INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX:IFP.A)
reported a net loss of $29.4 million, or $0.62 per share, for the second quarter
of 2008, compared to loss of $3.4 million or $0.07 per share for the second
quarter of 2007.
The loss for the quarter includes restructuring costs of $33.0 million ($22.9
million or $0.49 per share, after tax) primarily relating to the permanent
closure of the Company's Queensboro Sawmill Division, which was announced on
July 8, 2008. The site is being actively marketed and proceeds are expected to
more than offset the writedown taken for the permanent closure.
Before restructuring costs, Interfor's net loss for the second quarter amounted
to $6.5 million or $0.14 per share.
EBITDA, adjusted to exclude one-time items and unrealized foreign exchange
gains, was $1.9 million or 1.6% of sales in the second quarter.
Included in the second quarter loss was $0.5 million ($0.4 million or $0.01 per
share, after tax) in continuing costs associated with the Queensboro plant over
and above the restructuring provision and $2.2 million ($1.6 million or $0.03
per share, after tax) in costs associated with the Grand Forks and Castlegar
operations acquired from Pope & Talbot, Inc. ("P&T") on April 30, 2008, but
which remained curtailed following the acquisition.
Interfor's loss in the second quarter reflects lower earnings from the Company's
B.C. coastal operations, primarily as a result of an increase in inventory
levels following the resumption of logging activity in the spring. The
difference vis-a-vis the first quarter was magnified by the lagged effect of the
2007 coastal industry work stoppage which resulted in higher-than-normal
year-end log inventories and a greater-than-normal earnings' contribution in the
first quarter as those inventories were drawn down. Lower prices for some cedar
products and reduced activity in Japan, along with higher stumpage rates,
further impacted the Company's results in the second quarter.
The performance of the Company's commodity operations improved in the second
quarter as prices increased on most product lines.
In the quarter, SPF 2X4 prices increased 14% to US$232 per mfbm compared to
US$203 per mfbm in the first quarter, while the Random Lengths Composite Index
increased 9% to US$266 compared with US$244 per mfbm in the previous quarter.
Interfor continued to proactively manage production levels in the second quarter
in the face of weak market demand. Lumber production amounted to 128 million
board feet compared to 104 million board feet in the first quarter of 2008.
Sales were 125 million board feet compared with 113 million board feet in the
first quarter.
Cash flow from operations in the second quarter was $6.2 million after changes
in working capital were considered.
After taking account of capital spending and the P&T acquisition, the Company
ended the quarter with net debt of $60.5 million, or 13.0% of invested capital.
Good progress was made on the Adams Lake project in the second quarter.
Construction is approximately 60% complete and is on-schedule and on-budget. The
mill is expected to commence start-up procedures in the fourth quarter of 2008.
The U.S. housing market is expected to remain soft through the balance of 2008
as the pace of sales remains slow. Commodity prices have weakened in recent
weeks and remain below breakeven levels on most items. Prices for cedar in the
domestic market have softened and are likely to remain slow through the summer.
Offshore markets for high grade items remain steady while the outlook for pine
specialties is mixed. The pace of activity in Japan has slowed in recent months
as the economy is impacted by the slowdown in the U.S. and by higher prices for
most types of commodities.
In spite of the weak market environment, Interfor continues to pursue
opportunities to enhance long-term value. Earlier today, the Company entered
into an agreement with Portac, Inc. ("Portac") to acquire its operations on the
Olympic Peninsula in Washington State for US$28.25 million plus an amount for
working capital. Interfor has bank facilities in place to fund the acquisition.
The agreement with Portac also provides Interfor with an option to pay a portion
of the purchase price in Interfor Class A Subordinate Voting shares, to a
maximum of 2.3 million shares. The Portac assets include a sawmill and planer
mill with production capacity of approximately 145 million board feet per year.
"The Portac mill is an excellent fit with our operations in the area," said
Duncan Davies, Interfor's President and C.E.O. "The mill produces dimension
products and small timbers in lengths up to 20 feet which will nicely complement
our product mix and presence in the Puget Sound market."
The Portac acquisition is in line with the Company's strategy of building a
diversified geographic base of operations and will bring Interfor's production
capacity in the U.S. Pacific Northwest to 670 million board feet on an annual
basis. The purchase price is equivalent to US$195 per mfbm of annual capacity
and represents an enterprise value multiple of 1.7 times peak EBITDA (2004/5).
Interfor has projected annual synergies from the acquisition in the range of
US$1 to 2 million per year from a combination of reduced administrative expenses
and improved operating efficiency.
The transaction is subject to customary closing conditions and scheduled to
close on September 30, 2008.
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, July 25, 2008 at 8:00 AM (Pacific
Time) hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose of
reviewing the Company's release of its Second 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
August 8, 2008. The number to call is 1-866-245-6755 Passcode 197169.
For further information regarding the Portac acquisition:
Ric Slaco
Vice President and Chief Forester
(604) 689-6843
International Forest Products Limited
Second Quarter Report
For the three and six months ended June 30, 2008
Management's Discussion and Analysis
Dated as of July 24, 2008
This Management's Discussion and Analysis ("MD&A") provides a review of
Interfor's financial performance for the three and six months ended June 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 six months ended June 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 $29.4 million, or $0.62 per share for the second
quarter of 2008, and a net loss for the six months ended June 30, 2008 of $30.5
million, or $0.65 per share. This compares to a net loss of $3.4 million, or
$0.07 per share, for the same quarter in 2007 and a net loss of $2.8 million, or
$0.06 per share, for the six months ended June 30, 2007.
EBITDA and Adjusted EBITDA for the second quarter of 2008 were $2.5 million and
$1.9 million, respectively, compared to $14.5 million and $12.6 million, for the
second quarter of 2007. EBITDA and adjusted EBITDA for the first half of 2008
were $11.0 million and $10.4 million, respectively, compared to $27.5 million
and $23.4 million for the same period in 2007.
Before restructuring costs, foreign exchange gains (losses) and other one-time
items, the Company's net loss for the second quarter, 2008, was $7.1 million
after-tax, or $0.15 per share, as compared to a loss of $0.3 million after-tax,
or $0.01 per share in the second quarter, 2007. The losses for the first half of
2008, adjusted for restructuring costs, foreign exchange gains (losses) and
other one-time items totalled $6.4 million after-tax, or $0.14 per share, as
compared to $0.1 million after-tax, or $0.00 per share for the first half of
2007.
Included in the second quarter results of 2008 were $0.5 million ($0.4 million
after-tax, or $0.01 per share) in continuing costs associated with the
Queensboro sawmill in excess of the restructuring provision, and $2.2 million
($1.6 million after-tax, or $0.03 per share) for the first half of 2008. In
addition, the second quarter 2008 results included $2.2 million ($1.5 million
after-tax, or $0.03 per share) in costs associated with the Grand Forks and
Castlegar sawmills purchased from Pope & Talbot, Inc. ("P&T") on April 30, 2008.
These mills remain curtailed following the acquisition, and the Queensboro mill
is permanently shutdown.
Interfor's loss in the second quarter reflects lower earnings from the Company's
B.C. coastal operations, primarily as a result of an increase in inventory
levels following resumption of logging activity in the spring. The difference
vis-a-vis the first quarter was magnified by the lagged effect of 2007 coastal
industry work stoppage which resulted in higher-than-normal year-end log
inventories and a greater-than-normal earnings contribution in the first quarter
as those inventories were drawn down. Lower prices for some cedar products and
reduced activity in Japan, along with higher stumpage rates, further impacted
the Company's results in the second quarter.
North American structural lumber prices were depressed through the first quarter
of 2008 and strengthened slightly during the second quarter as markets responded
to the reduced supply resulting from production curtailments taken by North
American mills in the first quarter. 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 second quarter and first half of
2008. Seasonally adjusted U.S. housing starts in June 2008 were down 26.9%
year-over-year.
Production in the Company's commodity operations was proactively curtailed in
the first quarter of 2008, and continued into the second quarter, but slight
improvements in pricing justified the operation of most mills on a one shift
basis throughout the second quarter.
In all areas, the focus is on inventory management.
Sales
Lumber shipments were down 144.6 million board feet, or 53.6%, for the second
quarter of 2008 compared to the same quarter of 2007, and down 275.3 million
board feet, or 53.6% for the first half of 2008 compared to the first half of
2007, reflecting lower operating rates and the permanent closure of Queensboro.
Relative to the same periods in 2007, unit lumber sales values increased by $127
per mfbm, or 24.0%, for the quarter and $138 per mfbm, or 26.2%, for the six
months, resulting from a change in the sales mix to higher percentage of
higher-value cedar and Japanese hemlock product. The Canadian dollar was up 9
cents on average, or 8.0%, relative to its U.S. counterpart compared to the
second quarter of 2007, and 13 cents on average, or 11.3%, compared to the first
half of 2007.
In comparison to the same periods of 2007, log sales were down $7.5 million, or
22.7%, for the second quarter, and $4.0 million, or 7.5%, in the first half of
2008, with higher sales volumes of lower quality logs to reduce and manage
inventories and meet the demand for pulp logs. The average sales price declined
to $79 per cubic metre in the second quarter of 2008, as compared to $101 per
cubic metre for the second quarter of 2007 and $77 per cubic metre in the first
half of 2008, as compared to $97 per cubic metre for the first half of 2007.
Pulp chip and other by-product revenues for the second quarter of 2008 were down
$9.7 million, or 56.8%, compared to the second quarter of 2007, and down $20.2
million, or 61.1%, for the first half of 2008 compared to the first half of
2007, with sales volumes down significantly due to the mill curtailments.
Relative to the same periods in 2007, average chip prices were down $7 per mfbm,
or 13.0%, for the second quarter of 2008, and $11 per mfbm, or 20.0%, for the
first half of 2008.
Operating Costs
Production costs for the second quarter of 2008 were down $62.0 million, or
35.9%, and $105.3 million, or 33.2%, for the first half of 2008, compared to the
same periods in 2007, substantially as a result of market curtailments and the
permanently closed Queensboro operation - lumber production was down 142 million
board feet, or 52.6% for the second quarter, 2008 compared to the second
quarter, 2007, and down 286 million board feet, or 55.2% for the first half of
2008 compared to the first half of 2007. Weaker demand for logs in the Pacific
Northwest resulted in lower log prices for purchased logs.
Compared to the same periods in 2007, B.C. log production increased by 53,000
cubic metres, or 8.5%, in the second quarter of 2008 and 97,800 cubic metres, or
9.9%, in the first half of 2008, with a substantial portion harvested through
heli-logging which resulted in higher logging costs. Also included in production
costs were costs related to the acquired Grand Forks and Castlegar mills which
have been curtailed since acquisition on April 30, and continuing costs in
excess of the restructuring provision for the permanently closed Queensboro
mill.
The Canada/U.S. lumber export tax remained at 15% through the first half of
2008. Export taxes totalled $1.2 million for the second quarter, 2008, compared
to $3.0 million for the second quarter, 2007, and $2.1 million for the first
half of 2008, compared to $6.2 million for the first half of 2007. These
declines were due to a drop of 36 million board feet in shipments to the U.S.
for the second quarter, 2008, and 78 million board feet for the first half, 2008
compared to the same periods of the previous year. Export taxes were also
impacted by the strengthening Canadian dollar.
Selling and administrative costs for the second quarter of 2008 remained
constant compared to the second quarter of 2007, as did the costs for the first
half of 2008 compared to the first half of 2007. The Company recorded long term
incentive compensation ("LTIC") recovery of $0.1 million for the second quarter
of 2008, reflecting a decline in the Company's share price over the period. For
the first half of 2008, the LTIC recovery totalled $0.4 million, again
reflecting a year-to-date decline in the share price. For the second quarter of
2007, the Company recorded a LTIC expense of $2.8 million and $4.8 million for
the first half of 2007.
Amortization and depletion expense for the second quarter of 2008 was down $3.1
million, or 18.9% compared to the same quarter of 2007 and down $6.1 million, or
21.6% for the first half of 2008, compared to the same half of 2007, primarily
as a result of lower operating rates for the mills. In the second quarter, 2008,
reduced amortization and depletion expense was offset in part by increased road
amortization in Coastal Woodlands resulting from increased logging activity.
Restructuring costs totalled $33.0 million in the second quarter of 2008,
compared to $1.4 million in the second quarter of 2007, and $35.2 million in the
first half of 2008, compared to $1.6 million in the first half of 2007. On July
8, 2008, the Company announced the permanent closure of the Queensboro sawmill
located in New Westminster, B.C., following more than a year of continuous
curtailment. During the curtailment period the majority of the mill's hourly
employees accepted the Company's offer of voluntary severance. The remaining
employees will receive severance following the effective date of the closure.
For the second quarter, 2008, severance costs total $2.1 million, and $3.9
million for the first half of 2008. In addition to severance costs, in the
second quarter, 2008, the Company accrued costs of $1.0 million to remediate the
mill site in preparation for sale, and took a provision of $29.8 million to
adjust the carrying value of plant and equipment at the site to expected
recovery amounts. Equipment at the site will be redeployed to other Company
sites or sold.
Cushman & Wakefield LePage has been retained to market the Queensboro site, and
proceeds are expected to more than offset the writedown taken for the permanent
closure. The Queensboro site has been classified as held for sale on the Balance
Sheet as the expectation is that the property will sell prior to the end of the
year.
Additional severance costs arising from the permanent closure of the Albion
remanufacturing operation located in Maple Ridge, B.C. and other restructuring
total $0.1 million for the second quarter of 2008, and $0.5 million for the
first half of 2008.
Interest, Other Foreign Exchange Gain (Loss), Other Income
For the second quarter of 2008, net interest expense was $0.8 million, compared
to the net interest income of $0.5 million in the same quarter of 2007. For the
first half of 2008, net interest expense was $1.2 million, compared to the net
interest income of $1.4 million for the first half of 2007. Investment of
significant cash balances retained from the U.S. duty refunds received in late
2006, generated interest income in the first two quarters of 2007. These cash
balances have since been drawn down. Other foreign exchange gains were $0.4
million for the three months ended June 30, 2008 and a negligible loss for the
first half of 2008. This compares to a loss of $5.3 million for the second
quarter of 2007, and a loss for the first half of 2007 of $6.5 million, which
arose from the impact of the stronger CAD$ on $U.S. cash balances held after
receipt of the U.S. duty refund.
The Company reported $0.6 million in Other income from net compensation received
under the Forest Revitalization Act and gains on disposal of surplus equipment
for the second quarter and first half of 2008. This compares with $1.9 million
generated from gains on disposal of surplus property, plant and equipment in the
second quarter of 2007 and $4.1 million in the first half of 2007 which included
disposal of surplus assets and the Company's interest in Tree Farm Licence 54.
Cash Flow and Financial Position
Cash generated by the Company from operations, after changes in working capital,
was $6.2 million for the second quarter of 2008, compared to cash used of $6.3
million for the second quarter of 2007. The increase was due to reduced
investment in working capital as a result of mill curtailments, offset by lower
earnings and the seasonal build-up of inventories over the quarter. In addition,
the Company received an income tax refund of $13.3 million on the filing of its
2007 income tax returns. For the six months ended June 30, 2008 the Company
generated $30.2 million cash from operations compared to cash used of $34.3
million in the first six 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 offset by lower earnings and
less working capital utilization due to curtailments as well as receipt of
income tax refunds of $13.3 million in the first half of 2008.
Capital expenditures for the second quarter of 2008 were $21.0 million,
excluding changes in amounts accrued, and $34.7 million year-to-date (Quarter 2,
2007 - $16.8 million; first half, 2007 - $33.2 million). Spending in the current
quarter consisted of $13.3 million on the new Adams Lake sawmill, $1.4 million
on other high-return discretionary projects, $0.6 million on maintenance
projects, $0.5 on land development at Queensboro to prepare the site for sale
and $5.3 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 April 25, 2008, the Company renewed its existing Canadian operating line of
credit for one year, and increased it from $40.0 million to $100.0 million. The
Company's existing Canadian revolving term line of credit ("Revolving Line")
increased from $10.0 million to $115.0 million, with $55.0 million of the
Revolving Line made available on April 25, 2008, and the remainder of $60.0
million made available on April 30, 2008, when the acquisition of the P&T
sawmill and timber assets completed. The Revolving Line matures on April 24,
2011.
The maturity date of the U.S. operating line of credit was extended to August 1,
2008. The Company also received a commitment from its lender to extend the
maturity date of the U.S. operating line to April 24, 2009 and Interfor has
provided a parent guarantee on the line.
For all lines, the terms and conditions remain unchanged except for an increase
in the interest rate margins.
On April 30, 2008, the Company concluded the acquisition of the P&T Castlegar,
B.C. and Grand Forks, B.C. sawmills, related timber harvesting rights and other
related assets. To acquire these assets, the Company paid $49.4 million. See
"Acquisition of P&T's Mills and Woodlands" below for further discussion.
To fund the P&T transaction and the Adams Lake expansion, the Company utilized
cash on hand and the Revolving Line and as at June 30, 2008, the Revolving Line
was drawn by $28.0 million. At June 30, 2007 there were no drawings under this
Revolving Line.
As part of the P&T asset purchase, the Company had paid a US$8.8 million
interest-bearing deposit held in escrow in respect of the transaction. With
accumulated interest, the deposit totalled US$9.0 million and was used to
partially fund the acquisition when it completed on April 30, 2008.
There were no shares purchased under the Company's Normal course Issuer Bid in
the second quarter of 2008 or the first half of 2008 (Quarter 2, 2007 - 367,600
Class A shares at a cost of $3.3 million; first half of 2007 - 714,600 Class A
shares at a cost of $6.0 million), nor were there any shares issued under the
Company's share option plan (Quarter 2, 2007 - 121,340 Class A shares for
proceeds of $0.7 million; first half of 2007 - 179,280 Class A shares for
proceeds of $0.8 million).
At June 30, 2008, the Company had cash and cash equivalents of $3.6 million.
After deducting the Company's US$ Non-Revolving Line of $35.4 (US$35.0) million,
the Revolving Line of $28.0 million, and bank indebtedness the Company ended the
quarter with net debt of $60.5 million or 13.0% of invested capital. This
compares to a net cash balance of $44.5 million or (10.8%) of invested capital
at June 30, 2007.
Selected Quarterly Financial Information
Quarterly Earnings
Summary(4) 2008 2007 2006
------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
------------------------------------------------------
(millions of dollars except share and per share amounts)
Sales
- Lumber 82.2 76.2 70.7 93.2 143.0 127.5 120.5 153.9
- Logs 25.7 30.9 35.6 30.3 33.2 19.4 32.6 31.4
- Wood chips and
other by-products 7.4 5.5 7.2 10.0 17.1 16.0 12.1 11.3
- Other 2.1 1.8 1.9 2.0 2.1 1.7 9.3 12.6
------------------------------------------------------
Total Sales 117.4 114.4 115.4 135.5 195.4 164.6 174.5 209.2
------------------------------------------------------
Operating earnings
(loss) before U.S.
duty refunds, net,
restructuring costs
and asset write-
downs (11.8) (1.3) (15.3) (4.6) (3.5) (1.8) (2.4) -
Operating earnings
(loss) (44.8) (3.5) (15.7) (4.6) (4.9) (2.1) 94.5 -
Net earnings (loss) (29.4) (1.1) (8.9) (1.6) (3.4) 0.6 77.2 1.6
Net earnings (loss)
per share
- basic (0.62) (0.02) (0.19) (0.03) (0.07) 0.01 1.60 0.03
- diluted (0.62) (0.02) (0.19) (0.03) (0.07) 0.01 1.58 0.03
EBITDA(3) 2.5 8.5 (4.6) 8.9 14.5 13.0 115.0 14.5
Cash flow from
operations per
share(1) (0.06) 0.22 (0.06) 0.10 0.12 0.37 1.82 0.29
Shares outstanding
- end of period
(millions)(2) 47.1 47.1 47.1 47.1 47.6 47.8 48.1 48.3
- weighted average
(millions) 47.1 47.1 47.1 47.4 47.8 48.0 48.2 48.4
Adjusted EBITDA(3) 1.9 8.5 (4.7) 7.2 12.6 10.8 11.5 13.9
1 Cash generated from operations before taking account of changes in
operating working capital.
2 As at July 23, 2008, the number of shares outstanding by class are: Class
A Subordinate Voting shares - 46,089,076 Class B Common shares -
1,015,779, Total - 47,104,855.
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
------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
------------------------------------------------------
(millions of dollars)
Net earnings (loss) (29.4) (1.1) (8.9) (1.6) (3.4) 0.6 77.2 1.6
Add: Income taxes
(recovery) (14.6) (2.5) (7.1) (1.8) (4.5) (0.3) 38.5 (1.3)
Interest expense
(income) 0.8 0.4 0.2 (0.1) (0.5) (0.9) 0.5 0.9
Interest income on
U.S. duty refund,
net of special
charge - - - - - - (12.7) -
Depletion and
amortization 13.1 9.1 10.7 11.7 16.2 12.2 13.6 13.4
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 33.0 2.2 0.3 - 1.4 0.3 - -
------------------------------------------------------
EBITDA 2.5 8.5 (4.6) 8.9 14.5 13.0 115.0 14.5
Deduct:
U.S. duty refunds,
net - - - - - - 96.9 -
Other income 0.6 - 0.2 1.7 1.9 2.2 6.6 0.6
------------------------------------------------------
Adjusted EBITDA 1.9 8.5 (4.7) 7.2 12.6 10.8 11.5 13.9
------------------------------------------------------
Volume and Price
Statistics 2008 2007 2006
-------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------
Lumber sales (million fbm) 125 113 161 196 270 244 225 299
Lumber
production(1) (million fbm) 128 104 150 187 269 249 222 292
Log sales(2) (thousand cubic
metres) 312 399 382 315 319 207 381 358
Log production(2) (thousand cubic
metres) 679 411 373 401 626 366 616 707
Average selling
price - lumber(3) ($/thousand fbm) $658 $672 $441 $476 $530 $522 $534 $515
Average selling
price - logs(2) ($/cubic metre) $ 79 $ 75 $ 91 $ 95 $101 $ 91 $ 85 $ 87
Average selling
price - pulp
chips ($/thousand fbm) $ 47 $ 41 $ 37 $ 43 $ 54 $ 56 $ 49 $ 35
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 seven most recent quarters 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 had a lesser impact. These factors contributed to lower
operating rates and lumber sales realizations in the applicable periods.
Acquisition of P&T's Mills and Woodlands
On November 19, 2007, the Company and 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.
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 and Neiman concluded their acquisition of the Spearfish sawmill
and related assets.
To acquire these assets, the Company paid $49.4 million, of which $9.0 million
was funded through the deposit held in escrow, $17.7 million was financed
through the Revolving Line, and the balance of $22.7 million through cash on
hand. Amounts paid in US$ were translated to CAD$ at the April 29, 2008 rate of
US$0.9882 : CAD$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 purchase price paid has been placed in
escrow and the Company expects some amount to be returned to the Company upon
determination of the adjustment amounts or the obtaining of certain
authorization in accordance with the P&T APA. The amount to be returned cannot
be determined as it is subject to either the agreement of the Company and P&T,
or the determinations of an independent accounting firm. The total consideration
and purchase price will be adjusted once these amounts have been determined.
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 closing.
Work has been initiated on a number of opportunities which have been identified
to improve the financial performance of the mills through improvements in
operational efficiency and other non-capital initiatives, and other cost savings
that will be realized through high-return capital projects.
Agreement to Purchase Portac, Inc. Assets
On July 24, 2008, the Company entered into an agreement with Portac, Inc.
("Portac"), a subsidiary of Mitsui U.S., Inc., to acquire its operations on the
Olympic Peninsula in Washington State. The Portac assets include a sawmill and
planer mill with production capacity of 145 million board feet per year. The
purchase price is US$28.25 million plus an amount for working capital. Interfor
has existing bank facilities in place to fund the acquisition, but has an option
to pay up to US$15.25 million of the purchase price in Class A Subordinate
Voting shares of Interfor to a maximum of 2.3 million shares. The transaction is
subject to customary closing conditions and is scheduled to close on September
30, 2008.
The Portac mill is an excellent fit with existing Interfor operations at Port
Angeles, producing dimension products and small timbers in lengths up to 20 feet
which complement Interfor's product mix and presence in the Puget Sound market.
The Portac acquisition is in line with the Company's strategy of building a
diversified geographic base of operations and will bring Interfor's production
capacity in the U.S. Pacific Northwest to 670 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 is expected to benefit Interfor's sawmill at Adams Lake by strengthening
Interfor's long term timber supply in the region and helping to offset
anticipated declines in future supply as a result of the Mountain Pine Beetle
infestation.
The transaction is subject to various regulatory reviews and is expected 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' results.
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 June 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 June 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 U.S. housing market is expected to remain soft through the balance of 2008
as the pace of home sales remains slow and unsold housing inventory remains
high. Commodity prices have weakened in recent weeks and remain below breakeven
levels on most items. Prices for cedar in the domestic market have softened and
are likely to remain slow through the summer. Offshore markets for high grade
items remain steady while the outlook for pine specialties is mixed. The pace of
activity in Japan has slowed in recent months as the economy is impacted by the
slowdown in the U.S. and by higher prices for most types of commodities.
Concerns over the health of the U.S. economy continues to impact currency
markets, and thus the outlook for the CAD$ versus the US$ and Yen for 2008
remains volatile.
Stumpage rates on the B.C. Coast for the third quarter of 2008 are anticipated
to decrease and coastal logging operations expect to take fire season shutdowns,
but have sufficient inventories to carry the mills through the third quarter.
The Company will continue to regularly monitor the economics of affected
operations and curtail production where necessary, with a focus to managing
inventory levels.
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 Duncan K. Davies
Chairman President and Chief Executive Officer
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
(thousands of Canadian dollars June 30, June 30, June 30, June 30,
except earnings per share) 2008 2007 2008 2007
--------------------------------------------------------------------------
Sales $ 117,404 $ 195,412 $ 231,778 $ 360,058
Costs and expenses:
Production 110,484 172,487 211,851 317,175
Selling and administration 4,513 4,483 9,004 8,936
Long term incentive compensation
expense (recovery) (102) 2,761 (361) 4,753
Export taxes 1,180 3,035 2,116 6,171
Amortization of plant and
equipment 5,768 8,340 11,452 15,851
Depletion and amortization of
timber, roads and other 7,339 7,828 10,788 12,525
-------------------------------------------------------------------------
129,182 198,934 244,850 365,411
--------------------------------------------------------------------------
Operating loss before
restructuring costs (11,778) (3,522) (13,072) (5,353)
Restructuring costs (note 10) (33,009) (1,390) (35,249) (1,640)
--------------------------------------------------------------------------
Operating loss (44,787) (4,912) (48,321) (6,993)
Interest expense on long-term
debt (700) (728) (1,218) (1,524)
Other interest income (expense) (120) 1,201 31 2,884
Other foreign exchange gain
(loss) 379 (5,328) (6) (6,477)
Other income (note 9) 552 1,905 559 4,131
Equity in earnings of investee
companies 608 (66) 1,275 367
--------------------------------------------------------------------------
719 (3,016) 641 (619)
--------------------------------------------------------------------------
Loss before income taxes (44,068) (7,928) (47,680) (7,612)
Income taxes (recovery):
Current (3,090) (1,719) (7,440) (1,625)
Future (11,555) (2,780) (9,725) (3,155)
--------------------------------------------------------------------------
(14,645) (4,499) (17,165) (4,780)
--------------------------------------------------------------------------
Net loss $ (29,423) $ (3,429) $ (30,515) $ (2,832)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net earnings (loss) per share,
basic and diluted (note 11) $ (0.62) $ (0.07) $ (0.65) $ (0.06)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the six months ended June 30, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
6 Months 6 Months
June 30, June 30,
(thousands of Canadian dollars) 2008 2007
--------------------------------------------------------------------------
Retained earnings, beginning of year, as restated
(note 2(d)) $ 170,584 $ 183,905
Net loss (30,515) (2,832)
--------------------------------------------------------------------------
Retained earnings, end of period $ 140,069 $ 181,073
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and six months ended June 30, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
(thousands of Canadian dollars) 2008 2007 2008 2007
--------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings (loss) $ (29,423) $ (3,429) $ (30,515) $ (2,832)
Items not involving cash:
Amortization of plant and
equipment 5,768 8,340 11,452 15,851
Depletion and amortization of
timber, roads and other 7,339 7,828 10,788 12,525
Future income taxes (recovery) (11,555) (2,780) (9,725) (3,155)
Other assets (268) (487) (297) 1,195
Reforestation liability (2,981) 1,123 (2,591) 1,264
Other long-term liabilities (71) (268) (116) 1,707
Share of earnings net (in
excess) of cash distributions
of investee company (608) 66 (1,275) 4,002
Write-down of plant and
equipment 29,750 - 29,750 -
Foreign exchange loss (gain) on
translation of long term debt (382) (3,122) 675 (3,500)
Other (594) (1,925) (622) (4,172)
-------------------------------------------------------------------------
(3,025) 5,346 7,524 22,885
Cash generated from (used in)
operating working capital:
Accounts receivable (3,209) (12,774) 1,193 (9,107)
Inventories (10,343) 1,576 3,250 (2,591)
Prepaid expenses (1,378) (1,419) (1,168) (2,641)
Accounts payable and accrued
liabilities 15,130 3,564 14,764 (17,793)
Income taxes 9,013 (2,933) 4,627 (25,405)
--------------------------------------------------------------------------
6,188 (6,640) 30,190 (34,652)
Investing activities:
Additions to property, plant
and equipment (15,965) (7,716) (25,611) (18,446)
Additions to deferred start-up
costs - - - (959)
Additions to logging roads and
timber (5,257) (9,077) (7,897) (13,819)
Proceeds on disposal of property,
plant, equipment, timber and
roads 837 2,598 865 6,386
Acquisition of Pope and Talbot
sawmills and related timber
assets (note 5) (49,418) - (49,418) -
Deposit held in escrow for
acquisition 9,007 - 8,943 -
Investments and other assets 435 (103) 63 (566)
--------------------------------------------------------------------------
(60,361) (14,298) (73,055) (27,404)
Financing activities:
Repurchase of share capital
(note 8) - (3,310) - (5,997)
Issuance of share capital (note 8) - 611 - 849
Increase (decrease) in bank
indebtedness 682 - 682 (582)
Additions to long-term debt 66,925 - 66,925 -
Repayments of long-term debt (38,925) - (38,925) -
-------------------------------------------------------------------------
28,682 (2,699) 28,682 (5,730)
Foreign exchange gain (loss) on
cash and cash equivalents
held in a foreign currency 591 (141) (62) 453
--------------------------------------------------------------------------
Decrease in cash and cash
equivalents (24,900) (23,778) (14,245) (67,333)
Cash and cash equivalents,
beginning of period 28,450 105,616 17,795 149,171
--------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 3,550 $ 81,838 $ 3,550 $ 81,838
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Supplementary disclosures
Cash interest paid (received) $ 820 $ (473) $ 1,187 $ (1,360)
Cash income taxes paid
(received) (13,336) 778 (13,336) 23,250
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
June 30, 2008 and 2007 (unaudited) and December 31, 2007 (audited)
-------------------------------------------------------------------------
June 30, Dec. 31, June 30,
(thousands of Canadian dollars) 2008 2007 2007
-------------------------------------------------------------------------
restated - restated -
Assets note 2(d) note 2(d)
Current assets:
Cash and cash equivalents $ 3,550 $ 17,795 $ 81,838
Deposit (note 5) - 8,761 -
Accounts receivable 36,091 37,172 58,937
Income taxes recoverable 4,211 8,838 -
Inventories (note 6) 82,286 76,429 82,364
Prepaid expenses 7,859 6,267 6,848
Future income taxes 5,367 3,083 3,074
------------------------------------------------------------------------
139,364 158,345 233,061
Investments and other assets (note 2(d)) 14,624 12,270 11,065
Property, plant and equipment, net
of accumulated amortization 302,131 300,150 295,702
Timber and logging roads, net of
accumulated depletion and amortization 95,248 55,050 48,686
Goodwill and other intangible assets 13,078 13,078 13,131
Future income taxes 11,201 7,000 2,630
Long-lived assets held for sale 12,511 3,239 3,233
-------------------------------------------------------------------------
$ 588,157 $ 549,132 $ 607,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 7(a)) $ 682 $ - $ -
Accounts payable and accrued liabilities 78,478 49,999 76,737
Income taxes payable - - 2,221
Future income taxes - - 2
------------------------------------------------------------------------
79,160 49,999 78,960
Reforestation liability, net of
current portion 17,226 11,874 14,474
Long-term debt (note 7(b)) 63,371 34,696 37,289
Other long-term liabilities 13,032 8,859 10,309
Future income taxes 11,021 13,080 9,064
Shareholders' equity:
Share capital (note 8)
Class A subordinate voting shares 284,444 284,444 287,521
Class B common shares 4,080 4,080 4,080
Contributed surplus 5,408 5,408 6,137
Accumulated other comprehensive
income (loss) (29,654) (33,892) (21,399)
Retained earnings (note 2(d)) 140,069 170,584 181,073
------------------------------------------------------------------------
404,347 430,624 457,412
--------------------------------------------------------------------------
$ 588,157 $ 549,132 $ 607,508
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Commitment and Contingencies (note 16)
Purchase agreement (note 17)
Subsequent event (notes 7(a) and 18)
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 six months ended June 30, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
(thousands of Canadian dollars) 2008 2007 2008 2007
--------------------------------------------------------------------------
Net loss $ (29,423) $ (3,429) $ (30,515) $ (2,832)
Other comprehensive income
(loss), net of income taxes
(recovery):
Net change in unrealized
foreign currency translation
gains (losses) (1,596) (13,978) 4,238 (15,038)
--------------------------------------------------------------------------
Other comprehensive income
(loss) (1,596) (13,978) 4,238 (15,038)
--------------------------------------------------------------------------
Comprehensive loss $ (31,019) $ (17,407) $ (26,277) $ (17,870)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the six months ended June 30, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
6 Months 6 Months
June 30, June 30,
(thousands of Canadian dollars) 2008 2007
--------------------------------------------------------------------------
Accumulated other comprehensive loss, beginning of
year $ (33,892) $ (6,361)
Other comprehensive income (loss) 4,238 (15,038)
--------------------------------------------------------------------------
Accumulated other comprehensive loss, end of period $ (29,654) $ (21,399)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 months ended June 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 the 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 As
reported Adjustment adjusted
--------------------------------------------------------------------------
Consolidated Statement of Retained
Earnings for the six months ended
June 30, 2007:
Retained earnings, beginning $ 181,477 $ 2,428 $ 183,905
Consolidated Balance Sheet as at
June 30, 2007:
Investments and other assets 8,637 2,428 11,065
Retained earnings, ending 178,645 2,428 181,073
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. Acquisition of Pope and Talbot, Inc. sawmills:
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. sawmills, related timber harvesting rights and other
related assets and Neiman concluded their acquisition of the Spearfish sawmill
and related assets.
To acquire these assets, the Company paid $49,418,000, 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 $22,702,000 through cash on hand. Amounts
paid in US$ were translated to CAD$ at the April 29, 2008 rate of US$0.9882 :
CAD$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 and the Company expects some amount to be returned to the Company upon
determination of the adjustment amounts or the obtaining of certain
authorization in accordance with the P&T APA. The amount to be returned cannot
be determined as it is subject to the agreement of the Company and P&T, and the
determination of an independent accounting firm. The total consideration and
purchase price will be adjusted once these amounts have been determined.
The purchase price has been allocated on a preliminary basis to the fair value
of assets acquired and related liabilities arising from the transaction, based
on management's best estimates and taking into account all available information
to June 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 the P&T acquisition.
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.
This acquisition has been accounted for using the purchase method and the
purchase price is allocated as follows:
--------------------------------------------------------------------------
Net assets acquired:
Current assets $ 9,252
Property, plant and equipment 23,287
Timber and logging roads 43,000
--------------------------------------------------------------------------
75,539
Liabilities assumed:
Current liabilities (12,447)
Reforestation and other long-term obligations (12,232)
Future income taxes (1,442)
--------------------------------------------------------------------------
$ 49,418
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash consideration funded by:
Cash on hand $ 22,702
Deposit held in escrow 9,007
Revolving Line 17,709
--------------------------------------------------------------------------
$ 49,418
--------------------------------------------------------------------------
--------------------------------------------------------------------------
6. Inventories:
--------------------------------------------------------------------------
June 30, Dec. 31, June 30,
2008 2007 2007
--------------------------------------------------------------------------
Logs $ 56,449 $ 53,631 $ 51,884
Lumber 19,379 18,588 25,219
Other 6,458 4,210 5,261
--------------------------------------------------------------------------
$ 82,286 $ 76,429 $ 82,364
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 June 30, 2008 was $18,024,000 (December 31, 2007 -
$16,019,000; June 30, 2007 - $9,527,000).
7. Cash, bank indebtedness and long-term debt:
(a) Bank indebtedness:
--------------------------------------------------------------------------
Canadian U.S.
Operating Operating
June 30, 2008 Facility Facility Total
--------------------------------------------------------------------------
Available line of credit $ 100,000 $ 10,106 $ 110,106
Maximum borrowing available 65,056 7,398 72,454
Unused portion of line 60,211 6,267 66,478
Outstanding letters of credit included
in line utilization 4,845 121 4,966
--------------------------------------------------------------------------
--------------------------------------------------------------------------
December 31, 2007
--------------------------------------------------------------------------
Available line of credit $ 40,000 $ 9,913 $ 49,913
Maximum borrowing available 40,000 9,913 49,913
Unused portion of line 35,182 9,794 44,976
Outstanding letters of credit included
in line utilization 4,818 119 4,937
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 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, the maturity date of the U.S. operating line of
credit was extended to August 1, 2008 with an increase to the interest rate
margins. In July, 2008, the Company received a commitment from its lender to
extend the maturity date of the U.S. operating line to April 24, 2009. The
Company has provided a parent guarantee on the line.
(b) Long-term debt:
In the second quarter of 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. The financing renewed on April 25,
2008, with $55,000,000 of the Revolving Line made available at that time, and
the remainder of $60,000,000 was made available on April 30, 2008 when the P&T
transaction completed. The extended Revolving Line matures on April 24, 2011.
The Revolving Line 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 P&T transaction and the Adams Lake sawmill capital project, the
Company utilized the Revolving Line and as at June 30, 2008, the Line was drawn
by $28,000,000 (December 31, 2007 - $nil; June 30, 2007 - $nil).
The US dollar non-revolving term line (the "Non-Revolving Line") remains fully
drawn at US$35,000,000 (December 31, 2007 - US$35,000,000; June 30, 2007 -
US$35,000,000) and was revalued at the quarter-end exchange rate to $35,371,000
(December 31, 2007 - $34,696,000; June 30, 2007 - $37,289,000). 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 and matures on September 1, 2009. The foreign exchange loss of
$675,500 (June 2007 - $3,122,000 gain) arising on revaluation of the
Non-Revolving Line for the six months ended June 30, 2008 was recognized in
Other foreign exchange gain (loss) on the Statement of Operations. In 2007, the
Company had designated the Non-Revolving Line as a hedge against its investment
in its self-sustaining U.S. operations until March 31, 2007, and the foreign
exchange gain of $378,000 for the first quarter of 2007 was recognized in Other
Comprehensive Income.
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 $ 35,371
2010 -
2011 28,000
2012 -
2013 -
---------------------------------------------------------------------------
$ 63,371
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 6 Months 6 Months
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Acquisitions under normal
course issuer bid
Number of shares purchased
and cancelled - 367,600 - 714,600
Cost - $ 3,310 $ - $ 5,997
Excess of cost of shares
over assigned value charged
to contributed surplus - 1,040 - 1,583
Shares issued on exercise of
options
Number of shares - 121,340 - 179,280
Proceeds - $ 611 $ - $ 849
--------------------------------------------------------------------------
--------------------------------------------------------------------------
9. Other income:
--------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Gain on disposal of surplus
plant and equipment, and
timber $ 64 $ 1,926 $ 91 $ 4,172
Gain on settlement of
timber takeback 531 - 531 -
Other (expense) (43) (21) (63) (41)
--------------------------------------------------------------------------
$ 552 $ 1,905 $ 559 $ 4,131
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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.
In the first and second 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 $6,386,000 and a gain
of $4,172,000.
10. Restructuring costs and write-downs of plant and equipment:
--------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Plant and equipment
write-downs $ 29,750 $ - $ 29,750 $ -
Severance and other
restructuring costs 2,233 1,013 4,473 1,263
Other 1,026 377 1,026 377
--------------------------------------------------------------------------
$ 33,009 $ 1,390 $ 35,249 $ 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.
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 six months
ended June 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 June 30, 2008 3 Months June 30, 2007
------------------------- ----------------------------
Net Net
earnings Per earnings Per
(loss) Shares share (loss) Shares share
-------------------------------------------------------------------------
Basic earnings
(loss) per share $ (29,423) 47,105 $ (0.62) $ (3,429) 47,847 $ (0.07)
Share options - 270 - - 708 -
(i) (i)
-------------------------------------------------------------------------
Diluted earnings
(loss) per share $ (29,423) 47,105 $ (0.62) $ (3,429) 47,847 $ (0.07)
(i)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6 Months June 30, 2008 6 Months June 30, 2007
------------------------- ----------------------------
Net Net
earnings Per earnings Per
(loss) Shares share (loss) Shares share
-------------------------------------------------------------------------
Basic earnings
(loss) per share $ (30,515) 47,105 $ (0.65) $ (2,832) 47,911 $ (0.06)
Share options - 239 - - 651 -
(i) (i)
-------------------------------------------------------------------------
Diluted earnings
(loss) per share $ (30,515) 47,105 $ (0.65) $ (2,832) 47,911 $ (0.06)
(i)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 6 Months 6 Months
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------------------------
Canada $ 41,642 $ 67,904 $ 92,353 $ 122,160
United States 44,981 85,194 81,753 161,019
Japan 10,416 14,277 19,557 32,636
Other export 20,365 28,037 38,115 44,243
---------------------------------------------------------------------
$ 117,404 $ 195,412 $ 231,778 $ 360,058
---------------------------------------------------------------------
---------------------------------------------------------------------
Sales by product line are as follows:
---------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------------------------
Lumber $ 82,237 $ 143,008 $ 158,471 $ 270,489
Logs 25,672 33,219 56,555 52,609
Wood chips
and other
by products 7,379 17,065 12,889 33,098
Other 2,116 2,120 3,863 3,862
---------------------------------------------------------------------
$ 117,404 $ 195,412 $ 231,778 $ 360,058
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company has capital assets, goodwill and other intangible assets located in:
---------------------------------------------------------------------
June 30, 2008 Dec. 31, 2007 June 30, 2007
---------------------------------------------------------------------
Canada $ 283,870 $ 232,988 $ 211,374
United States 139,098 138,529 149,378
---------------------------------------------------------------------
$ 422,968 $ 371,517 $ 360,752
---------------------------------------------------------------------
---------------------------------------------------------------------
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 6 Months 6 Months
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
Defined contribution plan $ 347 $ 406 $ 671 $ 757
Defined benefit plan 30 79 51 208
Unionized employees' pension plan 392 590 803 1,178
U.S. employees benefit plan 115 145 237 321
Senior management supplementary
pension plan 130 117 250 207
--------------------------------------------------------------------------
Total pension expense $ 1,014 $ 1,337 $ 2,012 $ 2,671
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 June 30, 2008, the fair value of the Company's long-term debt approximated
its carrying value of $63,371,000 (June 30, 2007 - $37,289,000) 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.
(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 June 30, 2008, the Company has outstanding obligations to buy
US$15,000,000 at an average rate of US$1.0125 to CAD$1.00 and sell a maximum of
US$3,000,000 at an average rate of US$1.0241 to CAD$1.00 and sell 120,000,000
Japanese Yen at an average rate of 103.69 Yen to the CAD$1.00 and sell 75,000
Euro at an average rate of 1.6040 to CAD$1.00 during 2008. All foreign currency
gains or losses to June 30, 2008 have been recognized in the Statement of
Operations and the fair value of $26,000 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 $3,516,000 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 June 30, 2008, there were no trade accounts receivable past due
which were considered uncollectible (June 30, 2007 - $nil), and no reserve in
respect of doubtful accounts was set up (June 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
The Company's policy is to provide financial guarantees only to wholly-owned
subsidiary companies, with no guarantees outstanding at June 30, 2008.
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:
--------------------------------------------------------------------------
June 30, 2008
--------------------------------------------------------------------------
Canada $ 17,679
United States 12,448
Japan 1,235
Other 4,729
--------------------------------------------------------------------------
$ 36,091
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 June 30, 2008, the Company's Non-Revolving Line remains fully drawn at
US$35,000,000 (June 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 June 30, 2008, the Company's accounts receivable were denominated in the
following currencies:
--------------------------------------------------------------------------
CAD USD Japanese Yen Euro
--------------------------------------------------------------------------
Accounts receivable 21,282 9,002 21,313 110
Accounts receivable held by
self-sustaining foreign subsidiaries - 5,277 - -
--------------------------------------------------------------------------
21,282 14,279 21,313 110
--------------------------------------------------------------------------
--------------------------------------------------------------------------
As at June 30, 2008, the Company held cash and cash equivalents of US$992,000
with the remaining amounts in $CAD. Bank indebtedness of self-sustaining foreign
subsidiaries totalled US$675,000.
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.
Based on 2007 levels of operations, a $10 change in the Company's average
selling price of its products would impact net annual earnings as follows:
Lumber $10 increase per thousand fbm $5.7 million increase in net income
Chips $10 increase (1) $2.9 million increase in net income
(1) Interfor sells chips in either volumetric units (VU's or GPU's - B.C.
Coastal operations) or bone dry units (BDU's - B.C. Interior and
Pacific Northwest operations).
16. Commitments and contingencies:
(a) Contractual obligations for Adams Lake sawmill construction:
The Company has undertaken obligations under various contracts totalling
$25,901,000 as at June 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 2008.
18. Subsequent event:
On July 24, 2008, the Company entered into an agreement with Portac, Inc.
("Portac"), a subsidiary of Mitsui U.S., Inc., to acquire its operations on the
Olympic Peninsula in Washington State. The Portac assets include a sawmill and
planer mill. The purchase price is US$28,250,000 plus an amount for working
capital. The Company has existing bank facilities in place to fund the
acquisition, but has an option to pay up to US$15,250,000 of the purchase price
in Class A Subordinate Voting shares of Interfor to a maximum of 2,300,000
shares. The transaction is subject to customary closing conditions and is
scheduled to close on September 30, 2008.
19. 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.
Grafico Azioni Powerstar Intl (TSXV:SLA)
Storico
Da Mag 2024 a Giu 2024
Grafico Azioni Powerstar Intl (TSXV:SLA)
Storico
Da Giu 2023 a Giu 2024
