INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX:IFP.A)
reported a net loss of $1.1 million, or $0.02 per share, for the first quarter
of 2008, compared to net income of $0.6 million or $0.01 per share for the first
quarter of 2007.
The loss for the quarter includes restructuring costs of $2.2 million pre-tax
($1.5 million or $0.03 per share, after tax) relating to severance payments for
employees of the Company's Albion remanufacturing plant, which was permanently
closed in January 2008, and for employees of the idled Queensboro sawmill
division who chose to accept voluntary severance during the quarter.
Before restructuring costs, Interfor's net income for the quarter amounted to
$0.5 million or $0.01 per share. These figures include $1.7 million ($1.2
million or $0.02 per share, after tax) in continuing costs associated with the
Queensboro plant over and above severance costs.
EBITDA, excluding one-time items and unrealized foreign exchange losses, totaled
$8.5 million or 7.4% of sales in the quarter.
"Our strategy of maintaining a diversified line of products had a material
affect on our results in the first quarter," said Duncan Davies, Interfor's
President and C.E.O.
In the quarter, SPF 2X4 prices were down 12% to US$203 per mfbm compared with
US$230 per mfbm in the previous quarter, while the Random Lengths' Composite
Index was down 8% to US$244 per mfbm compared with US$264 per mfbm in the fourth
quarter of 2007. Pine specialties were similarly affected as commodity producers
attempted to shift production into higher-valued products, resulting in
significant downward pressure on those product prices.
Prices for the Company's cedar and offshore product lines, on the other hand,
remained firm during the quarter in the face of limited supply. The results for
those operations also benefited from normal seasonal inventory drawdowns.
Interfor took steps to manage its exposure by proactively curtailing production
in the first quarter. Lumber production amounted to 104 million b.f. compared to
249 million b.f. in the same period last year. Sales were 113 million b.f.
compared to 244 million b.f. in the first quarter of 2007.
Cash flow from operations in the first quarter was $10.5 million before changes
in working capital and $24.0 million after changes in working capital were
considered.
The Company ended the quarter with cash and deposits of $37.5 million and a net
cash position of $1.8 million or 0.4% of invested capital.
In spite of the weak market environment, Interfor made good progress on a number
of strategic initiatives in the first quarter.
In January, the Company received Court approval for its acquisition of Pope &
Talbot's ("P & T") Castlegar and Grand Forks sawmill assets and related timber
tenures in the Southern B.C. Interior and for its Spearfish sawmill assets in
South Dakota. In a separate transaction, Interfor reached agreement to sell the
Spearfish mill to a local operator in a transaction scheduled to close
concurrently with the P & T acquisition. The transaction is scheduled to close
April 30, 2008.
Also in January, Interfor reached agreement to acquire a timber tenure in the
Kamloops area from Weyerhaeuser Company Limited. The tenure will strengthen
Interfor's long-term timber supply in the region and will benefit the Company's
new sawmill under construction at Adams Lake. The transaction is expected to
close in the second quarter of 2008.
Good progress was made on the Adams Lake project in the first quarter.
Construction is on-schedule and on-budget. The mill is expected to commence
start-up procedures in the fourth quarter of 2008, as planned.
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 improved in recent
weeks in the face of announced production curtailments, but remain below
breakeven levels on most items. Cedar prices are expected to weaken in the
quarter in the face of increased supply, while prices in Japan could soften as
well. Adding to the challenge will be an increase in stumpage rates in the
Coastal region which will impact margins at those operations. Exchange rates are
expected to continue to fluctuate within a narrow range over the balance of the
year.
"Our key focus areas for 2008 remain unchanged," said Davies. "From an
operational standpoint, we will continue to maintain a tight control on cash by
managing production against viable orders. Strategically, we are focused on
completing the Adams Lake Project and the P & T and Weyerhaeuser transactions
and integrating those operations into our fold. We will also remain alert to
opportunities for growth in regions and products with attractive fundamentals."
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 three sawmills in the Coastal region of British Columbia, one 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, April 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 First 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
May 9, 2008. The number to call is 1-866-245-6755 Passcode 510627.
International Forest Products Limited
First Quarter Report
For the three months ended March 31, 2008
Management's Discussion and Analysis
Dated as of April 23, 2008
This Management's Discussion and Analysis ("MD&A") provides a review of
Interfor's financial performance for the three months ended March 31, 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 months ended March 31, 2008 and 2007, and Interfor's
Annual Statutory 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 Statutory
Information Form.
Review of Operating Results
Overview
Interfor recorded a net loss of $1.1 million, or $0.02 per share for the first
quarter of 2008, compared to net earnings of $0.6 million, or $0.01 per share,
for the same quarter in 2007. EBITDA and Adjusted EBITDA for the first quarter
of 2008 were $8.5 million and $8.5 million, respectively, compared to $13.0
million and $10.8 million, for the same quarter of 2007.
Before restructuring costs, the Company's net earnings for the first quarter of
2008 amounted to $0.5 million or $0.01 per share as compared to net earnings of
$0.8 million, or $0.02 per share for the first quarter of 2007. Included in the
first quarter results of 2008 were $1.7 million in continuing pre-tax costs
associated with the idled Queensboro sawmill.
The operating loss for the first quarter of 2008 reflected depressed North
American structural lumber prices, and the weaker U.S. dollar, both of which
weighed heavily on sales realizations and inventory valuations. Seasonally
adjusted U.S. housing starts in March 2008 were the lowest in 17 years, and were
down 36.5% year-over-year. The Company responded to the worst market conditions
in recent memory by proactively curtailing production in its commodity
operations in the first quarter. On a more positive note, Interfor's Canadian
specialty operations delivered strong results in the quarter, with a
higher-value sales mix, stable prices, good cost control and a drawdown in
inventory levels all contributing factors.
Sales
Lumber shipments were down 130.7 million board feet, or 53.5%, for the first
quarter of 2008 compared to the same quarter of 2007, reflecting lower operating
rates. Unit lumber sales values over the same period were up $150 per mfbm, or
28.7%, with significant volumes of a higher-value cedar and Japanese hemlock
product mix more than offsetting the impact of lower structural lumber prices
and the stronger Canadian dollar. Compared to the first quarter of 2007, the
Canadian dollar was up 17 cents on average, or 14.3%, relative to its U.S.
counterpart.
Pulp chip and other by-product revenues for the first quarter of 2008 were down
$10.5 million, or 65.6%, compared to the first quarter of 2007, with sales
volumes down significantly due to the decline in sawmill operating rates.
Average chip prices were down $15 per mfbm, or 26.8%, reflecting the impact on
realizations from the stronger Canadian dollar, as well as species mix. Log
sales were up $11.5 million, or 59.3%, with high sales volumes of lower quality
logs in the quarter to reduce inventories as well as to meet the demand for pulp
logs. This is reflected in the average sales price which declined to $75 per
cubic metre in the first quarter of 2008, as compared to $91 per cubic metre for
the same period of 2007.
Operating Costs
Production costs for the first quarter of 2008 were down $43.3 million, or
29.9%, compared to the same period in 2007, substantially as a result of market
curtailments and the indefinitely idled Queensboro operation - lumber production
was down 144 million board feet, or 58.1%. B.C. log production increased by
45,000 cubic metres, or 12.3%. Lower log prices in the Pacific Northwest, as a
result of weaker demand, also contributed to the decrease in costs.
The Canada/U.S. lumber export tax remained at 15% through the first quarter of
2008. Export taxes were down $2.2 million, due to a drop of 42 million board
feet in shipments to the U.S. and lower prices.
There was no change in selling and administrative costs for the first quarter of
2008 compared to the first quarter of 2007. The Company recorded long term
incentive compensation ("LTIC") recovery of $0.3 million for the first quarter
of 2008, reflecting a 5.6% decline in the Company's share price over the period.
For the first quarter of 2007, the Company recorded a LTIC expense of $2.0
million.
Amortization and depletion expense for the first quarter of 2008 was down $3.1
million, or 25.2% compared to the same quarter of 2007, primarily as a result of
lower operating rates.
Restructuring costs totaled $2.2 million in the first quarter of 2008, compared
to $0.3 million in the first quarter of 2007. Costs in the first quarter of 2008
consisted of severance costs arising from the permanent closure of the Albion
remanufacturing operation located in Maple Ridge, B.C., and voluntary severance
offered to hourly workers at the Company's idled Queensboro sawmill.
Interest, Other Foreign Exchange Gain (loss), Other Income
Net interest expense was $0.4 million for the first quarter of 2008, compared to
the net interest income of $0.9 million in the first quarter of 2007, which was
generated by investment of significant cash balances retained from the U.S. duty
refunds. Other foreign exchange losses were $0.4 million for the three months
ended March 31, 2008, compared to $1.1 million for the same period of 2007
arising from the impact of the stronger CAD$ on the $U.S. cash balances held
after receipt of the U.S. duty refunds. The Company reported minimal Other
income for the first quarter of 2008, in contrast to the first quarter of 2007,
when it recorded $2.2 million from gains on the disposal of surplus property,
plant and equipment 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 $24.0 million for the first quarter of 2008, compared to cash used of $28.0
million for the first quarter 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 $26.2 million whereas there was a significant
reduction of inventories in the first quarter of 2008.
Capital expenditures for the first quarter of 2008 were $13.7 million, excluding
changes in amounts accrued, (Quarter 1, 2007 - $16.4 million), with $9.9 million
related to spending on the new Adams Lake sawmill, $0.6 million on other
high-return discretionary projects, $0.6 million on maintenance projects, and
$2.6 million on roads. Construction of the new sawmill at Adams Lake remains on
schedule and on budget. The mill is expected to commence start-up procedures in
the fourth quarter of 2008, as planned.
There were no shares purchased under the Company's Normal course Issuer Bid in
the first quarter of 2008 (Quarter 1, 2007 - 347,000 Class A shares at a cost of
$2.7 million).
On February 1, 2008, the Company obtained a financing commitment from its
lenders to increase and extend the maturity date of its syndicated credit
facilities. The financing will close on April 25, 2008. The existing Canadian
operating line of credit will increase from $40.0 million to $100.0 million and
will mature on April 25, 2009. The Company's existing Canadian revolving term
line of credit ("Revolving Line") will increase 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 when the acquisition of
the Pope and Talbot, Inc. ("P&T") sawmill and timber assets completes. The
Revolving Line will mature on April 25, 2011. The maturity date of the U.S.
operating line of credit was also extended to May 23, 2008.
At March 31, 2008, the Company had a $9.1 (US$8.9) million deposit held in
escrow in respect of the Pope and Talbot ("P&T") acquisition and cash of $28.5
million. After deducting the Company's US$ non-revolving term line of $35.8
(US$35.0) million, the Company ended the quarter with net cash of $1.8 million.
Selected Quarterly Financial Information
Quarterly Earnings 2008 2007 2006
Summary ------------------------------------------------------
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
------------------------------------------------------
(millions of dollars except share and per share amounts)
Sales - Lumber 76.2 70.7 93.2 143.0 127.5 120.5 153.9 173.5
- Logs 30.9 35.6 30.3 33.2 19.4 32.6 31.4 22.0
- Wood chips
and other
by-products 5.5 7.2 10.0 17.1 16.0 12.1 11.3 9.3
- Other 1.8 1.9 2.0 2.1 1.7 9.3 12.6 19.7
------------------------------------------------------
Total Sales 114.4 115.4 135.5 195.4 164.6 174.5 209.2 224.5
------------------------------------------------------
Operating earnings
(loss) before U.S.
duty refunds,
net, restructuring
costs and asset
write-downs (1.3) (15.3) (4.6) (3.5) (1.8) (2.4) - 8.3
Operating earnings
(loss) (3.5) (15.7) (4.6) (4.9) (2.1) 94.5 - 0.3
Net earnings
(loss) (1.1) (8.9) (1.6) (3.4) 0.6 77.2 1.6 8.0
Net earnings
(loss) per share
- basic (0.02) (0.19) (0.03) (0.07) 0.01 1.60 0.03 0.17
- diluted (0.02) (0.19) (0.03) (0.07) 0.01 1.58 0.03 0.16
EBITDA(3) 8.5 (4.6) 8.9 14.5 13.0 115.0 14.5 33.7
Cash flow from
operations per
share(1) 0.22 (0.06) 0.10 0.12 0.37 1.82 0.29 0.40
Shares outstanding
- end of period
(millions)(2) 47.1 47.1 47.1 47.6 47.8 48.1 48.3 48.4
- weighted
average (millions) 47.1 47.1 47.4 47.8 48.0 48.2 48.4 48.6
Adjusted EBITDA(3) 8.5 (4.7) 7.2 12.6 10.8 11.5 13.9 23.6
1 Cash generated from operations before taking account of changes in
operating working capital.
2 As at April 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.
EBITDA and Adjusted EBITDA can be calculated from the Statements of
Operations as follows:
2008 2007 2006
------------------------------------------------------
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
------------------------------------------------------
(millions of dollars)
Net earnings (loss) (1.1) (8.9) (1.6) (3.4) 0.6 77.2 1.6 8.0
Add: Income taxes
(recovery) (2.5) (7.1) (1.8) (4.5) (0.3) 38.5 (1.3) 2.1
Interest expense
(income) 0.4 0.2 (0.1) (0.5) (0.9) 0.5 0.9 1.0
Interest income on
U.S. duty refund,
net of special
charge - - - - - (12.7) - -
Depletion and
amortization 9.1 10.7 11.7 16.2 12.2 13.6 13.4 14.6
Other foreign
exchange (gains)
losses 0.4 0.2 0.7 5.3 1.1 (2.1) - -
Restructuring
costs, asset
write-downs and
other 2.2 0.3 - 1.4 0.3 - - 8.0
------------------------------------------------------
EBITDA 8.5 (4.6) 8.9 14.5 13.0 115.0 14.5 33.7
Deduct:
U.S. duty
refunds, net - - - - - 96.9 - -
Other income - 0.2 1.7 1.9 2.2 6.6 0.6 10.1
------------------------------------------------------
Adjusted EBITDA 8.5 (4.7) 7.2 12.6 10.8 11.5 13.9 23.6
------------------------------------------------------
Volume and Price Statistics 2008 2007 2006
---------------------------------------
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
---------------------------------------
Lumber sales (million fbm) 113 161 196 270 244 225 299 319
Lumber
production
(1) (million fbm) 104 150 187 269 249 222 292 326
Log
sales(2) (thousand cubic metres) 399 382 315 319 207 381 358 229
Log
production
(2) (thousand cubic metres) 411 373 401 626 366 616 707 667
Average
selling
price -
lumber(3) ($/thousand fbm) $672 $441 $476 $530 $522 $534 $515 $545
Average
selling
price -
logs(2) ($/cubic metre) $75 $ 91 $ 95 $101 $ 91 $ 85 $ 87 $ 95
Average
selling
price -
pulp chips ($/thousand fbm) $41 $ 37 $ 43 $ 54 $ 56 $ 49 $ 35 $ 26
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. All these factors contributed
in lower operating rates and lumber sales realizations in the applicable
periods.
Acquisition of P&T's Mills and Woodlands
On January 7, 2008, the courts overseeing the creditor restructuring of P&T in
Canada and the United States approved the sale of P&T's Castlegar and Grand
Forks sawmill assets and related timber tenures in the Southern B.C. Interior,
and its Spearfish sawmill assets in South Dakota to Interfor. The purchase price
is US$69 million, plus working capital and adjustments for certain other items.
The transaction has also been approved by the Canadian Competition Bureau, the
B.C. Ministry of Forests and Range, and U.S. anti-trust authorities. Concurrent
with this transaction, the Company has agreed to sell the Spearfish, South
Dakota sawmill to a private company for US$14 million plus working capital.
The Company expects to complete the transaction by the Asset Purchase Agreement
termination date of April 30, 2008.
The Company has paid a US$8.8 million interest-bearing deposit held in escrow in
respect of this transaction, which is refundable should the transaction not
complete due to circumstances beyond the Company's control. At March 31, 2008,
this deposit and accumulated interest totaled US$8.9 million and was revalued to
$9.1 million using the quarter-end exchange rate.
The acquisition of the two Southern B.C. Interior sawmills will increase
Interfor's total lumber capacity by approximately 460 million board feet per
year to approximately 1.8 billion board feet. The mills add critical mass in one
of the Company's core operating regions and broaden the Company's product lines
in both specialty and commodity grades. The acquired timber tenures represent
annual harvesting rights of approximately 1.0 million cubic metres.
The Company has identified a number of opportunities 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 Kamloops Timber Tenure
On February 18, 2008, the Company reached agreement to acquire a timber tenure
in the Kamloops region currently owned by Weyerhaeuser Company Limited
("Weyerhaeuser") having an Allowable Annual Cut (AAC) of approximately 356,000
cubic metres. The tenure will strengthen Interfor's long term timber supply in
the region and help to offset anticipated declines in future supply as a result
of the Mountain Pine Beetle infestation. The acquisition will benefit Interfor's
sawmill at Adams Lake and the communities associated with that operation.
The transaction is subject to various regulatory reviews and is expected to
close in the second quarter 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 $2.3 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.
New Accounting Policies
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 full 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 March 31, 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 March 31, 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
There remains no immediate end in sight to the challenging North American
structural lumber market conditions, and little prospect of any meaningful price
recovery over the balance of 2008. The Company will continue to regularly
monitor the economics of affected operations and curtail production where
necessary. Export taxes on sales to the U.S. are expected to remain at 15%
through 2008. Cedar prices are expected to weaken in the second quarter in the
face of increased supply, while prices in Japan could soften as well.
The outlook for the CAD$ versus the US$ and Yen for 2008 continues to be very
difficult to predict, given heightened concerns over the health of the U.S.
economy and the continuing volatility of currency markets.
Stumpage rates on the B.C. Coast for the second quarter of 2008 are expected to
increase, reflecting the strength of cedar log prices, and will impact
production costs and margins in that region.
Given the current climate, the Company will continue to maintain tight control
over cash, while remaining alert to selective growth opportunities in regions
and products with attractive fundamentals. The rebuild of the Adams Lake
sawmill, the P&T acquisition, and the Kamloops timber tenure acquisition remain
the only major capital investments currently approved for 2008.
Additional Information
Additional information relating to the Company and its operations can be found
on its website at www.interfor.com and in the Annual Information Form and on
SEDAR at www.sedar.com. Interfor's trading symbol on the Toronto Stock Exchange
is IFP.A.
E. Lawrence Sauder, Chairman
Duncan K. Davies, President and Chief Executive Officer
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
(thousands of Canadian dollars except 3 Months 3 Months
earnings per share) Mar. 31, Mar. 31,
2008 2007
--------------------------------------------------------------------------
Sales $ 114,374 $ 164,646
Costs and expenses:
Production 101,367 144,688
Selling and administration 4,491 4,453
Long term incentive compensation expense
(recovery) (259) 1,992
Export taxes 936 3,136
Amortization of plant and equipment 5,684 7,511
Depletion and amortization of timber, roads and
other 3,449 4,697
-------------------------------------------------------------------------
115,668 166,477
--------------------------------------------------------------------------
Operating loss before restructuring costs (1,294) (1,831)
Restructuring costs (note 10) (2,240) (250)
--------------------------------------------------------------------------
Operating loss (3,534) (2,081)
Interest expense on long-term debt (518) (796)
Other interest income 151 1,683
Other foreign exchange loss (385) (1,149)
Other income (note 9) 7 2,226
Equity in earnings of investee companies 667 433
--------------------------------------------------------------------------
(78) 2,397
--------------------------------------------------------------------------
Earnings (loss) before income taxes (3,612) 316
Income taxes (recovery):
Current (4,350) 94
Future 1,830 (375)
--------------------------------------------------------------------------
(2,520) (281)
--------------------------------------------------------------------------
Net earnings (loss) $ (1,092) $ 597
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net earnings (loss) per share, basic and diluted
(note 11) $ (0.02) $ 0.01
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the three months ended March 31, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
(thousands of Canadian dollars) 3 Months 3 Months
Mar. 31, Mar. 31,
2008 2007
--------------------------------------------------------------------------
(restated -
note 2(d))
Retained earnings, beginning of year, as restated
(note 2(d)) $ 170,408 $ 183,729
Net earnings (loss) (1,092) 597
--------------------------------------------------------------------------
Retained earnings, end of period $ 169,316 $ 184,326
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
(thousands of Canadian dollars) 3 Months 3 Months
Mar. 31, Mar. 31,
2008 2007
--------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings (loss) $ (1,092) $ 597
Items not involving cash:
Amortization of plant and equipment 5,684 7,511
Depletion and amortization of timber, roads and
other 3,449 4,697
Future income taxes (recovery) 1,830 (375)
Other assets (29) 1,682
Reforestation liability 390 141
Other long-term liabilities (45) 1,975
Share of earnings net (in excess) of cash
distributions of investee company (667) 3,936
Foreign exchange loss (gain) on translation of
long term debt 1,057 (378)
Other (28) (2,247)
-------------------------------------------------------------------------
10,549 17,539
Cash generated from (used in) operating working
capital:
Accounts receivable 4,402 3,667
Inventories 13,593 (4,167)
Prepaid expenses 210 (1,222)
Accounts payable and accrued liabilities (366) (21,357)
Income taxes (4,386) (22,472)
-------------------------------------------------------------------------
24,002 (28,012)
Investing activities:
Additions to property, plant and equipment (9,646) (10,730)
Additions to deferred start-up costs - (959)
Additions to logging roads and timber (2,640) (4,742)
Proceeds on disposal of property, plant,
equipment, timber and roads 28 3,788
Deposit held in escrow for acquisition (64) -
Investments and other assets (372) (463)
-------------------------------------------------------------------------
(12,694) (13,106)
Financing activities:
Repurchase of share capital (note 8) - (2,687)
Issuance of share capital (note 8) - 238
Increase (decrease) in bank indebtedness - (582)
-------------------------------------------------------------------------
- (3,031)
Foreign exchange gain (loss) on cash and cash
equivalents held in a foreign currency (653) 594
--------------------------------------------------------------------------
Decrease in cash 10,655 (43,555)
Cash on deposit, beginning of period 17,795 149,171
--------------------------------------------------------------------------
Cash on deposit, end of period $ 28,450 $ 105,616
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Supplementary disclosures
Cash interest paid (received) $ 367 $ (887)
Cash income taxes paid - 22,472
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
March 31, 2008 and 2007 (unaudited) and December 31, 2007 (audited)
--------------------------------------------------------------------------
(thousands of Canadian dollars) Mar. 31, Dec. 31, Mar. 31,
2008 2007 2007
--------------------------------------------------------------------------
restated - restated -
Assets note 2(d) note 2(d)
Current assets:
Cash and cash equivalents $ 28,450 $ 17,795 $ 105,616
Deposit (note 5) 9,092 8,761 -
Accounts receivable 32,912 37,172 46,947
Income taxes recoverable 14,212 8,838 -
Inventories (note 6) 63,166 76,429 85,241
Prepaid expenses 6,130 6,267 5,613
Future income taxes 2,627 3,083 3,849
--------------------------------------------------------------------------
156,589 158,345 247,266
Investments and other assets
(note 2(d)) 13,599 12,094 10,402
Property, plant and equipment, net
of accumulated amortization 309,652 300,150 312,048
Timber and logging roads, net of
accumulated depletion and
amortization 54,273 55,050 47,651
Goodwill and other intangible
assets 13,078 13,078 13,136
Future income taxes 9,694 7,000 1,972
Long-lived assets held for sale 3,239 3,239 -
--------------------------------------------------------------------------
$ 560,124 $ 548,956 $ 632,475
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Current liabilities:
Accounts payable and accrued
liabilities $ 51,182 $ 49,999 $ 73,886
Income taxes payable - - 4,973
Future income taxes 3 - 184
--------------------------------------------------------------------------
51,185 49,999 79,043
Reforestation liability, net of
current portion 12,264 11,874 13,351
Long-term debt (note 7(b)) 35,753 34,696 40,411
Other long-term liabilities 8,814 8,859 10,577
Future income taxes 16,918 13,080 11,751
Shareholders' equity:
Share capital (note 8)
Class A subordinate voting shares 284,444 284,444 289,180
Class B common shares 4,080 4,080 4,080
Contributed surplus 5,408 5,408 7,177
Accumulated other comprehensive
income (loss) (28,058) (33,892) (7,421)
Retained earnings (note 2(d)) 169,316 170,408 184,326
--------------------------------------------------------------------------
435,190 430,448 477,342
--------------------------------------------------------------------------
$ 560,124 $ 548,956 $ 632,475
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Commitment and Contingency (note 16)
Agreement-in-principle (note 17)
See accompanying notes to consolidated financial statements
On behalf of the Board:
E.L. Sauder H.C. Kalke
Director Director
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
(thousands of Canadian dollars) 3 Months 3 Months
Mar. 31, Mar. 31,
2008 2007
--------------------------------------------------------------------------
Net earnings (loss) $ (1,092) $ 597
Other comprehensive income (loss), net of income
taxes (recovery):
Net change in unrealized foreign currency
translation gains (losses) 5,834 (1,060)
--------------------------------------------------------------------------
Other comprehensive income (loss) 5,834 (1,060)
--------------------------------------------------------------------------
Comprehensive income (loss) $ 4,742 $ (463)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 2008 and 2007 (unaudited)
--------------------------------------------------------------------------
(thousands of Canadian dollars) 3 Months 3 Months
Mar. 31, Mar. 31,
2008 2007
--------------------------------------------------------------------------
Accumulated other comprehensive loss,
beginning of year $ (33,892) $ (6,361)
Other comprehensive income (loss) 5,834 (1,060)
--------------------------------------------------------------------------
Accumulated other comprehensive loss,
end of period $ (28,058) $ (7,421)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 March 31, 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 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
reported Adjustment As adjusted
--------------------------------------------------------------------------
Consolidated Statement
of Retained Earnings for
the three months ended
March 31, 2007:
Retained earnings, beginning $ 181,477 $ 2,252 $ 183,729
Consolidated Balance Sheet
as at March 31, 2007:
Investments and other assets 8,150 2,252 10,402
Retained earnings, ending 182,074 2,252 184,326
Consolidated Balance Sheet
as at December 31, 2007:
Investments and other assets 9,842 2,252 12,094
Retained earnings, ending 168,156 2,252 170,408
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The restatement has not affected net earnings (loss) previously reported for any
of the periods presented.
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 January 7, 2008, the courts overseeing the creditor restructuring of Pope and
Talbot, Inc. ("P&T") in Canada and the United States approved the sale of two
southern B.C. interior sawmills and their related timber tenures and one sawmill
in South Dakota to the Company for US$69,000,000 plus working capital and other
adjustments. The transaction has also been approved by the Canadian Competition
Bureau and the U.S. anti-trust authorities. The Company expects to complete the
transaction by the Asset Purchase Agreement termination date of April 30, 2008.
The Company has paid a US$8,800,000 interest-bearing deposit held in escrow in
respect of this transaction, which is refundable should the transaction not
complete due to circumstances beyond the Company's control. At March 31, 2008,
this deposit and accumulated interest totaled US$8.9 million and was revalued to
$9.1 million using the quarter-end exchange rate.
The Company has also reached an agreement to sell the Spearfish, South Dakota
sawmill, being acquired as part of the P&T transaction to Neiman Enterprises,
Inc., a family owned company based in Wyoming, for US$14,000,000 plus working
capital. The sale of the Spearfish sawmill will close concurrently with the P&T
transaction.
6. Inventories:
--------------------------------------------------------------------------
Mar. 31, Dec. 31, Mar. 31,
2008 2007 2007
--------------------------------------------------------------------------
Logs $ 39,476 $ 53,631 $ 54,824
Lumber 19,196 18,588 25,101
Other 4,494 4,210 5,316
--------------------------------------------------------------------------
$ 63,166 $ 76,429 $ 85,241
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 March 31, 2008 is $15,066,000 (March 31, 2007 -
$8,056,000).
7. Cash, bank indebtedness and long-term debt:
(a) Bank indebtedness:
--------------------------------------------------------------------------
Canadian U.S.
Operating Operating
March 31, 2008 Facility Facility Total
--------------------------------------------------------------------------
Available line of credit $ 40,000 $ 10,215 $ 50,215
Maximum borrowing available 40,000 6,840 46,840
Unused portion of line 35,259 6,717 41,976
Outstanding letters of credit
included in line utilization 4,741 123 4,864
--------------------------------------------------------------------------
--------------------------------------------------------------------------
March 31, 2007
--------------------------------------------------------------------------
Available line of credit $ 60,000 $ 11,546 $ 71,546
Maximum borrowing available 59,311 11,546 70,857
Unused portion of line 54,073 11,407 65,480
Outstanding letters of credit
included in line utilization 5,238 139 5,377
--------------------------------------------------------------------------
--------------------------------------------------------------------------
On February 1, 2008, the Company obtained a financing commitment from its
lenders to increase and extend its syndicated credit facilities. The existing
Canadian operating line of credit ("Operating Line") is to increase from
$40,000,000 to $100,000,000. The financing will close on April 25, 2008. The
Operating Line will mature 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.
The maturity date of the U.S. operating line of credit was extended to May 23, 2008.
(b) Long-term debt:
On February 1, 2008, the Company obtained a financing commitment from its
lenders to increase and extend its syndicated credit facilities. The existing
Canadian revolving term line of credit ("Revolving Line") is to increase from
$10,000,000 to $115,000,000. The existing US$35,000,000 Non-Revolving Line
remains unchanged. The financing will close on April 25, 2008, with $55,000,000
of the Revolving Line made available on April 25, 2008, and the remainder of
$60,000,000 made available when the P&T transaction completes. The extended
Revolving Line will mature 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.
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; March 31, 2007 -
US$35,000,000) and was revalued at the quarter-end exchange rate to $35,753,000
(December 31, 2007 - $34,696,000; March 31, 2007 - $40,411,000). 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
$1,058,000 arising on revaluation of the Non-Revolving Line at March 31, 2008
was recognized in Other foreign exchange loss on the Statement of Operations.
The foreign exchange gain of $378,000 for the quarter ending March 31, 2007 was
recognized in Other Comprehensive Income as the Company had designated the
Non-Revolving as a hedge against its investment in its self-sustaining U.S.
operations until March 31, 2007.
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 $ 35,753
2010 -
2011 -
2012 -
2013 -
-----------------------------------------------------------
$ 35,753
-----------------------------------------------------------
-----------------------------------------------------------
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 sharee capital are described below:
--------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, Mar. 31,
2008 2007
--------------------------------------------------------------------------
Acquisitions under normal course issuer bid
Number of shares purchased and cancelled - 347
Cost $ - $ 2,687
Excess of cost of shares over assigned value
charged to contributed surplus - 543
Shares issued on exercise of options
Number of shares - 58
Proceeds $ - $ 238
--------------------------------------------------------------------------
--------------------------------------------------------------------------
9. Other income:
--------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, Mar. 31,
2008 2007
--------------------------------------------------------------------------
Gain on disposal of surplus property, plant
and equipment, roads and timber $ 28 $ 2,246
Other (expense) (21) (20)
--------------------------------------------------------------------------
$ 7 $ 2,226
--------------------------------------------------------------------------
--------------------------------------------------------------------------
In the first quarter of 2008, the Company disposed of surplus equipment,
generating a gain of $28,000.
In the first quarter 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 $3,788,000 and a gain of
$2,246,000.
10. Restructuring costs:
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.
During the first quarter of 2007, the Company recorded severance costs of
$250,000, net of recoveries from the B.C. Forestry Revitalization Trust set up
by the Government of British Columbia, as reimbursement for severance costs of
workers who were displaced by the reductions in harvesting rights taken under
the Forestry Revitalization Act.
11. Net earnings (loss) per share:
---------------------------------------------------------------------------
3 Months Mar. 31, 2008 3 Months Mar. 31, 2007
----------------------------- -------------------------
Net Net
earnings Per earnings Per
(loss) Shares share (loss) Shares share
---------------------------------------------------------------------------
Basic earnings
(loss) per share $ (1,092) 47,105 $ (0.02) $ 597 47,976 $ 0.01
Share options - 219(i) - - 632 -
---------------------------------------------------------------------------
Diluted earnings
(loss) per share $ (1,092) 47,105(i) $ (0.02) $ 597 48,608 $ 0.01
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(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, U.S.A.
The Company sells to both foreign and domestic markets as follows:
--------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, Mar. 31,
2008 2007
--------------------------------------------------------------------------
Canada $ 50,711 $ 54,256
United States 36,772 75,825
Japan 9,141 18,359
Other export 17,750 16,206
--------------------------------------------------------------------------
$ 114,374 $ 164,646
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Sales by product line are as follows:
--------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, Mar. 31,
2008 2007
--------------------------------------------------------------------------
Lumber $ 76,234 $ 127,481
Logs 30,883 19,390
Wood chips and other by products 5,510 16,033
Other 1,747 1,742
--------------------------------------------------------------------------
$ 114,374 $ 164,646
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The Company has capital assets, goodwill and other intangible assets
located in:
--------------------------------------------------------------------------
Mar. 31, Dec. 31, Mar. 31,
2008 2007 2007
--------------------------------------------------------------------------
Canada $ 238,460 $ 232,988 $ 211,434
United States 141,782 138,529 161,401
--------------------------------------------------------------------------
$ 380,242 $ 371,517 $ 372,835
--------------------------------------------------------------------------
--------------------------------------------------------------------------
13. Employee future benefits:
The total benefits cost under its various pension plans (described in the
Company's audited annual consolidated financial statements) are as follows:
--------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, Mar. 31,
2008 2007
--------------------------------------------------------------------------
Defined contribution plan $ 324 $ 351
Defined benefit plan 21 129
Unionized employees' pension plan 411 587
U.S. employees benefit plan 122 176
Senior management supplementary pension plan 120 90
--------------------------------------------------------------------------
Total pension expense $ 998 $ 1,333
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 March 31, 2008, the fair value of the Company's long-term debt approximated
its carrying value of $35,752,500 (March 31, 2007 - $40,411,000) 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 March 31, 2008, the Company has outstanding obligations to sell a maximum
of US$7,000,000 at an average rate of US$1.0078 to CAD$1.00 and Japanese Yen
275,000,000 at an average rate of yens 106.62 to the CAD$1.00 during 2008. All
foreign currency gains or losses to March 31, 2008 have been recognized in the
Statement of Operations and the fair value of $205,000 has been recorded in
accounts payable and accrued liabilities.
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 $3,402,000 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 March 31, 2008, there were no trade accounts receivable past due
which were considered uncollectible (March 31, 2007 - $nil), and no reserve in
respect of doubtful accounts was set up (March 31, 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 March 31, 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:
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Mar. 31, 2008
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Canada $ 15,695
United States 10,191
Japan 1,746
Other 5,280
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$ 32,912
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(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 March 31, 20008, the Company's Non-Revolving Line remains fully drawn at
US$35,000,000 (March 31, 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 March 31, 2008, the Company's accounts receivable were denominated in the
following currencies:
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Japanese
CAD USD Yen
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Accounts receivable 19,960 8,676 31,941
Accounts receivable held by
self-sustaining foreign subsidiaries - 3,719 -
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19,960 12,395 31,941
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As at March 31, 2008, the Company held cash and cash equivalents, including the
P&T deposit, of US$16,289,000 with the remaining amounts in $CAD. Of this
amount, cash held by self-sustaining foreign subsidiaries totalled US$1,008,000.
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 contingency:
(a) Contractual obligations for Adams Lake sawmill construction:
The Company has undertaken obligations under various contracts totalling
$26,476,000 as at March 31, 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.
17. Agreement-in-principle:
On February 18, 2008, the Company reached an agreement-in-principle to acquire a
timber tenure in the southern B.C. Interior currently owned by Weyerhaeuser
Company. The agreement is subject to completion of negotiations and regulatory
approval and is expected to close in the second quarter, 2008.
18. Future Accounting Changes:
(a) International Financial Reporting Standards
The CICA will transition Canadian generally accepted accounting principles
("GAAP") for publicly accountable entities to International Financial Reporting
Standards ("IFRS"). The Company's consolidated financial statements are to be
prepared in accordance with IFRS for the fiscal year commencing January 1, 2011.
The impact of the transition to IFRS on the Company's consolidated financial
statements has not been determined.
(b) Goodwill and Intangible Assets
Effective January 1, 2009, the Company will adopt new CICA Handbook Section
3064, Goodwill and Intangible Assets. This section replaces CICA Handbook
Section 3062, Goodwill and Intangible Assets, and establishes revised standards
for the recognition, measurement, presentation and disclosure of goodwill and
intangible assets. The new standard also provides guidance for the treatment of
various preproduction and start-up costs and requires that these costs be
expensed as incurred. The Company is still evaluating the full impact of this
standard on its consolidated financial statements.
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