INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX:IFP.A)
reported a net loss of $6.5 million or $0.12 per share in the first quarter of
2012. Included in the Company's results in the quarter was the effect of
unrecognized tax assets of $1.8 million or $0.03 per share.
Excluding the tax allowance and other one-time items, Interfor recorded a net
loss of $5.2 million or $0.09 per share in the first quarter of 2012 compared to
a net loss of $3.7 million or $0.07 per share in the immediately preceding
quarter and a net loss of $1.7 million or $0.03 per share in the first quarter
of 2011.
Also included in the Company's accounts in the first quarter was a provision for
share-based compensation of $1.3 million or $0.02 per share compared to a
provision of $0.9 million or $0.02 per share in the immediately preceding
quarter.
Key factors impacting the Company's results in the first quarter were lower
sales revenue, which fell $2 million or 1% vs the immediately preceding quarter,
and higher log costs, particularly on the B.C. Coast.
EBITDA for the quarter (adjusted to exclude one-time items and "other income")
was $5.8 million, down $0.9 million versus the fourth quarter of 2011 and down
$5.8 million versus the first quarter of 2011.
Lumber production in the first quarter was 323 million board feet, up 29 million
board feet or 10 percent compared to the immediately preceding quarter,
reflecting increased volumes in each of the Company's operating regions. Sales
volume, including wholesale activities, was 320 million board feet, up 2 million
board feet compared with the fourth quarter.
In the quarter, SPF 2x4 in the North American market averaged US$266 per mfbm,
up US$28 per mfbm versus the fourth quarter, and Hem-Fir studs were $US294 per
mfbm, up US$34 per mfbm. Activity levels in China remained strong and sales
values improved as the quarter progressed. Japan, however, experienced a modest
slowing of activities as winter conditions impacted building activity in that
market. Pricing in Japan was adversely affected by a weakening of the Yen/US
dollar ratio while the cedar market was firm as mild weather in North America
and low inventories throughout the distribution channel helped to support
demand.
In the quarter, Interfor generated $8.7 million in cash before changes in
working capital were considered. Changes in working capital used was $12.0
million in the quarter mostly due to an increase in accounts receivable which in
turn was attributable to high shipments prior to quarter-end. Cash capital
spending amounted to $10.9 million, including $4.5 million on the Grand Forks
and Castlegar upgrades with construction now underway.
Net debt closed the quarter at $115.1 million or 23 percent of invested capital.
In spite of promising economic news in the U.S. in recent months only modest
improvements in the U.S. housing market are expected in 2012. Canadian housing
markets are forecast to moderate over the balance of the year.
The economic outlook for China appears less robust in 2012 compared to recent
years, with the Chinese government scaling back economic growth targets to 7.5%,
although the pace of lumber imports is expected to continue to grow.
Activity levels in Japan are expected to improve as the year progresses as
reconstruction in the areas impacted by the March 2011 earthquake and tsunami
gets underway.
The Canadian dollar is projected to trade near parity relative to its U.S.
counterpart through 2012.
Considerable attention continues to be devoted to the Grand Forks and Castlegar
capital projects, with project timelines accelerated to a projected completion
in the first quarter, 2013.
Interfor intends to maintain a disciplined approach to managing its business by
focusing on those items that will position the Company to deliver above average
returns on capital invested in the years ahead.
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 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 Friday, May 4 2012 at 8:00 AM (Pacific Time)
hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose of reviewing the
Company's release of its First Quarter, 2012 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
May 18, 2012. The number to call is 1-866-245-6755 Passcode 948394.
International Forest Products Limited
First Quarter Report
For the three months ended March 31, 2012
Management's Discussion and Analysis
Dated as of May 3, 2012
This Management's Discussion and Analysis ("MD&A") provides a review of
Interfor's financial performance for the three months ended March 31, 2012
relative to 2011, 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 months ended March 31, 2012 and 2011, and
Interfor's Annual Information Form, Consolidated Financial Statements and Annual
MD&A for the years ended December 31, 2011 and 2010 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"; in
the description of economic conditions under the headings "Sales" and "Outlook";
and in the description of risks and uncertainties under the headings "Softwood
Lumber Agreement Disputes" and "WorkSafeBC Orders Safety Reviews". 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 a net loss of $6.5 million, or $0.12 per share for the
first quarter of 2012 as compared to a net loss of $1.7 million, or $0.04 per
share for the first quarter of 2011. EBITDA and Adjusted EBITDA for the first
quarter of 2012 declined to $6.0 million and $5.8 million, compared to $11.6
million for both for the same quarter of 2011.
Before restructuring costs, certain foreign exchange gains (losses), certain
other one-time items and the effect of unrecognized tax assets, the Company's
net loss for the first quarter of 2012 amounted to $5.2 million or $0.09 per
share as compared to a net loss of $1.7 million, or $0.03 per share for the
first quarter of 2011. Share-based incentive compensation charges totalled $1.3
million or $0.02 per share in the first quarter, 2012 as compared to $3.5
million or $0.07 per share for the same quarter, 2011.
The first quarter of 2012 saw modest increases in domestic demand partially as a
result of milder weather across North America. Industry-wide, domestic lumber
supply was impacted by two North American mills destroyed by fire and by several
large competitor mills being exclusively dedicated to export market production
late in the quarter. As a result, prices reported by Random Lengths for Western
SPF 2x4 #2&Btr ended the first quarter, 2012 at US$279 per mfbm, up by US$31 per
mfbm over December, 2011 average prices.
Cooling Chinese demand through the second half of 2011 stabilized in the first
quarter, 2012, as Chinese distributors reduced the backlog of lumber inventories
that existed in the fourth quarter, 2011. Towards the end of the first quarter,
2012, Chinese lumber demand and prices began to show moderate improvement over
the fourth quarter, 2011 sales and sales realizations. Log inventories in China,
however, remained relatively high through most of the first quarter, 2012 which
resulted in a decline in log export sales from the Company's B.C. Coastal
logging operations, but also provided less competition for log purchases in the
U.S. Pacific Northwest. China remains a price-sensitive market, tending to move
largely in step with trends in the U.S.
The Japan markets were affected by an unusually harsh winter in the first
quarter, 2012 which resulted in a delay in the spring buying. Towards the end of
the first quarter, 2012 there also has been significant downward pressure on
selling prices as Japanese purchasers try to mitigate the impacts of a
depreciating yen against North American currencies.
The mild winter across much of the U.S. resulted in stronger than expected
demand in the cedar markets in the first quarter, 2012 and generated higher
sales realizations. Cedar production was curtailed for two weeks in early
January, 2012 due to limited log availability.
Results quarter-over-quarter have also been impacted by the slightly weakened
Canadian dollar which, relative to its U.S. counterpart depreciated by two
percent on average for the first quarter, 2012 compared to the same period of
2011.
Sales
Lumber shipments totalled 320 million board feet for the first quarter, 2012, up
marginally from 313 million board feet in the same quarter, 2011. Milder weather
resulted in stronger North American demand as compared to the first quarter,
2011 which saw shipments challenged by weather related logistical issues as well
as delays associated with railcar, truck and container availability,
particularly in the B.C. Interior.
Excluding wholesale programs, first quarter, 2012 shipments to China declined
30% as compared to the first quarter, 2011. Export shipments and prices in the
latter half of 2011 fell as Chinese buyers sought to reduce a large backlog of
inventories. As North American prices for structural and dimension lumber
products strengthened the Company redirected sales to North American markets to
benefit from higher realizations in the first quarter, 2012 as compared to the
fourth quarter, 2011. China volumes were supplanted by shipments to the North
American market, which saw a 13% increase in lumber sales volumes,
quarter-over-quarter, and increased to 71% of total lumber shipments in the
first quarter, 2012 from 64% of shipments in the first quarter, 2011.
Average unit lumber sales values remained virtually unchanged for the first
quarter, 2012 relative to the same period in 2011, reflecting weaker North
American structural lumber product and export prices compared to the same period
in 2011 offset by improved cedar prices. Sales prices in Japan also experienced
downward pressure as purchasers struggled to maintain Japanese yen prices in
response to the depreciation of the Japanese yen against the U.S. dollar towards
the end of the first quarter, 2012. A slightly weaker Canadian dollar on average
in the first quarter, 2012 as compared to the same quarter, 2011, positively
impacted sales returns during the period.
Compared to the same period, 2011, log sales improved by $6.1 million or 29% in
the first quarter, 2012. Canadian operations, which generate the bulk of log
sales, showed an increase of 20% in volumes over the same quarter, 2011,
primarily due to higher inventory levels available for sale from the B.C. Coast
as compared to 2011, when fall storm damage and reduced logging operations
reduced log inventory levels. On the B.C. Coast, a 75% increase in log sales
resulted from increased operating rates to meet higher domestic demand. The
increased domestic sales volumes are reflected in the average sale price for log
sales on the B.C. Coast which decreased by $11 per cubic metre to $69 per cubic
metre as higher-value export log volumes fell by 31%. Overall Canadian log sales
prices increased by $3 per cubic metre to $64 per cubic metre as increased
volumes from the B.C. Coast reduced the impact on sales mix of smaller, lower
value logs typically sold in the B.C. Interior.
Pulp chip and other by-product revenues for the first quarter of 2012 were up
11% to $18.2 million compared to the first quarter of 2011 largely driven by
increased sales values in the B.C. Interior and U.S. Average chip prices
improved by 19% in the first quarter, 2012 as compared to the same period, 2011.
Despite declines in U.S. pulp prices in late 2011, chip prices remain buoyed
from sales contracts negotiated when pulp markets were stronger. U.S. chip
prices in the U.S. Pacific Northwest are also affected by the increases in
export logs which reduced the availability of fibre used in whole log chipping.
Operating Costs
Production costs for the first quarter of 2012 increased $15.5 million, or 10%
compared to the same period in 2011.
Overall lumber production fell slightly in the first quarter, 2012 as compared
to the same period of 2011, down by 9.2 million board feet or 3%. Minor
production gains across the B.C. and were offset by decreased operating rates in
the U.S. Pacific Northwest sawmills which were impacted by lack of economic
fibre.
Unit cash conversion costs increased slightly, quarter-over-quarter as compared
to 2011. Per unit conversion costs declined marginally across the B.C.
operations, offset by the U.S. sawmills which saw increased per unit costs
resulting from reduced activity. Unit costs for the U.S. sawmills were
negatively impacted by a slightly weaker Canadian dollar on average for the
first quarter, 2012 as compared to the same quarter in 2011.
The unit cost of logs consumed by the sawmills increased 3% in the first
quarter, 2012 over the same quarter, 2011. While export markets for logs
softened in the U.S. Pacific Northwest, fibre supply remained tight due to
reduced timber sale activity, harvest reductions by private landowners and poor
weather on the Olympic Peninsula. When compared to the same quarter, 2011 these
factors resulted in increases in log costs for the U.S. sawmills who source
their fibre through purchase and timber sale agreements. The impact of the
increased log costs for the U.S. operations was further impacted by the weaker
Canadian dollar.
Compared to the same period in 2011, B.C. log production grew by 9% to 891,600
cubic metres from 815,600 cubic metres. Despite difficult harvesting conditions
due to harsh weather on the B.C. Coast during the first quarter, 2012 logging on
the coast increased when compared to 2011, which saw significant reductions in
logging activity as a result of major storm damage. First quarter, 2012
heli-logging production was more than double that of the same quarter, 2011 and
contributed to higher logging costs.
Extended cold weather in the B.C. Interior allowed for a 13% increase in logging
production prior to spring break up as compared to the first quarter, 2011.
The first quarter, 2011 saw the Company record a $2.2 million advance against
its business interruption insurance claim to compensate it for lost profits
resulting from the storm damage on the B.C. Coast which occurred in the late
fall, 2010. 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 in the first quarter, 2011 and consequently, the advance was netted
against production costs.
Export taxes increased by $0.2 million, or 7% in comparison to the first
quarter, 2011. As prices in both years were low enough to attract the maximum
rate of 15% tax, the increase results primarily from increased Canadian shipment
volumes to the U.S. and a weakened average Canadian dollar.
Increases in selling and export market administration in the latter half of 2011
contributed to the $0.3 million increase in selling and administrative costs for
the first quarter of 2012 compared to the first quarter of 2011.
Long-term incentive compensation ("LTIC") expense of $1.3 million reflects
changes in the estimated fair value of the share-based compensation plans for
the first quarter of 2012 (Quarter 1, 2011 - $3.5 million). Fair value is
estimated based on a number of components including current market price of the
underlying shares, strike price, expected volatility, vesting periods and the
expected life of the awards. The movement in the Company's share price in has
the greatest impact on expense.
First quarter, 2012, depreciation of plant and equipment at $6.8 million was 7%
lower than the corresponding quarter in 2011, primarily due to lower operating
rates on the Olympic Peninsula. The first quarter, 2011 also included
accelerated depreciation on a number of assets with shortened useful lives which
were retired in early 2011.
Road amortization and depletion expense for the first quarter of 2012 increased
by only $0.1 million vis-a-vis the same quarter of 2011.
The Company incurred no restructuring costs for the first quarter, 2012 compared
to $0.8 million for the same quarter in 2011, which resulted from the buyout of
a logging contractor's Bill 13 entitlements and severance costs related to early
retirement of hourly workers.
Finance Costs, Other Foreign Exchange Gain (loss), Other Income (Expense)
First quarter, 2012 Finance costs decreased by $0.7 million compared to the
first quarter of 2011, primarily driven by a reduction in Interest expense of
$0.6 million as a result of an overall decrease in average debt levels compared
to the same period in the prior year.
In 2012, the Company changed its accounting policy to recognize realized trading
gains and losses and changes in fair value of its derivative forward foreign
exchange contracts in Other foreign exchange gain (loss). Previously these gains
and losses were recognized as an adjustment to Sales. The policy was adopted in
order to better align the Company's presentation on the Statement of earnings
with those adopted by Interfor's peer group. The policy was adopted on a
retrospective basis, and had no effect on Net earnings or the Statement of
Financial Position for any of the periods presented.
Other foreign exchange gain at $0.4 million for the first quarter, 2012 and $1.1
million for the first quarter, 2011 is impacted by the volatility of the
Canadian dollar and the timing and amount of derivative forward foreign exchange
contracts.
Other income for the first quarter of 2012 and 2011 was negligible.
Income Taxes
In the first quarter of 2012, the Company recorded a small income tax expense
(Quarter 1, 2011 - $0.4 million recovery) which excludes the benefit of $1.8
million of certain deferred income tax assets arising from loss carry-forwards
available to reduce future taxable income which were not recognized (Quarter 1,
2011 - $0.3 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
Cash generated by the Company from operations, before changes in non-cash
working capital items, was $8.7 million in the first quarter, 2012 compared with
$13.0 million a year ago. The decrease in cash flow quarter-over-quarter was due
primarily to lower overall sales values and higher cash conversion and log costs
in the U.S. Pacific Northwest operations.
Including changes in non-cash working capital items resulted in cash used by
operations of $3.3 million for the first quarter of 2012, compared to cash
generated of $3.9 million for the first quarter of 2011. A build-up of log
inventories in the B.C. Interior before spring break-up, lumber production in
excess of shipment volumes over the quarter and increased shipment volumes in
March 2012 were reflected in cash utilization of $7.9 million for accounts
receivable and $3.2 million for inventories during the first quarter, 2012.
In the first quarter, 2011, significant increases in logging activity in the
B.C. Interior before spring break-up, increased lumber production as well as
weather-related logistical issues causing shipping delays resulted in an
inventory build-up of $12.7 million. The increase in accounts receivable of $7.2
million, offset by a $10.4 million rise in accounts payable was the result of
the higher operating rates and export shipments in the first quarter, 2011.
Cash capital expenditures for the first quarter of 2012 totalled $10.9 million
(Quarter 1, 2011 - $8.0 million) with $4.5 million spent on the capital upgrades
for the Grand Forks and Castlegar mills, $0.4 million on other high-return
discretionary projects, $1.5 million on business maintenance expenditures and
$4.5 million on road construction. These expenditures were funded by net
drawings of $10.9 million on the Company's Revolving Term Line during the first
quarter, 2012. A further $4.1 million was drawn on the Revolving Term Line to
fund operations.
On January 3, 2011 the Seaboard General Partnership ("SGP") declared an income
distribution to its partners of which 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 in the first quarter, 2011 includes cash received on acquisition of
the SGP of $4.8 million.
In the first quarter, 2011 several stock option holders exercised their options
generating $0.9 million in cash.
As at March 31, 2012, the Revolving Term Line was drawn by US$30.2 million
(revalued at the quarter-end exchange rate to $30.1 million) and $95.0 million
for total drawings of $125.1 million, leaving an unused available line of $74.9
million. The Company's Operating Line of $65.0 million had no borrowings other
than outstanding letters of credit of $5.3 million, leaving an unused available
line of $59.7 million. Including cash of $10.0 million, the Company had
available resources of $144.6 million as at March 31, 2012.
These resources, together with cash generated from operations, will be used to
support our working capital requirements, capital expenditures including the
Kootenay optimization projects, and debt servicing commitments.
As global market conditions improve, Interfor continues to monitor discretionary
capital expenditures. Based on current pricing and cash flow projections and
existing credit lines the Company believes it has sufficient liquidity to meet
all of its financial obligations.
At March 31, 2012, the Company had cash of $10.0 million. After deducting the
Company's drawings under its Revolving Term Line, the Company ended the quarter
with net debt of $115.1 million or 23% of invested capital as compared to 30% as
at March 31, 2011, primarily as a result of a share issuance in April, 2011
which allowed the reduction of debt levels.
Selected Quarterly Financial Information(1)
Quarterly
Earnings
Summary 2012 2011 2010
---------------------------------------------------------------
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
---------------------------------------------------------------
(millions of dollars except share and per share amounts)
Sales -
Lumber(2) 133.6 133.6 139.6 133.7 131.4 136.3 112.2 124.9
- Logs 27.0 22.9 36.0 28.6 20.8 20.6 21.9 19.8
- Wood
chips and
other
residual
products 18.2 17.5 17.6 16.8 16.4 15.7 14.0 13.3
- Other 7.9 14.6 9.9 8.7 10.0 2.4 2.4 1.0
---------------------------------------------------------------
Total Sales 186.7 188.7 203.1 187.9 178.6 175.0 150.6 159.1
---------------------------------------------------------------
Operating
earnings
(loss)
before
restructur-
ing costs
and asset
impairments
(2) (5.5) (6.2) 3.9 (2.3) (0.1) 0.3 (3.0) 0.3
Operating
earnings
(loss)(2) (5.5) (6.1) 4.2 (2.4) (1.0) 0.3 (3.4) (0.8)
Net earnings
(loss) (6.5) (6.5) 0.0 (5.3) (1.7) 0.8 1.4 (3.5)
Net earnings
(loss) per
share -
basic and
diluted (0.12) (0.12) 0.00 (0.10) (0.04) 0.02 0.03 (0.07)
Net earnings
(loss),
adjusted for
certain one-
time and
other items
(2,4,6) (5.2) (3.7) 2.4 (3.2) (1.7) (0.8) (2.0) 0.6
Net earnings
(loss),
adjusted for
certain one-
time and
other items
- per share
(2,4) (0.09) (0.07) 0.04 (0.06) (0.03) (0.02) (0.04) 0.01
EBITDA(7) 6.0 6.7 17.6 11.3 11.6 13.3 14.4 14.9
Adjusted
EBITDA(7) 5.8 6.7 17.3 11.3 11.6 13.2 9.7 14.5
Cash flow
from
operations
per share(5) 0.15 0.08 0.26 0.22 0.27 0.22 0.18 0.25
Shares
outstanding
- end of
period
(millions)
(3) 55.9 55.9 55.9 55.9 47.5 47.4 47.1 47.1
- weighted
average
(millions) 55.9 55.9 55.9 55.2 47.4 47.2 47.1 47.1
Average
foreign
exchange
rate per
US$1.00 1.0010 1.0230 0.9808 0.9680 0.9856 1.0131 1.0395 1.0283
Closing
foreign
exchange
rate per
US$1.00 0.9975 1.0170 1.0482 0.9645 0.9696 0.9946 1.0290 1.0646
1. Tables may not add due to rounding.
2. The Company uses derivative forward foreign exchange contracts which are
designated as held for trading and are carried on the Statement of
Financial Position at fair value. Previously changes in fair value were
recorded as an adjustment to Sales in Net earnings. Effective January 1,
2012 the Company changed its accounting policy to align with the
presentation adopted by companies in its peer group and changes in fair
value are now recorded in Other foreign exchange gain (loss) in Net
earnings.
The policy has been applied on a retrospective basis and comparative
information has been restated. There is no change to Net earnings as a
result of the adoption of this new policy.
3. As at May 3, 2012, the numbers 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.
4. Net earnings (loss), adjusted for certain one-time and other items
represents net earnings (loss) before restructuring costs, certain
foreign exchange gains and losses, other income (expense), certain 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. Net earnings (loss), adjusted for certain one-time and other items is
not a defined term under IFRS, and may not be comparable to adjusted
earnings (loss) calculated by others. Net earnings (loss), adjusted for
certain one-time and other items may be calculated as follows(3):
2012 2011 2010
------------------------------------------------
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
------------------------------------------------
(millions of dollars)
Net earnings (loss) (6.5) (6.5) 0.0 (5.3) (1.7) 0.8 1.4 (3.5)
Add (deduct):
Other (income) expense (0.1) - (0.4) - - 0.3 0.1 (0.4)
Other (income) expense of
associate company - - - - - (0.4) (4.8) -
Other foreign exchange
(gains) losses (0.4) (1.1) 2.5 (0.2) (1.1) (1.1) (0.8) 1.2
Restructuring costs, asset
write-downs and other
(recovery) - (0.1) (0.3) 0.1 0.8 - 0.5 1.1
Deferred tax assets not
recognized (recognized) 1.8 3.9 0.6 2.2 0.3 (0.3) 1.6 2.2
------------------------------------------------
Net earnings (loss) adjusted
for certain one-time and
other items(3) (5.2) (3.7) 2.4 (3.2) (1.7) (0.8) (2.0) 0.6
------------------------------------------------
7. 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(3):
2012 2011 2010
------------------------------------------------
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
------------------------------------------------
(millions of dollars)
Net earnings (loss) (6.5) (6.5) 0.0 (5.3) (1.7) 0.8 1.4 (3.5)
Add: Income taxes (recovery) - 0.2 0.5 1.2 (0.4) (0.5) (0.2) 1.0
Finance costs 1.5 1.3 1.7 1.9 2.3 2.5 2.6 2.8
Depreciation, depletion
and amortization 11.3 13.0 13.3 13.6 11.7 11.7 11.0 12.3
Other foreign exchange
(gains) losses (0.4) (1.1) 2.5 (0.2) (1.1) (1.1) (0.8) 1.2
Restructuring costs, asset
write-downs and other
(recovery) - (0.1) (0.3) 0.1 0.8 - 0.5 1.1
------------------------------------------------
EBITDA 6.0 6.7 17.6 11.3 11.6 13.3 14.4 14.9
Deduct:
Other income (expense) 0.1 - 0.4 - - (0.3) (0.1) 0.4
Other income of associate
company - - - - - 0.4 4.8 -
------------------------------------------------
Adjusted EBITDA 5.8 6.7 17.3 11.3 11.6 13.2 9.7 14.5
------------------------------------------------
Volume and Price Statistics 2012 2011 2010
------------------------------------------
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
------------------------------------------
Lumber sales (million fbm) 320 318 336 334 313 321 277 270
Lumber (million fbm)
production 323 294 313 325 332 303 272 277
Log sales(1) (thousand cubic
metres) 361 310 430 314 301 292 289 262
Log (thousand cubic
production(1) metres) 892 795 1,002 796 816 794 595 624
Average selling ($/thousand fbm)
price -
lumber(2) $418 $420 $ 415 $400 $419 $424 $405 $463
Average selling ($/cubic metre)
price - logs(1) $ 64 $ 69 $ 74 $ 82 $ 61 $ 64 $ 73 $ 68
Average selling ($/thousand fbm)
price - pulp
chips $ 48 $ 51 $ 48 $ 44 $ 40 $ 42 $ 40 $ 37
1. B.C. operations
2. Gross sales before export taxes
3. 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 early 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 half,
2011, levelling off for the balance of 2011 and slowing further in the first
quarter, 2012.
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. dollars. 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 through the first quarter
of 2012.
In the first quarter, 2011 the Company acquired complete control of SGP. It was
wound up in 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 Disputes
On January 18, 2011 the U.S. Trade Representative's ("USTR") 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 is being 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 USTR filed a detailed statement of claim with the LCIA and
Canada delivered its initial response in November, 2011. Final submissions to
the arbitration panel are due on May 24, 2012 with a final decision expected by
the end of 2012. Since its initial submissions the USTR has reduced its alleged
claim by 40%.
As the U.S. arbitration request is still in preliminary stages the existence of
any potential claim has not been determined and no provision has been recorded
in the financial statements as at March 31, 2012.
In April, 2012 the U.S. Lumber Coalition approached the USTR alleging that the
B.C. government is undercharging B.C. Coastal forest companies for timber
harvested on Crown lands. As this second complaint is in the very preliminary
stages of investigation and the existence of any potential claim has not been
determined, no provision has been recorded in the financial statements as at
March 31, 2012.
WorkSafeBC Orders Safety Reviews
On April 24, 2012, as a result of the explosion and destruction of two sawmills
in the B.C. Interior in 2012, WorkSafeBC, the workers' compensation insurer in
B.C., ordered province-wide sawmill safety reviews, including full hazard
identification and risk assessment with particular focus on combustible dust,
dust accumulation and potential ignition sources. In May, 2012 WorkSafeBC
officers will be following up on these orders to confirm that the ordered
actions have been taken and sawmills are in compliance with the Workers
Compensation Act and Occupational Health and Safety Regulation in regard to
combustible dust and potential safety hazards.
In early 2012, the Company engaged a consultant to assist in the evaluation of
safety standards at each of its sawmills and as at May 3, 2012 reviews have been
completed at the Canadian sawmill sites. The Company believes that it maintains
high standards of safe work practices and provides a safe work environment.
Accounting Policy Changes
The Company uses derivative forward foreign exchange contracts which are
designated as held for trading and are carried on the Statement of Financial
Position at fair value. Previously, changes in fair value were recorded as an
adjustment to Sales in Net earnings. Effective January 1, 2012 the Company
changed its accounting policy to align with the presentation adopted by
companies in its peer group and changes in fair value are now recorded in Other
foreign exchange gain (loss) in Net earnings.
The policy has been applied on a retrospective basis and comparative information
has been restated.
IFRS Future 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. This standard is in effect for accounting periods
beginning on or after January 1, 2015, with earlier adoption permitted.
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. This standard is 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.
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 financial instruments and leases currently on the International
Accounting Standards Board agenda.
Controls and Procedures
There were no changes in the Company's internal controls over financial
reporting ("ICFR") during the quarter ended March 31, 2012 that have materially
affected, or are reasonably likely to materially affect, the Company's ICFR.
Critical Accounting Estimates
There were no material changes to the Company's critical accounting estimates
during the quarter ended March 31, 2012. 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, 2011 as filed on SEDAR at www.sedar.com.
Outlook
In spite of promising economic news in the U.S. in recent months only modest
improvements in the U.S. housing market are expected in 2012. Canadian housing
markets are forecast to moderate over the balance of the year.
The economic outlook for China appears less robust in 2012 compared to recent
years, with the Chinese government scaling back economic growth targets to 7.5%,
although the pace of lumber imports is expected to continue to grow.
Activity levels in Japan are expected to improve as the year progresses as
reconstruction in the areas impacted by the March 2011 earthquake and tsunami
gets underway.
The Canadian dollar is projected to trade near parity relative to its U.S.
counterpart through 2012.
Considerable attention continues to be devoted to the Grand Forks and Castlegar
capital projects, with project timelines accelerated to a projected completion
in the first quarter, 2013.
Interfor intends to maintain a disciplined approach to managing its business by
focusing on those items that will position the Company to deliver above average
returns on capital invested in the years ahead.
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.
Lawrence Sauder, Chairman
Duncan K. Davies, President and Chief Executive Officer
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31, 2012 and 2011 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars except earnings
per share) 3 Months 3 Months
Mar. 31, 2012 Mar. 31, 2011
----------------------------------------------------------------------------
Sales (note 3(a)) $ 186,660 $ 178,582
Costs and expenses:
Production 171,670 156,124
Selling and administration 5,305 4,971
Long term incentive compensation expense 1,317 3,541
Export taxes 2,533 2,364
Depreciation of plant and equipment (note 8) 6,792 7,286
Depletion and amortization of timber, roads
and other (note 8) 4,525 4,414
--------------------------------------------------------------------------
192,142 178,700
----------------------------------------------------------------------------
Operating loss before restructuring costs (5,482) (118)
Restructuring costs - 850
----------------------------------------------------------------------------
Operating loss (5,482) (968)
Finance costs (note 9) (1,542) (2,274)
Other foreign exchange gain (note 3(a)) 432 1,088
Other income 122 29
----------------------------------------------------------------------------
(988) (1,157)
----------------------------------------------------------------------------
Loss before income taxes (6,470) (2,125)
Income taxes (recovery):
Current 114 38
Deferred (74) (433)
--------------------------------------------------------------------------
40 (395)
----------------------------------------------------------------------------
Net loss $ (6,510) $ (1,730)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss per share, basic and diluted (note 10) $ (0.12) $ (0.04)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2012 and 2011 (unaudited)
----------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, 2012 Mar. 31, 2011
----------------------------------------------------------------------------
Net loss $ (6,510) $ (1,730)
Other comprehensive income (loss):
Foreign currency translation differences -
foreign operations (2,458) (3,203)
Defined benefit plan actuarial gains (losses) (609) 124
Gain in fair value of interest rate swaps
(note 12) 566 -
Income tax expense on other comprehensive
income (74) (125)
--------------------------------------------------------------------------
(2,575) (3,204)
----------------------------------------------------------------------------
Total comprehensive loss for the period $ (9,085) $ (4,934)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2012 and 2011 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars) 3 Months 3 Months
Mar. 31, 2012 Mar. 31, 2011
----------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net loss $ (6,510) $ (1,730)
Items not involving cash:
Depreciation of plant and equipment 6,792 7,286
Depletion and amortization of timber, roads
and other 4,525 4,414
Income tax expense (recovery) 40 (395)
Finance costs 1,542 2,274
Reforestation liability 2,807 1,310
Other liabilities and provisions (565) 43
Unrealized foreign exchange losses (gains) 120 (212)
Other (97) (29)
--------------------------------------------------------------------------
8,654 12,961
Cash generated from (used in) operating
working capital:
Trade accounts receivable and other (7,865) (7,172)
Inventories (3,182) (12,713)
Prepayments (286) 567
Trade accounts payable and accrued
liabilities (318) 10,407
Income taxes paid (310) (117)
--------------------------------------------------------------------------
(3,307) 3,933
Investing activities:
Additions to property, plant and equipment (6,365) (4,151)
Additions to logging roads (4,495) (3,799)
Additions to timber and other intangible
assets - (42)
Proceeds on disposal of property, plant, and
equipment 127 29
Cash received on acquisition of subsidiary - 4,846
Investments and other assets (86) (1,207)
--------------------------------------------------------------------------
(10,819) (4,324)
Financing activities:
Issuance of capital stock - 876
Interest payments (1,312) (1,828)
Additions to long-term debt (note 6(b)) 30,000 25,000
Repayments of long-term debt (note 6(b)) (15,000) (18,000)
--------------------------------------------------------------------------
13,688 6,048
Foreign exchange loss on cash and cash
equivalents held in a foreign currency (8) (90)
----------------------------------------------------------------------------
Increase (decrease) in cash (446) 5,567
Cash and cash equivalents, beginning of year 10,435 9,301
----------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 9,989 $ 14,868
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31, 2012 (unaudited) and December 31, 2010 and 2011 (audited)
----------------------------------------------------------------------------
(thousands of Canadian dollars) Mar. 31, Dec. 31, Dec. 31,
2012 2011 2010
----------------------------------------------------------------------------
(note 3(a))
Assets
Current assets:
Cash and cash equivalents $ 9,989 $ 10,435 $ 9,301
Trade accounts receivable and other 51,615 44,000 45,961
Inventories (note 5) 100,460 97,645 71,762
Prepayments 10,980 10,757 8,334
--------------------------------------------------------------------------
173,044 162,837 135,358
Investment in associate company - - 16,074
Employee future benefits 1,029 1,256 515
Other investments and assets 2,712 2,836 2,636
Property, plant and equipment 337,464 340,034 347,990
Logging roads and bridges 17,818 16,753 17,063
Timber licences 75,843 76,792 80,154
Other intangible assets 1,091 1,250 1,723
Goodwill 13,078 13,078 13,078
----------------------------------------------------------------------------
$ 622,079 $ 614,836 $614,591
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Current liabilities:
Trade accounts payable and accrued
liabilities $ 60,054 $ 60,692 $ 50,053
Reforestation liability 14,208 14,121 9,785
Income taxes payable 863 1,058 230
Payable to associate - - 15,738
--------------------------------------------------------------------------
75,125 75,871 75,806
Reforestation liability 20,670 17,777 17,325
Long-term debt (note 6(b)) 125,125 110,713 156,037
Employee future benefits 8,042 8,186 5,815
Other liabilities and provisions 11,380 11,467 12,158
Equity:
Share capital (note 7)
Class A subordinate voting shares 342,285 342,285 285,362
Class B common shares 4,080 4,080 4,080
Contributed surplus 7,476 7,476 5,408
Reserves (7,398) (5,432) (7,646)
Retained earnings 35,294 42,413 60,246
--------------------------------------------------------------------------
381,737 390,822 347,450
----------------------------------------------------------------------------
$622,079 $614,836 $614,591
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingencies (note 13)
Subsequent events (note 14)
See accompanying notes to consolidated financial statements
On behalf of the Board:
L. Sauder, Director
G.H. MacDougall, Director
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the three months ended March 31, 2012 and 2011 (unaudited)
----------------------------------------------------------------------------
Class Class Con
A B trib- Trans- Hedg- re-
(thousands of Share Share uted lation ing tained
Canadian Capi- Capi- Sur- Re- Re- Earn-
dollars) tal tal plus serve serve ings Total
----------------------------------------------------------------------------
Balance at
December 31,
2011 $342,285 $4,080 $7,476 $ (4,929) $(503) $42,413 $390,822
Net loss for the
period: - - - - - (6,510) (6,510)
Other
comprehensive
loss:
Foreign currency
translation
differences, net
of tax - - - (2,532) - - (2,532)
Defined benefit
plan actuarial
losses, net of
tax - - - - - (609) (609)
Gain in fair
value of
interest rate
swaps - - - - 566 566
----------------------------------------------------------------------------
Balance at March
31, 2012 $342,285 $4,080 $7,476 $ (7,461) $ 63 $35,294 $381,737
----------------------------------------------------------------------------
Balance at
December 31,
2010 $285,362 $4,080 $5,408 $ (7,646) $ - $60,246 $347,450
Net loss for the
period: - - - - - (1,730) (1,730)
Other
comprehensive
earnings (loss):
Foreign currency
translation
differences, net
of tax - - - (3,297) - - (3,297)
Defined benefit
plan actuarial
gains, net of
tax - - - - - 93 93
Contributions:
Share options
exercised 876 - - - - - 876
Changes in
ownership
interests in
investee:
Acquisition of
subsidiary - - 2,068 - - (4) 2,064
----------------------------------------------------------------------------
Balance at March
31, 2011 $286,238 $4,080 $7,476 $(10,943) $ - $58,605 $345,456
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 months ended March 31, 2012 and 2011 (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 months ended March 31, 2012 comprise the Company and its
subsidiaries. The consolidated financial statements of the Company as at and for
the year ended December 31, 2011 are available on www.sedar.com.
2. Statement of Compliance:
(a) Statement of compliance:
These condensed consolidated interim financial statements, including
comparatives, have been prepared in accordance with IAS 34 Interim Financial
Reporting using accounting policies consistent with the International Financial
Reporting Standards ("IFRS") issued by the International Accounting Standards
Board ("IASB") and Interpretations of the International Financial Reporting
Interpretations Committee ("IFRIC"). These condensed consolidated interim
financial statements were approved by the Board of Directors on May 3, 2012.
(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) Long-term debt is measured at fair value at inception and at amortized cost
thereafter;
(iii) Liabilities for cash-settled share-based payment arrangements are measured
at fair value; and
(iv) 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.
The functional and presentation currency of the parent company is Canadian dollars.
3. Significant accounting policies:
These condensed consolidated interim financial statements have been prepared
using the significant accounting policies and methods of computation consistent
with those applied in the Company's December 31, 2011 annual consolidated
financial statements, except for the accounting policy adopted subsequent to
that date, as discussed below.
(a) Change in accounting policy:
The Company uses derivative forward foreign exchange contracts which are
designated as held for trading and are carried on the Statement of Financial
Position at fair value. Previously, changes in fair value were recorded as an
adjustment to Sales in Net earnings. Effective January 1, 2012 the Company
changed its accounting policy to align with the presentation adopted by
companies in its peer group and changes in fair value are now recorded in Other
foreign exchange gain (loss) in Net earnings.
The policy has been applied on a retrospective basis and comparative information
has been restated. The following changes to historical financial statements have
been made to reflect the new policy:
For the three months ended As previously
March 31, 2011 reported Adjustment Restated
----------------------------------------------------------------------------
Sales $ 179,745 $ (1,163) $ 178,582
Other foreign exchange
gain (loss) (75) 1,163 1,088
----------------------------------------------------------------------------
----------------------------------------------------------------------------
There are no changes to previously issued Statements of Financial Position as a
result of this change in accounting policy.
(b) New standards and interpretations not yet adopted:
The IASB periodically issues new standards and amendments or interpretations to
existing standards. The following new pronouncements are those that the Company
considers most significant and are not intended to be a complete list of new
pronouncements that may affect the financial statements.
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. This standard is in effect for accounting periods
beginning on or after January 1, 2015, with earlier adoption permitted. The
Company does not expect this standard to have a significant effect on its
financial statements.
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. This standard is 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. Inventories:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mar. 31, 2012 Dec. 31, 2011
-------------------------------------------------------------------------
Logs $ 55,626 $ 59,412
Lumber 37,715 31,729
Other 7,119 6,504
-------------------------------------------------------------------------
$ 100,460 $ 97,645
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Inventory expensed in the period includes production costs, amortization
of plant and equipment, and depletion and amortization of timber, roads
and other. The inventory writedown in order to record inventory at the
lower of cost and net realizable value at March 31, 2012 was $7,313,000
(December 31, 2011 - $10,006,000).
6. Cash and borrowings:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revolving
Operating Term
March 31, 2012 Line Line Total
-------------------------------------------------------------------------
Available line of credit $ 65,000 $ 200,000$ 265,000
Maximum borrowing available 65,000 200,000 265,000
Drawings - 125,125 125,125
Outstanding letters of credit
included in line utilization 5,301 - 5,301
Unused portion of line 59,699 74,875 134,574
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2011
-------------------------------------------------------------------------
Available line of credit $ 65,000 $ 200,000 $ 265,000
Maximum borrowing available 65,000 200,000 265,000
Drawings - 110,713 110,713
Outstanding letters of credit
included in line utilization 5,062 - 5,062
Unused portion of line 59,938 89,287 149,225
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 March 31, 2012 other than outstanding letters of credit
included in the line utilization the Operating Line was undrawn (December 31,
2011 - $nil).
The maturity date of the Operating Line is July 28, 2015.
(b) Long-term debt:
The Revolving Term Line may be drawn in either CAD$ 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. The
maturity date of the Revolving Term Line is July 28, 2015.
As at March 31, 2012, the Revolving Term Line was drawn by US$30,200,000
(December 31, 2011 - US$30,200,000) revalued at the quarter- end exchange rate
to $30,125,000 (December 31, 2011 - $30,713,000), and $95,000,000 (December 31,
2011 - $80,000,000) for total drawings of $125,125,000 (December 31, 2011 -
$110,713,000).
The US$30,200,000 drawing under the Revolving Term Line has been designated as a
hedge against the Company's investment in its U.S. operations and unrealized
foreign exchange gains of $589,000 (Quarter 1, 2011 - $755,000 gain) arising on
revaluation of the Non-Revolving Term Line were recognized in Foreign exchange
translation differences in Other comprehensive income.
Minimum principal amounts due on long-term debt within the next five years are
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Twelve months ending
March 31, 2013 $ -
March 31, 2014 -
March 31, 2015 -
March 31, 2016 125,125
March 31, 2017 -
----------------------------------------------------------------------------
$ 125,125
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) EBITDA represents earnings before interest, taxes, depreciation, depletion
and amortization.
7. Share capital:
The transactions in share capital are described below:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number
-------------------------------------
Class A Class B Total Amount
-------------------------------------------------------------------------
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 55,553
-------------------------------------------------------------------------
Balance, December 31,
2011 and March 31,
2012 54,847,176 1,015,779 55,862,955 $ 346,365
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. Depreciation, depletion and amortization:
Depreciation, depletion and amortization can be allocated by function as
follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, 2012 Mar. 31, 2011
-------------------------------------------------------------------------
Production $ 11,110 $ 11,453
Selling and
administration 207 247
-------------------------------------------------------------------------
$ 11,317 $ 11,700
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Finance costs:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, 2012 Mar. 31, 2011
-------------------------------------------------------------------------
Interest on borrowing $ 1,276 $ 1,860
Accretion expense 113 178
Amortization of
prepaid finance
costs 153 236
-------------------------------------------------------------------------
$ 1,542 $ 2,274
-------------------------------------------------------------------------
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10.Net earnings (loss) per share:
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3 Months Mar. 31, 2012 3 Months Mar. 31, 2011
------------------------ -------------------------
Per Per
Net loss Shares share Net loss Shares share
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Basic loss per share $(6,510) 55,863 $(0.12) $(1,730) 47,389 $(0.04)
Share options - - - - 19(i) -
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Diluted loss per share $(6,510) 55,863 $(0.12) $(1,730) 47,389 $(0.04)
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(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. There were no share options outstanding at March 31, 2012.
11. Segmented information:
The Company manages its business as a single operating segment, solid wood. The
Company purchases and harvests logs which are then manufactured into lumber
products at the Company's sawmills, or sold. Substantially all of the Company's
operations are located in British Columbia, Canada and the U.S. Pacific
Northwest, U.S.A.
The Company sales to both foreign and domestic markets are as follows:
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3 Months 3 Months
Mar. 31, 2012 Mar. 31, 2011
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Canada $ 60,416 $ 51,115
United States 70,565 63,719
China and Taiwan 20,547 31,324
Japan 25,788 20,667
Other export 9,344 11,757
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$ 186,660 $ 178,582
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Sales by product line are as follows:
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3 Months 3 Months
Mar. 31, 2012 Mar. 31, 2011
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Lumber $ 133,622 $ 131,365
Logs 26,950 20,849
Wood chips and other by products 18,163 16,413
Ocean freight and other 7,925 9,955
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$ 186,660 $ 178,582
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12. 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 changes in 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 March 31, 2012, the Company has outstanding obligations to sell a maximum
of US$24,200,000 at an average rate of CAD$0.99925 to the US$1.00 and sell
Japanese yen 100,000,000 at an average rate of yen 76.44 to the US$1.00 and buy
US$6,000,000 at an average rate of CAD$0.9949 to the US$1.00 during 2012. All
foreign currency gains or losses to March 31, 2012 have been recognized in Other
foreign exchange gain (loss) in Net earnings and the fair value of these foreign
currency contracts, being an asset of $164,000 (measured based on Level 2 of the
fair value hierarchy), has been recorded in Trade accounts receivable and other
(December 31, 2011 - $283,000 asset recorded in Trade accounts receivable and
other 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 March 31, 2012, being an
asset of $63,000 (measured based on Level 2 of the fair value hierarchy), has
been recorded in Trade accounts receivable and other (December 31, 2011 -
$503,000 liability recorded in Trade accounts payable and accrued liabilities
measured based on Level 2 of the fair value hierarchy) and a gain of $566,000
(Quarter 1, 2011 - $nil) has been recognized in Other comprehensive income for
the first quarter, 2012.
During the first quarter, 2012 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 March 31, 2012
there were no outstanding lumber futures contracts and a gain of $25,000 was
recognized in Other income (expense) on completed contracts for the first
quarter, 2012 (Quarter 1, 2011 - $nil).
13. Contingencies:
(a) Softwood Lumber Agreement:
On January 18, 2011, the U.S. Trade Representative's ("USTR") 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 is being 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 USTR filed a detailed statement of claim with the LCIA and
Canada delivered its initial response in November, 2011. Final submissions to
the arbitration panel are due on May 24, 2012 with a final decision expected by
the end of 2012.
As the U.S. arbitration request is still in preliminary stages and the existence
of any potential claim has not been determined, no provision has been recorded
in the financial statements as at March 31, 2012.
(b) Significant customer in creditor protection:
On January 31, 2012, Catalyst Paper Corporation ("Catalyst") announced that the
company and certain of its subsidiaries had obtained an Initial Order from the
Supreme Court of British Columbia under the Companies' Creditors Arrangement
Act. Catalyst is the primary buyer of Interfor's chips on the B.C. Coast, under
long-term purchase contracts. Catalyst is also a purchaser of Interfor's pulp
logs and other residuals.
The Court has granted Interfor a security interest as a critical supplier on all
current and future products purchased from Interfor. Catalyst continues to meet
its obligations to Interfor during the restructuring process.
As at March 31, 2012 the trade accounts receivable at risk for non-payment total
approximately $150,000.
The outcome of Catalyst's restructuring and any potential impact to the Company
cannot be determined at this point.
(c) Storm 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 until the
first quarter, 2012. There are no immediate financial impacts on the Company and
no provision has been recorded in the financial statements as at March 31, 2012.
(14) Subsequent events:
(a) Softwood Lumber Agreement:
In April, 2012 the U.S. Lumber Coalition approached the USTR alleging that the
B.C. government is undercharging B.C. Coastal forest companies for timber
harvested on Crown lands. As this second complaint is in the very preliminary
stages of investigation, the existence of any potential claim has not been
determined and no provision has been recorded in the financial statements as at
March 31, 2012.
(b) WorkSafeBC Orders Safety Reviews:
On April 24, 2012, as a result of a second explosion and destruction of a
sawmill in B.C. in the first quarter, 2012, WorkSafeBC, the workers'
compensation insurer in B.C., has ordered province-wide sawmill safety reviews,
including full hazard identification and risk assessment with particular focus
on combustible dust, dust accumulation and potential ignition sources. In May,
2012 WorkSafeBC officers will be following up on these orders to confirm that
the ordered actions have been taken and sawmills are in compliance with the
Workers Compensation Act and Occupational Health and Safety Regulation in regard
to combustible dust and potential safety hazards.
In early 2012, the Company engaged a consultant to assist in the evaluation of
safety standards at each of its sawmills and as at May 3, 2012 reviews have been
completed at the Canadian sawmill sites. The Company believes that it maintains
high standards of safe work practices and provides a safe work environment.
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