INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX:IFP.A)
reported net income of $6,000 or $0.00 per share in the third quarter of 2011.
Included in the Company's accounts in the quarter was the effect of unrecognized
tax assets of $0.6 million and other one-time items of $1.1 million.
Excluding these items, Interfor recorded a net loss of $0.5 million or $0.01 per
share compared to a net loss of $2.9 million or $0.05 per share in the
immediately preceding quarter and a loss of $1.1 million or $0.02 per share in
the third quarter of 2010.
Also included in the Company's accounts in the third quarter was a recovery of
share-based compensation expense of $0.9 million or $0.02 per share compared to
a recovery of $3.1 million or $0.06 per in the second quarter.
Sales revenue in the third quarter was $200.2 million, up $12.0 million or 6.4%
versus the second quarter, resulting from higher log and lumber sales volumes
and prices.
EBITDA for the quarter (adjusted to exclude one-time items and "other income")
was $14.3 million, up $2.7 million from the second quarter and up $3.7 million
from the third quarter of 2010.
Lumber production in the third quarter was 313 million board feet, down 12
million board feet or 4 percent versus the second quarter as production rates
were adjusted downwards in the face of weak market conditions and high log costs
in the Pacific Northwest. Sales volumes, including wholesale activities,
increased 2 million board feet to 336 million board feet versus 334 million
board feet in the second quarter.
In the quarter, SPF 2x4 in the North American market was US$246, up US$6 versus
the second quarter, and Hem-Fir studs were down US$7 to US$274. Prices and
volumes to China softened as high in-market inventories, seasonal factors and
tighter credit conditions combined to slow demand. Key Japanese grades were flat
in the quarter while the cedar market was mixed with strength in certain
products offset by weaker prices on others.
Results have also been impacted by changes in the value of the Canadian dollar
which declined by 1% quarter-over-quarter but which closed the quarter at
US$0.954, down 8% compared to the end of the second quarter.
In the quarter, Interfor generated $14.4 million in cash from operations before
changes in working capital and $9.0 million in cash after working capital
changes were considered. Capital spending in the quarter amounted to $7.6
million, including $4.9 million on roads.
Net debt closed the quarter at $94.9 million or 19 percent of invested capital.
Business conditions remain uncertain. Sovereign debt issues in Europe, slow
progress in the U.S. and credit conditions in China bear watching. On the
positive side, a noticeable reduction in demand from offshore buyers has
resulted in some easing of log prices in the Pacific Northwest.
At its meeting today, Interfor's Board of Directors approved a $24 million
capital plan to upgrade the Company's Grand Forks and Castlegar sawmills.
The plan involves the installation of a new small log line at Grand Forks to
replace the existing two-line facility, along with funds to complete the
installation of an automated lumber grading system. The Grand Forks project is
budgeted at $19 million and will incorporate the same technology recently
installed at the Company's Adams Lake sawmill. Construction will commence in the
first quarter of 2012 and will be completed in mid 2013.
The investment at Castlegar, which totals $5 million, consists of a series of
high return projects including the installation of an automated lumber grading
system focused on increasing productivity and value extraction at that mill.
When completed, the Grand Forks and Castlegar mills will operate with a combined
capacity of 375 million board feet on a full two-shift basis.
The Grand Forks and Castlegar sawmills were acquired by Interfor in April 2008.
The projects announced are consistent with the Company's philosophy of operating
top quartile manufacturing facilities capable of extracting full value from the
available timber resource. The investment, which will be funded primarily out of
operating cash flow, is made possible by the Company's strong financial position
and by the support of the management and crew at the two mills, along with other
stakeholders, who have helped create a positive operating and investment climate
in the area. The improvements to be made at these mills will help support long
term jobs in the local communities.
FORWARD-LOOKING STATEMENTS
This release contains information and statements that are forward-looking in
nature, including, but not limited to, statements containing the words "will"
and "is expected" and similar expressions. Such statements involve known and
unknown risks and uncertainties that may cause Interfor's actual results 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 Interfor's 2010 Annual Report and Management Information Circular
available on www.sedar.com. The forward-looking information and statements
contained in this report are based on Interfor's current expectations and
beliefs. Readers are cautioned not to place undue reliance on forward-looking
information or statements. Interfor undertakes no obligation to update such
forward-looking information or statements, except where required by law.
ABOUT INTERFOR
Interfor is a leading global supplier, with one of the most diverse lines of
lumber products in the world. 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, two in Washington and two in Oregon. For
more information about Interfor, visit our website at www.interfor.com.
There will be a conference call on Thursday, November 3, 2011 at 8:00 AM
(Pacific Time) hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose
of reviewing the Company's release of its Third Quarter, 2011 Financial Results.
The dial-in number is 1-866-323-8540. The conference call will also be recorded
for those unable to join in for the live discussion, and will be available until
November 17, 2011. The number to call is 1-866-245-6755 Passcode 502667.
International Forest Products Limited
Third quarter Report
For the three and nine months ended September 30, 2011
Management's Discussion and Analysis
Dated as of November 2, 2011
This Management's Discussion and Analysis ("MD&A") provides a review of
Interfor's financial performance for the three and nine months ended September
30, 2011 relative to 2010, the Company's financial condition and future
prospects. The MD&A should be read in conjunction with the interim Condensed
Consolidated Financial Statements for the three and nine months ended September
30, 2011 and 2010 and for the three months ended March 31, 2011 and 2010, and
Interfor's Annual Information Form, Consolidated Financial Statements and Annual
MD&A for the years ended December 31, 2010 and 2009 filed on SEDAR at
www.sedar.com. The financial information contained in this MD&A has been
prepared in accordance with IAS 34 Interim Financial Reporting and International
Financial Reporting Standards ("IFRS") except as noted herein. In this MD&A,
reference is made to EBITDA and Adjusted EBITDA. EBITDA represents earnings
before finance costs, taxes, depreciation, depletion, amortization,
restructuring costs, other foreign exchange gains and losses, and write-downs of
property, plant, equipment ("asset write-downs"). Adjusted EBITDA represents
EBITDA adjusted for other income (expense) and other income of an associate
company. 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 not a
defined term under IFRS, 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 forward-looking statements. Forward-looking statements are
statements that address or discuss activities, events or developments that the
Company expects or anticipates may occur in the future. Forward-looking
statements are included in the description of areas which are likely to be
impacted by the description of future cash flows and liquidity under the
headings "Overview", "Income Taxes" and "Cash Flow and Financial Position";
changes in accounting policy under the heading "Accounting Policy Changes"; and
in the description of economic conditions under the headings "Sales" and
"Outlook". These forward-looking statements reflect management's current
expectations and beliefs and are based on certain assumptions including
assumptions as to general business and economic conditions in the U.S. and
Canada, as well as other factors management believes are appropriate in the
circumstances including, among others: product selling prices, raw material and
operating costs, changes in foreign currency exchange rates, and other factors
referenced herein. Such forward-looking statements are subject to risks and
uncertainties and no assurance can be given that any of the events anticipated
by such statements will occur or, if they do occur, what benefit the Company
will derive from them. A number of factors could cause actual results,
performance or developments to differ materially from those expressed or implied
by such forward-looking statements, including those matters described herein and
in Interfor's current Annual Information Form available on www.sedar.com.
Accordingly, readers should exercise caution in relying upon forward-looking
statements and the Company undertakes no obligation to publicly revise them to
reflect subsequent events or circumstance, except as required by law.
Review of Operating Results
Overview
The Company recorded net earnings of $6,000 or $0.00 per share for the third
quarter of 2011 as compared to net earnings of $1.4 million, or $0.03 per share
for the third quarter of 2010. For the first nine months, 2011, Interfor
recorded a net loss of $7.0 million, or $0.13 per share as compared to a net
loss of $5.9 million, or $0.13 per share for the first nine months, 2010.
EBITDA and Adjusted EBITDA for the third quarter of 2011 were $14.7 million and
$14.3 million, respectively, compared to $15.3 million and $10.6 million for the
third quarter, 2010. EBITDA and Adjusted EBITDA for the first nine months of
2011 were $39.1 million and $38.6 million, respectively, compared to $39.0
million and $33.9 million for the same period in 2010.
Before restructuring costs, foreign exchange gains (losses), certain other
one-time items and the effect of unrecognized tax assets, the Company's net loss
was $0.5 million, or $0.01 per share for the third quarter, 2011 as compared to
$1.1 million, or $0.02 per share for the third quarter of 2010. The Company
recorded a recovery of share-based incentive compensation of $0.9 million, or
$0.02 per share in the third quarter, 2011 as compared to an expense of $0.1
million, or $0.00 per share for the same period, 2010.
For the first nine months, 2011 Interfor's net loss before restructuring costs,
foreign exchange gains (losses), certain other one-time items and the effect of
unrecognized tax assets was $4.0 million, or $0.07 per share as compared to $3.9
million, or $0.08 per share for the first nine months, 2010. The Company
recorded a recovery of share-based incentive compensation of $0.5 million, or
$0.01 per share for the first nine months, 2011 as compared to a recovery of
$0.5 million, or $0.01 per share for the same period, 2010.
North American lumber demand continued to be weak through the first nine months
of 2011 as U.S. housing starts languished in the face of weak economic
conditions and a glut of distressed and foreclosed properties on the market. In
addition, difficult weather conditions in the first half of 2011 hampered
building starts, transportation and seasonal buying for home improvement
projects and resulted in lower sales volumes through the first nine months.
Increased export market demand in 2011, particularly from China, helped to
offset weak domestic demand and provided some stability for pricing. In the
first quarter, 2011 North American prices were buoyed by strong export demand
but increased production in the second quarter created a supply-demand imbalance
which resulted in lower domestic prices and negatively impacted export pricing,
particularly as China's consumption slowed toward the end of the quarter. In the
third quarter, 2011 Chinese demand cooled as measures introduced by the Chinese
government to address inflation and an overheated housing market impacted credit
availability.
Results have also been impacted by a stronger Canadian dollar which, relative to
its U.S. counterpart, appreciated by 6% on average for both the third quarter,
2011 and for the nine months, 2011 as compared to the same periods of 2010.
Concerns over the global economy and the European debt crisis in late summer
caused a significant drop in interest rates and a sharp weakening of the
Canadian dollar, which closed the third quarter, 2011 9% lower than the previous
quarter's closing rate.
On April 8, 2011 the Company closed a public offering of 8,222,500 Class A
Subordinate Voting shares at a price of $7.00 per share for gross proceeds of
$57.6 million. For full details of the Offering see the short form prospectus
filed on March 31, 2011 on www.sedar.com.
The Company's results are now being prepared in accordance with International
Financial Reporting Standards ("IFRS"). Several of the Company's accounting
policies have changed and the presentation, financial statement captions and
terminology used in this discussion and the accompanying unaudited financial
statements may differ from that used in previously issued financial statements
and quarterly and annual reports. The new policies have been consistently
applied to all of the quarters presented and comparative information has been
restated or reclassified unless otherwise noted. Further details on the
conversion to IFRS are provided in the First Quarter Report for the three months
ended March 31, 2011 in the Management's Discussion and Analysis under
"Accounting Policy Changes" and in the notes to the Condensed Consolidated
Unaudited Financial Statements as at and for the three months ended March 31,
2011 filed on www.sedar.com.
Sales
Lumber shipments improved by 59 million board feet for the third quarter, 2011
and by 173 million board feet for the first nine months, 2011, up 21% over the
comparative periods, 2010. Increases reflect the impact of strong export demand
with China driving the majority of growth in lumber sales volume.
Shipments to China slowed in the third quarter, 2011 relative to the previous
two quarters, 2011, but still outweighed shipments in the same quarter, 2010 by
almost 20%. For the first nine months, 2011 shipments to China more than doubled
those for the same period, 2010. Shipments to North American markets were flat
for the first nine months, 2011 as compared to 2010, as the protracted downturn
continued to impact demand.
Unit lumber sales values were virtually unchanged for the third quarter, 2011
and declined by $15 per mfbm, or 4% for the first nine months, 2011 relative to
the same periods in 2010.
In the first quarter, 2011 high export demand helped bolster North American
prices. In the second quarter, with U.S. housing starts returning to the lowest
levels since the downturn began in 2008, demand faded and prices dropped. The
decline in domestic prices impacted prices in China as well. The third quarter,
2011 saw softened demand in China due to normal seasonal factors along with
specific actions taken to cool the housing market and reduce inflation.
Average unit sales values were further negatively impacted, though to a lesser
extent, by a decline in cedar prices in 2011 as compared to 2010, a change in
sales mix away from higher value cedar products, and a stronger average Canadian
dollar.
Compared to the same periods of 2010, pulp chip and other by-product revenues
improved by $3.6 million for the third quarter of 2011 and $10.3 million for the
first nine months, 2011 corresponding to higher lumber production levels. Chip
prices, boosted by strong global demand for pulp, improved by 21% in the third
quarter, 2011 and 13% in the first nine months, 2011 as compared to the same
periods, 2010.
Log sales improved by 64% or $14.0 million and by 44% or $26.3 million for the
third quarter and first nine months, 2011 respectively in comparison to the same
periods, 2010. Canadian log sales volume increased by 49% in the third quarter,
2011 and by 33% year-to-date relative to the same periods, 2010 reflecting
increased domestic demand for fibre, but driven primarily by increased demand
for logs from export markets. On the B.C. Coast, export log sales volume more
than doubled in the third quarter, 2011 and for the first nine months, 2011 as
compared to 2010.
The impact on average unit sales values of the increase in export log shipments
and shift in sales mix towards higher value export logs in the third quarter,
2011 and first nine months, 2011 was tempered by sales of smaller, lower value
logs in the B.C. Interior.
Unrealized foreign exchange gains (losses) on changes in the fair value of
forward exchange contracts are classified as a component of sales revenue. The
significant weakening of the Canadian dollar at the end of September, 2011
resulted in a charge against net earnings (loss) of $2.4 million for the third
quarter, 2011 and $2.6 million for the nine months, 2011. As the Canadian dollar
recovered much of its strength, moving close to parity again in late October,
2011, a portion of unrealized foreign exchange losses are likely to reverse in
the fourth quarter, 2011.
For the third quarter, 2010, the Company recognized an unrealized foreign
exchange gain of $0.6 million, and a loss of $0.3 million for the first nine
months, 2010 relating to changes in the fair value of forward exchange
contracts.
Operating Costs
Production costs for the third quarter of 2011 increased $43.2 million, or 32%,
and $105.2 million, or 26%, for the first nine months of 2011, compared to the
same periods in 2010.
Lumber production increased by 41 million board feet, or 15% in the third
quarter, 2011 and by 163 million board feet, or 20% in the first nine months,
2011 vis-a-vis the same periods of 2010. The increase was driven by higher
operating rates in the U.S. Pacific Northwest and B.C. Interior divisions,
particularly the Castlegar sawmill, which had been curtailed in the first nine
months, 2010 but operated throughout the first nine months, 2011. Lumber
production on the B.C. Coast was impeded in the first half of 2011 by the
availability of logs as a result of reduced logging activity on the B.C. Coast
in the first quarter, 2011 due in part to access issues caused by storm damage
in late 2010.
In June, 2011 the Company finalized an insurance claim as compensation for lost
profits and reimbursement of costs resulting from storm damage on the B.C. Coast
which occurred in the late fall, 2010. The Company recorded $2.7 million of
business interruption recoveries for the first nine months, 2011. The diminished
ability to log in storm damaged areas reduced the logs available for external
sales and resulted in downtime for the B.C. Coastal sawmills and consequently,
the insurance proceeds were netted against production costs.
Compared to the same period in 2010, B.C. log production in the third quarter,
2011 grew by 68% to 1.0 million cubic metres from 595,000 cubic metres and by
40% to 2.6 million cubic metres from 1.9 million cubic metres for the first nine
months, 2011. Increased logging activity in B.C. was driven by increased fibre
demands resulting from higher operating rates in the B.C. Interior, little
downtime due to a short fire season, and strong export demand.
The Company's overall per unit cost of conversion declined as increases in per
unit lumber conversion costs on the B.C. Coast caused by reduced activity were
more than offset by improved unit costs in the U.S. and the B.C. Interior
sawmills. Unit cash conversion costs fell by 5%, for the third quarter, 2011 and
8% for the first nine months, 2011 vis-a-vis the same periods, 2010.
Log supply in the U.S. Pacific Northwest remains tight as a result of strong
export markets for logs causing increases in log costs for the U.S. sawmills who
source their logs through purchase and timber sale agreements. Competition for
logs has increased their U.S.$ log costs by 13% for the third quarter and first
nine months, 2011 as compared to the same periods, 2010.
Production costs were also impacted by the sharp decline in interest rates in
the latter part of September, 2011 driving increases in the fair value of
reforestation and other decommissioning obligations of $1.2 million in the third
quarter, 2011 and for the first nine months, 2011 (Quarter 3, 2010 - $0.3
million; first nine months, 2010 - $0.6 million).
Export taxes for the third quarter, 2011 increased by $0.9 million, or 49% over
the third quarter, 2010 with an increase in Canadian shipment volumes to the
U.S. of almost 12% over the same period. For the first nine months, 2011, export
taxes increased $1.8 million, or 37% as compared to the same period, 2010
although year-over-year Canadian shipment volumes to the U.S. remained flat.
Higher commodity lumber prices in the third quarter, 2010 caused export tax
rates to drop from 15% to 10% on May 1, 2010, and from 10% to 0% on June 1,
2010. The decline in export tax rates prompted a surge in Canadian shipments to
the U.S. in the second quarter, 2010 to take advantage of the lower taxes. As
lumber prices dropped in the third quarter, 2010, export taxes rose to 10% for
July, 2010 and to 15% on August 1, 2010 for the balance of the year. Export tax
rates for 2011 remained constant at 15%.
Relative to the same periods of 2010, selling and administrative costs increased
by $0.3 million and $2.1 million for the third quarter and first nine months,
2011 respectively. In response to higher sales and customer service levels,
additional selling and export market administration resulted in increased costs.
Long-term incentive compensation ("LTIC") expense, which reflects changes in the
estimated fair value of the share-based compensation plans was a recovery of
$0.9 million for the third quarter, 2011 (Quarter 3, 2010 - $0.1 million
expense) and a recovery of $0.5 million for the first nine months, 2011 (first
nine months, 2010 - $0.5 million recovery). Fair value is estimated based on a
number of contributors including current market price of the underlying shares,
strike price, expected volatility, vesting periods and the expected life of the
awards. The decline in the Company's share price over the third quarter and the
first nine months, 2011 and 2010 is the most significant component of the change
in fair value of the LTIC liability.
Depreciation of plant and equipment for the third quarter, 2011 declined by $0.5
million as compared to the same quarter, 2010. In reviewing its strategic
capital plans in the third quarter, 2010 the useful lives of certain assets were
adjusted resulting in accelerated depreciation charges. For the first nine
months, 2011 depreciation of plant and equipment was essentially unchanged over
the corresponding periods in 2010.
Road amortization and depletion expense increased $2.8 million and $3.9 million
for the third quarter and first nine months, 2011 as compared to the same
periods in 2010, corresponding to 68% and 40% respective increases in logging
activity in B.C.
During the third quarter, 2011 the Company reversed an amount of $0.4 million
for a write-down of an asset previously considered impaired. This, partially
offset with severance costs for early retirement of hourly workers resulted in
the recognition of a $0.3 million recovery of restructuring costs. For the first
nine months, 2011 payments in relation to the buyout of logging contractor's
Bill 13 entitlements together with severance costs, primarily for early
retirement of hourly workers, and partially offset by the impairment reversal
resulted in the recognition of $0.7 million expense.
Restructuring costs in the comparative periods of 2010 totalled $0.5 million for
the third quarter and $1.6 million for the first nine months as the Company
accrued severance costs as it restructured certain of its manufacturing
operations and impaired an asset by $0.5 million.
Finance Costs, Other Foreign Exchange Gain (loss), Other Income (Expense)
Net proceeds of $54.9 million received from a public offering of Class A
Subordinate Voting shares on April 8, 2011 reduced the Company's debt levels in
the second quarter, 2011. This, together with a decrease in the Company's
overall lending rates and the impact of a stronger average Canadian dollar on
interest on U.S. denominated debt, resulted in a decline of 44% and 30% in
interest expenses for the third quarter and first nine months, 2011 respectively
vis-a-vis the same periods, 2010.
Under IFRS finance costs also include accretion expense on decommissioning
liabilities and amortization of prepaid financing costs. Prior year figures have
been retroactively restated to conform to this presentation.
The Company reported a $0.4 million gain in Other income (expense) for the third
quarter and first nine months, 2011 arising from the minor disposals of surplus
equipment and gains from lumber futures trading. This compares to a loss of $0.1
million for the third quarter, 2010 and a gain of $0.3 million for the first
nine months, 2010 arising primarily from the final settlement of compensation
under the Forest Act for timber and other assets resulting from the 2006
legislated takeback of certain logging rights on the B.C. Coast.
The significant weakening of the Canadian dollar at the end of September, 2011
resulted in a foreign exchange gain of $0.5 million in the third quarter, 2011
and $0.3 million for the first nine months, 2011. Other foreign exchange gain
(loss) was impacted by the strengthening Canadian dollar for the comparable
periods in 2010 and amounts were negligible.
Equity income at $6.5 million for the third quarter, 2010 and $9.8 million for
the first nine months, 2010 represented equity participation in the earnings and
gains on the disposals of vessels of the Seaboard General Partnership ("the
SGP"). The SGP was wound-up on January 7, 2011 and continues operations as
Seaboard Shipping Company Limited ("Seaboard") which became a wholly owned
subsidiary of Interfor. Seaboard's accounts are included in the consolidated
financial statements of the Company from the date of change in control.
Income Taxes
In the third quarter of 2011, the Company recorded an income tax expense of $0.5
million (Quarter 3, 2010 - $0.2 million recovery) which excludes the benefit of
$0.6 million of certain deferred income tax assets arising from loss
carry-forwards available to reduce future taxable income which were not
recognized (Quarter 3, 2010 - $1.6 million). For the first nine months, 2011,
the income tax expense of $1.3 million (first nine months, 2010 - $1.0 million)
excluded the benefit of $3.1 million of deferred tax assets (first nine months,
2010 - $5.4 million). Although the Company expects to realize the full benefit
of the loss carry-forwards and other deferred tax assets, due to the cyclical
nature of the wood products industry and the economic conditions over the last
several years, the Company has not recognized the benefit of its deferred tax
assets in excess of its deferred tax liabilities.
Cash Flow and Financial Position
The Company generated cash from operating activities, before changes in non-cash
working capital, of $39.0 million for the first nine months, 2011 as compared to
$30.1 million for the first nine months, 2010. Higher export sales volumes drove
cash earnings in 2011 while a short-lived spike in North American sales values
in the second quarter, 2010 impacted year-to-date results in 2010.
Year-over-year, the increase in cash flow was due to higher export sales volumes
partially offset by lower overall sales realizations and a stronger average
Canadian dollar.
Cash generated by the Company from operations, after changes in working capital,
was $24.5 million for the nine months ended September 30, 2011 compared to cash
generated of $24.4 million in the first nine months, 2010. Significant increases
in lumber production for export markets resulted in an inventory build-up in
lumber and logs of $17.8 million. The increase in accounts receivable of $4.7
million, offset by a $10.9 million rise in accounts payable was the result of
the higher manufacturing and logging operating rates and the increase in export
shipments through the first nine months of 2011.
Capital expenditures for the first nine months of 2011 totalled $27.3 million
(first nine months, 2010 - $33.1 million). For the first nine months, 2011
spending was $14.6 million on road construction, $7.4 million on high-return
discretionary projects with the balance spent on business maintenance. Capital
expenditures in the first nine months, 2010 include the acquisition of a timber
tenure in the Kamloops region in the first quarter, 2010.
On January 3, 2011 the SGP declared an income distribution to its partners.
Interfor's share was $15.7 million and was paid to the Company by way of setoff
against the promissory note payable to the SGP. On January 5, 2011 by virtue of
the withdrawal of all other partners in the SGP, Interfor acquired control of
its net assets. Cash generated from investments includes cash received on
acquisition of the SGP of $4.8 million.
In the second quarter, 2011 the Company also settled an insurance claim in
respect of severe storm damage to logging roads and bridges in the fall, 2010.
Net cash proceeds of $4.8 million were received in June 2011, with $2.7 million
reflected in net earnings, $0.5 million applied against receivables, and the
remainder set up as provisions for future remediation.
On April 8, 2011 the Company closed a public offering of 8,222,500 Class A
Subordinate Voting shares at a price of $7.00 per share for net proceeds of
$54.9 million. The closing of the Offering included the exercise in full of the
overallotment option of 1,072,500 shares by the Underwriters. In addition, in
the first nine months, 2011 several stock option holders exercised their options
generating $1.4 million in cash.
Funds received from the issuance of shares enabled the Company to reduce its
drawings under its Revolving Term Line by $56.0 million over the first nine
months, 2011.
On August 25, 2011, the Company entered into two interest rate swaps, each with
notional value of $25.0 million and maturing July 28, 2015. Under the terms of
the swaps the Company pays an amount based on a fixed annual interest rate of
1.56% and receives a 90 day BA CDOR plus a margin which is recalculated at set
interval dates. The intent of these swaps is to convert floating-rate interest
expense to fixed-rate interest expense. As these interest rate swaps have been
designated as cash flow hedges the fair value of these interest rate swaps at
September 30, 2011 being a liability of $500,000 (measured based on Level 2 of
the fair value hierarchy) has been recorded in Trade accounts payable and
accrued liabilities and a charge of $500,000 has been recognized in Other
comprehensive income.
As at September 30, 2011, the Revolving Term Line was drawn by US$30.2 million
(revalued at the quarter-end exchange rate to $31.7 million) and $75.0 million
for total drawings of $106.7 million, leaving an unused available line of $93.3
million. The Company's Operating Line had an unused available line of $60.1
million, after including outstanding letters of credit of $4.9 million in the
line utilization. Including unrestricted cash of $11.6 million, the Company had
available resources of $165.0 million as at September 30, 2011.
These resources, together with cash generated from operations, will be used to
support our working capital requirements, debt servicing commitments, and any
capital expenditures.
On July 11, 2011 the Company extended and modified its syndicated credit
facilities. The maturity date of the Operating Line was extended from July 28,
2012 to July 28, 2015 and the maturity date of the Revolving Term Line was
extended from July 28, 2013 to July 28, 2015. All other terms and conditions of
the lines remain substantially unchanged except for a reduction in pricing.
Based on current pricing and cash flow projections and existing credit lines the
Company believes it has sufficient resources to meet all of its financial
obligations.
At September 30, 2011, the Company had cash of $11.7 million. After deducting
the Company's drawings under its Operating Line and Revolving Term Line, the
Company ended the third quarter, 2011 with net debt of $94.9 million or 19% of
invested capital down from 30% of invested capital at December 31, 2010.
Selected Quarterly Financial Information(1)
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International Financial Reporting Standards GAAP
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Quarterly
Earnings
Summary 2011 2010 2009(2)
------------------------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
------------------------------------------------------------
(millions of dollars except share and per share amounts)
Sales
- Lumber 136.7 134.0 132.5 137.5 113.1 123.7 107.6 93.1
- Logs 36.0 28.6 20.8 20.6 21.9 19.8 17.4 17.3
- Wood chips
and other by-
products 17.6 16.8 16.4 15.7 14.0 13.3 13.2 12.2
- Ocean
freight and
other(3) 9.9 8.7 10.0 2.4 2.4 1.0 1.7 2.9
------------------------------------------------------------
Total Sales 200.2 188.2 179.7 176.3 151.5 157.9 139.9 125.5
------------------------------------------------------------
Operating
earnings (loss)
before
restructuring
costs and asset
impairments 1.0 (2.0) 1.0 1.5 (2.0) (0.9) (2.4) (7.8)
Operating
earnings (loss) 1.3 (2.1) 0.2 1.5 (2.5) (2.0) (2.5) (7.8)
Net earnings
(loss) 0.0 (5.3) (1.7) 0.8 1.4 (3.5) (3.8) (5.0)
Net earnings
(loss) per
share - basic
and diluted 0.00 (0.10) (0.04) 0.02 0.03 (0.07) (0.08) (0.11)
Net earnings
(loss),
adjusted for
one-time
items(4) (0.5) (2.9) (0.5) 0.5 (1.1) (0.6) (2.2) (4.4)
Net earnings
(loss),
adjusted for
one-time items
- per share(4) (0.01) (0.05) (0.01) 0.01 (0.02) (0.01) (0.05) (0.09)
EBITDA(8) 14.7 11.6 12.8 14.6 15.3 13.7 10.0 6.3
Adjusted
EBITDA(8) 14.3 11.6 12.7 14.5 10.6 13.3 10.0 5.7
Cash flow from
operations per
share(5) 0.26 0.22 0.27 0.22 0.18 0.25 0.21 0.06
Shares
outstanding -
end of period
(millions)(6) 55.9 55.9 47.5 47.4 47.1 47.1 47.1 47.1
- weighted
average
(millions) 55.9 55.2 47.4 47.2 47.1 47.1 47.1 47.1
Average foreign
exchange rate
per US$1.00(7) 0.9808 0.9680 0.9856 1.0131 1.0395 1.0283 1.0401 1.0571
Closing foreign
exchange rate
per US$1.00(7) 1.0482 0.9645 0.9696 0.9946 1.0290 1.0646 1.0158 1.0510
1. Tables may not add due to rounding.
2. Quarter is not restated for conversion to IFRS.
3. Other revenues include ocean freight revenues of Seaboard which are
included in the consolidated results from the date of change in control
on January 5, 2011. The Company's share of Seaboard results were
previously recognized in equity income.
4. Net earnings (loss), adjusted for one-time items represents net earnings
(loss) before restructuring costs, foreign exchange gains and losses,
other income (expense), other one-time items and the effect of
unrecognized tax assets.
5. Cash generated from operations before taking account of changes in
operating working capital.
6. As at November 2, 2011, the number of shares outstanding by class are:
Class A Subordinate Voting shares - 54,847,176; Class B Common shares -
1,015,779; Total - 55,862,955.
7. Accounting quarter-end dates may differ slightly from the reporting
date. As such, the foreign exchange rate used to revalue quarter-end
balances may differ from those calculated using the Bank of Canada
closing foreign exchange rate per US$1.00.
8. EBITDA represents earnings before finance costs, taxes, depreciation,
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 and Interfor's management to evaluate
the Company's performance. As EBITDA is not a defined term under IFRS,
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 other income and other income of the
associate company. EBITDA and Adjusted EBITDA can be calculated from the
Statements of Operations as follows(4):
------------------------------------------------------------
Previous
Canadian
International Financial Reporting Standards GAAP
------------------------------------------------------------
2011 2010 2009(3)
------------------------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4(3)
------------------------------------------------------------
(millions of dollars)
Net earnings
(loss) 0.0 (5.3) (1.7) 0.8 1.4 (3.5) (3.8) (5.0)
Add: Income
taxes
(recovery) 0.5 1.2 (0.4) (0.5) (0.2) 1.0 0.2 (3.3)
Finance costs 1.7 1.9 2.3 2.5 2.6 2.8 2.6 2.0
Depreciation,
depletion and
amortization 13.3 13.6 11.7 11.7 11.0 12.3 11.1 12.5
Other foreign
exchange
(gains)
losses (0.5) 0.1 0.1 0.2 0.1 0.1 - 0.1
Restructuring
costs, asset
impairments
and other
costs
(recoveries) (0.3) 0.1 0.8 - 0.5 1.1 - 0.1
------------------------------------------------------------
EBITDA 14.7 11.6 12.8 14.6 15.3 13.7 10.0 6.3
Deduct:
Other income
(expense) 0.4 - - (0.3) (0.1) 0.4 - 0.6
Other income
of associate
company - - - 0.4 4.8 - - -
------------------------------------------------------------
Adjusted EBITDA 14.3 11.6 12.7 14.5 10.6 13.3 10.0 5.7
------------------------------------------------------------
Volume and Price Statistics 2011 2010 2009
-------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
-------------------------------------------
Lumber sales (million fbm) 336 334 313 321 277 270 264 234
Lumber
production (million fbm) 313 325 332 303 272 277 258 245
Log sales(1) (thousand cubic
metres) 430 314 301 292 289 262 239 261
Log (thousand cubic
production(1) metres) 1,002 796 816 794 595 624 648 533
Average selling
price -
lumber(2) ($/thousand fbm) $ 407 $401 $423 $428 $408 $459 $408 $398
Average selling
price - logs(1)($/cubic metre) $ 74 $ 82 $ 61 $ 64 $ 73 $ 68 $ 64 $ 62
Average selling
price - pulp
chips ($/thousand fbm) $ 48 $ 44 $ 40 $ 42 $ 40 $ 37 $ 40 $ 39
1. B.C. operations
2. Gross sales before export taxes
3. Quarter is not restated for conversion to IFRS
4. Tables may not add due to rounding
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 closures. Generally, the Company's B.C.
Coastal 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. Logging activity in the B.C. Interior is generally
higher in the first half of the first quarter, slows during spring thaw and
increases in the third and fourth quarters. Sawmill operations are less seasonal
than logging operations but are dependent on the availability of logs from
logging operations, including those from suppliers. In addition, the market
demand for lumber and related products is generally lower in the winter due to
reduced construction activity, which increases during the spring, summer and
fall.
Operating rates increased in the fourth quarter of 2009 and first quarter, 2010,
as lumber prices rose in response to increased North American demand and a
temporary supply/demand imbalance. During the same period off-shore demand
increased, particularly from China, with rapid export market growth through the
remaining quarters of 2010 and the first three quarters, 2011.
The volatility of the Canadian dollar also impacted results, given that
historically over 75% of the Canadian operation's lumber sales are to export
markets and priced in $U.S. A strong Canadian dollar reduces the lumber sales
realizations in Canada, but reduces the impact of losses in U.S. operations when
converted to Canadian dollars. No deferred tax assets arising from loss
carry-forwards were recognized during 2010 or 2011.
In the first quarter, 2011 the Company acquired complete control of SGP. SGP was
wound up on early January, 2011 but continued operations as Seaboard and its
accounts were consolidated from the date of change in control on January 5,
2011. Other sales revenues include the ocean freight revenues of Seaboard.
Softwood Lumber Agreement Arbitration
On October 8, 2010, the U.S. Trade Representative's office filed a request for
consultations with Canada under the terms of the Softwood Lumber Agreement
("SLA") over its concern that the province of British Columbia is charging too
low a price for certain grades of timber harvested on public lands in the B.C.
Interior.
Under the terms of the SLA, consultations between the two governments were held
but the matter was not resolved and on January 18, 2011 the U.S. Trade
Representative filed for arbitration. The arbitration will be conducted by the
London Court of International Arbitration ("LCIA"). Decisions by the LCIA are
final and binding on both parties. The Company believes that B.C. and Canada are
complying with their obligations under the SLA.
In August, 2011 the U.S. Trade Representative filed a detailed statement of
claim with the LCIA and Canada is expected to deliver its initial response in
November, 2011. A hearing before the arbitration panel is expected to take place
in early 2012 with a final decision expected by the end of 2012.
As the arbitration process is still in its early stages, the existence of any
potential claim has not been determined and no provision has been recorded in
the financial statements as at September 30, 2011.
Accounting Policy Changes
Adoption of International Financial Reporting Standards
Effective January 1, 2011 Canadian publicly listed entities were required to
prepare their financial statements in accordance with IFRS. Due to the
requirement to present comparative financial information, the effective
transition date was January 1, 2010. The Company's first reporting period under
IFRS is the quarter ended March 31, 2011.
While IFRS uses a conceptual framework similar to Canadian Generally Accepted
Accounting Principles ("GAAP"), there are significant differences on
recognition, measurement, and disclosures. The Company identified a number of
key areas impacted by changes in accounting policies, including: property,
plant, and equipment; impairment of assets; provisions, including reforestation
liabilities and other decommissioning obligations; share-based payments;
employee future benefits; and deferred income taxes.
Note 18 to the consolidated interim financial statements provides more detail on
key Canadian GAAP to IFRS differences, accounting policy decisions and IFRS 1,
First-Time Adoption of International Financial Reporting Standards optional
exemptions for significant or potentially significant areas that have had an
impact on Interfor's financial statements on transition to IFRS or may have an
impact in future periods.
IFRS Transitional Impact on Equity
As a result of the policy choices selected and changes required under IFRS,
Interfor has recorded an increase in equity of $3.4 million as at the date of
transition, January 1, 2010. The table below outlines adjustments to equity on
adoption of IFRS on January 1, 2010, and at September 30, 2010 and December 31,
2010 for comparative purposes(1):
January 1 Sept. 30 December 31
2010 2010 2010
----------------------------------------------------------------------------
(millions of dollars)
Equity under Canadian GAAP $ 358.0 $ 350.5 $ 347.3
Transition election to fair
value property 15.7 15.7 15.7
Employee future benefits (6.9) (11.0) (9.0)
Decommissioning liabilities (2.8) (3.9) (3.3)
Share based compensation (2.1) (1.1) (2.2)
Equity participation in
associate's income (0.9) (1.4) (1.1)
Deferred income taxes 0.3 - -
----------------------------------------------------------------------------
Total IFRS adjustments to
equity 3.4 (1.6) 0.2
----------------------------------------------------------------------------
Equity under IFRS $ 361.4 $ 348.9 $ 347.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Table may not add due to rounding
IFRS Impact on Comprehensive Income
The following is a summary of the adjustments to Comprehensive Income for the
three and nine months ended Sept. 30, 2010 under IFRS:1
Three months ended Nine months ended
Sept. 30, 2010 Sept. 30, 2010
----------------------------------------------------------------------------
(millions of dollars)
Comprehensive income (loss) under
Canadian GAAP $ (3.4)$ (7.5)
Profit adjustments
Employee future benefits(2) - -
Decommissioning liabilities (0.4) (1.1)
Share based compensation 0.1 0.9
Equity participation in associate's
income(2) - -
Deferred income taxes 0.1 (1.3)
----------------------------------------------------------------------------
Total IFRS adjustments to net
earnings (0.1) (1.5)
----------------------------------------------------------------------------
Other comprehensive income
adjustments
Employee future benefits -
actuarial gains (losses) 0.3 (4.1)
Equity participation in associate's
employee future benefits
actuarial gains (losses) 0.1 (0.5)
Deferred income taxes (0.1) 1.0
----------------------------------------------------------------------------
Total other comprehensive income
adjustments 0.3 (3.6)
----------------------------------------------------------------------------
Comprehensive income (loss) under
IFRS $ (3.2)$ (12.6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Table may not add due to rounding
(2) Due to rounding, amount appears to have no impact
New Accounting Policy - Derivative Financial Instruments, Interest Rate Swaps
On August 25, 2011, the Company entered into two interest rate swaps and
designated these financial instruments as cash flow hedges. The intent of these
swaps is to convert floating-rate interest expense to fixed-rate interest
expense based on BA CDOR. As these derivatives are designated as the hedging
instrument in a cash flow hedge of fluctuations in market interest rates
associated with specific drawings under the Revolving Term Line, the effective
portion of changes in the fair value of the derivative is recognized in Other
comprehensive income (loss) and presented in the Hedging reserve in Equity. Any
ineffective portion of the changes in the fair value of the derivative is
recognized immediately in Net earnings (loss).
IFRS Future Accounting Policy Changes
The standard-setting bodies that set IFRS have significant ongoing projects that
could impact the IFRS accounting policies selected. Specifically, it is
anticipated that there will be additional new or revised IFRS or IFRIC standards
in relation to consolidation, and leases with Exposure Drafts currently in
circulation for comment. Currently the following standards have been issued:
IFRS 9, Financial Instruments, replaces the multiple classification and
measurement models in IAS 39, Financial Instruments: Recognition and
Measurement, with a single model that has only two classification categories:
amortized cost and fair value.
IAS 19, Employee Benefits, was revised to eliminate the option to defer
recognition of gains and losses, known as the "corridor method", and to enhance
disclosure requirements for defined benefit plans. As the Company did not choose
the corridor method in accounting for its defined benefit plans, there is no
impact on its financial statements as a result of the elimination of this
option.
Both standards are in effect for accounting periods beginning on or after
January 1, 2013, with earlier adoption permitted. As at the reporting date, no
assessment has been made of the impact of these standards on the Company's
financial statements other than the effect of the elimination of the corridor
method.
Controls and Procedures
There were no changes in the Company's internal controls over financial
reporting ("ICFR") during the quarter ended September 30, 2011 that have
materially affected, or are reasonably likely to materially affect, the
Company's ICFR.
Critical Accounting Estimates
There were no material changes to the Company's critical accounting estimates
during the quarter ended September 30, 2011. For a full discussion of critical
accounting estimates, please refer to the Company's discussion in its MD&A for
the year ended December 31, 2010 and to the First Quarter, 2011 Report for the
three months ended March 31, 2011 for the impact of changes on accounting
estimates due to the adoption of IFRS. Both documents are filed on SEDAR at
www.sedar.com.
Outlook
Business conditions remain uncertain. Sovereign debt issues in Europe, slow
progress in the U.S. and credit conditions in China bear watching. On the
positive side, a noticeable reduction in demand from offshore buyers has
resulted in some easing of log prices in the Pacific Northwest.
At its meeting today, Interfor's Board of Directors approved a $24 million
capital plan to upgrade the Company's Grand Forks and Castlegar sawmills.
The plan involves the installation of a new small log line at Grand Forks to
replace the existing two-line facility, along with funds to complete the
installation of an automated lumber grading system. The Grand Forks project is
budgeted at $19 million and will incorporate the same technology recently
installed at the Company's Adams Lake sawmill. Construction will commence in the
first quarter of 2012 and will be completed in mid 2013.
The investment at Castlegar, which totals $5 million, consists of a series of
high return projects including the installation of an automated lumber grading
system focused on increasing productivity and value extraction at that mill.
When completed, the Grand Forks and Castlegar mills will operate with a combined
capacity of 375 million board feet on a full two-shift basis.
Additional Information
Additional information relating to the Company and its operations can be found
on its website at www.interfor.com, 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
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months ended September 30, 2011 and 2010 (unaudited)
(thousands of Canadian dollars except loss per share)
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Sales $ 200,165 $ 151,493 $ 568,064 $ 449,315
Costs and expenses:
Production 179,166 135,969 507,951 402,781
Selling and administration 5,008 4,728 15,248 13,180
Long term incentive
compensation expense
(recovery) (945) 129 (485) (480)
Depreciation of plant and
equipment (note 10) 6,629 7,091 20,540 20,131
Depletion and amortization
of timber, roads and
other (note 10) 6,698 3,870 18,055 14,164
----------------------------------------------------------------------------
199,166 153,533 568,025 454,679
----------------------------------------------------------------------------
Operating earnings (loss)
before restructuring costs 999 (2,040) 39 (5,364)
Restructuring (costs)
recovery (note 11) 305 (480) (684) (1,587)
----------------------------------------------------------------------------
Operating earnings (loss) 1,304 (2,520) (645) (6,951)
Finance costs (note 12) (1,657) (2,565) (5,826) (7,932)
Other foreign exchange gain
(loss) 461 (67) 331 (111)
Other income (expense)
(note 13) 359 (129) 416 259
Equity in earnings of
associate company - 6,481 - 9,779
----------------------------------------------------------------------------
(837) 3,720 (5,079) 1,995
----------------------------------------------------------------------------
Earnings (loss) before
income taxes 467 1,200 (5,724) (4,956)
Income tax expense
(recovery):
Current 145 8 535 42
Deferred 316 (213) 727 951
----------------------------------------------------------------------------
461 (205) 1,262 993
----------------------------------------------------------------------------
Net earnings (loss) 6 1,405 (6,986) (5,949)
Other comprehensive income
(loss):
Foreign currency
translation differences -
foreign operations 10,713 (4,930) 6,741 (3,046)
Defined benefit plan
actuarial losses (4,913) 314 (5,571) (4,134)
Equity share of
associate's defined
benefit plan actuarial
losses - 84 - (487)
Loss in fair value of
interest rate swaps (500) - (500) -
Income tax recovery
(expense) on defined
benefit plan actuarial
losses - (78) 165 1,034
----------------------------------------------------------------------------
5,300 (4,610) 835 (6,633)
----------------------------------------------------------------------------
Total comprehensive income
(loss) for the period $ 5,306 $ (3,205) $ (6,151) $ (12,582)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) per
share, basic and diluted
(note 14) $ 0.00 $ 0.03 $ (0.13) $ (0.13)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2011 and 2010 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars) 9 Months 9 Months
Sept. 30, 2011 Sept. 30, 2010
----------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net loss $ (6,986) $ (5,949)
Items not involving cash:
Depreciation of plant and equipment 20,540 20,131
Depletion and amortization of timber,
roads and other 18,055 14,164
Deferred income tax expense 727 951
Income tax expense 535 42
Finance costs 5,826 7,932
Other assets 76 15
Reforestation liability 580 1,411
Other liabilities and provisions (2,296) 327
Equity in earnings of associate company - (9,779)
Write-downs (reversals) of plant and
equipment (423) 809
Unrealized foreign exchange losses 2,551 312
Other (note 13) (228) (259)
----------------------------------------------------------------------------
38,957 30,107
Cash generated from (used in) operating
working capital:
Trade accounts receivable and other (4,715) 1,511
Inventories (17,792) (11,566)
Prepayments (2,465) (1,363)
Trade accounts payable and accrued
liabilities 10,936 5,293
Income taxes refunded (paid) (410) 399
----------------------------------------------------------------------------
24,511 24,381
Investing activities:
Additions to property, plant and equipment (12,603) (6,252)
Additions to logging roads (14,597) (11,839)
Additions to timber and other intangible
assets (59) (15,050)
Proceeds on disposal of property, plant,
and equipment 257 1,301
Cash received on acquisition of subsidiary
(note 5) 4,846 -
Investments and other assets (736) (3,536)
----------------------------------------------------------------------------
(22,892) (35,376)
Financing activities:
Issuance of capital stock, net of share
issue expenses (note 9) 56,256 39
Interest payments (4,624) (7,098)
Funds from promissory note payable to
associate - 6,896
Additions to long-term debt (note 8(b)) 70,000 120,819
Repayments of long-term debt (note 8(b)) (121,000) (102,534)
----------------------------------------------------------------------------
632 18,122
Foreign exchange gain on cash and cash
equivalents held in a foreign currency 179 102
----------------------------------------------------------------------------
Increase in cash 2,430 7,229
Cash and cash equivalents, beginning of year 9,301 3,802
----------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 11,731 $ 11,031
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, 2011 and December 31, 2010 (unaudited)
(thousands of Canadian dollars) Sept. 30, Dec. 31,
2011 2010
----------------------------------------------------------------------------
(note 2)
Assets
Current assets:
Cash and cash equivalents (note 8(c)) $ 11,731 $ 9,301
Trade accounts receivable and other 51,909 45,961
Inventories (note 7) 90,359 71,762
Prepayments 11,760 8,334
----------------------------------------------------------------------------
165,759 135,358
Investment in associate company
(notes 5 and 6) - 16,074
Employee future benefits 811 515
Other investments and assets 2,907 2,636
Property, plant and equipment 347,511 347,990
Logging roads and bridges 16,545 17,063
Timber licences 77,658 80,154
Other intangible assets 1,354 1,723
Goodwill 13,078 13,078
----------------------------------------------------------------------------
$ 625,623 $ 614,591
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Current liabilities:
Trade accounts payable and accrued
liabilities $ 65,789 $ 50,053
Reforestation liability 12,784 9,785
Income taxes payable 972 230
Payable to associate (note 6) - 15,738
----------------------------------------------------------------------------
79,545 75,806
Reforestation liability 18,348 17,325
Long-term debt (notes 8(a), 8(b)) 106,656 156,037
Employee future benefits 8,957 5,815
Other liabilities and provisions 11,830 12,158
Equity:
Share capital (note 9)
Class A subordinate voting shares 342,286 285,362
Class B common shares 4,080 4,080
Contributed surplus 7,476 5,408
Translation reserve (905) (7,646)
Hedging reserve (500) -
Retained earnings 47,850 60,246
----------------------------------------------------------------------------
400,287 347,450
----------------------------------------------------------------------------
$ 625,623 $ 614,591
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingencies (note 17)
See accompanying notes to consolidated financial statements
On behalf of the Board:
E.L. Sauder G.H. MacDougall
Director Director
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the nine months ended September 30, 2011 and 2010 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars)
Class A Class B Contri- Trans-
Share Share buted lation Hedging Retained
Capital Capital Surplus Reserve Reserve Earnings Total
----------------------------------------------------------------------------
Balance at
January 1,
2011 $285,362 $ 4,080 $ 5,408 $(7,646) $ - $ 60,246 $347,450
Net loss for
the period: - - - - (6,986) (6,986)
Other
comprehen-
sive earnings
(loss):
Foreign
currency
translation
differences
- foreign
operations - - - 6,741 - - 6,741
Defined
benefit
plan
actuarial
losses, net
of income
tax benefit - - - - - (5,406) (5,406)
Loss in fair
value of
interest
rate swaps - - - - (500) - (500)
Contributions:
Share
options
exercised 1,370 - - - - - 1,370
Share
issuance,
net of
share issue
expenses
and income
tax benefit 55,554 - - - - - 55,554
Changes in
ownership
interests
in
investee:
Acquisition
of
subsidiary - - 2,068 - - (4) 2,064
----------------------------------------------------------------------------
Balance at
September
30, 2011 $342,286 $ 4,080 $ 7,476 $ (905) $ (500) $ 47,850 $400,287
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Hedg-
Class A Class B Contri- Trans- ing
Share Share buted lation Re- Retained
Capital Capital Surplus Reserve serve Earnings Total
----------------------------------------------------------------------------
Balance at
January 1,
2010 $284,500 $ 4,080 $ 5,408 $ - $ - $ 67,421 $361,409
Net loss for
the period: - - - - - (5,949) (5,949)
Other
comprehensive
loss:
Foreign
currency
translation
differences
- foreign
operations - - - (3,046) - - (3,046)
Defined
benefit plan
actuarial
losses, net
of income tax
benefit - - - - - (3,100) (3,100)
Equity in
associate
defined
benefit plan
actuarial
losses - - - - - (487) (487)
Contributions:
Share options
exercised 39 - - - - - 39
----------------------------------------------------------------------------
Balance at
September 30,
2010 $284,539 $ 4,080 $ 5,408 $(3,046) $ - $ 57,885 $348,866
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
INTERNATIONAL FOREST PRODUCTS LIMITED
Notes to Unaudited Condensed Consolidated Interim Financial Statements
(Tabular amounts expressed in thousands except number of shares and per
share amounts)
Three and nine months ended September 30, 2011 and 2010 (unaudited)
1. Nature of operations:
International Forest Products Limited and its subsidiaries (the "Company" or
"Interfor") is a producer of wood products in British Columbia and the U.S.
Pacific Northwest for sale to markets around the world.
The Company is a publicly listed company incorporated under the Business
Corporations Act (British Columbia) with shares listed on the Toronto Stock
Exchange. Its head office, principal address and records office is located at
Suite 3500, 1055 Dunsmuir Street, Vancouver, British Columbia, V7X 1H7.
The condensed consolidated interim financial statements of the Company as at and
for the three and nine months ended September 30, 2011 comprise the Company and
its subsidiaries. The consolidated financial statements of the Company as at and
for the year ended December 31, 2010 which were prepared under Canadian
generally accepted accounting principles ("GAAP") are available on
www.sedar.com.
2. Statement of Compliance:
a. Statement of compliance and conversion to International Financial Reporting
Standards ("IFRS"):
For fiscal years commencing January 1, 2011 Canadian GAAP were converged with
IFRS. Consequently, the Company has prepared current and comparative financial
information under IFRSs for the reporting period ending September 30, 2011.
These condensed consolidated interim financial statements have been prepared in
accordance with IAS 34 Interim Financial Reporting. As these IFRS condensed
consolidated interim financial statements are for part of the period covered by
the first IFRS annual financial statements IFRS 1 First-time Adoption of
International Financial Reporting Standards has been applied. The condensed
consolidated interim financial statements do not include all of the information
required for full annual financial statements.
An explanation of how the transition to IFRSs has affected the reported
financial position, financial performance and cash flows of the Company as at
the date of transition of January 1, 2010 and as at December 31, 2010 have been
fully described in note 19 of the Company's unaudited condensed consolidated
interim financial statements as at and for the three months ended March 31, 2011
as filed on www.sedar.com.
Reconciliations of equity as at September 30, 2010 and total comprehensive
income for the three and nine months ended September 30, 2010 comparative
periods reported under Canadian GAAP to those reported for those periods under
IFRSs are provided in note 18.
In these financial statements the term Canadian GAAP refers to Canadian GAAP
before the adoption of IFRS.
These condensed consolidated interim financial statements were approved by the
Board of Directors on November 2, 2011.
b. Basis of measurement:
The condensed consolidated interim financial statements have been prepared on
the historical cost basis except for the following material items in the
Statement of Financial Position:
i. Derivative financial instruments are measured at fair value;
ii. Liabilities for cash-settled share-based payment arrangements are measured
at fair value; and
iii.The employee benefit assets and liabilities are recognized as the net of the
fair value of the plan assets and the present value of the benefit obligations
on a plan by plan basis.
3. Significant accounting policies:
The accounting policies that the Company has adopted in its consolidated
financial statements for the year ended December 31, 2011 have been fully
described in note 3 of the Company's unaudited condensed consolidated interim
financial statements as at and for the three months ended March 31, 2011 and as
filed on www.sedar.com. These accounting policies have been applied consistently
to all periods presented in these condensed consolidated interim financial
statements.
New Accounting Policy - Derivative Financial Instruments, Interest Rate Swaps:
On August 25, 2011, the Company entered into two interest rate swaps and
designated these financial instruments as cash flow hedges. The intent of these
swaps is to convert floating-rate interest expense to fixed-rate interest
expense based on BA CDOR. As these derivatives are designated as the hedging
instrument in a cash flow hedge of fluctuations in market interest rates
associated with specific drawings under the Revolving Term Line, the effective
portion of changes in the fair value of the derivative is recognized in Other
comprehensive income (loss) and presented in the Hedging reserve in Equity. Any
ineffective portion of the changes in the fair value of the derivative is
recognized immediately in Net earnings (loss).
Future accounting changes:
IFRS 9, Financial Instruments, replaces the multiple classification and
measurement models in IAS 39, Financial Instruments: Recognition and
Measurement, with a single model that has only two classification categories:
amortized cost and fair value.
IAS 19, Employee Benefits, was revised to eliminate the option to defer
recognition of gains and losses, known as the "corridor method", and to enhance
disclosure requirements for defined benefit plans. As the Company did not choose
the corridor method in accounting for its defined benefit plans, there is no
impact on its financial statements as a result of the elimination of this
option.
Both standards are in effect for accounting periods beginning on or after
January 1, 2013, with earlier adoption permitted. As at the reporting date, no
assessment has been made of the impact of the standard on the Company's
financial statements other than the effect of the elimination of the corridor
method.
4. Seasonality of operating results:
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 B.C.
Coastal 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. Logging activity in the B.C. Interior is generally
higher in the first half of the first quarter, slows during spring thaw and
increases in the third and fourth quarters. Sawmill operations are less seasonal
than logging operations but are dependent on the availability of logs from
logging operations, including those from suppliers. In addition, the market
demand for lumber and related products is generally lower in the winter due to
reduced construction activity, which increases during the spring, summer and
fall.
5. Acquisition:
On January 5, 2011, all partners in the Seaboard General Partnership ("the SGP")
withdrew with the exception of Interfor. The SGP was wound-up on January 7, 2011
and continues shipping operations as Seaboard Shipping Company Limited
("Seaboard") which became a wholly-owned subsidiary of Interfor. Seaboard's
accounts are included in the consolidated financial statements of the Company
from the date of change in control.
This acquisition has been accounted for using the purchase method. At the date
of change in control the identifiable assets acquired and liabilities and
residual equity assumed were recorded at fair value based on management's best
estimates and allocated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets acquired:
Cash $ 4,846
Other current assets 1,950
Employee future benefits 1,659
----------------------------------------------------------------------------
8,455
Liabilities assumed:
Current liabilities (5,422)
Employee future benefits (326)
Deferred income taxes (307)
Residual equity assumed:
Contributed surplus (2,068)
Withdrawing partners' share of actuarial gains and losses
recognized through Other Comprehensive Income 4
----------------------------------------------------------------------------
Previous carrying value of investment in associate $ 336
----------------------------------------------------------------------------
----------------------------------------------------------------------------
There was no cash consideration paid and the net assets acquired were equal to
the existing interest in the SGP at the date of change in control.
6. Payable to associate company:
On July 30, 2010 the SGP made an advance to its partners, with the Company's
share of the advance being $6,896,000. A second advance was made on December 30,
2010 and Interfor received an additional $8,842,000. The Company signed
unsecured promissory notes in respect of each of these advances, payable on
demand on or before January 3, 2011 and non-interest bearing until January 3,
2011.
On January 3, 2011, the SGP declared an income distribution to its partners, of
which the Company's share of $15,738,000 was received by way of setoff against
the promissory note payable to the SGP. In accordance with equity accounting,
the income distribution was recorded as a reduction of the investment in
associate company.
7. Inventories:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sept. 30, 2011 Dec.31, 2010
----------------------------------------------------------------------------
Logs $ 48,741 $ 39,107
Lumber 34,987 27,353
Other 6,631 5,302
----------------------------------------------------------------------------
$ 90,359 $ 71,762
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Inventory expensed in the period includes production costs, amortization of
plant and equipment, and depletion and amortization of timber, roads and other.
The inventory writedown in order to record inventory at the lower of cost and
net realizable value at September 30, 2011 was $6,761,000 (December 31, 2010 -
$6,253,000).
8. Cash and borrowings:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revolving
Operating Term
September 30, 2011 Facility Facility Total
----------------------------------------------------------------------------
Available line of credit $ 65,000 $ 200,000 $ 265,000
Maximum borrowing available 65,000 200,000 265,000
Drawings - 106,656 106,656
Outstanding letters of credit included
in line utilization 4,909 - 4,909
Unused portion of line 60,091 93,344 153,435
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, 2010
----------------------------------------------------------------------------
Available line of credit $ 65,000 $ 200,000 $ 265,000
Maximum borrowing available 65,000 200,000 265,000
Drawings - 156,037 156,037
Outstanding letters of credit included
in line utilization 4,756 - 4,756
Unused portion of line 60,244 43,963 104,207
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Minimum principal amounts due on long-term debt within the next five years
are follows:
----------------------------------------------------------------------------
Twelve months ending
September 30, 2012 $ -
September 30, 2013 -
September 30, 2014 -
September 30, 2015 106,656
September 30, 2016 -
----------------------------------------------------------------------------
$ 106,656
----------------------------------------------------------------------------
----------------------------------------------------------------------------
a. Operating Line:
The Canadian operating line of credit ("Operating Line") may be drawn in either
CAD$ or US$ advances, and bears interest at bank prime plus a margin or, at the
Company's option, at rates for Bankers' Acceptances or LIBOR based loans plus a
margin, and in all cases dependent upon a financial ratio of total debt divided
by twelve months' trailing EBITDA(1). Borrowing levels under the Operating 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, charges against
timber tenures, and mortgage security on sawmills. The Operating Line is subject
to certain financial covenants including a minimum working capital requirement,
a maximum ratio of total debt to total capitalization and a minimum net worth
calculation. As at September 30, 2011, other than outstanding letters of credit
included in the line utilization, the Operating Line was undrawn (December 31,
2010 - $nil).
On July 11, 2011, the Company extended and amended its Operating Line with the
maturity date of the Operating Line extended from July 28, 2012 to July 28,
2015. All other terms and conditions of the line remain substantially unchanged
except for a reduction in pricing.
b. Revolving Term Line:
The Revolving Term Line may be drawn in either CAD$ or US$ advances, and bears
interest at bank prime plus a margin or, at the Company's option, at rates for
Bankers' Acceptances or LIBOR based loans plus a margin, and in all cases
dependent upon a financial ratio of total debt divided by twelve months'
trailing EBITDA(1).
The Revolving Term Line is available to a maximum of $200,000,000 and is secured
by a general security agreement which includes a security interest in all
accounts receivable and inventories, charges against timber tenures, and
mortgage security on sawmills. The line is subject to certain financial
covenants including a minimum working capital requirement and a maximum ratio of
total debt to total capitalization and a minimum net worth calculation.
As at September 30, 2011, the Revolving Term Line was drawn by US$30,200,000
(December 31, 2010 - US$30,200,000) revalued at the quarter-end exchange rate to
$31,656,000 (December 31, 2010 - $30,037,000), and $75,000,000 (December 31,
2010 - $126,000,000) for total drawings of $106,656,000 (December 31, 2010 -
$156,037,000).
The US$30,200,000 drawing under the line has been designated as a hedge against
the Company's investment in its U.S. operations and unrealized foreign exchange
loss of $1,619,000 (September 30, 2010 - $664,000 gain) arising on revaluation
of the Revolving Term Line for the year ending September 30, 2011 were
recognized in Other comprehensive income (loss). For the third quarter, 2011 the
unrealized foreign exchange loss of $2,528,000 (Quarter 3, 2010 - $1,075,000
gain) was recognized in Other comprehensive income (loss).
On July 11, 2011, the Company extended and amended its Revolving Line with the
maturity date of the Revolving Line extended from July 28, 2013 to July 28,
2015. All other terms and conditions of the line remain substantially unchanged
except for a reduction in pricing.
(1) EBITDA represents earnings before interest, taxes, depreciation, depletion
and amortization.
c. Other:
On January 5, 2011 the Company acquired full control of Seaboard and its
wholly-owned subsidiaries, Seaboard Shipping Company Limited ("SSCo") and
Seaboard International Shipping Company ("SISCO") (see note 5). Seaboard had
demand facilities with a Canadian bank which were secured by a general
assignment of accounts receivable, inventory and insurance. The demand lines
could be drawn in either CAD$ or US$ and bore interest at either the bank prime
rate plus a margin for CAD$ borrowings or the U.S. base rate plus a margin for
$US borrowings. Borrowing levels under the line were subject to a borrowing base
calculation dependent on certain accounts receivable.
On September 29, 2011 both lines were cancelled and the related security was
released.
At September 30, 2011 Company's cash balances are restricted by the amount of
Seaboard's outstanding letters of credit of $138,000 (December 31, 2010 - $nil).
9. Share capital:
The transactions in share capital are described below:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number
------------------------------------
Class A Class B Total Amount
----------------------------------------------------------------------------
Balance, December 31,
2009 46,101,476 1,015,779 47,117,255 $ 288,580
Shares issued on exercise
of options 236,200 - 236,200 862
----------------------------------------------------------------------------
Balance, December 31,
2010 46,337,676 1,015,779 47,353,455 289,442
Shares issued on exercise
of options 287,000 - 287,000 1,370
Share issuance, net of
share issue costs and
income tax benefit 8,222,500 - 8,222,500 55,554
----------------------------------------------------------------------------
Balance, September 30,
2011 54,847,176 1,015,779 55,862,955 $ 346,366
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On April 8, 2011 the Company closed a public offering of 8,222,500 Class A
Subordinate Voting shares at a price of $7.00 per share for net cash proceeds of
$54,886,000.
10. Depreciation, depletion and amortization:
Depreciation, depletion and amortization allocated by function is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Production $ 13,108 $ 10,716 $ 37,922 $ 33,532
Selling and administration 219 245 673 763
----------------------------------------------------------------------------
$ 13,327 $ 10,961 $ 38,595 $ 34,295
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Restructuring costs:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Severance costs $ 118 $ (5) $ 369 $ 1,102
Contractor buyout - - 840 -
Plant and equipment write-downs
(reversal) (423) 485 (423) 485
Other recovery - - (102) -
----------------------------------------------------------------------------
$ (305) $ 480 $ 684 $ 1,587
----------------------------------------------------------------------------
Restructuring costs of $850,000 in the first quarter, 2011 resulted from the
buyout of a logging contractor's Bill 13 entitlements and severance costs
related to early retirement of hourly workers.
Additional payments in the second quarter, 2011 resulted in the recognition of
further restructuring costs of $175,000 for the buyout of Bill 13 entitlements.
Further hourly worker early retirements were slightly offset by revisions to
previously accrued severances resulted in a recovery of $102,000 in the second
quarter, and an expense of $118,000 in the third quarter, 2011.
During the third quarter, 2011, the Company also reversed an amount of $423,000
for a write-down for an asset previously considered impaired.
During the first quarter of 2010 the Company revised its estimated severance
costs and recorded $33,000 in additional restructuring costs. In the second
quarter of 2010 the Company restructured certain of its manufacturing operations
resulting in additional severance costs of $1,074,000. The Company recorded
$485,000 in asset write-downs in the third quarter, 2010, as it determined
certain assets were impaired.
12. Finance costs:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Interest on borrowing $ 1,173 $ 2,097 $ 4,488 $ 6,421
Accretion expense 194 195 575 614
Amortization of prepaid finance
costs 290 273 763 897
----------------------------------------------------------------------------
$ 1,657 $ 2,565 $ 5,826 $ 7,932
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Other income (expense):
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Gain (loss) on disposal of surplus
plant and equipment, and licences $ 171 $ (146) $ 228 $ (117)
Gain on settlement of timber
takeback - - - 376
Gain on lumber futures trading 188 - 188 -
Other (expense) - 17 - -
----------------------------------------------------------------------------
$ 359 $ (129) $ 416 $ 259
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In the first, second and third quarters, 2011, the Company disposed of surplus
equipment and a timber licence which generated $257,000 in proceeds and a gain
of $228,000.
During the third quarter, 2011 the Company generated a gain of $188,000 on
lumber futures trading.
In the first quarter of 2010, minor disposals of surplus equipment resulted in
proceeds of $14,000 and a loss of $8,000. In the second quarter, 2010, the
Company received further compensation under the Forest Act for timber, roads and
bridges resulting from the 2006 legislated takeback of certain logging rights on
the B.C. Coast which, combined with further minor disposals of surplus
equipment, resulted in proceeds of $475,000 and a gain of $413,000. Additional
minor sales of surplus equipment in the third quarter, 2010 generated proceeds
of $812,000 and a loss of $146,000.
14. Net earnings (loss) per share:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months Sept. 30, 2011 3 Months Sept. 30, 2010
--------------------------------------------------------------
Weighted Average Weighted Average
Number of Number of
Net Net
earnings Shares Per share earnings Shares Per share
----------------------------------------------------------------------------
Basic earnings
per share $ 6 55,863 $ 0.00 $ 1,405 47,128 $ 0.03
Share options - - - - -
----------------------------------------------------------------------------
Diluted
earnings per
share $ 6 55,863 $ 0.00 $ 1,405 47,128 $ 0.03
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9 Months Sept. 30, 2011 9 Months Sept. 30, 2010
------------------------------------------------------------
Weighted Average Weighted Average
Number of Number of
Net loss Shares Per share Net loss Shares Per share
----------------------------------------------------------------------------
Basic loss per
share $ (6,986) 52,852 $ (0.13) $ (5,949) 47,123 $ (0.13)
Share options - - - 56(i) -
----------------------------------------------------------------------------
Diluted loss per
share $ (6,986) 52,852 $ (0.13) $ (5,949) 47,123 $ (0.13)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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.
15. 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.
In the first quarter, 2011 the Company acquired complete control of the SGP. The
SGP was wound up on early January, 2011 but continued operations as Seaboard and
its accounts were consolidated from the date of change in control on January 5,
2011. Other sales revenues in sales by product line include the ocean freight
revenues of Seaboard.
The Company sales to both foreign and domestic markets are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Canada $ 57,089 $ 44,601 $ 157,185 $ 127,325
United States 71,898 53,164 194,443 182,760
China/Taiwan 33,057 23,773 110,391 46,400
Japan 27,000 19,956 71,110 57,764
Other export 11,121 9,999 34,935 35,066
----------------------------------------------------------------------------
$ 200,165 $ 151,493 $ 568,064 $ 449,315
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sales by product line are as
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Lumber $ 136,695 $ 113,103 $ 403,241 $ 344,434
Logs 35,979 21,946 85,473 59,186
Wood chips and other by products 17,624 14,000 50,817 40,486
Ocean freight and other 9,867 2,444 28,533 5,209
----------------------------------------------------------------------------
$ 200,165 $ 151,493 $ 568,064 $ 449,315
----------------------------------------------------------------------------
16. Financial instruments:
The Company employs financial instruments such as foreign currency forward and
option contracts to manage exposure to fluctuations in foreign exchange rates
and interest rate swaps to manage exposure to interest rates. The Company does
not expect any credit losses in the event of non-performance by counterparties
as the counterparties are the Company's Canadian bankers, which are all highly
rated.
As at September 30, 2011, the Company has outstanding obligations to sell a
maximum of US$39,800,000 at an average rate of CAD$0.99652 to the USD$1.00 and
sell Japanese yen 65,507,077 at an average rate of yen 80.19 to the US$1.00
during 2011. All foreign currency gains or losses to September 30, 2011 have
been recognized in Sales revenue in net earnings and the fair value of these
foreign currency contracts being a liability of $2,077,000 (measured based on
Level 2 of the fair value hierarchy) has been recorded in Trade accounts payable
and accrued liabilities (December 31, 2010 - $492,000 asset recorded in Trade
accounts receivable and other and $18,000 liability recorded in Trade accounts
payable and accrued liabilities measured based on Level 2 of the fair value
hierarchy).
On August 25, 2011, the Company entered into two interest rate swaps, each with
notional value of $25,000,000 and maturing July 28, 2015. Under the terms of the
swaps the Company pays an amount based on a fixed annual interest rate of 1.56%
and receives a 90 day BA CDOR which is recalculated at set interval dates. The
intent of these swaps is to convert floating-rate interest expense to fixed-rate
interest expense. As these interest rate swaps have been designated as cash flow
hedges the fair value of these interest rate swaps at September 30, 2011 being a
liability of $500,000 (measured based on Level 2 of the fair value hierarchy)
has been recorded in Trade accounts payable and accrued liabilities and a charge
of $500,000 has been recognized in Other comprehensive income.
During the third quarter, 2011 the Company also traded lumber futures to manage
price risk and which were designated as held for trading with changes in fair
value recorded in Other income (expense) in net earnings. At September 30, 2011
there were no outstanding lumber futures contracts and a gain of $188,000 was
recognized in Other income (expense) on completed contracts for the third
quarter, 2011.
17. Contingencies:
a. Softwood Lumber Agreement:
On January 18, 2011 U.S. Trade Representative's office filed for arbitration
under the provisions of the Softwood Lumber Agreement ("SLA") over its concern
that the Province of British Columbia ("B.C.") is charging too low a price for
certain timber harvested on public lands in the B.C. Interior. The arbitration
will be conducted by the London Court of International Arbitration ("LCIA"). The
Company believes that B.C. and Canada are complying with their obligations under
the SLA.
In August, 2011 the U.S. Trade Representative filed a detailed statement of
claim with the LCIA and Canada is expected to deliver its initial response in
November, 2011. A hearing before the arbitration panel is expected to take place
in early 2012 with a final decision expected by the end of 2012.
As the arbitration process is still in its early stages, the existence of any
potential claim has not been determined and no provision has been recorded in
the financial statements as at September 30, 2011.
b. Storm and earthquake damage:
In September 2011, an earthquake on Vancouver Island and heavy rains on the B.C.
mainland coastal and inlet areas resulted in mudslides and debris torrents with
some logging areas impacted by road washouts and bridge and culvert damage. Due
to the remoteness and magnitude of the areas impacted the Company has been
unable to fully assess the extent of the damage and its related costs.
Similarly, in the latter half of September 2010, heavy rains and strong winds on
northern Vancouver Island and the B.C. Central Coast triggered mudslides, road
washouts and flooding and caused bridge and culvert damage. Certain losses
relating to the 2010 storm damage were covered by insurance and in June, 2011
the Company settled with its insurers for recovery of qualifying expenditures,
net of the insurance deductible for total proceeds of $4,836,000 of which
$4,815,000 was received in the second quarter, 2011.
During the first quarter, 2011, the Company recorded business interruption
insurance recoveries of $2,211,000 as a reduction in Production costs in net
earnings with a further recovery of $503,000 recognized during the second
quarter, 2011 for total recoveries reflected in net earnings of $2,714,000.
A further $525,000 was applied against amounts previously set up as receivable
for costs already incurred. The remaining $1,576,000 was set up as a provision
for future remediation on roads and bridges, with $482,000 recorded in Trade
accounts payable and accrued liabilities and $1,094,000 recorded in Other
liabilities and provisions.
As at September 30, 2011 $1,237,000 of these provisions remain unspent.
18. Explanation of transition to IFRS:
As stated in note 2 (a), these consolidated interim financial statements are
prepared in accordance with IFRSs.
As described in note 3, the accounting policies adopted by the Company under
IFRSs have been applied in preparing the interim financial statements for the
comparative information presented in these unaudited condensed consolidated
interim financial statements for both the three and nine months ended September
30, 2010.
An explanation of how the transition from previous GAAP to IFRSs has affected
the Company's financial position, financial performance and cash flows is set
out in the following tables and the notes that accompany the tables.
Reconciliation of equity
September 30, 2010
(thousands of Canadian dollars)
Previous IFRSs IFRSs
Note GAAP Reclassify Adjustment IFRSs
----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 11,031 $ - $ - $ 11,031
Trade accounts receivable
and other 30,980 - - 30,980
Inventories 71,324 - - 71,324
Prepayments 9,570 - - 9,570
Deferred tax assets a 3,222 (3,222) - -
----------------------------------------------------------------------------
126,127 (3,222) - 122,905
Investment in associate
company b, j - 15,423 (1,373) 14,050
Employee future benefits c, i - 7,464 (7,243) 221
Other investments and
assets b, c 26,311 (23,361) - 2,950
Property, plant and
equipment d, k 338,474 (1,853) 15,748 352,369
Logging roads and bridges 16,390 - - 16,390
Timber licences 80,623 - - 80,623
Other intangible assets d - 1,853 - 1,853
Goodwill 13,078 - - 13,078
Asset classified as held
for sale 3,424 - - 3,424
----------------------------------------------------------------------------
$ 604,427 $ (3,696) $ 7,132 $ 607,863
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Current liabilities:
Trade accounts payable
and accrued liabilities e, n $ 49,270 $ (8,906) $ 1,031 $ 41,395
Reforestation liability e - 8,906 - 8,906
Income taxes payable 215 - - 215
Payable to investee
company 6,896 - - 6,896
----------------------------------------------------------------------------
56,381 - 1,031 57,412
Reforestation liability m 16,501 - 2,711 19,212
Long-term debt 162,076 - - 162,076
Employee future benefits c, i - 4,611 3,765 8,376
Other liabilities and c, m,
provisions n 15,745 (5,085) 1,261 11,921
Deferred income taxes a, p 3,222 (3,222) - -
Equity:
Share capital
Class A subordinate
voting shares 284,539 - - 284,539
Class B common shares 4,080 - - 4,080
Contributed surplus 5,408 - - 5,408
Translation reserves h (27,901) 24,855 - (3,046)
Retained earnings h, q 84,376 (24,855) (1,636) 57,885
----------------------------------------------------------------------------
350,502 - (1,636) 348,866
----------------------------------------------------------------------------
$ 604,427 $ (3,696) $ 7,132 $ 607,863
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of comprehensive income (loss):
Three months ended
September 30, 2010
----------------------------------------------------------------------------
IFRSs IFRSs
(thousands of Canadian Previous Reclass- Adjust-
dollars) Note GAAP ify ment IFRSs
----------------------------------------------------------------------------
Sales $151,493 $ - $ - $151,493
Costs and Expenses:
Production f, i, k, m 135,830 (195) 334 135,969
Selling and
administration 4,728 - - 4,728
Long term incentive
compensation expense
(recovery) n 249 - (120) 129
Export taxes 1,746 - - 1,746
Amortization of plant
and equipment d 7,246 (155) - 7,091
Depletion and
amortization of
timber, roads and
other f 3,988 (118) - 3,870
----------------------------------------------------------------------------
153,787 (468) 214 153,533
----------------------------------------------------------------------------
Operating earnings
(loss) before
restructuring costs (2,294) 468 (214) (2,040)
Restructuring costs (480) - - (480)
----------------------------------------------------------------------------
Operating earnings
(loss) (2,774) 468 (214) (2,520)
Finance costs f - (2,565) - (2,565)
Interest expense on
long-term debt f (1,956) 1,956 - -
Other interest expense f (141) 141 - -
Other foreign exchange
loss (67) - - (67)
Other income (129) - - (129)
Equity in earnings of
associate company j 6,465 - 16 6,481
----------------------------------------------------------------------------
4,172 (468) 16 3,720
----------------------------------------------------------------------------
Earnings (loss) before
income taxes 1,398 - (198) 1,200
Income tax expense
(recovery):
Current 8 - - 8
Deferred p (135) - (78) (213)
----------------------------------------------------------------------------
(127) - (78) (205)
----------------------------------------------------------------------------
Net earnings (loss) 1,525 - (120) 1,405
Other comprehensive
income (loss):
Foreign currency
translation
differences - foreign
operations (4,930) - - (4,930)
Defined benefit plan
actuarial losses i - - 314 314
Equity share of
associate's defined
benefit plan
actuarial losses j - - 84 84
Income tax recovery on
defined benefit plan
actuarial losses p - - (78) (78)
----------------------------------------------------------------------------
(4,930) - 320 (4,610)
----------------------------------------------------------------------------
Total comprehensive
income (loss) for the
period $ (3,405) $ - $ 200 $ (3,205)
----------------------------------------------------------------------------
Net earnings (loss) per
share, basic and
diluted $ 0.03 $ - $ - $ 0.03
----------------------------------------------------------------------------
Nine months ended
September 30, 2010
----------------------------------------------------------------------------
Previous IFRSs IFRSs
(thousands of Canadian Previous Reclass- Adjust-
dollars) Note GAAP ify ment IFRSs
----------------------------------------------------------------------------
Sales $449,315 $ - $ - $449,315
Costs and Expenses:
Production f, i, k, m 402,309 (614) 1,086 402,781
Selling and
administration 13,180 - - 13,180
Long term incentive
compensation expense
(recovery) n 454 - (934) (480)
Export taxes 4,903 - - 4,903
Amortization of plant
and equipment d 20,622 (491) - 20,131
Depletion and
amortization of
timber, roads and
other f 14,570 (406) - 14,164
----------------------------------------------------------------------------
456,038 (1,511) 152 454,679
----------------------------------------------------------------------------
Operating earnings
(loss) before
restructuring costs (6,723) 1,511 (152) (5,364)
Restructuring costs (1,587) - - (1,587)
----------------------------------------------------------------------------
Operating earnings
(loss) (8,310) 1,511 (152) (6,951)
Finance costs f - (7,932) - (7,932)
Interest expense on
long-term debt f (5,976) 5,976 - -
Other interest expense f (445) 445 - -
Other foreign exchange
loss (111) - - (111)
Other income 259 - - 259
Equity in earnings of
associate company j 9,745 - 34 9,779
----------------------------------------------------------------------------
3,472 (1,511) 34 1,995
----------------------------------------------------------------------------
Earnings (loss) before
income taxes (4,838) - (118) (4,956)
Income tax expense
(recovery):
Current 42 - - 42
Deferred p (395) - 1,346 951
----------------------------------------------------------------------------
(353) - 1,346 993
----------------------------------------------------------------------------
Net earnings (loss) (4,485) - (1,464) (5,949)
Other comprehensive
income (loss):
Foreign currency
translation
differences - foreign
operations (3,046) - - (3,046)
Defined benefit plan
actuarial losses i - - (4,134) (4,134)
Equity share of
associate's defined
benefit plan
actuarial losses j - - (487) (487)
Income tax recovery on
defined benefit plan
actuarial losses p - - 1,034 1,034
----------------------------------------------------------------------------
(3,046) - (3,587) (6,633)
----------------------------------------------------------------------------
Total comprehensive
income (loss) for the
period $ (7,531) $ - $ (5,051) $(12,582)
----------------------------------------------------------------------------
Net earnings (loss) per
share, basic and
diluted $ (0.10) $ - $ (0.03) $ (0.13)
----------------------------------------------------------------------------
Presentation reclassifications:
a. Deferred taxes:
Under Canadian GAAP deferred taxes are split between current and non-current
components on the basis of either the underlying asset or liability or the
expected reversal of items not related to an asset or liability.
Under IFRS deferred tax assets and liabilities are classified as non-current.
Consequently, current deferred tax assets under Canadian GAAP have been
reclassified against non-current deferred tax liabilities to conform to IFRS
requirements.
b. Investment in associate company:
Under Canadian GAAP separate disclosure of investments accounted for on the
equity basis is required but may be disclosed in either the financial statements
or the notes to the financial statements.
Under IAS 1, Presentation of Financial Statements, investments accounted for
using the equity method must be disclosed separately in the Statement of
Financial Position.
The Company's investment in an associate company has been reclassified from
Other investments and assets as a separate line item on the Statement of
Financial Position to conform to IFRS requirements.
c. Employee future benefits:
Employee benefit plan assets and obligations have been reclassified from Other
investments and assets and Other liabilities and provisions to highlight items
where there has been a significant transitional IFRS adjustment in accordance
with IAS 34, Interim Financial Reporting.
d. Other intangible assets, net of accumulated amortization:
Under Canadian GAAP computer software acquired or developed for use is treated
as a component of Property, plant and equipment.
Under IAS 38, Intangible Assets, computer software acquired or developed for use
meets the definition of an intangible asset and is therefore reclassified from
Property, plant and equipment on the Statement of Financial Position as is the
related amortization on the Statement of Comprehensive Income.
e. Reforestation liability, current:
IAS 1, Presentation of Financial Statements, requires the separate disclosure of
provisions, where significant. Consequently, the current portion of
reforestation liability has been reclassified from Trade accounts payable and
other accrued liabilities.
f. Finance costs:
Under IFRS 7, Financial Instruments: Disclosures, interest expense on
borrowings, the unwinding of the discount on provisions (accretion expense), the
amortization of prepaid financing costs and other related transaction costs are
disclosed as finance costs.
Under Canadian GAAP, interest expense on borrowings was disclosed separately,
accretion expense was included in Production costs and the amortization of
prepaid financing costs were included in Depletion and amortization of timber,
roads and other.
To comply with IFRS, these items have been reclassified to Finance costs on the
Statement of Comprehensive Income.
g. Interest paid:
Cash flows relating to interest paid have been classified as financing
activities in the Statement of Cash Flows.
First-time adoption elections and changes due to IFRS:
h. Currency translation differences:
Retrospective application of IFRS would require the Company to determine
cumulative currency translation differences in accordance with IAS 21, The
Effects of Changes in Foreign Exchange Rates, from the date a foreign subsidiary
was formed or acquired. IFRS 1, First-time Adoption of International Financial
Reporting Standards, permits cumulative translation gains and losses to be reset
to zero at the transition date. The Company elected to reset all cumulative
translation gains and losses to zero in the opening retained earnings at January
1, 2010.
The impact on the Statement of Financial Position is summarized as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sept. 30, 2010
----------------------------------------------------------------------------
Reserve increase $ 24,855
----------------------------------------------------------------------------
Reduction to retained earnings $ (24,855)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
i. Employee future benefits:
IFRS 1 provides the option to retrospectively apply the corridor approach under
IAS 19, Employee Benefits, for the recognition of actuarial gains and losses, or
to recognize all cumulative gains and losses deferred under Canadian GAAP in
opening retained earnings as at the transition date. The Company elected to
recognize all cumulative actuarial gains and losses that existed at its
transition date of January 1, 2010 in opening retained earnings for all of its
employee benefit plans.
Under Canadian GAAP actuarial gains and losses that arise in calculating the
present value of the defined benefit obligations and the fair value of plan
assets are recognized on a systematic and consistent basis subject to a minimum
required amortization based on a "corridor" approach. The corridor was 10% of
the greater of the accrued benefit obligation at the beginning of the year and
the fair value of plan assets at the beginning of the year. The unamortized net
actuarial gains and losses in excess of the corridor is amortized as a component
of pension expense on a straight-line basis over the expected average remaining
service life of active participants. Actuarial gains and losses below the 10%
corridor are deferred.
Under IFRS the Company elected to recognize all actuarial gains and losses
immediately Other comprehensive income without recycling to the income statement
in subsequent periods. As a result, actuarial gains and losses are not amortized
to the income statement but rather are recorded directly to other comprehensive
income at the end of each period. Consequently, the Company adjusted its pension
expense to remove the amortization of actuarial gains and losses.
Under Canadian GAAP when a defined benefit plan gives rise to an accrued benefit
asset, a provision is recognized for any excess of the accrued benefit asset
over the expected future benefit. The accrued benefit asset is presented in the
Statement of Financial Position net of the provision. A change in the provision
is recognized in earnings for the period in which the change occurs.
IFRS also limits the recognition of the net benefit asset under certain
circumstances to the amount that is recoverable. Since the Company has elected
to recognize all actuarial gains and losses in Other comprehensive income,
changes in the provision are recognized in other comprehensive income in the
period in which the change occurs. The Company did not have a provision in
respect of its benefit assets for any of the periods presented.
The impact on the Statement of Financial Position was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sept. 30, 2010
----------------------------------------------------------------------------
Employee benefit assets decrease $ (7,243)
Employee benefit obligations increase (3,765)
Related tax effect 2,752
----------------------------------------------------------------------------
Reduction to retained earnings $ (8,256)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of
Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 9 Months
Sept. 30, 2010 Sept. 30, 2010
----------------------------------------------------------------------------
Production expense increase (decrease) $ (18) $ 3
Other comprehensive loss (income):
Defined benefit plan actuarial
losses (gains) (314) 4,134
----------------------------------------------------------------------------
Reduction to (increase in)
comprehensive income before income
taxes $ (332) $ 4,137
----------------------------------------------------------------------------
----------------------------------------------------------------------------
j. Investment in associate company:
In applying the equity method of accounting for an investment in an associate
company both Canadian GAAP and IFRS require the accounting policies of the
associate entity to be consistent with those of the parent company. As such, the
employee defined benefit asset of the associate company has been adjusted to
reflect the same policies as described in Note 19 (i) for employee future
benefits and the Company has reflected its proportionate share of the
associate's after-tax adjustments to earnings and comprehensive income.
The impact on the Statement of Financial Position was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sept. 30, 2010
----------------------------------------------------------------------------
Investment in associate decrease $ (1,373)
----------------------------------------------------------------------------
Reduction to retained earnings $ (1,373)
----------------------------------------------------------------------------
The impact on the Statement of
Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 9 Months
Sept. 30, 2010 Sept.30, 2010
----------------------------------------------------------------------------
Equity in income $ (16) $ (34)
Other comprehensive loss (income):
Equity share of associate's defined
benefit plan actuarial losses (gains) (84) 487
----------------------------------------------------------------------------
Reduction to (increase in) comprehensive
income before income taxes $ (100) $ 453
----------------------------------------------------------------------------
----------------------------------------------------------------------------
k. Property, plant and equipment:
IFRS 1 allows a company to elect to measure an item of property, plant and
equipment at the date of transition at its fair value and use that fair value as
its deemed cost at that date. The Company identified a property at its Hammond
sawmill site which it elected to use fair value as its deemed cost. As at
January 1, 2010 the fair value of the property was estimated to be $16,320,000
with a historical cost of $572,000.
In addition, the Company reversed certain costs related to the transfer of
equipment from one sawmill site to another which, under previous GAAP, qualified
for capital treatment, but under IFRS do not.
The impact on the Statement of Financial Position was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sept. 30, 2010
----------------------------------------------------------------------------
Property, plant and equipment increase $ 15,748
Related tax effect (1,969)
----------------------------------------------------------------------------
Increase in retained earnings $ 13,779
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The was no impact on the Statement of Comprehensive Income for the three months
and nine months ended September 30, 2010.
l. Borrowing costs:
IAS 23, Borrowing Costs, requires an entity to capitalize the borrowing costs
for qualifying assets for which the commencement date for capitalization is on
or after January 1, 2009. Early adoption is permitted. IFRS 1 contains an
exemption allowing companies to apply this standard to assets for which the
commencement date is the later of January 1, 2009 and the date of transition.
The Company elected to take this IFRS 1 exemption and, therefore, borrowing
costs prior to January 1, 2010 are expensed.
m. Decommissioning provisions:
The Company's logging activities give rise to obligations for reforestation and
deactivation of logging roads. In addition, the Company has also recognized some
environmental provisions.
Provisions are measured at the expected value of future cash flows, discounted
to their present value and determined according to the probability of
alternative estimates of cash flows occurring for each operation. Canadian GAAP
requires the provision to be measured at fair value based on the amount a third
party would charge for performing the remediation work. The measurement under
IAS 37, Provisions, Contingent Liabilities and Contingent Assets, is based on
"best estimate". The best estimate calculation can be based on internal or
external costs, depending upon which is most likely.
Discount rates used under Canadian GAAP for decommissioning provisions (known as
asset retirement obligations under Canadian GAAP) are based on the Company's
credit-adjusted risk-free rate. Adjustments are made to decommissioning
provisions for changes in the timing or amount of the cashflows and the
unwinding of the discount. Changes in estimates that decrease provisions are
discounted using the discount rate applied upon initial recognition of the
liability; changes in estimates that increase the provision are discounted using
the current discount rate.
Discount rates used under IFRS reflect the risks specific to the decommissioning
provision. Adjustments are made to decommissioning provisions each period for
changes in the timing or amount of cash flows, changes in the discount rate and
the unwinding of the discount. As such, the discount rate reflects the current
risk-free rate given that risks are incorporated into the future cash flow
estimates.
The impact on the Statement of Financial Position was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sept. 30, 2010
----------------------------------------------------------------------------
Reforestation liability, non-current
increase $ (2,711)
Other liabilities and provisions increase (1,151)
Related tax effect 966
----------------------------------------------------------------------------
Reduction to retained earnings $ (2,896)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of
Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 9 Months
Sept. 30, 2010 Sept. 30, 2010
----------------------------------------------------------------------------
Production expense increase $ 352 $ 1,083
----------------------------------------------------------------------------
Reduction to comprehensive income before
income taxes $ 352 $ 1,083
----------------------------------------------------------------------------
----------------------------------------------------------------------------
n. Share-based payments:
The Company has granted certain cash-settled share-based payments to certain
employees. The Company accounted for these share-based payment arrangements by
reference to their intrinsic value under Canadian GAAP.
Under IFRSs the related liability has been adjusted to reflect the fair value of
the outstanding cash-settled share-based payments. The fair value is estimated
by applying an option pricing model and until the liability is settled the fair
value of the liability is remeasured at each reporting date, with changes in
fair value recognized as the awards vest. Additionally, IFRS requires an
estimate of the number of awards expected to vest, which is revised if
subsequent information indicates that actual forfeitures are likely to differ
from the estimate.
As a result, the Company adjusted expenses associated with cash-settled
share-based payments to reflect the changes of the fair values of these awards.
The impact on the Statement of Financial Position was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sept. 30, 2010
----------------------------------------------------------------------------
Trade accounts payable and accrued
liabilities increase $ (1,031)
Other liabilities and provisions
increase (110)
Related tax effect 285
----------------------------------------------------------------------------
Reduction to retained earnings $ 856
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of
Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 9 Months
Sept. 30, 2010 Sept. 30, 2010
----------------------------------------------------------------------------
Long term incentive compensation
recovery $ (120) $ (934)
----------------------------------------------------------------------------
Increase in comprehensive income before
income taxes $ (120) $ (934)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
o. Business combinations:
IFRS 1 provides the option to apply IFRS 3, Business Combinations,
retrospectively or prospectively from the date of transition of January 1, 2010.
The retrospective basis would require restatement of all business combinations
that occurred prior to the transition date. The Company elected not to
retrospectively apply IFRS 3 to business combinations that occurred prior to its
transition date and such business combinations have not been restated. Any
goodwill arising on such business combinations prior to the transition date has
not been adjusted from the carrying value previously determined under Canadian
GAAP as a result of applying these exemptions.
p. Income taxes:
Due to the cyclical nature of the wood products industry and the economic
conditions over the last several years, the Company has not recognized the
benefit of deferred tax assets in excess of deferred tax liabilities under
Canadian GAAP or IFRS.
The above changes had the following impact on deferred income tax liabilities
based on a tax rate of 25 percent:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sept. 30, 2010
----------------------------------------------------------------------------
Employee future benefits $ 2,752
Property, plant and equipment (1,969)
Decommissioning provisions 966
Share-based payments 285
Reduction of deferred income tax assets
for loss carry-forwards not recognized (2,034)
----------------------------------------------------------------------------
Reduction to deferred income tax
liability and increase in retained
earnings $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of
Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 9 Months
Sept. 30, 2010 Sept. 30, 2010
----------------------------------------------------------------------------
Deferred income tax expense (recovery) $ (78) $ 1,346
Income tax expense (recovery) on other
comprehensive losses 78 (1,034)
----------------------------------------------------------------------------
Reduction to comprehensive income $ - $ 312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
First-time adoption elections and changes due to IFRS:
q. Retained earnings:
The above changes had the following impact on retained earnings:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sept. 30, 2010
----------------------------------------------------------------------------
Employee future benefits $ (8,256)
Investment in associate company (1,373)
Property, plant and equipment 13,779
Decommissioning provisions (2,896)
Share-based payments (856)
Tax reduction of deferred income tax
assets for loss carry-forwards not
recognized (2,034)
----------------------------------------------------------------------------
Reduction to retained earnings due to
IFRS adjustments (1,636)
Reclassifications due to IFRS
Currency translation adjustments (24,855)
----------------------------------------------------------------------------
Reduction to retained earnings $ (26,491)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of
Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 9 Months
Sept. 30, 2010 Sept. 30, 2010
----------------------------------------------------------------------------
Production expense increase (decrease)
Employee future benefits increase
(decrease) $ (18) $ 3
Decommissioning provisions increase 352 1,083
----------------------------------------------------------------------------
334 1,086
Long term incentive compensation
recovery (120) (934)
Equity in earnings of associate company
increase (16) (34)
Deferred income tax expense (78) 1,346
----------------------------------------------------------------------------
Decrease to net earnings/increase to net
loss 120 1,464
----------------------------------------------------------------------------
Other comprehensive loss increase
(decrease):
Defined benefit plan actuarial losses
(gains) (314) 4,134
Equity share of associate's defined
benefit plan actuarial losses (gains) (84) 487
Income tax recovery on other
comprehensive losses 78 (1,034)
----------------------------------------------------------------------------
Increase in (reduction to) other
comprehensive loss (320) 3,587
----------------------------------------------------------------------------
Increase in (reduction to) comprehensive
loss $ (200) $ 5,051
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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