per
(loss) Shares share (loss) Shares share
--------------------------------------------------------------------------
Basic earnings
(loss) per share $ (8,146) 47,109 $ (0.17) $ (1,552) 47,415 $ (0.03)
Share options - 121(i) - - 817(i) -
--------------------------------------------------------------------------
Diluted earnings
(loss) per share $ (8,146) 47,109 $ (0.17) $ (1,552) 47,415 $ (0.03)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
9 Months Sept. 30, 2008 9 Months Sept. 30, 2007
-------------------------- --------------------------
Net Net
earnings Per earnings Per
(loss) Shares share (loss) Shares share
--------------------------------------------------------------------------
Basic earnings
(loss) per share $ (38,661) 47,106 $ (0.82) $ (4,384) 47,734 $ (0.09)
Share options - 183(i) - - 780(i) -
--------------------------------------------------------------------------
Diluted earnings
(loss) per share $ (38,661) 47,106 $ (0.82) $ (4,384) 47,734 $ (0.09)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(i) Where the addition of share options to the total shares outstanding has
an anti-dilutive impact on the diluted earnings (loss) per share
calculation, those share options have not been included in the total
shares outstanding for purposes of the calculation of diluted earnings
(loss) per share.
12. Segmented information:
The Company manages its business as a single operating segment, solid wood. The
Company purchases and harvests logs which are then manufactured into lumber
products at the Company's sawmills, or sold. Substantially all of the Company's
operations are located in British Columbia, Canada and the U.S. Pacific
Northwest.
The Company sells to both foreign and domestic markets as follows:
--------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Canada $ 44,131 $ 47,163 $ 136,484 $ 169,323
United States 40,191 64,540 121,944 225,558
Japan 8,641 14,920 28,198 47,557
Other export 18,990 8,937 57,105 53,180
--------------------------------------------------------------------------
$ 111,953 $ 135,560 $ 343,731 $ 495,618
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Sales by product line are as follows:
--------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Lumber $ 73,404 $ 93,225 $ 231,875 $ 363,714
Logs 28,754 30,345 85,309 82,954
Wood chips and other
by products 8,852 9,993 21,741 43,091
Other 943 1,997 4,806 5,859
--------------------------------------------------------------------------
$ 111,953 $ 135,560 $ 343,731 $ 495,618
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The Company has capital assets, goodwill and other intangible assets
located in:
--------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
2008 2007 2007
--------------------------------------------------------------------------
Canada $ 301,937 $ 232,988 $ 225,463
United States 175,053 138,529 139,370
--------------------------------------------------------------------------
$ 476,990 $ 371,517 $ 364,833
--------------------------------------------------------------------------
--------------------------------------------------------------------------
13. Employee future benefits:
The total benefits cost under its various pension plans, including those
acquired through the P&T acquisition, are as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Defined contribution plan $ 316 $ 419 $ 987 $ 1,176
Defined benefit plan 43 152 94 360
Unionized employees'
pension plan 440 138 1,243 1,316
U.S. employees
benefit plan 120 140 357 461
Senior management
supplementary
pension plan 125 106 375 313
--------------------------------------------------------------------------
Total pension expense $ 1,044 $ 955 $ 3,056 $ 3,626
--------------------------------------------------------------------------
--------------------------------------------------------------------------
14. Capital management:
The Company's policy is to maintain a strong capital base so as to maintain
investor, creditor and market confidence and sustain future development of the
business. The Company monitors the return on average invested capital, which it
defines as net earnings (loss) plus after tax interest cost divided by the
average of opening and closing invested capital comprised of the total of bank
indebtedness, long-term debt and shareholders' equity.
The Company seeks to maintain a balance between the higher returns that might be
possible with the leverage afforded by higher borrowing levels and the security
afforded by a sound capital position. The Company's target is to create value
for its shareholders over the long-term through increases in share value.
In January 2008, the Company filed a normal course issuer bid, as described in
note 8. As all purchases are made at market prices, the timing of any purchases
will be managed based on the share price and available cash flow. The Company
considers its shares to be undervalued, and a buy-back program is consistent
with the Company's goal of creating long-term value for its shareholders.
There were no changes in the Company's approach to capital management during the
period. Under its debt financing agreements, the Company cannot exceed a total
debt to total capitalization ratio of 45%, with total debt defined as the total
of bank indebtedness, including letters of credit, and long-term debt, net of
cash and cash equivalents.
15. Financial instruments:
(a) Fair value of financial instruments:
At September 30, 2008, the fair value of the Company's long-term debt
approximated its carrying value of $132,386,000 (September 30, 2007 -
$34,818,000) as the long-term debt bore interest at current market rates. The
fair values of other financial instruments approximate their carrying values due
to their short-term nature or due to the financial instruments being carried at
fair value.
(b) Derivative financial instruments:
The Company employs financial instruments, such as interest rate swaps and
foreign currency forward and option contracts, to manage exposure to
fluctuations in interest rates and foreign exchange rates. The Company does not
expect any credit losses in the event of non-performance by counter parties as
the counter parties are the Company's bankers.
As at September 30, 2008, the Company has outstanding obligations to buy
US$15,000,000 at an average rate of US$1.03535 to CAD$1.00 and sell a maximum of
US$4,500,000 at an average rate of US$1.0596 to CAD$1.00 and sell Japanese yens
70,000,000 at an average rate of yens 103.18 to the CAD$1.00. All foreign
currency gains or losses to September 30, 2008 have been recognized in the
Statement of Operations and the fair value of the foreign currency contracts of
$418,000 has been recorded in accounts receivable.
During September 2005, the Company entered into a cross currency interest rate
swap. The Company has agreed to receive US$20,000,000 at maturity on September
1, 2009 in exchange for payment of CAD$23,530,000 (an exchange rate of 1.1765).
In addition, during the term of the swap the Company will pay an amount based on
annual interest of 5.84% on the CAD$23,530,000 and will receive 90 day LIBOR
plus a spread of 200 basis points on the US$20,000,000. LIBOR will be
recalculated at set interval dates. The swap will mature on September 1, 2009
and has been marked to market with all gains or losses on the swap recognized in
the Statement of Operations. The fair value of $2,465,000 has been recorded in
accounts payable and accrued liabilities.
(c) Financial risk management:
Financial instrument assets include cash resources, deposits and accounts
receivable. Cash resources and deposits are designated as held-for-trading and
measured at fair value, while accounts receivable are designated as loans and
receivables and measured at amortized cost.
Financial instrument liabilities include accounts payable and accrued
liabilities, long-term debt, and certain other long-term liabilities. All
financial liabilities are designated as Other liabilities and are measured at
amortized cost.
There are no financial instruments classified as available-for-sale or
held-to-maturity.
The use of financial instruments exposes the Company to credit, liquidity and
market risk.
The Board of Directors has overall responsibility for the establishment and
oversight of the Company's risk management framework. The Company's risk
management policies are established to identify and analyze the risks faced by
the Company, to set appropriate risk limits and controls, and to monitor risks
and adherence to limits. Risk management policies and systems are reviewed
regularly to reflect changes in market conditions and the Company's activities.
Through its standards and procedures, management has developed a control
environment in which employees are clear on roles and obligations and management
regularly monitors compliance with its risk management policies and procedures.
(i) Credit risk:
Credit risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations, and arises primarily from the Company's receivables from customers
and from short-term investments.
Accounts receivable
The Company's exposure to credit risk is dependent upon individual
characteristics of each customer. Each new customer is assessed for
creditworthiness before standard payment and delivery terms and conditions are
offered, with such review encompassing any external ratings, and bank and other
references. Purchase limits are established for each customer, and are regularly
reviewed. In some cases, where customers fail to meet the Company's benchmark
creditworthiness, the Company may choose to transact with the customer on a
prepayment basis.
All North American sales are conducted under standard industry terms. All lumber
sales outside of the North American markets are either insured by the Export
Development Corporation or are secured by irrevocable letters of credit.
The Company regularly reviews the collectibility of its accounts receivable and
establishes an allowance for doubtful accounts based on its best estimate of any
potentially uncollectible accounts. Historically, the Company has experienced
minimal bad debts and based on this past experience, the Company believes that
no impairment allowance is necessary in respect of trade accounts receivable
past due. As at September 30, 2008, there were no trade accounts receivable past
due which were considered uncollectible (September 30, 2007 - $nil), and no
reserve in respect of doubtful accounts was set up (September 30, 2007 - $nil).
Deposits
The Company limits it exposure to credit risk by only investing in liquid
securities and only with counterparties that have a high credit rating. As such,
management does not expect any counterparty to fail to meet its obligations.
Guarantees
In the third quarter of 2008, the Company provided a parent guarantee on the
U.S. Line utilized by its U.S. operating subsidiary. This is in compliance with
the Company's policy to provide financial guarantees only with respect to
wholly-owned subsidiary companies.
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure
for receivables in North America. As lumber sales outside of the North American
markets are insured by the Export Development Corporation to 90% or secured by
irrevocable letters of credit, credit exposure for these sales is limited.
Accounts receivable carrying value at the reporting date by geographic region was:
--------------------------------------------------------------------------
Sept. 30, 2008
--------------------------------------------------------------------------
Canada $ 16,800
United States 9,640
Japan 1,448
Other 3,688
--------------------------------------------------------------------------
$ 31,576
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(ii) Liquidity risk:
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company ensures, as far as possible,
that it will always have sufficient liquidity to meet obligations when due and
monitors cash flow requirements daily and projections weekly. Weekly debt graphs
are reviewed by senior management to monitor cash balances and debt line
utilizations.
The Company also maintains a revolving Canadian Operating Line and a U.S.
Operating Line of credit that can be drawn down to meet short-term financing
needs.
(iii) Market risk:
Market risk is the risk that changes in market prices, such as foreign exchange
rates, interest rates and equity prices, will affect the Company's income or the
value of its holdings of financial instruments. The objective of market risk
management is to manage and control market risk exposures within acceptable
parameters, while optimizing the return on risk.
Currency risk
The Company is exposed to currency risk on cash and deposits, sales, purchases
and loans that are denominated in a currency other than the respective
functional currencies of the Company's domestic and foreign operations,
primarily Canadian (CAD) and U.S. dollars (USD), but also the Euro, Sterling and
Yen. The Company uses forward exchange contracts and cross currency interest
rate swaps to hedge its currency risk, as described in Note 15(b), Derivative
financial instruments. Daily, the Company assesses its foreign exchange exposure
by reviewing outstanding contracts, pending order files and working capital
denominated in foreign currencies.
At September 30, 2008, the Company has US$ drawings under its Revolving Line of
US$30,200,000 (September 30, 2007 - $US nil). The US$ drawings under this Line
have been designated as a hedge against the investment in the Company's
self-sustaining U.S. operations.
At September 30, 2008, the Non-Revolving Line remains fully drawn at
US$35,000,000 (September 30, 2007 - US$35,000,000). To March 31, 2007, the
Company designated the Non-Revolving Line as a hedge against its investment in
its self-sustaining U.S. operations. On April 1, 2007, the Company terminated
the designation of the hedging relationship and discontinued its use of hedge
accounting.
As at September 30, 2008, the Company's accounts receivable were denominated in
the following currencies:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
CAD USD Japanese Yen Euro EUR
---------------------------------------------------------------------------
Accounts receivable 16,502 5,570 51,278 -
Accounts receivable held
by self-sustaining
foreign subsidiaries - 5,361 - -
---------------------------------------------------------------------------
16,502 10,931 51,278 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
As at September 30, 2008, the Company held cash and cash equivalents of
US$1,026,000, offset by bank indebtedness of CAD$3,302,000. Bank indebtedness of
self-sustaining and other foreign subsidiaries totalled US$2,429,000.
Based on the Company's net exposure to foreign currencies as at December 31,
2007, including USD denominated cash held in deposits and cash equivalents and
USD denominated debt and other USD denominated financial instruments, the
sensitivity of the USD balances to the Company's net annual earnings is as
follows:
U.S. Dollar $0.01 increase vs CAD$ $0.8 million increase in net income
Japanese Yen 1 yen increase vs CAD$ $0.1 million increase in net income
Interest rate risk
The Company reduces its exposure to changes in interest rates on borrowings by
entering into cross currency interest rate swaps, as described in Note 15(b)
Derivative financial instruments.
Based on the Company's average debt level during 2007, the sensitivity of a 100
basis point increase in interest rates would result in an approximate decrease
of $0.1 million in net annual earnings.
Other market price risk
The Company does not enter into commodity contracts other than to meet the
Company's expected usage and sale requirements and such contracts are not
settled net.
16. Commitments and contingencies:
(a) Contractual obligations for Adams Lake sawmill construction:
The Company has undertaken commitments under various contracts totalling
$21,641,000 as at September 30, 2008, relating to construction of a new sawmill
at its Adams Lake operation in the southern B.C. Interior. These amounts are
expected to be paid over the next year.
(b) Softwood Lumber Agreement:
The Softwood Lumber Agreement ("SLA") includes a surge mechanism that increases
the export tax by 50% (the "Surge Tax") when the monthly volume of exports
exceeds a certain trigger volume, as defined in the SLA. This calculation is
based on estimated trailing U.S. lumber consumption. In 2007, the U.S. Coalition
for Fair Lumber Imports (the "Coalition") asserted that the consumption volumes
used in calculation of the applicability of a surge tax should be based on a 12
month rolling average actual volume. Under current market conditions, the use of
actual consumption rather than expected consumption would decrease the surge
trigger volume, and could cause the exporters to be liable for additional Surge
Tax. This issue was brought before the London Court of International Arbitration
("LCIA").
On March 4, 2008, the LCIA ruled in favour of the Canadian provinces utilizing
the export charge only option ("Option A") under the SLA, including the Province
of B.C., supporting the Canadian position that Surge Tax was not applicable to
shipments to the U.S. over the period under review for Option A provinces.
(c) Contingency
The P&T assets acquired may have pipe insulation and board in the kiln decks
that contain asbestos. There are no plans to disturb or remove this material and
the Company is unable to determine the amount of asbestos that may be present.
As such, there is insufficient information to apply expected present value
techniques to these conditional asset retirement obligations and no liability
has been recorded.
17. Purchase agreement:
On February 18, 2008, the Company reached an agreement to acquire a timber
tenure in the southern B.C. Interior currently owned by Weyerhaeuser Company.
The agreement is subject to receipt of regulatory approval and is expected to
close in the fourth quarter of 2008.
18. Future Accounting Changes:
(a) International Financial Reporting Standards
The CICA has announced that it will transition Canadian generally accepted
accounting principles ("GAAP") for publicly accountable entities to
International Financial Reporting Standards ("IFRS"). The Company's consolidated
financial statements are to be prepared in accordance with IFRS for the fiscal
year commencing January 1, 2011. The impact of the transition to IFRS on the
Company's consolidated financial statements has not been determined.
(b) Goodwill and Intangible Assets
Effective January 1, 2009, the Company will adopt new CICA Handbook Section
3064, Goodwill and Intangible Assets. This section replaces CICA Handbook
Section 3062, Goodwill and Intangible Assets, and establishes revised standards
for the recognition, measurement, presentation and disclosure of goodwill and
intangible assets. The new standard also provides guidance for the treatment of
various preproduction and start-up costs and requires that these costs be
expensed as incurred. The Company is still evaluating the full impact of this
standard on its consolidated financial statements.
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