INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX:IFP.A)
reported net earnings of $11.4 million or $0.18 per share in the fourth quarter
of 2013, compared to net losses of $0.1 million or $0.00 per share in the third
quarter and $3.8 million or $0.07 per share in the fourth quarter of 2012.
EBITDA, adjusted to exclude the effects of long-term incentive compensation and
other items, was $36.2 million compared with $24.6 million in the third quarter
of 2013 and $19.3 million in the fourth quarter of last year.
Lumber production in the fourth quarter was a record 470 million board feet, up
5% from the third quarter of 2013. Lumber sales, including wholesale and agency
volumes, were a record 500 million board feet, up 12% versus the prior quarter.
The Company's fourth quarter results also benefited from a rise in commodity
lumber prices. SPF 2x4 in the US market averaged US$370, up US$42 versus the
third quarter. Hem-Fir studs increased US$41 to average US$374 while SYP 2x4
East increased US$22 to average US$415.
Long-term incentive compensation amounted to $5.2 million or $0.08 per share in
the fourth quarter.
Export taxes on shipments to the US averaged 2% in the fourth quarter of this
year versus 5% in the third quarter and an average of 8% in the fourth quarter
last year.
In the fourth quarter, Interfor generated $35.2 million in cash from operations
before working capital changes and $33.5 million after working capital changes.
Capital spending amounted to $16.8 million during the quarter.
Net debt closed the quarter at $140.8 million or 21.5% of invested capital.
Subsequent to the quarter end, Interfor announced that it had reached an
agreement with Ilim Timber Continental, S.A. ("Ilim Timber") to acquire Tolleson
Ilim Lumber Company ("Tolleson") of Perry, Georgia, USA. Refer to the Company's
news release dated February 9, 2014, for further information.
Though the US economic recovery remains fragile, expectations are that US
housing starts and lumber prices will continue to improve in 2014. Export tax
rates for the first two months of 2014 have been set at 0% as lumber prices
remain above the relevant benchmark price. Demand in Japan is expected to be
stable through the first half of 2014. Following the implementation of a VAT
increase in April 2014, there is potential for a moderate reduction in demand as
consumers adjust to higher housing prices. Demand and pricing in China are
expected to remain stable across all product lines. Long-term interest rates are
expected to increase while continued volatility in the value of the Canadian
dollar is anticipated.
Interfor will continue its disciplined approach to production, cost control,
inventory management and capital spending to help position the Company to
deliver above average returns on invested capital as conditions improve. At the
same time, Interfor will remain alert to opportunities to position the Company
for long-term success.
(1) Adjusted to exclude the effects of long-term incentive compensation, foreign
exchange gains (losses), other income (expense) and restructuring costs (refer
to our MD&A prepared as of February 13, 2014 for the full definition).
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 growth-oriented lumber company with operations in Canada and the
United States. Our Company has annual production capacity of more than 2.2
billion board feet and offers one of the most diverse lines of lumber products
to customers around the world. For more information about Interfor, visit our
website at www.interfor.com.
There will be a conference call on Friday, February 14, 2014 at 8:00 a.m.
(Pacific Time) hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose
of reviewing the Company's release of its fourth quarter and fiscal 2013
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
February 28, 2014. The number to call is 1-866-245-6755, Passcode 582743.
FINANCIAL AND OPERATING HIGHLIGHTS(1)
For the For the
3 months ended year ended
December 31, December 31,
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Unit 2013 2012 2013 2012 2011
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Financial Highlights(2)
Total sales $mm 315.3 222.4 1,105.2 849.2 758.2
Lumber $mm 249.2 173.3 872.3 631.2 538.4
Logs $mm 41.3 24.5 136.6 113.9 108.4
Wood chips and other $mm
residual products 20.0 15.9 72.4 69.4 68.4
Ocean freight and other $mm 4.9 8.7 23.9 34.7 43.1
Operating earnings (loss) $mm 13.7 (2.4) 52.5 (3.1) (5.8)
Net earnings (loss) $mm 11.4 (3.8) 42.2 (9.5) (13.9)
Net earnings (loss) per $/share
share, basic and diluted 0.18 (0.07) 0.73 (0.17) (0.26)
EBITDA(3) $mm 31.4 13.0 115.8 50.2 46.7
Adjusted EBITDA(3) $mm 36.2 19.3 134.0 59.9 46.8
Adjusted EBITDA margin(3) % 11.5% 8.7% 12.1% 7.1% 6.2%
Total assets $mm 824.1 632.0 614.8
Total long-term debt $mm 145.5 135.0 110.7
Pre-tax return on total %
assets(3) 5.3% -1.4% -2.0%
Net debt to invested %
capital(3) 21.5% 24.2% 20.4%
Operating Highlights
Lumber production million
fbm 470 347 1,725 1,351 1,264
Lumber sales million
fbm 500 384 1,761 1,432 1,301
Lumber - average selling $/thousa
price(4) nd fbm 498 452 495 441 414
Log production(5) thousand
cubic
metres 965 748 3,598 3,296 3,408
Log sales(5) thousand
cubic
metres 397 267 1,339 1,352 1,356
Logs - average selling $/cubic
price(5) metre 92 76 88 72 72
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Notes:
(1) Figures in this table may not add due to rounding.
(2) Financial information presented for the annual periods is based on the
Company's audited financial statements as at and for the years ended
December 31, 2013, 2012 and 2011, prepared in accordance with IFRS.
Financial information presented for quarterly periods is prepared in
accordance with IFRS but is unaudited.
(3) Refer to the Non-GAAP Measures section of this news release for
definitions and reconciliations of these measures to figures reported
in the Company's consolidated financial statements.
(4) Gross sales before export taxes.
(5) For B.C. operations.
SUMMARY OF 2013 ANNUAL FINANCIAL PERFORMANCE
Sales
The Company realized $1.1 billion of total sales, up 30% from $849 million in
2012, driven by the sale of nearly 1.8 billion board feet of lumber at an
average price of $495 per mfbm. Lumber sales volume and average selling price
increased 23% and 12%, respectively, over 2012.
Higher North American pricing, supplemented by higher realizations in China and
Japan and a weaker Canadian dollar, contributed to a $55 per mfbm average
selling price improvement from 2012.
The 329 million board feet increase in lumber shipments from 2012 primarily
reflects the addition of four U.S. Southeast sawmills, which contributed sales
of 247 million board feet, and increased production from the B.C. Interior and
U.S. Pacific Northwest operations.
Lumber shipments to China increased by 18%, as 2012 was affected by an
oversupply in late 2011 and interest rate increases by the Chinese government.
China remained a significant market for the Company, accounting for 17% of total
lumber sales volume in 2013 (2012 - 17%). Lumber shipments to Japan improved
marginally over 2012 levels.
Log sales of $136.6 million represents an increase of $22.7 million, or 20%,
compared to 2012. A slight decline in sales volume from our B.C. operations was
more than offset by a 22% increase in average selling price to $88 per cubic
metre, reflecting improved lumber markets and a shift in mix to offshore
markets.
Wood chips and other residual products revenue increased 4% from 2012 to $72.4
million, due mostly to higher volumes from increased sawmill production.
Ocean freight and other revenues decreased by $10.8 million from 2012 to $23.9
million, due mainly to lower ocean freight resulting from decreased break bulk
volumes.
Operations
Production costs increased by 24% or $181.1 million over 2012, attributable
primarily to the 23% increase in lumber shipments.
The $7.3 million decrease in export taxes from 2012 was due to higher commodity
lumber prices, which resulted in the export tax rate under the Softwood Lumber
Agreement ("SLA") averaging 2% of lumber sales from Canada to the U.S., compared
to 11% in 2012.
Increased operating rates in the U.S. Pacific Northwest sawmills, a higher
depreciation base for the rebuilt Grand Forks sawmill, and the inclusion of
depreciation for the four acquired U.S. Southeast sawmills resulted in a $10.5
million increase in depreciation of plant and equipment as compared to 2012.
Corporate and Other
Long term incentive compensation ("LTIC") expense increased by 87% over 2012 to
$18.8 million, reflecting changes in the estimated fair value of the share-based
compensation plans. A 68% increase in the Company's share price during the year
had the greatest impact on this expense.
Business development costs, including transaction and integration costs related
to the acquisition of the four U.S. Southeast sawmills, and larger
infrastructure to support the Company's growth contributed to the $8.1 million
increase in selling and administration costs over 2012.
Income Taxes
The Company recorded income tax expense of $0.6 million and decreased its
unrecognized deferred tax assets by $12.7 million in relation to certain unused
tax losses that are available to be carried forward against future taxable
income. 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, except in limited circumstances.
The Company's Canadian non-capital loss carry forwards and U.S. net operating
loss carry forwards totaling $276 million (2012 - $292 million) expire between
2023 and 2032, and are available to reduce future taxable income. The overall
effective tax rate is significantly different from the Canadian statutory rate
of 25.75% (2012 - 25%) due mainly to the decrease in unrecognized deferred tax
assets of $12.7 million (2012 - increase of $2.4 million).
Net Earnings
The Company recorded net earnings of $42.2 million or $0.73 per share, compared
to a net loss of $9.5 million or $0.17 per share in 2012. The improved
performance was primarily the result of the addition of the four sawmills in the
U.S. Southeast, increased lumber prices, record shipment volumes and lower
export tax rates, offset partly by the cost of additional infrastructure
required to support growth and the increase in LTIC expense.
SUMMARY OF FOURTH QUARTER 2013 FINANCIAL PERFORMANCE
Sales
The Company achieved $315.3 million of total sales in the fourth quarter of
2013, an improvement of $92.9 million over the same quarter of 2012. The
majority of this improvement, amounting to $75.8 million, was driven by higher
lumber sales.
Lumber shipments improved 30% over 2012 to reach a record level of 500 million
board feet for the quarter. Sales volumes benefited from the four acquired U.S.
Southeast sawmills and stronger domestic demand driven by improved U.S. housing
starts, which increased 18% from 2012 to 923,000 units in 2013. Lumber sales
averaged $498 per mfbm in the quarter, 10% higher than the same period of 2012.
Higher North American pricing, supplemented by higher realizations in China and
Japan and a weaker Canadian dollar were factors in this improvement.
Log sales revenue was $41.3 million in the quarter, up 68% from the comparable
quarter of 2012. B.C. log sales volumes increased 130,000 cubic metres, or 49%,
from the fourth quarter of 2012 due mainly to tight supply at the end of 2012
and increased logging rates in 2013. On the B.C. Coast, where the majority of
Interfor's log sales are transacted, the price per cubic meter improved 18% as
compared to the fourth quarter of 2012. This improvement reflects higher average
overall log sales prices and a shift in mix to offshore markets.
Higher chip and residuals volumes from the addition of the four U.S. Southeast
mills were partially offset by lower overall chip prices, which resulted in an
increase of $4.1 million in wood chip and other residuals revenues for the
quarter, as compared to the same period of 2012.
Operations
Production costs increased by 38% or $75.3 million as compared to the same
period in 2012, driven mostly by the 30% increase in lumber shipments. The
remainder of the cost increase is explained by higher log and conversion costs.
Log costs increased due to higher logging and stumpage costs in the B.C.
Interior, partially offset by the addition of lower log costs in the U.S.
Southeast. Competition for logs from China spurred increased log costs for some
of the Company's sawmills in the U.S. Pacific Northwest. Elevated operating
rates in the U.S. Pacific Northwest sawmills, a higher depreciation base for the
rebuilt Grand Forks sawmill, and the inclusion of depreciation for the four
acquired U.S. Southeast sawmills increased plant and equipment depreciation
expense, as compared to the fourth quarter of 2012.
Corporate and Other
Business development costs and larger infrastructure required to support the
Company's growth contributed to increased selling and administration costs over
the comparable quarter of 2012.
Long term incentive compensation expense decreased by $1.0 million over the
corresponding period of 2012, reflecting changes in the estimated fair value of
the share-based compensation plans. The movement in the Company's share price
had the greatest impact on this expense, as reflected by a 13% increase in the
share price during the quarter versus a 35% increase over the same period of
2012.
Income Taxes
In the fourth quarter of 2013, the Company recorded income tax expense of $0.3
million (2012 - $0.1 million) and decreased its unrecognized deferred tax assets
by $3.7 million (2012 - increased by $1.0 million) in relation to certain unused
tax losses that are available to be carried forward against future taxable
income.
Net Earnings
The Company recorded net earnings of $11.4 million or $0.18 per share, compared
to a net loss of $3.8 million or $0.07 per share in fourth quarter of 2012. The
improved performance was due mainly to the addition of the four sawmills in the
U.S. Southeast, increased lumber prices, increased shipment volumes and lower
export tax rates, offset partly by the cost of additional infrastructure
required to support growth.
LIQUIDITY
Balance Sheet
The Company strengthened its financial position throughout 2013, ending the year
with $140.8 million of net debt representing 21.5% of invested capital.
Interfor's strong financial position benefited from $97.5 million of cash
generated from operating activities in 2013.
As at December 31, 2013, the Company had net working capital of $118.2 million
(2012 - $90.1 million), available operating and term lines of $186.4 million
(2012 - $124.8 million) and unrestricted cash of $4.5 million (2012 - $14.3
million).
These resources, in addition to cash generated from operations, will be used to
support our working capital requirements, debt servicing commitments and capital
expenditures. The Company believes that it will have sufficient liquidity to
satisfy the funding of operating and capital requirements for the foreseeable
future.
Cash Flow From Operating Activities
The Company generated $123.7 million of cash flow from operations, before
changes in working capital, an increase of 165% over 2012. This improvement was
driven mainly by higher lumber shipments and lumber sales prices, a zero export
tax rate for nine months of 2013, and positive contributions from the four newly
acquired U.S. Southeast sawmills.
Increased sales volumes, lumber prices, manufacturing unit rates and log costs
all contributed to an operating working capital cash utilization of $26.2
million, as compared to $1.3 million in 2012.
Total cash generated from operations after changes in working capital was $97.5
million, increased from $45.4 million for 2012. Throughout 2013, the Company
focused on optimizing inventory levels, matching production with export and
domestic demand, and purchasing logs and producing products that would provide
positive margins.
Cash Flow From Investing Activities
Cash capital expenditures totaled $68.2 million for 2013 (2012 - $60.8 million),
with $14.9 million spent on high-return discretionary projects, $20.3 million on
other business maintenance expenditures, and $33.0 million on road construction
and timber licences. These investments included the installation of a Weinig
moulder at the Gilchrist sawmill, and kiln projects at the Baxley, Swainsboro
and Thomaston sawmills.
On March 1, 2013, the Company concluded the acquisition of Rayonier Inc.'s Wood
Products Business in Georgia, U.S., consisting of three manufacturing facilities
plus working capital for $86.6 million.
On May 1, 2013, the company acquired two timber tenures in the Kootenay Region
of B.C. from Springer Creek Management Ltd. The tenures have a combined AAC of
approximately 174,000 cubic metres and will support an increase in production at
the Castlegar sawmill.
On July 1, 2013, the company acquired the Thomaston sawmill from Keadle Lumber
Enterprises, Inc. in Georgia, U.S., including working capital, for $33.8
million. The Company will pay an additional US$7.0 million contingent upon
receipt of an upgrade to the air permit which would allow the Company to operate
a second shift. Receipt of this approval is expected in the first quarter of
2014, with payment to be made 365 days thereafter.
Cash Flow From Financing Activities
On September 30, 2013 the Company closed a public offering of 7,187,500 Class A
Subordinate Voting shares at a price of $12.00 per share for proceeds of $82.4
million, net of $3.9 million in transaction costs. The proceeds were used to
fund completion of capital projects and reduce debt. No shares were issued in
2012.
During 2013, the Company funded its U.S. Southeast acquisitions and capital
improvements with drawings of US$85.2 million under its Revolving Term Line, and
the issuance of US$50.0 million of Series A Senior Secured Notes ("Senior
Secured Notes") on June 26, 2013.
Interfor also utilized its operating lines in 2013 for net drawings of $9.2
million, including $7.5 million in outstanding letters of credit (2012 - $5.2
million letters of credit).
Summary of Contractual Obligations
The payments due in respect of contractual and legal obligations, including
projected major capital improvements, are summarized as follows:
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Payments due by period
Up to 2-3 4-5 After 5
Total 1 year years years years
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(millions of
dollars)
Trade accounts payable and
accrued liabilities $ 81.8 $ 81.8 $ - $ - $ -
Income taxes payable 0.4 0.4 - - -
Long term debt 145.5 - 0.7 91.6 53.2
Reforestation liability 33.3 11.8 8.1 6.1 7.3
Provisions and other
liabilities 40.9 15.9 9.6 2.0 13.5
Operating leases and
contractual commitments 31.0 12.3 9.5 4.7 4.5
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Total contractual obligations
(1) $ 332.8 $ 122.1 $ 27.9 $ 104.3 $ 78.5
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Note: (1) Figures in this table may not add due to rounding.
CAPITAL RESOURCES
As at December 31, 2013, the Company had an Operating Line of $65.0 million.
Drawings under this line are subject to borrowing base calculations dependent
upon accounts receivable, inventories and certain accounts payable. At year end,
the Company had borrowings of $8.5 million, including letters of credit, with
available credit of $56.5 million.
On February 27, 2013, the Company extended the maturities of its Operating Line
and Revolving Term Line to February 27, 2017 and increased the credit available
under the Revolving Term Line from $200 million to $250 million. Subsequent to
the issuance of US$50 million of Senior Secured Notes on June 26, 2013, the
credit available on the Revolving Term Line was reduced from $250 million to
$200 million. All other terms and conditions of this line remained unchanged
except for a reduction in pricing. As at December 31, 2013, the Revolving Term
Line was drawn by $90.6 million (December 31, 2012 - $135.0 million), leaving
available capacity of $109.4 million (2012 - $65.0 million).
On May 24, 2013, the Company entered into an agreement with a U.S. lender for a
US$20 million operating line. The U.S. Operating Line is secured by accounts
receivable and inventories of the Company's wholly- owned subsidiary, Interfor
U.S. Inc., and matures on April 28, 2015. As at December 31, 2013, the U.S.
Operating Line was drawn by US$0.7 million, revalued at the year-end exchange
rate to $0.7 million.
On June 26, 2013, the Company issued US$50.0 million of Series A Senior Secured
Notes, bearing interest at 4.33%. The notes are 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. Payments
of US$16.7 million are required on each of June 26, 2021 and 2022, with the
balance due on June 26, 2023. As at December 31, 2013, the Senior Secured Notes
were revalued at the year-end exchange rate to $53.2 million.
TRANSACTIONS BETWEEN RELATED PARTIES
On August 23, 2013, the Company's controlling shareholder, Sauder Industries
Limited ("SIL") exercised its right under the Company's Articles to exchange its
Class B Common Shares for Class A Subordinate Voting Shares on a share for share
basis without any cash or non-cash consideration and ceased to be a significant
shareholder.
Prior to August 23, 2013, the Company had lumber sales to SIL in the amount of
$0.5 million (2012 - $1.1 million). These transactions were conducted on a
normal commercial basis, including terms and prices and did not result in any
ongoing contractual or other commitments.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has off-balance sheet arrangements which include letters of credit
and surety performance bonds, primarily for timber sales. These are more fully
described in Note 10 and Note 20(c) of the Company's 2013 consolidated financial
statements. At December 31, 2013, such instruments aggregated $26.7 million
(2012 - $23.0 million). Off-balance sheet arrangements have not had, and are not
reasonably likely to have, any material impact on the Company's current or
future financial condition, results of operations or cash flows.
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
From time to time, the Company employs financial instruments, such as interest
rate swaps and foreign currency forward and option contracts, to manage exposure
to fluctuations in interest rates and foreign exchange rates. The Company also
trades lumber futures to manage price risk. The Company's policy is not to use
derivatives for trading or speculative purposes. Risk management strategies and
relationships are formally documented and assessed on a regular, ongoing basis
to ensure derivatives are effective in offsetting changes in fair values or cash
flows of hedged items.
The counter-parties for all derivative contracts, except lumber futures, are the
Company's Canadian bankers who are highly-rated and, hence, the risk of credit
loss on such instruments is mitigated.
Interest Rate Swaps
As at December 31, 2013, Interfor had drawn $92.3 million of floating rate debt,
excluding letters of credit, from its operating and term credit facilities, and
$53.2 million of fixed rate debt through the Senior Secured Notes.
The Company's operating and term credit facilities bear interest at the bank
prime rate plus a premium, or, at the Company's option, at rates for Bankers'
Acceptances for Canadian dollar loans or at LIBOR for U.S. dollar loans, in all
cases dependent upon a financial ratio. The Senior Secured Notes bear interest
at 4.33%.
On August 25, 2011, the Company entered into two interest rate swaps, each with
a notional value of $25 million and maturing July 28, 2015. Under the terms of
these swaps, the Company paid an amount based on a fixed annual interest rate of
1.56% and received a 90 day BA CDOR which was recalculated at set interval
dates. These interest rate swaps were unwound on October 22, 2013.
On March 25, 2013, the Company entered into two additional interest rate swaps,
each with a notional value of US$25.0 million and maturing February 17, 2017.
Under the terms of these swaps, the Company pays an amount based on a fixed
annual interest rate of 0.84% and receives a 90 day LIBOR which is recalculated
at set interval dates.
The intent of these interest rate swaps is to convert floating-rate interest
expense to fixed-rate interest expense. As these swaps have been designated as
cash flow hedges the fair value of these interest rate swaps at December 31,
2013, being an asset of $0.2 million (measured based on Level 2 of the fair
value hierarchy), has been recorded in Trade accounts receivable and other (2012
- $0.1 million in Trade accounts payable and provisions) and a gain of $0.2
million (2012 - $0.4 million gain) has been recognized in Other comprehensive
income.
Based on the Company's average debt level during 2013, the sensitivity of a 100
basis point increase in interest rates would result in an approximate decrease
of $0.5 million in Net earnings.
Foreign Currency Forward Exchange Contracts
The Company actively manages its currency exchange risk for fluctuations in U.S.
dollars and Japanese Yen by identifying opportunities to enter into foreign
exchange contracts and options to effectively hedge its net exposure. As at
December 31, 2013, the Company had outstanding foreign currency forward contract
obligations to sell a maximum of US$8.0 million at an average rate of CAD$1.0653
per U.S. dollar and yen 145 million at an average rate of yen 96.95 per U.S.
dollar during 2014. All foreign currency gains or losses in 2013 have been
recognized in Other foreign exchange gain (loss) in Net earnings and the fair
value of the foreign currency contracts has been recorded as an asset of $0.1
million in Trade accounts receivable and other (2012 - $0.1 million asset
recorded in Trade accounts receivable and other).
Based on the Company's net exposure to foreign currencies resulting from forward
contracts in 2013, the sensitivity of Interfor's net earnings is as follows:
US$ $0.01 increase vs. CAD$ $2.6 million increase in net income
Japanese Yen 1 yen increase vs. US$ $0.1 million increase in net income
Interfor's U.S. operations produce and sell products almost exclusively for the
U.S. market, with all revenues and expenses denominated in U.S. dollars. All
foreign currency denominated assets and liabilities of Interfor's U.S. foreign
operations with a U.S. dollar functional currency are translated at exchange
rates in effect at the Consolidated Statement of Financial Position date.
Revenues and expenses are translated at transaction date or average rates for
the period as appropriate. Unrealized gains and losses arising upon translation
of net foreign currency investment positions in U.S. dollar functional currency
foreign operations, together with any gain or losses arising from hedges of
those net investment positions, to the extent effective, are credited or charged
to net change in unrealized foreign currency translation gains (losses) in the
Consolidated Statement of Comprehensive Income. Upon sale, reduction or
substantial liquidation of an investment position, the previously recorded net
unrealized gains (losses) thereon in the Translation reserve are reclassified to
the Consolidated Statement of Earnings.
The Company recorded an $8.4 million unrealized foreign exchange gain on
translation of its U.S. operations with a U.S. dollar functional currency to
Other comprehensive income (loss) in 2013 (2012 - $2.9 million loss).
As at December 31, 2013, the Company had designated the US$85.2 million drawn
under its Revolving Term Line and US$50.0 million drawn under its Senior Secured
Notes as hedges against the investment in its U.S. operations. Unrealized
foreign exchange losses of $6.2 million have been recorded in Other
comprehensive income (loss) in 2013 (2012 - $0.7 million gain).
Lumber Futures
To manage price risk, the Company also traded lumber futures which were
designated as held for trading with changes in fair value recorded within Other
income in Net earnings. At December 31, 2013, there were no outstanding lumber
futures contracts and a gain of $0.1 million was recognized in Other income on
completed contracts during the year (2012 - negligible gain).
OUTSTANDING SHARES
As of February 13, 2014, Interfor had 63,050,455 Class A Subordinate Voting
Shares issued and outstanding. These shares are listed on the Toronto Stock
Exchange under the symbol IFP.A.
CONTROLS AND PROCEDURES
The Company's management, under the supervision of the Chief Executive Officer
("CEO") and the Chief Financial Officer ("CFO"), has evaluated the design and
effectiveness of the Company's disclosure controls and procedures. Based on this
evaluation, the CEO and CFO have concluded that the Company's disclosure
controls and procedures were effective as of December 31, 2013.
The Company's management, under the supervision of the CEO and CFO, has
evaluated the design and effectiveness of the Company's internal controls over
financial reporting ("ICFR") based on the criteria established within the 1992
COSO framework. Based on this evaluation, the CEO and CFO have concluded that
the Company's ICFR were effective as of December 31, 2013.
The CEO and CFO acknowledge responsibility for the design of ICFR and confirm
that there were no changes in these controls that occurred during the year ended
December 31, 2013, which materially affected, or are reasonably likely to
materially affect, the Company's ICFR. The operations in Georgia acquired during
2013 have been in compliance with the Company's ICFR since acquisition.
NON-GAAP MEASURES
This news release makes reference to the following non-GAAP measures: EBITDA,
Adjusted EBITDA, Pre- tax return on total assets and Net debt to invested
capital, which are used by the Company and certain investors to evaluate
operating performance and financial position. These non-GAAP measures do not
have any standardized meaning prescribed by IFRS and are therefore unlikely to
be comparable to similar measures presented by other issuers. The following
table provides a reconciliation of these non-GAAP measures to figures as
reported in the Company's audited annual (and unaudited interim) consolidated
financial statements prepared in accordance with IFRS:
For the For the
3 months ended year ended
December 31, December 31,
---------------------------------------------
Thousands of Canadian dollars 2013 2012 2013 2012 2011
----------------------------------------------------------------------------
Adjusted EBITDA
Net earnings (loss) 11,431 (3,827) 42,239 (9,474) (13,919)
Add:
Depreciation of plant and
equipment 11,040 7,565 39,206 28,745 27,291
Depletion and amortization of
timber, roads and other 6,253 7,528 23,061 23,648 24,263
Restructuring costs, asset
write-downs and other costs 49 283 371 529 580
Finance costs 2,097 1,549 9,069 6,441 7,073
Other foreign exchange
(gains) losses 211 (174) 1,250 (189) 25
Income tax expense 324 83 555 458 1,366
----------------------------------------------------------------------------
EBITDA 31,405 13,007 115,751 50,158 46,679
Add:
Long term incentive
compensation expense 5,205 6,245 18,841 10,065 449
Other (income) expense (375) 5 (602) (334) (371)
----------------------------------------------------------------------------
Adjusted EBITDA 36,235 19,257 133,990 59,889 46,757
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Pre-tax return on total assets
Earnings (loss) before income
taxes 42,794 (9,016) (12,553)
Add:
Restructuring costs, asset
write-downs and other costs 371 529 580
Other foreign exchange
(gains) losses 1,250 (189) 25
Other (income) expense (602) (334) (371)
----------------------------------------------------------------------------
43,813 (9,010) (12,319)
Total assets, period end 824,126 632,040 614,836
----------------------------------------------------------------------------
Pre-tax return on total assets 5.3% -1.4% -2.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net debt to invested capital
Net debt
Long term debt 145,479 135,046 110,713
Less: Cash and cash
equivalents (4,717) (14,994) (10,435)
----------------------------------------------------------------------------
Total net debt 140,762 120,052 100,278
----------------------------------------------------------------------------
Invested capital
Net debt 140,762 120,052 100,278
Shareholders' equity 515,137 376,030 390,822
----------------------------------------------------------------------------
Total invested capital 655,899 496,082 491,100
----------------------------------------------------------------------------
Net debt to invested capital 21.5% 24.2% 20.4%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the three months and years ended December 31, 2013 and 2012 (unaudited)
----------------------------------------------------------------------------
(thousands of
Canadian dollars 3 Months 3 Months Year Year
except earnings per Dec. 31, Dec. 31, Dec. 31, Dec. 31,
share) 2013 2012 2013 2012
----------------------------------------------------------------------------
Re-stated Re-stated
(note 3(a)) (note 3(a))
Sales $ 315,318 $ 222,400 $ 1,105,222 $ 849,196
Costs and expenses:
Production (note
3(a)) 271,535 196,213 940,667 759,544
Selling and
administration 6,958 5,162 28,829 20,719
Long term incentive
compensation
expense 5,205 6,245 18,841 10,065
Export taxes 590 1,768 1,736 9,044
Depreciation of
plant and
equipment (note 9) 11,040 7,565 39,206 28,745
Depletion and
amortization of
timber, roads and
other (note 9) 6,253 7,528 23,061 23,648
----------------------------------------------------------------------------
301,581 224,481 1,052,340 851,765
----------------------------------------------------------------------------
Operating earnings
(loss) before
restructuring costs 13,737 (2,081) 52,882 (2,569)
Restructuring costs
and write-down of
roads (49) (283) (371) (529)
----------------------------------------------------------------------------
Operating earnings
(loss) 13,688 (2,364) 52,511 (3,098)
Finance costs (notes
3(a) and 8) (2,097) (1,549) (9,069) (6,441)
Other foreign exchange
gain (loss) (211) 174 (1,250) 189
Other income (loss) 375 (5) 602 334
----------------------------------------------------------------------------
(1,933) (1,380) (9,717) (5,918)
----------------------------------------------------------------------------
Earnings (loss) before
income taxes 11,755 (3,744) 42,794 (9,016)
Income tax expense
(recovery):
Current 367 137 463 640
Deferred (43) (54) 92 (182)
----------------------------------------------------------------------------
324 83 555 458
----------------------------------------------------------------------------
Net earnings (loss) $ 11,431 $ (3,827)$ 42,239 $ (9,474)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) per
share, basic and
diluted (note 10) $ 0.18 $ (0.07)$ 0.73 $ (0.17)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months and years ended December 31, 2013 and 2012 (unaudited)
----------------------------------------------------------------------------
3 Months 3 Months Year Year
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2013 2012 2013 2012
----------------------------------------------------------------------------
Re-stated Re-stated
(note 3(a)) (note 3(a))
Net earnings (loss) $ 11,431 $ (3,827) $ 42,239 $ (9,474)
Other comprehensive
income (loss):
Items that will not be
reclassified
subsequently to net
earnings:
Defined benefit plan
actuarial gains
(losses) (note
3(a)) 942 637 5,832 (2,800)
----------------------------------------------------------------------------
Items that are or may
be reclassified
subsequently to net
earnings (loss):
Foreign currency
translation
differences -
foreign operations 3,759 1,492 8,167 (2,805)
Gain in fair value
of interest rate
swaps (note 12) 23 90 241 371
Reclassification of
loss in fair value
of interest rate
swaps to net
earnings (loss)
(note 12) - - 58 -
Income tax recovery
(expense) on other
comprehensive
income - 44 212 (84)
----------------------------------------------------------------------------
Total items that are
or may be
reclassified
subsequently to net
earnings: 3,782 1,626 8,678 (2,518)
----------------------------------------------------------------------------
Total other
comprehensive income
(loss), net of tax 4,724 2,263 14,510 (5,318)
----------------------------------------------------------------------------
Total comprehensive
income (loss) for the
period $ 16,155 $ (1,564) $ 56,749 $ (14,792)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2013 and 2012 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars)
2013 2012
----------------------------------------------------------------------------
Re-stated
(note 3(a))
Cash provided by (used in):
Operating activities:
Net earnings (loss) $ 42,239 $ (9,474)
Items not involving cash:
Depreciation of plant and equipment 39,206 28,745
Depletion and amortization of timber,
roads and other 23,061 23,648
Income tax expense 555 458
Finance costs (note 3(a) and 8) 9,069 6,441
Other assets 884 (1,953)
Reforestation liability 2,599 (516)
Other liabilities and provisions 6,612 (710)
Write-down of roads - 164
Foreign exchange losses (gains) (14) 150
Other (484) (309)
----------------------------------------------------------------------------
123,727 46,644
Cash generated from (used in) operating
working capital:
Trade accounts receivable and other (9,667) (3,798)
Inventories (40,866) (879)
Prepayments 493 (1,087)
Trade accounts payable and accrued
liabilities 24,495 5,592
Income taxes paid (652) (1,090)
----------------------------------------------------------------------------
97,530 45,382
Investing activities:
Additions to property, plant and equipment (33,038) (39,830)
Additions to logging roads (18,676) (20,662)
Additions to timber and other intangible
assets (16,531) (319)
Proceeds on disposal of property, plant, and
equipment 2,089 537
Acquisitions (note 4) (120,407) -
Investments and other assets (108) (298)
----------------------------------------------------------------------------
(186,671) (60,572)
Financing activities:
Issuance of share capital, net of share
issue expenses (note 7) 82,358 -
Interest payments (7,142) (5,241)
Debt refinancing costs (1,460) -
Additions to long-term debt (notes 4 and 6) 326,738 82,000
Repayments of long-term debt (note 6) (322,517) (57,000)
----------------------------------------------------------------------------
77,977 19,759
Foreign exchange gain (loss) on cash and cash
equivalents eld in a foreign currency 887 (10)
----------------------------------------------------------------------------
Increase (decrease) in cash (10,277) 4,559
Cash and cash equivalents, beginning of period 14,994 10,435
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,717 $ 14,994
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, 2013 and December 31, 2012 (unaudited)
(thousands of Canadian dollars) Dec. 31, Dec. 31,
2013 2012
----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 6) $ 4,717 $ 14,994
Trade accounts receivable and other 62,735 47,392
Inventories (note 5) 149,509 98,024
Prepayments 11,374 11,749
----------------------------------------------------------------------------
228,335 172,159
Employee future benefits 3,980 878
Other investments and assets 3,960 4,198
Property, plant and equipment 460,930 349,779
Logging roads and bridges 16,224 17,316
Timber licences 84,344 73,796
Other intangible assets 2,420 738
Goodwill 23,715 13,078
Deferred income taxes 218 98
----------------------------------------------------------------------------
$ 824,126 $ 632,040
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Current liabilities:
Trade accounts payable and provisions $ 98,017 $ 70,597
Reforestation liability 11,754 10,864
Income taxes payable 395 593
----------------------------------------------------------------------------
110,166 82,054
Reforestation liability 20,662 17,621
Long term debt (note 6) 145,479 135,046
Employee future benefits 7,006 9,631
Other liabilities and provisions (note 13) 25,676 11,658
Equity:
Share capital (note 7)
Class A subordinate voting shares 428,723 342,285
Class B common shares - 4,080
Contributed surplus 7,476 7,476
Reserves 728 (7,950)
Retained earnings 78,210 30,139
----------------------------------------------------------------------------
515,137 376,030
----------------------------------------------------------------------------
$ 824,126 $ 632,040
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitment (note 13)
Subsequent event (note 14)
See accompanying notes to consolidated financial statements
On behalf of the Board:
L. Sauder, Director
D. Whitehead, Director
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended December 31, 2013 and 2012 (unaudited)
(thousands of Canadian Class A Class B
dollars) Share Share Contributed
Capital Capital Surplus
--------------------------------------------------------------
Balance at December 31,
2011 $ 342,285 $ 4,080 $ 7,476
Net earnings (loss): - - -
Other comprehensive
earnings (loss):
Foreign currency
translation differences,
net of tax - - -
Defined benefit plan
actuarial gains (losses)
(note 3(a)) - - -
Gain in fair value of
interest rate swaps - - -
--------------------------------------------------------------
Balance at December 31,
2012 $ 342,285 $ 4,080 $ 7,476
Net earnings (loss): - - -
Other comprehensive
earnings (loss):
Foreign currency
translation differences,
net of tax - - -
Defined benefit plan
actuarial gains (losses) - - -
Gain in fair value of
interest rate swaps - - -
Reclassification of loss in
fair value of interest
rate swaps to net earnings - - -
Contributions:
Share issuance, net of
share issue expenses (note
7) 82,358 - -
Share exchange (note 7) 4,080 (4,080) -
--------------------------------------------------------------
Balance at December 31,
2013 $ 428,723 $ - $ 7,476
--------------------------------------------------------------
--------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended December 31, 2013 and 2012 (unaudited)
(thousands of Canadian
dollars) Translation Hedging Retained
Reserve Reserve Earnings Total
----------------------------------------------------------------------------
Balance at December 31,
2011 $ (4,929) $ (503) $ 42,413 $ 390,822
Net earnings (loss): - - (9,474) (9,474)
Other comprehensive
earnings (loss):
Foreign currency
translation differences,
net of tax (2,889) - - (2,889)
Defined benefit plan
actuarial gains (losses)
(note 3(a)) - - (2,800) (2,800)
Gain in fair value of
interest rate swaps - 371 - 371
----------------------------------------------------------------------------
Balance at December 31,
2012 $ (7,818) $ (132) $ 30,139 $ 376,030
Net earnings (loss): - - 42,239 42,239
Other comprehensive
earnings (loss):
Foreign currency
translation differences,
net of tax 8,379 - - 8,379
Defined benefit plan
actuarial gains (losses) - - 5,832 5,832
Gain in fair value of
interest rate swaps - 241 - 241
Reclassification of loss in
fair value of interest
rate swaps to net earnings - 58 - 58
Contributions:
Share issuance, net of
share issue expenses (note
7) - - - 82,358
Share exchange (note 7) - - - -
----------------------------------------------------------------------------
Balance at December 31,
2013 $ 561 $ 167 $ 78,210 $ 515,137
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
INTERNATIONAL FOREST PRODUCTS LIMITED
Notes to Unaudited Condensed Consolidated Interim Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars except number of
shares and per share amounts)
Three months and years ended December 31, 2013 and 2012 (unaudited)
1. Nature of operations:
International Forest Products Limited and its subsidiaries (the "Company" or
"Interfor") produce wood products in British Columbia, the U.S. Pacific
Northwest and the U.S. Southeast for sale to markets around the world.
The Company is incorporated under the Business Corporations Act (British
Columbia) with shares listed on the Toronto Stock Exchange. Its head office,
principal address and records office are located at Suite 3500, 1055 Dunsmuir
Street, Vancouver, British Columbia, Canada, V7X 1H7.
The unaudited condensed consolidated interim financial statements of the Company
as at and for the three months and years ended December 31, 2013 and 2012
comprise the Company and its subsidiaries.
2. Basis of preparation:
(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 February 13,
2014.
(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.Employee benefit plan 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, 2012 annual consolidated
financial statements, except for the accounting policy adopted subsequent to
that date, as discussed below.
(a) Changes in accounting policy:
Effective January 1, 2013, 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.
Application of this standard also impacts the calculation of finance costs,
resulting in an increase to Production expense and Finance costs in the
Statement of Earnings, which will be fully offset by an increase (decrease) in
Defined benefit plan actuarial gains (losses) in the Statement of Comprehensive
Income. Prior to this standard, the impact of defined benefit plans on Net
earnings included an interest cost on the obligation using the discount rate
(based on current bond yields), and a credit on the plan assets using the
expected rate of return (based on long term expected bond and equity returns).
Under the new standard, the credit on plan assets no longer recognizes the
equity risk premium and is based on the discount rate only.
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:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As previously
reported Adjustment Restated
----------------------------------------------------------------------------
For the three months ended
December 31, 2012
Statement of Earnings
Production $ 196,037 $ 176 $ 196,213
Finance costs 1,527 22 1,549
Net loss (3,629) (198) (3,827)
Statement of Comprehensive
Income
Defined benefit plan actuarial
gains (losses) 439 198 637
Other comprehensive income
(loss) 2,065 198 2,263
For the year ended December 31,
2012
Statement of Earnings
Production 758,893 651 759,544
Finance costs 6,324 117 6,441
Net loss (8,706) (768) (9,474)
Statement of Comprehensive
Income
Defined benefit plan actuarial
gains (losses) (3,568) 768 (2,800)
Other comprehensive income
(loss) (6,086) 768 (5,318)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
There are no changes to previously issued Statements of Financial Position as a
result of this change in accounting policy.
Effective January 1, 2013, IFRS 13, Fair Value Measurement, replaced the fair
value measurement guidance contained in individual IFRSs with a single source of
fair value measurement guidance and established new requirements for fair value
measurements and disclosures. The new standard is applied prospectively and will
require more extensive disclosure, but has no impact on the Company's financial
information.
(b) New standards and interpretations not yet adopted:
A number of new standards, and amendments to standards and interpretations, are
not yet effective for the year ended December 31, 2013, and have not been
applied in preparing these consolidated financial statements. The following
pronouncement is considered by the Company to be the most significant of several
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.
4. Acquisitions:
On March 1, 2013, the Company concluded the acquisition of Rayonier Inc.'s Wood
Products Business in Georgia, U.S.A. ("U.S. Southeast") for US$84,355,000.
On July 1, 2013, the Company acquired the sawmill operations of Keadle Lumber
Enterprises, Inc. in Thomaston, Georgia for US$39,104,000, of which
US$32,104,000 had been paid as at December 31, 2013. The Company will pay an
additional US$7,000,000, contingent upon receipt of an upgrade to the air permit
which will allow the Company to operate a second shift. Receipt of this approval
is expected in the first quarter, 2014, with the payment to be made 365 days
thereafter.
Transaction costs of $1,077,000 related to the acquisitions have been expensed
in Selling and administration in 2013, all in the first three quarters, 2013.
The purchase price of each of these acquisitions has been allocated to the fair
value of assets acquired and related liabilities arising from the transactions
on a preliminary basis, based on management's best estimates and taking into
account all available information to December 31, 2013. As updated information
is available, further analysis may result in a refinement to the values
attributable to assets and liabilities arising on the acquisition.
These acquisitions have been accounted for using the acquisition method and the
purchase price is allocated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Rayonier Keadle
acquisition acquisition Total
----------------------------------------------------------------------------
Net assets acquired:
Current assets $ 10,730 $ 2,283 $ 13,013
Property, plant and equipment 76,516 28,337 104,853
Goodwill - 10,518 10,518
----------------------------------------------------------------------------
87,246 41,138 128,384
Current liabilities assumed (605) (9) (614)
----------------------------------------------------------------------------
$ 86,641 $ 41,129 $ 127,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash consideration funded by:
Cash on hand $ 7,223 $ - $ 7,223
Operating Line 27,848 - 27,848
Revolving Term Line 51,570 33,766 85,336
Provisions and other
liabilities (note 14) - 7,363 7,363
----------------------------------------------------------------------------
$ 86,641 $ 41,129 $ 127,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Since acquisition, the U.S. Southeast divisions contributed sales of
$121,398,000 and earnings of $14,733,000 to the Company's results. If the
acquisitions had occurred on January 1, 2013, management estimates that Sales
would have been $1,140,751,000 and Net earnings for the period would have been
$48,011,000. In determining these amounts, management has assumed that the fair
value adjustments, determined provisionally, that arose on the acquisition date
would have been the same if the acquisition had occurred on January 1, 2013.
5. Inventories:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Dec. 31, 2013 Dec. 31, 2012
-------------------------------------------------------------------------
Logs $ 89,170 $ 59,772
Lumber 51,449 31,833
Other 8,890 6,419
-------------------------------------------------------------------------
$ 149,509 $ 98,024
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 December 31, 2013 was $7,926,000 (2012 - $7,050,000).
6. Cash and borrowings:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Canadian Senior U.S.
Operating Revolving Secured Operating
December 31, 2013 Line Term Line Notes Line Total
-------------------------------------------------------------------------
Available line of
credit $ 65,000 $ 200,000 $ 53,180 $ 21,272 $ 339,452
Maximum borrowing
available 65,000 200,000 53,180 21,272 339,452
Drawings 936 90,619 53,180 744 145,479
Outstanding
letters of
credit included
in line
utilization 7,529 - - - 7,529
-------------------------------------------------------------------------
Unused portion of
line $ 56,535 $ 109,381 $ - $ 20,528 $ 186,444
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2012
-------------------------------------------------------------------------
Available line of
credit $ 65,000 $ 200,000 $ - $ - $ 265,000
Maximum borrowing
available 65,000 200,000 - - 265,000
Drawings - 135,046 - - 135,046
Outstanding
letters of
credit included
in line
utilization 5,190 - - - 5,190
-------------------------------------------------------------------------
Unused portion of
line $ 59,810 $ 64,954 $ - $ - $ 124,764
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Canadian Operating Line:
The terms and conditions of this line remain unchanged except for a reduction in
pricing.
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 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.
On February 27, 2013, the Company extended the maturity of its existing
Operating Line to February 27, 2017.
(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).
(1)EBITDA represents earnings before interest, taxes, depreciation, depletion
and amortization.
The Revolving Term 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 term 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.
On February 27, 2013, the Company extended the maturity of its Revolving Term
Line to February 27, 2017 and increased the credit available from $200,000,000
to $250,000,000. Subsequent to the issuance of US$50,000,000 of Senior Notes on
June 26, 2013 (see Note 6(c)), the credit available on the Revolving Term Line
was reduced from $250,000,000 to $200,000,000. All other terms and conditions of
this line remained unchanged except for a reduction in pricing.
During the year, the Company drew US$83,000,000 under its Revolving Term Line to
fund its acquisitions in the U.S., which it designated as a hedge against the
Company's investment in its U.S. operations. During the year, the Company repaid
US$28,000,000 of drawings previously designated as hedges. Related cumulative
unrealized foreign exchange losses remain in Foreign currency translation
differences in Other comprehensive income.
As at December 31, 2013, the Revolving Term Line was drawn by US$85,200,000
(2012 - US$30,200,000) revalued at the year-end exchange rate to $90,619,000
(2012 - $30,046,000), being the total drawings under the facility (2012 -
additional drawings of CAD$105,000,000 for total drawings of $135,046,000), and
leaving an unused available line of $109,381,000 (2012 - $64,954,000).
All outstanding US drawings under the Revolving Term Line have been designated
as a hedge against the Company's investment in its U.S. operations and
cumulative unrealized foreign exchange losses of $5,538,000 (2012 - $667,000
gain) arising on revaluation of the Non- Revolving Term Line, and from
translation of US$ borrowings designated as hedges and since repaid, were
recognized in Foreign currency translation differences in Other comprehensive
income.
(c) Senior Secured Notes:
On June 26, 2013, the Company issued US$50,000,000 of Series A Senior Secured
Notes ("Senior Secured Notes"), bearing interest at 4.33%. The notes are 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. Payments of US$16,667,000 are required on each of June 26, 2021 and
2022, with the balance due on June 26, 2023.
As at December 31, 2013, the Senior Secured Notes were revalued at the year-end
exchange rate to $53,180,000. The Senior Secured Notes have been designated as a
hedge against the Company's investment in its U.S. operations and unrealized
foreign exchange losses of $635,000 arising on their revaluation were recognized
in Foreign currency translation differences in Other comprehensive income.
(d) U.S. Operating Line
On May 24, 2013, the Company entered into an agreement with a U.S. lender for a
US$20,000,000 operating line ("U.S. Operating Line"). The U.S. Operating Line is
secured by accounts receivable and inventories of Interfor U.S. Inc., and
matures on April 28, 2015. As at December 31, 2013, the U.S. Operating Line was
drawn by US$700,000 revalued at the year-end exchange rate to $744,000, with
cumulative unrealized foreign exchange losses of $67,000 recognized in Foreign
currency translation differences in Other comprehensive income.
Minimum principal amounts due on long-term debt within the next five years are
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Twelve months ending
December 31, 2014 $ -
December 31, 2015 744
December 31, 2016 -
December 31, 2017 91,555
December 31, 2018 -
----------------------------------------------------------------------------
$ 92,299
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(e) Cash and cash equivalents:
At December 31, 2013, the Company's cash balances are restricted by $168,000 for
contractor holdback payments (2012 - $652,000).
7. Share capital:
The transactions in share capital are described below:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number
-------------------------------------
Class A Class B Total Amount
----------------------------------------------------------------------------
Balance, December 31, 2011
and 2012 54,847,176 1,015,779 55,862,955$ 346,365
Class B shares converted
to Class A 1,015,779 (1,015,779) - -
Share issuance, net of
share issue costs 7,187,500 - 7,187,500 82,358
----------------------------------------------------------------------------
Balance, December 31, 2013 63,050,455 - 63,050,455$ 428,723
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On August 23, 2013, the Company's controlling shareholder, Sauder Industries
Limited ("SIL") exercised its right under the Company's Articles to exchange its
Class "B" Common Shares for Class "A" Subordinate Voting Shares on a share for
share basis without any cash or non-cash consideration. As a result of the
exchange by SIL, all remaining Multiple Voting Shares were automatically
converted to Class "A" Shares.
At December 31, 2013, 1,631,740 Class A shares are reserved for possible future
issuance pursuant to the share option plan.
8. Finance costs:
------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2013 2012 2013 2012
------------------------------------------------------------------------
Interest on borrowing $ (1,784) $ (1,278) $ (7,460) $ (5,221)
Net interest on defined
benefit plans (66) (22) (210) (117)
Reclassification of loss in
fair value of interest rate
swap from Other
comprehensive income 66 - (58) -
Accretion expense (151) (100) (522) (454)
Amortization of deferred
finance costs (162) (149) (819) (649)
------------------------------------------------------------------------
$ (2,097) $ (1,549) $ (9,069) $ (6,441)
------------------------------------------------------------------------
------------------------------------------------------------------------
9. Depreciation, depletion and amortization:
Depreciation, depletion and amortization can be allocated by function as
follows:
------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2013 2012 2013 2012
------------------------------------------------------------------------
Production $ 17,077 $ 14,848 $ 61,300 $ 51,471
Selling and
administration 216 245 967 922
------------------------------------------------------------------------
$ 17,293 $ 15,093 $ 62,267 $ 52,393
------------------------------------------------------------------------
------------------------------------------------------------ ----------
10. Net earnings per share:
------------------------------------------------------------------------
3 Months Dec. 31, 2013 3 Months Dec. 31, 2012
--------------------------- --------------------------------
Weighted Average Weighted Average
Net Number Net Number
earnings of Per earnings of Per
(loss) Shares share (loss) Shares share
------------------------------------------------------------------------
Issued
shares at 63,050 55,863
October 1
------------------------------------------------------------------------
Basic and
diluted
earnings
(loss) per
share $ 11,431 63,050 $ 0.18 $ (3,827) 55,863 $ (0.07)
------------------------------------------------------------------------
------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended Dec. 31, 2013 Year ended Dec. 31, 2012
--------------------------- --------------------------------
Weighted Average Weighted Average
Net Number Net Number
earnings of Per earnings of Per
(loss) Shares share (loss) Shares share
------------------------------------------------------------------------
Issued
shares at
January 1 55,863 55,863
Effect of
shares
issued on
September
30, 2013 1,831 -
------------------------------------------------------------------------
Basic and
diluted
earnings
(loss) per
share $ 42,239 57,694 $ 0.73 $ (9,474) 55,863 $ (0.17)
------------------------------------------------------------------------
------------------------------------------------------------------------
The Company has no dilutive securities.
11. Segmented information:
The Company manages its business as a single operating segment, solid wood. The
Company harvests and purchases logs which are sorted by species, size and
quality and then either manufactured into lumber products at the Company's
sawmills, or sold. Substantially all operations are located in British Columbia,
Canada and the Pacific Northwest and U.S. Southeast, U.S.A.
The Company's sales to both foreign and domestic markets are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2013 2012 2013 2012
----------------------------------------------------------------------------
Canada $ 61,710 $ 51,496 $ 226,989 $ 234,750
United States 162,839 100,511 556,878 365,096
China/Taiwan 38,871 31,712 130,697 103,982
Japan 32,638 28,460 121,548 105,952
Other export 19,260 10,221 69,110 39,416
----------------------------------------------------------------------------
$ 315,318 $ 222,400 $ 1,105,222 $ 849,196
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sales by product line are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2013 2012 2013 2012
----------------------------------------------------------------------------
Lumber $ 249,157 $ 173,344 $ 872,264 $ 631,238
Logs 41,288 24,515 136,633 113,902
Wood chips and other by
products 19,954 15,849 72,418 69,376
Ocean freight and other 4,919 8,692 23,907 34,680
----------------------------------------------------------------------------
$ 315,318 $ 222,400 $ 1,105,222 $ 849,196
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. Financial instruments:
At December 31, 2013, the fair value of the Company's long-term debt and bank
indebtedness approximated its carrying value of $145,479,000 (2012 -
$135,046,000). The fair values of other financial instruments approximate their
carrying values due to their short-term nature.
As at December 31, 2013, the Company has outstanding foreign currency forward
contract obligations to sell a maximum of US$8,000,000 at an average rate of
CAD$1.0653 to the US$1.00 and yen 145,425,000 at an average rate of yen 96.95 to
the US$1.00 during 2014. All foreign currency gains or losses to December 31,
2013 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
$136,000 (measured based on Level 2 of the fair value hierarchy), has been
recorded in Trade accounts receivable and other (December 31, 2012 - $134,000
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. These
interest rate swaps were unwound on October 22, 2013.
On March 25, 2013, the Company entered into two additional interest rate swaps,
each with notional value of US$25,000,000 and maturing February 17, 2017. Under
the terms of these additional swaps the Company pays an amount based on a fixed
annual interest rate of 0.84% and receives a 90 day LIBOR 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 swaps have been designated as cash flow
hedges, the fair value of these interest rate swaps at December 31, 2013, being
an asset of $166,000 (measured based on Level 2 of the fair value hierarchy),
has been recorded in Trade accounts receivable and other (December 31, 2012 -
$133,000 liability recorded in Trade accounts payable and provisions measured
based on Level 2 of the fair value hierarchy) and a gain of $241,000 (December
31, 2012 - $371,000 gain) has been recognized in Other comprehensive income for
the year ending December 31, 2013.
To manage price risk, the Company also traded lumber futures which were
designated as held for trading with changes in fair value recorded in Other
income in Net earnings. At December 31, 2013 there were no outstanding lumber
futures contracts and a gain of $118,000 was recognized in Other income on
completed contracts for the year ended December 31, 2013 (December 31, 2012 -
$25,000 gain).
Lumber futures are traded through a well established financial services firm
with a long history of providing trading, exchange and clearing services for
commodities and foreign currencies. As trading activities are closely monitored
by senior management and restricted including a maximum number of outstanding
contracts at any point in time the risk of credit loss on these instruments is
considered low.
13. Commitment:
On acquisition of the Thomaston sawmill operations from Keadle Lumber
Enterprises, Inc., the Company agreed to pay an additional US$7,000,000,
contingent upon receipt of an upgrade to the air permit which will allow the
Company to operate a second shift. Receipt of this approval is expected in the
first quarter, 2014, with the payment to be made 365 days thereafter. The
liability, revalued at the year-end foreign exchange rate to $7,445,000, is
included in Other liabilities and provisions in the Statement of Financial
Position as at December 31, 2013.
14. Subsequent event:
On February 8, 2014, the Company entered into a share purchase agreement (the
"Purchase Agreement") with Ilim Timber Continental, S.A. ("ITC") to acquire all
of the outstanding common shares of Tolleson Ilim Lumber Company for
consideration comprised of US$129,900,000 in cash and retained liabilities and
3,680,000 common shares of the Company. The Tolleson operations include two
sawmills in Perry and Preston, Georgia, with a combined annual lumber production
capacity of more than 400 million board feet plus a remanufacturing facility in
Perry, Georgia.
The Company also entered into a non-competition agreement (the "Non-Competition
Agreement") with ITC, which is subject to completion of the Purchase Agreement.
Under terms of the Non-Competition Agreement, ITC and its affiliates would be
prohibited from carrying on various activities within Canada and the U.S. that
would be in competition with the Company's operating activities. The
Non-Competition Agreement expires five years from the closing date of the
Purchase Agreement.
This acquisition remains subject to various closing conditions, including
regulatory approval, and is anticipated to close in the first quarter of 2014.
The acquisition will be financed in part from Interfor's existing credit
facilities, to be amended as described below, and is expected to be accretive to
net earnings immediately.
In conjunction with the Purchase Agreement, the Company has secured commitments
from its lenders to increase the credit available under its Revolving Term Line
from $200,000,000 to $250,000,000, without change to other terms and conditions.
ADDITIONAL INFORMATION
Additional information relating to the Company and its operations can be found
on its website at www.interfor.com and in the Annual Information Form filed on
SEDAR at www.sedar.com.
FOR FURTHER INFORMATION PLEASE CONTACT:
International Forest Products Limited
John A. Horning
Senior Vice President and Chief Financial Officer
(604) 689-6829
www.interfor.com
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