INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX:IFP.A)
reported a net loss of $1.7 million or $0.04 per share in the first quarter of
2011. Included in the Company's accounts for the quarter was the effect of
unrecognized tax assets of $0.3 million and other one- time items of $0.9
million.
Excluding these items, Interfor recorded a net loss of $0.5 million or $0.01 per
share compared to net income of $0.5 million or $0.01 per share in the
immediately preceding quarter and a loss of $2.2 million or $0.05 per share in
the first quarter of 2010.
Also included in the Company's accounts in the first quarter was a provision for
long-term compensation expense of $3.5 million or $0.07 per share compared with
provisions of $2.4 million ($0.05 per share) in the fourth quarter and $89,000
($0.00 per share) in the first quarter of 2010.
EBITDA for the quarter (adjusted to exclude one-time items and "other income"
but after deducting the long-term compensation expense) was $12.7 million, down
$1.8 million from the fourth quarter but up $2.7 million versus the first
quarter of 2010.
Lumber production in the first quarter was 332 million board feet, up 10% versus
the fourth quarter, while sales volumes were off 2% to 313 million board feet.
Shipping delays caused by a lack of rail cars and trucks and other logistics
issues were the primary reason for the drop in shipments.
Sales to China were off 5% quarter-over-quarter due to the above-noted
transportation and logistics issues, but still accounted for 28% of the
Company's non-wholesale shipments.
In the quarter, SPF 2X4 in the North American market was US$296, up US$27 versus
the fourth quarter and Hem-Fir studs were up US$48 to US$324 as momentum built
in the last months of 2010 carried over to the first two and a half months of
the first quarter. Higher product prices helped offset the impact of the rising
C$ which increased 2.6% quarter-over-quarter.
The compression of price spreads between higher grade products and standard
framing lumber which further impacted mill level returns in the first quarter.
Traditional products in Japan were flat quarter-over-quarter while Cedar prices
were mixed with downward pressure on the price of high grade clears and some
knotty lines.
Interfor's results in the first quarter were further impacted by upward pressure
on log costs, particularly in the U.S. Pacific Northwest.
In the quarter, Interfor generated $13.0 million in cash from operations before
working capital was considered, up $2.4 million versus the immediately preceding
quarter. After changes in working capital, the Company generated net cash of
$3.9 million, down $1.5 million quarter-over-quarter.
Net debt closed the quarter at $147 million or 30% of invested capital.
Business conditions have deteriorated since the end of the first quarter as
housing activity in the U.S. continues to languish and container availability
limits shipments to offshore markets. Benchmark prices have fallen US$70 - $75
from the levels achieved in early March, with additional discounts being offered
by some suppliers looking to move large blocks. Mill returns in Canada continue
to be impacted by the strong C$.
On March 18, Interfor agreed to a bought deal equity issue with a group of
underwriters led by Scotia Capital Inc. and RBC Capital Markets. The
transaction, which closed on April 8, resulted in the issuance of 8,222,500
Class A Subordinate voting shares at a price of $7 per share for gross proceeds
to Interfor of $57,558,000. The Company filed a short form prospectus in each of
the Provinces of Canada on March 31 in connection with the offering. The closing
of the offering included the exercise in full of the over-allocation option
granted to the underwriters of 1,072,500 shares.
On a proforma basis the equity issue will reduce the Company's ratio of net debt
to invested capital to less than 20% and position the Company to move forward
with a number of higher return capital projects and other strategic
opportunities which may arise.
FORWARD-LOOKING STATEMENTS
This release contains information and statements that are forward-looking in
nature, including, but not limited to, statements containing the words "will"
and "is expected" and similar expressions. Such statements involve known and
unknown risks and uncertainties that may cause Interfor's actual results to be
materially different from those expressed or implied by those forward-looking
statements. Such risks and uncertainties include, among others: general economic
and business conditions, product selling prices, raw material and operating
costs, changes in foreign-currency exchange rates, and other factors referenced
herein and in Interfor's 2010 Annual Report and Management Information Circular
available on www.sedar.com. The forward-looking information and statements
contained in this report are based on Interfor's current expectations and
beliefs. Readers are cautioned not to place undue reliance on forward-looking
information or statements. Interfor undertakes no obligation to update such
forward-looking information or statements, except where required by law.
ABOUT INTERFOR
Interfor is one of the Pacific Northwest's largest producers of quality wood
products. The Company has operations in British Columbia, Washington and Oregon,
including two sawmills in the Coastal region of British Columbia, three in the
B.C. Interior, 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 Wednesday, May 18, 2011 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, 2011 Financial Results.
The dial-in number is 1-866-323-8540. The conference call will also be recorded
for those unable to join in for the live discussion, and will be available until
June 1, 2011. The number to call is 1-866-245-6755 Passcode 199356.
International Forest Products Limited
First Quarter Report
For the three months ended March 31, 2011
Management's Discussion and Analysis
Dated as of May 17, 2011
This Management's Discussion and Analysis ("MD&A") provides a review of
Interfor's financial performance for the three months ended March 31, 2011
relative to 2010, the Company's financial condition and future prospects. The
MD&A should be read in conjunction with the interim Condensed Consolidated
Financial Statements for the three months ended March 31, 2011 and 2010, and
Interfor's Annual Information Form, Consolidated Financial Statements and Annual
MD&A for the years ended December 31, 2010 and 2009 filed on SEDAR at
www.sedar.com. The financial information contained in this MD&A has been
prepared in accordance with IAS 34 Interim Financial Reporting and International
Financial Reporting Standards ("IFRS") except as noted herein. In this MD&A,
reference is made to EBITDA and Adjusted EBITDA. EBITDA represents earnings
before finance costs, taxes, depreciation, depletion, amortization,
restructuring costs, other foreign exchange gains and losses, and write-downs of
property, plant, equipment ("asset write-downs"). Adjusted EBITDA represents
EBITDA adjusted for other income (expense) and other income of an associate
company. The Company discloses EBITDA as it is a measure used by analysts and
Interfor's management to evaluate the Company's performance. As EBITDA is not a
defined term under IFRS, it may not be comparable to EBITDA calculated by
others. In addition, as EBITDA is not a substitute for net earnings, readers
should consider net earnings in evaluating the Company's performance.
Unless otherwise noted, all financial references in this MD&A are in Canadian
dollars.
References in this MD&A to "Interfor" and the "Company" mean International
Forest Products Limited, together with its subsidiaries.
Forward-Looking Statements
This report contains forward-looking statements. Forward-looking statements are
statements that address or discuss activities, events or developments that the
Company expects or anticipates may occur in the future. Forward-looking
statements are included in the description of areas which are likely to be
impacted by the description of future cash flows and liquidity under the
headings "Overview", "Income Taxes" and "Cash Flow and Financing Activities";
changes in accounting policy under the heading "Accounting Policy Changes"; and
in the description of economic conditions under the heading "Outlook". These
forward-looking statements reflect management's current expectations and beliefs
and are based on certain assumptions including assumptions as to general
business and economic conditions in the U.S. and Canada, as well as other
factors management believes are appropriate in the circumstances including,
among others: product selling prices, raw material and operating costs, changes
in foreign currency exchange rates, and other factors referenced herein. Such
forward-looking statements are subject to risks and uncertainties and no
assurance can be given that any of the events anticipated by such statements
will occur or, if they do occur, what benefit the Company will derive from them.
A number of factors could cause actual results, performance or developments to
differ materially from those expressed or implied by such forward-looking
statements, including those matters described herein and in Interfor's current
Annual Information Form available on www.sedar.com. Accordingly, readers should
exercise caution in relying upon forward-looking statements and the Company
undertakes no obligation to publicly revise them to reflect subsequent events or
circumstance, except as required by law.
Review of Operating Results
Overview
The Company recorded a net loss of $1.7 million, or $0.04 per share for the
first quarter of 2011 as compared to a net loss of $3.8 million, or $0.08 per
share for the first quarter of 2010. EBITDA and Adjusted EBITDA for the first
quarter of 2011 improved to $12.8 million and $12.7 million, compared to $10.0
million for both for the same quarter of 2010.
Before restructuring costs, foreign exchange gains (losses), other one-time
items and the effect of unrecognized tax assets, the Company's net loss for the
first quarter of 2011 amounted to $0.5 million or $0.01 per share as compared to
a net loss of $2.2 million, or $0.05 per share for the first quarter of 2010.
Share-based incentive compensation totalled $3.5 million or $0.07 per share in
the first quarter, 2011 as compared to $0.1 million with a negligible impact on
per share amounts for the same quarter, 2010.
The first quarter of 2011 continued to be affected by slow North American lumber
demand as the U.S. housing starts remained sluggish due to ongoing high
unemployment, foreclosures and an ongoing oversupply of homes in the U.S.
Seasonally adjusted U.S. housing starts declined to 549,000 units in March 2011,
13.4% lower than the March 2010 pace when homebuyer tax credits were still
available. In addition, severe weather conditions through the Northeastern and
Midwestern U.S. hampered transportation resulting in lower sales volumes through
the quarter.
However, increased demand from Asia, particularly China has helped to offset the
reduced demand in North America and the increased sales to those markets helped
to keep product prices at reasonable levels through the first quarter, 2011.
Cedar shipments have also been impacted by weather related issues and seasonal
demand. Slow markets and a tight log supply resulted in some production
curtailments during the first quarter, 2011.
Results quarter-over-quarter have also been impacted by the further strengthened
Canadian dollar which, relative to its U.S. counterpart appreciated by over five
percent on average for the first quarter, 2011 compared to the same period of
2010.
On April 8, 2011 the Company closed a public offering of 8,222,500 Class A
Subordinate Voting shares at a price of $7.00 per share for gross proceeds of
$57.6 million. The closing of the Offering included the exercise in full of the
overallotment option of 1,072,500 shares by the Underwriters. For full details
of the Offering see the short form prospectus filed on March 31, 2011 on
www.sedar.com.
The Company's results are now being prepared in accordance with International
Financial Accounting Standards ("IFRS"). Several of the Company's accounting
policies have changed and the presentation, financial statement captions and
terminology used in this discussion and the accompanying unaudited financial
statements may differ from that used in previously issued financial statements
and quarterly and annual reports. The new policies have been consistently
applied to all of the quarters presented and comparative information has been
restated or reclassified unless otherwise noted. Further details on the
conversion to IFRS are provided under "Accounting Policy Changes" and in the
notes to the condensed consolidated unaudited financial statements as at and for
the quarter ended March 31, 2011.
Sales
Lumber shipments totalled 313 million board feet for the first quarter, 2011, up
almost 20% over the same quarter, 2010 with the addition of production from the
Castlegar sawmill and higher operating rates at the Company's U.S. mills.
Shipments were challenged by weather-related logistical issues during the first
quarter, 2011 as well as delays associated with railcar, truck and container
availability, particularly in the B.C. Interior.
Excluding wholesale programs, shipments to China more than doubled as compared
to the first quarter, 2010 driving the majority of the growth in lumber sales
volume this quarter. North American markets remained stagnant in terms of total
sales volumes, quarter-over-quarter, but declined to 64% of total lumber
shipments in the first quarter, 2011 from 74% of shipments in the first quarter,
2010.
Unit lumber sales values increased by $15 per mfbm, or 3.7%, for the first
quarter, 2011 reflecting improved North American structural lumber product
prices relative to the same period in 2010. This more than offset the impact of
a change in sales mix away from higher value cedar products and a decline in
cedar prices quarter-over-quarter. Sales returns were also negatively impacted
by a stronger Canadian dollar.
Pulp chip and other by-product revenues for the first quarter of 2011 at $16.4
million were up 24.8% compared to the first quarter of 2010, coinciding with an
increase in sales volumes reflecting higher sawmill operating rates. Average
chip prices were virtually unchanged, quarter-over-quarter as increased prices
in the U.S. were offset by the stronger Canadian dollar on translation.
Compared to the same period, 2010, there was an improvement of $3.4 million or
almost 20% in log sales in the first quarter, 2011. Canadian operations, which
generate the bulk of log sales, showed an increase of 26.3% in volumes over the
same quarter, 2010, primarily as a result of the considerable increase in
logging activity in the B.C. Interior. On the B.C. Coast, a threefold increase
in export log sales volume offset a reduction in domestic sales by the same
amount. This is reflected as well in the average sale price for log sales in
B.C. which decreased by $3 per cubic metre to $61 per cubic metre with a shift
in sales mix towards smaller, lower value logs in the B.C. Interior, partially
offset by realizations on higher value export logs.
Operating Costs
Production costs for the first quarter of 2011 increased $30.9 million, or 24.7%
compared to the same period in 2010.
Overall lumber production increased by 73.4 million board feet, or 28.4% in the
first quarter, 2011 as compared to the same period of 2010. This was driven by
increased operating rates in the U.S. Pacific Northwest and B.C. Interior
divisions, particularly the Castlegar sawmill, which had been curtailed in the
first quarter, 2010 and operated throughout the first quarter, 2011. Lumber
production on the B.C. Coast was impeded by the availability of fibre supply as
a result of reduced logging activity on the B.C. Coast due in part to access
issues caused by the storm damage in late 2010.
Compared to the same period in 2010, B.C. log production grew by 25.9% to
815,600 cubic metres from 648,000 cubic metres. Significant logging activity in
the B.C. Interior resulting from seasonal logging and increased fibre demands to
meet increased operating rates more than offset storm related reductions in
logging activity on the B.C. Coast.
Unit cash conversion costs declined on average by 7.0%, quarter-over-quarter as
compared to 2010. Increased per unit conversion costs resulting from reduced
activity on the B.C. Coast were offset by improved unit costs in the U.S.
sawmills as their increased production volumes in the U.S. sawmills drove down
the Company's per unit cost of conversion. Unit costs for the U.S. sawmills were
further improved by a stronger Canadian dollar on average for the first quarter,
2011 as compared to the same quarter in 2010.
As a result of strong export markets for logs in the U.S. Pacific Northwest,
fibre supply remains tight and 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 mitigated in part
by the stronger Canadian dollar.
The Company recorded 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 claim for
property damage is not yet finalized as total costs are yet to be determined.
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 $0.5 million, or 29.3% greater than the first quarter,
2010. As prices in both years were low enough to attract the maximum rate of 15%
tax, the increase in the dollar amount of export taxes corresponds with a 33.7%
increase in Canadian shipment volumes to the U.S.
A 68.3% increase in export sales volumes necessitated expansion of export sales
administration, resulting in a $0.8 million increase in selling and
administrative costs for the first quarter of 2011 compared to the first quarter
of 2010.
Long-term incentive compensation ("LTIC") expense, which reflects changes in the
estimated fair value of the share-based compensation plans was an expense of
$3.5 million for the first quarter of 2011 (Quarter 1, 2010 - $0.1 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 most significant contributor to
the increased fair value of the LTIC liability quarter-over-quarter is the rise
in the Company's share price.
First quarter, 2011, depreciation of plant and equipment at $7.3 million was
12.3% higher than the corresponding quarter in 2010, due to the impact of higher
operating rates primarily at the B.C. Interior and the U.S. Pacific Northwest
sawmills.
Road amortization and depletion expense for the first quarter of 2011 decreased
$0.2 million vis-a-vis the same quarter of 2010, with significantly less logging
activity on the B.C. Coast due to the lack of access to logging areas as a
result of damage from severe storms which occurred in the fall of 2010.
Restructuring costs of $0.8 million resulted from the buyout of a logging
contractor's Bill 13 entitlements and severance costs related to early
retirement of hourly workers in the first quarter of 2011. Restructuring costs
were negligible in the first quarter of 2010.
Finance Costs, Other Foreign Exchange Gain (loss), Other Income (Expense)
Despite an overall increase in average debt levels, first quarter, 2011,
interest expense decreased by $0.2 million compared to the first quarter of 2010
arising from a decrease in the Company's overall lending rates and the impact of
a stronger Canadian dollar on interest on U.S. denominated debt.
Under IFRS finance costs also include accretion expense on decommissioning
liabilities and amortization of prepaid financing costs. Prior year figures have
been retroactively restated to conform to this presentation.
Other foreign exchange gains (losses) and Other income (expense) were negligible
for both quarters.
Equity income at $1.4 million for the first quarter, 2010 represented equity
participation in the earnings of the Seaboard General Partnership ("SGP"). On
January 5, 2011 all other partners in the partnership withdrew. The SGP was
wound-up on January 7, 2011 and continues operations as Seaboard Shipping
Company Limited ("Seaboard") which became a wholly owned subsidiary of Interfor.
Seaboard's accounts are included in the consolidated financial statements of the
Company from the date of change in control.
Income Taxes
In the first quarter of 2011, the Company recorded an income tax recovery of
$0.4 million (Quarter 1, 2010 - $0.2 million expense) which excludes the benefit
of $0.3 million of certain deferred income tax assets arising from loss
carry-forwards available to reduce future taxable income which were not
recognized (Quarter 1, 2010 - $1.6 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 $13.0 million in the first quarter, 2011 compared
with $10.1 million a year ago. The increase in cash flow quarter-over-quarter
was due to higher overall sales values and volumes, particularly in the B.C.
Interior operations.
Upon conversion to IFRS, we now include interest payments in financing
activities rather than operating activities in the Company's cash flow
statement. Prior period figures have been retroactively restated to reflect this
reclassification.
Including changes in non-cash working capital items resulted in cash generated
from operations of $3.9 million for the first quarter of 2011, compared to cash
generated of $11.7 million for the first quarter of 2010. 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.
Capital expenditures for the first quarter of 2011 totalled $8.0 million
(Quarter 1, 2010 - $19.7 million) with $2.2 million spent on high-return
discretionary projects, $2.0 million on business maintenance expenditures and
$3.8 million on road construction. These expenditures were funded by net
drawings of $7.0 million on the Company's Revolving Term Line during the first
quarter, 2011. Capital expenditures in the first quarter, 2010 include the
acquisition of a timber tenure in the Kamloops region and were funded through
net drawings of $18.3 million on the Revolving Term Line.
On January 3, 2011 the SGP declared an income distribution to its partners.
Interfor's share was $15.7 million and was paid to the Company by way of setoff
against the promissory note payable to the SGP. On January 5, 2011 by virtue of
the withdrawal of all other partners in the SGP, Interfor acquired control of
its net assets. Cash generated from investments includes cash received on
acquisition of the SGM 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, 2011, the Revolving Term Line was drawn by US$30.2 million
(revalued at the quarter-end exchange rate to $29.3 million) and $133.0 million
for total drawings of $162.3 million, leaving an unused available line of $37.7
million. The Company's Operating Line of $65 million had no borrowings other
than outstanding letters of credit of $4.9 million, leaving an unused available
line of $60.1 million. Including cash of $14.9 million and Seaboard's unutilized
lines, the Company had available resources of $114.1 million as at March 31,
2011.
These resources, together with cash generated from operations, will be used to
support our working capital requirements, debt servicing commitments, and any
capital expenditures.
In addition, on April 8, 2011 the Company closed a public offering of 8,222,500
Class A Subordinate Voting shares at a price of $7.00 per share for gross
proceeds of $57.6 million. The closing of the Offering included the exercise in
full of the overallotment option of 1,072,500 shares by the Underwriters. For
full details of the Offering see the short form prospectus filed on March 31,
2011 on www.sedar.com.
Despite some signs of improvement in global market conditions, Interfor
continues to monitor discretionary capital expenditures carefully. Based on
current pricing and cash flow projections and existing credit lines the Company
believes it has sufficient resources to meet all of its financial obligations.
At March 31, 2011, the Company had cash of $14.9 million. After deducting the
Company's drawings under its Revolving Term Line, the Company ended the quarter
with net debt of $147.4 million or 29.9% of invested capital. After completion
of the share offering net debt over invested capital improved to approximately
20%.
Selected Quarterly Financial Information(1)
---------------------------------------- ----------------------
International Financial
Quarterly Reporting Standards Previous Canadian GAAP
Earnings ---------------------------------------- ----------------------
Summary 2011 2010 2009(2)
---------------------------------------- ----------------------
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
---------------------------------------- ----------------------
(millions of dollars except share and per share amounts)
Sales
- Lumber 132.5 137.5 113.1 123.7 107.6 93.1 76.8 62.3
- Logs 20.8 20.6 21.9 19.8 17.4 17.3 17.3 13.0
- Wood chips
and other
by-
products 16.4 15.7 14.0 13.3 13.2 12.2 8.9 5.9
- Ocean
freight
and
other(6) 10.0 2.4 2.4 1.0 1.7 2.9 2.2 0.6
---------------------------------------- ----------------------
Total Sales 179.7 176.3 151.5 157.9 139.9 125.5 105.2 81.8
---------------------------------------- ----------------------
Operating
earnings
(loss)
before
restructuring
costs 1.0 1.5 (2.0) (0.9) (2.4) (7.8) (7.0) (16.4)
Operating
earnings
(loss) 0.2 1.5 (2.5) (2.0) (2.5) (7.8) (10.4) (16.3)
Net earnings
(loss) (1.7) 0.8 1.4 (3.5) (3.8) (5.0) 9.7 (15.0)
Net earnings
(loss) per
share -
basic and
diluted (0.04) 0.02 0.03 (0.07) (0.08) (0.11) 0.21 (0.32)
EBITDA(7) 12.8 14.6 15.3 13.7 10.0 6.3 25.3 (7.3)
Adjusted
EBITDA(7) 12.7 14.5 10.6 13.3 10.0 5.7 3.6 (7.3)
Cash flow
from
operations
per
share(3) 0.27 0.22 0.18 0.25 0.21 0.06 (0.07) (0.23)
Shares
outstanding
- end of
period
(millions)
(4) 47.5 47.4 47.1 47.1 47.1 47.1 47.1 47.1
- weighted
average
(millions) 47.4 47.2 47.1 47.1 47.1 47.1 47.1 47.1
Average
foreign
exchange
rate per
US$1.00(5) 0.9856 1.0131 1.0395 1.0283 1.0401 1.0571 1.0980 1.1669
Closing
foreign
exchange
rate per
US$1.00(5) 0.9696 0.9946 1.0290 1.0646 1.0158 1.0510 1.0707 1.1630
(1) Tables may not add due to rounding.
(2) Quarters are not restated for conversion to IFRS.
(3) Cash generated from operations before taking account of changes in
operating working capital.
(4) As at May 17, 2011, the number of shares outstanding by class are:
Class A Subordinate Voting shares - 54,847,176; Class B Common
shares - 1,015,779; Total - 55,862,955.
(5) Accounting quarter-end dates may differ slightly from the reporting
date. As such, the foreign exchange rate used to revalue quarter-end
balances may differ from those calculated using the Bank of Canada
closing foreign exchange rate per US$1.00.
(6) Other revenues include ocean freight revenues of Seaboard which are
included in the consolidated results from the date of change in control
on January 5, 2011. The Company's share of Seaboard results were
previously recognized in equity income.
(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(4) :
------------------------------------ ----------------------
International Financial
Reporting Standards Previous Canadian GAAP
------------------------------------ ----------------------
2011 2010 2009(3)
------------------------------------ ----------------------
Q1 Q4 Q3 Q2 Q1 Q4(3) Q3(3) Q2(3)
------------------------------------ ----------------------
(millions of dollars)
Net earnings
(loss) (1.7) 0.8 1.4 (3.5) (3.8) (5.0) 9.7 (15.0)
Add:
Income taxes
(recovery) (0.4) (0.5) (0.2) 1.0 0.2 (3.3) 0.1 (3.6)
Finance costs 2.3 2.5 2.6 2.8 2.6 2.0 2.2 2.0
Depreciation,
depletion and
amortization 11.7 11.7 11.0 12.3 11.1 12.5 9.9 9.5
Other foreign
exchange
(gains)
losses 0.1 0.2 0.1 0.1 - 0.1 - (0.1)
Restructuring
costs, asset
write-downs
and other 0.8 - 0.5 1.1 - 0.1 3.3 (0.1)
------------------------------------ ----------------------
EBITDA 12.8 14.6 15.3 13.7 10.0 6.3 25.3 (7.3)
Deduct:
Other income
(expense) - (0.3) (0.1) 0.4 - 0.6 21.7 -
Other income
of associate
company - 0.4 4.8 - - - - -
------------------------------------ ----------------------
Adjusted EBITDA 12.7 14.5 10.6 13.3 10.0 5.7 3.6 (7.3)
------------------------------------ ----------------------
Volume and Price Statistics 2011 2010 2009
------------------------- --------------
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
------------------------- --------------
Lumber
sales (million fbm) 313 321 277 270 264 234 181 131
Lumber
production (million fbm) 332 303 272 277 258 245 180 115
Log (thousand
sales(1) cubic metres) 301 292 289 262 239 261 242 216
Log (thousand
production(1) cubic metres) 816 794 595 624 648 533 378 312
Average selling
price
- lumber(2) ($/thousand fbm) $423 $428 $408 $459 $408 $398 $424 $477
Average selling
price
- logs(1) ($/cubic metre) $ 61 $ 64 $ 73 $ 68 $ 64 $ 62 $ 69 $ 56
Average selling
price
- pulp chips ($/thousand fbm) $ 40 $ 42 $ 40 $ 37 $ 40 $ 39 $ 38 $ 40
(1) B.C. operations
(2) Gross sales before export taxes
(3) Quarters are not restated for conversion to IFRS
(4) Tables may not add due to rounding
Quarterly trends normally reflect the seasonality of the Company's operations.
Logging operations are seasonal due to a number of factors including weather,
ground conditions and fire season woods closures. Generally, the Company's
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 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.
The impact of the global recession in late 2008 on overall demand and poor
lumber sales realizations increased the operating losses through the third
quarter, 2009. Operating rates increased in the fourth quarter of 2009 and first
quarter, 2010, as lumber prices rose in response to increased North American
demand and a temporary supply/demand imbalance. During the same period off-shore
demand increased, particularly from China which continued through the remaining
quarters of 2010 and the first quarter, 2011.
The volatility of the Canadian dollar also impacted results, given that
historically over 75% of the Canadian operation's sales are to export markets
and priced in $US. A strong Canadian dollar reduces the lumber sales
realizations in Canada, but reduces the impact of losses in U.S. operations when
converted to Canadian dollars. No deferred tax assets arising from loss
carry-forwards were recognized during 2010 or 2011. The third quarter of 2009
includes an after-tax gain of $19.0 million from the sale of the former
Queensboro sawmill site.
In the first quarter, 2011 the Company acquired complete control of SGP. SGP was
wound up on early January, 2011 but continued operations as Seaboard and its
accounts were consolidated from the date of change in control on January 5,
2011. Other sales revenues include the freight revenues of Seaboard.
Softwood Lumber Agreement Arbitration
On October 8, 2010, the U.S. Trade Representative's office filed a request for
consultations with Canada under the terms of the Softwood Lumber Agreement
("SLA") over its concern that the province of British Columbia is charging too
low a price for certain grades of timber harvested on public lands in the B.C.
Interior.
Under the terms of the SLA, consultations between the two governments were held
but the matter was not resolved and on January 18, 2011 the U.S. Trade
Representative filed for arbitration. The arbitration will be conducted by the
London Court of International Arbitration ("LCIA"). Decisions by the LCIA are
final and binding on both parties. The Company believes that B.C. and Canada are
complying with their obligations under the SLA.
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, 2011.
Accounting Policy Changes
Adoption of International Financial Reporting Standards
Effective January 1, 2011 Canadian publicly listed entities were required to
prepare their financial statements in accordance with IFRS. Due to the
requirement to present comparative financial information, the effective
transition date was January 1, 2010. The Company's first reporting period under
IFRS is the quarter ended March 31, 2011.
While IFRS uses a conceptual framework similar to Canadian Generally Accepted
Accounting Principles ("GAAP"), there are significant differences on
recognition, measurement, and disclosures. The Company identified a number of
key areas impacted by changes in accounting policies, including: property,
plant, and equipment; impairment of assets; provisions, including reforestation
liabilities and other decommissioning obligations; share-based payments;
employee future benefits; and deferred income taxes.
Note 19 to the consolidated interim financial statements provides more detail on
key Canadian GAAP to IFRS differences, accounting policy decisions and IFRS 1,
First-Time Adoption of International Financial Reporting Standards optional
exemptions for significant or potentially significant areas that have had an
impact on Interfor's financial statements on transition to IFRS or may have an
impact in future periods.
IFRS Transitional Impact on Equity
As a result of the policy choices selected and changes required under IFRS,
Interfor has recorded an increase in equity of $3.4 million as at the date of
transition, January 1, 2010. The table below outlines adjustments to equity on
adoption of IFRS on January 1, 2010, and at March 31, 2010 and December 31, 2010
for comparative purposes(1):
January 1 March 31 December 31
2010 2010 2010
----------------------------------------------------------------------------
(millions of dollars)
Equity under Canadian GAAP $ 358.0 $ 349.6 $ 347.3
Transition election to fair
value property 15.7 15.7 15.7
Employee future benefits (6.9) (7.8) (9.0)
Decommissioning liabilities (2.8) (3.0) (3.3)
Share based compensation (2.1) (1.7) (2.2)
Equity participation in
associate's income (0.9) (1.2) (1.1)
Deferred income taxes 0.3 - -
----------------------------------------------------------------------------
Total IFRS adjustments to
equity 3.4 2.0 0.2
----------------------------------------------------------------------------
Equity under IFRS $ 361.4 $ 351.6 $ 347.5
----------------------------------------------------------------------------
(1) Table may not add due to rounding
IFRS Impact on Comprehensive Income
The following is a summary of the adjustments to Comprehensive Income for the
three months ended March 31, 2010 and the year ended December 31, 2010 under
IFRS:(1)
Three months ended Year ended
March 31, 2010 December 31, 2010
----------------------------------------------------------------------------
(millions of dollars)
Comprehensive income (loss) under
Canadian GAAP $ (8.4) $ (11.6)
Profit adjustments
Employee future benefits - 0.4
Decommissioning liabilities (0.2) (0.5)
Share based compensation 0.3 (0.1)
Equity participation in
associate's income(2) - -
Plant and equipment(2) - -
Deferred income taxes (0.6) (0.9)
----------------------------------------------------------------------------
Total IFRS adjustments to net
earnings (0.4) (1.3)
----------------------------------------------------------------------------
Other comprehensive income
adjustments
Employee future benefits -
actuarial gains (losses) (1.0) (2.5)
Equity participation in
associate's employee future
benefits - actuarial gains (0.3) (0.1)
(losses)
Deferred income taxes 0.2 0.6
----------------------------------------------------------------------------
Total other comprehensive income
adjustments (1.0) (2.0)
----------------------------------------------------------------------------
Comprehensive income (loss) under
IFRS $ (9.9) $ (14.8)
----------------------------------------------------------------------------
(1) Table may not add due to rounding
(2) Due to rounding, amount appears to have no impact
IFRS Impact on Cash Flow Statement
The only impact of IFRS on the Statement of Cash Flows is in the presentation of
cash interest paid as a financing activity. Under previous Canadian GAAP, cash
interest paid was included as an operating activity.
As a result, this presentation change will increase the cash flows from
operating activities and reduce cash flows from financing activities in future
periods by the equivalent amount. For the three months ended March 31, 2010
operating cash flows increased by $2.5 million compared to Canadian GAAP, with
cash flow from financing activities reduced by the same amount. There is no
impact on cash and cash equivalents as a result of this presentation change.
IFRS Impact on Financial Statement Presentation
The transition to IFRS has resulted in numerous presentation changes in the
financial statements. The significant changes are summarized as follows:
-- Other intangible assets include software licences. These licences were
previously included in Property, plant and equipment;
-- The Statement of Financial Position will present additional disclosure
of balances separately including employee future benefits assets and
provisions and the investment in associate company;
-- Finance costs includes interest on debt, accretion expense for
decommissioning provisions, and amortization of prepaid financing costs.
Accretion was previously included in Production costs. Amortization of
prepaid financing costs was previously included in Depletion and
amortization of timber, roads and other; and
-- Interest paid will be presented as a financing activity in the Statement
of Cash Flows, as previously described. The above changes are
reclassifications within the financial statements and have no impact on
net earnings or equity.
IFRS Impact on Key Performance Measures
The transition to IFRS did not significantly impact the Company's financial
covenants and key ratios that have an equity component.
IFRS Impact on Controls and Information Systems
A review of the Company's information systems and the day-to-day accounting
processes and controls was carried out during the IFRS conversion project and no
significant impacts were identified. No significant changes to computer systems
were required and no changes which materially affect, or are reasonably likely
to materially affect, the Company's controls are required. To ensure the
effectiveness of the key monitoring controls under IFRS, additional training has
been performed in relation to the specific impacts of IFRS on the Company's
financial policies and statements.
IFRS Future Changes
The standard-setting bodies that set IFRS have significant ongoing project that
could impact the IFRS accounting policies selected. Specifically, it is
anticipated that there will be additional new or revised IFRS or IFRIC standards
in relation to consolidation, financial instruments, leases and employee future
benefits with Exposure Drafts currently in circulation for comment.
Controls and Procedures
There were no changes in the Company's internal controls over financial
reporting ("ICFR") during the quarter ended March 31, 2011 that have materially
affected, or are reasonably likely to materially affect, the Company's ICFR.
Critical Accounting Estimates
There were no material changes to the Company's critical accounting estimates
during the quarter ended March 31, 2011. For a full discussion of critical
accounting estimates, please refer to the Company's discussion in its MD&A for
the year ended December 31, 2010 as filed on SEDAR at www.sedar.com.
Outlook
Despite anticipated seasonal increases in home construction and renovations in
the coming months there is little expectation of any significant and sustained
improvement in the U.S. housing market through 2011. Canadian housing markets
are forecast to show slight improvement over the balance of 2011.
Demand from Asian export markets, strong through the first quarter, 2011, is
expected to continue through 2011 though possibly at a slightly less robust pace
of growth. The positive price impacts of lumber production being redirected to
offshore markets appears to be weakening as increased production has tipped the
supply-demand balance resulting in an oversupply of product available to North
American markets. Average prices reported by Random Lengths for Western SPF 2x4
#2&Btr dropped by just over 16 percent or US$46 per mfbm by the end of April,
2011 from the last week of March, 2011.
As Japan deals with unfortunate impacts of the March 2011 earthquake and
tsunami, lumber markets are not expected to grow for several quarters until
clean-up efforts are well underway and rebuilding of devastated areas can begin.
The Canadian dollar continues to strengthen against its U.S. counterpart and is
expected to remain above par through 2011.
In the face of these challenges Interfor intends to maintain the same
disciplined approach to managing its business and focusing on those items that
help position Interfor to deliver above average returns on capital invested as
markets renew.
Additional Information
Additional information relating to the Company and its operations can be found
on its website at www.interfor.com, in the Annual Information Form and on SEDAR
at www.sedar.com. Interfor's trading symbol on the Toronto Stock Exchange is
IFP.A.
E. Lawrence Sauder, Chairman
Duncan K. Davies, President and Chief Executive Officer
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2011 and 2010 (unaudited)
(thousands of Canadian dollars
except earnings per share) 3 Months 3 Months
Mar. 31, 2011 Mar. 31, 2010
----------------------------------------------------------------------------
Sales $ 179,745 $ 139,939
Costs and expenses:
Production 156,124 125,199
Selling and administration 4,971 4,169
Long term incentive compensation
expense 3,541 89
Export taxes 2,364 1,829
Depreciation of plant and
equipment (note 10) 7,286 6,489
Depletion and amortization of
timber, roads and other (note 10) 4,414 4,594
----------------------------------------------------------------------------
178,700 142,369
----------------------------------------------------------------------------
Operating earnings (loss) before
restructuring costs 1,045 (2,430)
Restructuring costs (note 11) 850 33
----------------------------------------------------------------------------
Operating earnings (loss) 195 (2,463)
Finance costs (note 12) (2,274) (2,565)
Other foreign exchange gain (loss) (75) 7
Other income (expense) (note 13) 29 (25)
Equity in earnings of associate
company - 1,375
----------------------------------------------------------------------------
(2,320) (1,208)
----------------------------------------------------------------------------
Loss before income taxes (2,125) (3,671)
Income taxes (recovery):
Current 38 40
Deferred (433) 113
----------------------------------------------------------------------------
(395) 153
----------------------------------------------------------------------------
Net loss (1,730) (3,824)
Other comprehensive loss:
Foreign currency translation
differences - foreign operations (3,297) (5,005)
Defined benefit plan actuarial
gains (losses) 124 (984)
Equity share of associate's
defined benefit plan actuarial - (284)
losses
Income tax recovery (expense) on
other comprehensive income (31) 246
----------------------------------------------------------------------------
(3,204) (6,027)
----------------------------------------------------------------------------
Total comprehensive loss for the
period $ (4,934) $ (9,851)
----------------------------------------------------------------------------
Net loss per share, basic and
diluted (note 14) $ (0.04) $ (0.08)
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2011 and 2010 (unaudited)
(thousands of Canadian dollars) 3 Months 3 Months
Mar. 31, 2011 Mar. 31, 2010
----------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net loss $ (1,730) $ (3,824)
Items not involving cash:
Depreciation of plant and
equipment 7,286 6,489
Depletion and amortization of
timber, roads and other 4,414 4,594
Deferred income tax expense
(recovery) (433) 113
Income tax expense 38 40
Finance costs 2,274 2,565
Reforestation liability 1,310 1,992
Other liabilities and provisions 43 (286)
Equity in earnings of associate
company - (1,375)
Unrealized foreign exchange
losses (gains) (212) (255)
Other (note 13) (29) 8
----------------------------------------------------------------------------
12,961 10,061
Cash generated from (used in)
operating working capital:
Trade accounts receivable and
other (7,172) 1,418
Inventories (12,713) (7,070)
Prepayments 567 1,729
Trade accounts payable and
accrued liabilities 10,407 5,297
Income taxes refunded (paid) (117) 227
----------------------------------------------------------------------------
3,933 11,662
Investing activities:
Additions to property, plant and
equipment (4,151) (573)
Additions to logging roads (3,799) (3,756)
Additions to timber and other
intangible assets (42) (15,333)
Proceeds on disposal of property,
plant, and equipment 29 14
Cash received on acquisition of
subsidiary (note 5) 4,846 -
Investments and other assets (1,207) (1,897)
----------------------------------------------------------------------------
(4,324) (21,545)
Financing activities:
Issuance of capital stock 876 -
Interest payments (1,828) (2,534)
Additions to long-term debt (note
8(b)) 25,000 90,819
Repayments of long-term debt (note
8(b)) (18,000) (72,534)
----------------------------------------------------------------------------
6,048 15,751
Foreign exchange loss on cash and
cash equivalents held in a foreign
currency (90) (42)
----------------------------------------------------------------------------
Increase in cash 5,567 5,826
Cash and cash equivalents, beginning
of year 9,301 3,802
----------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ 14,868 $ 9,628
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31, 2011, December 31, 2010 and January 1, 2010 (unaudited)
(thousands of Canadian dollars) Mar. 31, Dec. 31, Jan. 1,
2011 2010 2010
----------------------------------------------------------------------------
(note 19)
Assets
Current assets:
Cash and cash equivalents $ 14,868 $ 9,301 $ 3,802
Trade accounts receivable and
other 54,099 45,961 32,951
Income taxes recoverable - - 230
Inventories (note 7) 83,924 71,762 60,159
Prepayments 8,288 8,334 7,777
----------------------------------------------------------------------------
161,179 135,358 104,919
Investment in associate company
(notes 5 and 6) - 16,074 7,855
Employee future benefits 2,618 515 972
Other investments and assets 2,613 2,636 1,164
Property, plant and equipment 341,537 347,990 370,804
Logging roads and bridges 17,434 17,063 16,485
Timber licences 79,168 80,154 67,010
Other intangible assets 1,602 1,723 2,445
Goodwill 13,078 13,078 13,078
Asset classified as held for
sale - - 3,424
----------------------------------------------------------------------------
$ 619,229 $ 614,591 $ 588,156
----------------------------------------------------------------------------
Liabilities and Equity
Current liabilities:
Trade accounts payable and
accrued liabilities $ 63,944 $ 50,053 $ 38,482
Reforestation liability 10,620 9,785 6,772
Income taxes payable 767 230 -
Payable to associate (note 6) - 15,738 3,096
----------------------------------------------------------------------------
75,331 75,806 48,350
Reforestation liability 18,770 17,325 16,588
Long-term debt (note 8(b)) 162,282 156,037 144,525
Employee future benefits 5,835 5,815 5,428
Other liabilities and
provisions 11,555 12,158 11,856
Equity:
Share capital (note 9)
Class A subordinate voting
shares 286,238 285,362 284,500
Class B common shares 4,080 4,080 4,080
Contributed surplus 7,476 5,408 5,408
Reserves (10,943) (7,646) -
Retained earnings 58,605 60,246 67,421
----------------------------------------------------------------------------
345,456 347,450 361,409
----------------------------------------------------------------------------
$ 619,229 $ 614,591 $ 588,156
----------------------------------------------------------------------------
Contingencies (note 17)
Subsequent event (note 18)
See accompanying notes to consolidated financial statements
On behalf of the Board:
E.L. Sauder G.H. MacDougall
Director Director
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the three months ended March 31, 2011 and 2010 and year ended December
31, 2010 (unaudited)
(thousands of
Canadian
dollars) Class A Class B Contri- Trans-
Share Share buted lation Retained
Capital Capital Surplus Reserve Earnings Total
---------------------------------------------------------------------------
Balance at
January 1, 2010 $ 284,500 $ 4,080 $ 5,408 $ - $ 67,421 $ 361,409
Net loss for the
period: - - - - (3,824) (3,824)
Other
comprehensive
loss:
Foreign currency
translation
differences -
foreign
operations - - - (5,005) - (5,005)
Defined benefit
plan actuarial
losses, net of
tax - - - - (738) (738)
Equity in
associate
defined benefit
plan actuarial
losses - - - - (284) (284)
---------------------------------------------------------------------------
Balance at March
31, 2010 $ 284,500 $ 4,080 $ 5,408 $ (5,005) $ 62,575 $ 351,558
---------------------------------------------------------------------------
Class A Class B Contri- Trans-
Share Share buted lation Retained
Capital Capital Surplus Reserve Earnings Total
---------------------------------------------------------------------------
Balance at
January 1, 2011 $ 285,362 $ 4,080 $ 5,408 $ (7,646) $ 60,246 $ 347,450
Net loss for the
period: - - - - (1,730) (1,730)
Other
comprehensive
income (loss):
Foreign currency
translation
differences -
foreign
operations - - - (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
---------------------------------------------------------------------------
Class A Class B Contri- Trans-
Share Share buted lation Retained
Capital Capital Surplus Reserve Earnings Total
---------------------------------------------------------------------------
Balance at
January 1, 2010 $ 284,500 $ 4,080 $ 5,408 $ - $ 67,421 $ 361,409
Net loss for the
period: - - - - (5,193) (5,193)
Other
comprehensive
loss:
Foreign currency
translation
differences -
foreign
operations - - - (7,646) - (7,646)
Defined benefit
plan actuarial
losses, net of
tax - - - - (1,867) (1,867)
Equity in
associate
defined benefit
plan actuarial
losses - - - - (115) (115)
Contributions:
Share options
exercised 862 - - - - 862
---------------------------------------------------------------------------
Balance at
December 31,
2010 $ 285,362 $ 4,080 $ 5,408 $ (7,646) $ 60,246 $ 347,450
---------------------------------------------------------------------------
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, 2011 and 2010 (unaudited)
1. Nature of operations:
International Forest Products Limited and its subsidiaries (the "Company" or
"Interfor") is a producer of wood products in British Columbia and the U.S.
Pacific Northwest for sale to markets around the world.
The Company is a publicly listed company incorporated under the Business
Corporations Act (British Columbia) with shares listed on the Toronto Stock
Exchange. Its head office, principal address and records office is located at
Suite 3500, 1055 Dunsmuir Street, Vancouver, British Columbia, V7X 1H7.
The condensed consolidated interim financial statements of the Company as at and
for the three months ended March 31, 2011 comprise the Company and its
subsidiaries. The consolidated financial statements of the Company as at and for
the year ended December 31, 2010 which were prepared under Canadian generally
accepted accounting principles ("GAAP") are available on www.sedar.com.
2. Statement of Compliance:
(a) Statement of compliance and conversion to International Financial Reporting
Standards ("IFRS"):
For fiscal years commencing January 1, 2011 Canadian GAAP were converged with
IFRS. Consequently, the Company has prepared current and comparative financial
information under IFRSs for the reporting period ending March 31, 2011. These
condensed consolidated interim financial statements have been prepared in
accordance with IAS 34 Interim Financial Reporting. These are the Company's
first IFRS condensed consolidated interim financial statements for part of the
period covered by the first IFRS annual financial statements and IFRS 1
First-time Adoption of International Financial Reporting Standards has been
applied. The condensed consolidated interim financial statements do not include
all of the information required for full annual financial statements.
An explanation of how the transition to IFRSs has affected the reported
financial position, financial performance and cash flows of the Company is
provided in note 19. This note includes reconciliations of equity and total
comprehensive income for comparative periods and of equity at the date of
transition reported under Canadian GAAP to those reported for those periods and
at the date of transition under IFRSs.
In these financial statements the term Canadian GAAP refers to Canadian GAAP
before the adoption of IFRS.
These condensed consolidated interim financial statements were approved by the
Board of Directors on May 17, 2011.
(b) Basis of measurement:
The condensed consolidated interim financial statements have been prepared on
the historical cost basis except for the following material items in the
Statement of Financial Position:
(i) Derivative financial instruments are measured at fair value;
(ii) Liabilities for cash-settled share-based payment arrangements are measured
at fair value; and
(iii) The employee benefit assets and liabilities are recognized as the net of
the fair value of the plan assets and the present value of the benefit
obligations on a plan by plan basis.
3. Significant accounting policies:
The accounting policies set out below are the policies that the Company has
adopted in its consolidated financial statements for the year ended December 31,
2011. These policies have been applied consistently to all periods presented in
these condensed consolidated interim financial statements and in preparing the
opening IFRS statement of financial position as at January 1, 2010 for the
purposes of the transition to IFRSs, unless otherwise indicated.
(a) Principles of consolidation:
These condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries from their respective dates of
acquisition or incorporation. All intercompany balances, transactions and
unrealized income and expenses arising from intercompany transactions have been
eliminated on consolidation.
For business acquisitions on or after January 1, 2010, the Company measures
goodwill at the acquisition date as the fair value of the consideration
transferred including any non-controlling interest less the fair value of the
identifiable assets acquired and liabilities assumed, all measured as of the
acquisition date. When the excess is negative, a bargain purchase gain is
recognized immediately in net earnings. Transaction costs, other than those
associated with the issue of debt or equity securities, are expensed as
incurred.
As part of its transition to IFRSs, the Company elected not to restate those
business combinations that occurred prior to January 1, 2010. In respect of
acquisitions prior to January 1, 2010, goodwill represents the amount recognized
under the Company's previous accounting framework, Canadian GAAP.
(b) Use of estimates and judgements:
The preparation of the condensed consolidated interim financial statements in
conformity with IFRSs requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from these estimates.
In preparing these condensed consolidated interim financial statements, the
significant judgements made by management in applying the Company's accounting
policies and the key sources of estimation uncertainty are expected to be the
same as those to be applied in the first annual IFRS financial statements.
Significant areas requiring the use of management estimates relate to the
determination of restructuring, reforestation, road deactivation, environmental
and tax obligations, share-based compensation, recoverability of assets, rates
for depreciation, depletion and amortization, and determination of fair values
of assets and liabilities acquired in business combinations and impairment
analysis of non-financial assets including goodwill.
(c) Financial instruments:
i. Non-derivative financial instruments:
Non-derivative financial instruments are comprised of trade and other
receivables, cash and cash equivalents, trade accounts payable and accrued
liabilities, provisions, and loans and borrowings including long-term debt. The
Company recognizes receivables, payables and loans on the date that they are
originated at fair value plus, for instruments not at fair value through
earnings or loss, any direct transaction costs. All other financial assets,
including assets designated at fair value through earnings or loss, are
recognized initially on the trade date at which the Company becomes party to the
contractual provisions of the instrument.
Assets designated as at fair value through earnings or loss are measured at fair
value and changes therein are recognized in net earnings or loss with
transaction costs recognized when incurred. Assets designated as at fair value
include cash which consists of cash on deposit and short-term interest bearing
securities with maturities at their purchase date of three months or less.
Trade and other receivables are designated as loans and receivables and measured
at amortized cost using the effective interest rate method, less any impairment
losses.
Trade payables and accrued liabilities, provisions, and loans and borrowings
including long-term debt are designated as other financial liabilities and are
measured at amortized cost using the effective interest rate method.
There are no financial instruments classified as available-for-sale or
held-to-maturity.
ii. Derivate financial instruments:
The Company at times uses derivative financial instruments for economic hedging
purposes in the management of foreign currency exposures. Foreign exchange
exposure to foreign currency receipts and related receivables, primarily U.S.
currency, is managed through the use of foreign exchange forward contracts and
options.
The Company has chosen not to designate its derivative forward foreign exchange
contracts as hedges. These derivate financial instruments are designated as held
for trading and, consequently, are carried on the Statement of Financial
Position at fair value, with changes in fair value being recorded as an
adjustment to Sales in net earnings.
The Company also trades lumber futures in managing price risk and which are
designated as held for trading with changes in fair value being recorded in
Other income (expense) in net earnings. Trading activities are closely monitored
and restricted including a maximum number of outstanding contracts outstanding
at any point in time.
The risk management strategies and relationships are formally documented and
assessed on a regular, on-going basis.
(d) Inventories:
Lumber inventories are valued at the lower of cost and net realizable value on a
specific product basis. Cost is determined as the weighted average of cost of
production on a three month rolling average, lagged by one month and adjusted
for exceptional costs, as in the case of a curtailment.
Log inventories are valued at the lower of cost and net realizable value on a
specific boom basis where logs are in boom form, or in aggregate on a species
and sort basis where the logs do not exist in boom form. Cost for internally
produced log inventories is determined as the weighted average cost of logging
on a twelve month rolling average on the B.C. Coast and on a three month rolling
average in the B.C. Interior. For both areas, costs are lagged by one month and
adjusted for exceptional costs, as in the case of a curtailment. Log inventories
purchased from external sources are costed at acquisition cost. Net realizable
value of logs is based on either replacement cost or, for logs for which have
been committed to processing into lumber, on estimated net realizable value
after taking into consideration costs of completion and sale.
Other inventories consist primarily of supplies which are recorded at lower of
cost and replacement cost.
(e) Investments in associates:
Investments over which the Company is able to exert significant influence but
not control are accounted for on the equity basis and are recognized initially
at cost. The consolidated financial statements include the Company's share of
the profit or loss and other comprehensive income of equity-accounted investees,
after adjustments to align the accounting policies with those of the Company,
from the date that significant influence commences until the date that it
ceases.
Until January 5, 2011, the Company held 60% of the outstanding common shares of
Seaboard Shipping Company Ltd. ("Seaboard") with the remaining common shares
held by other British Columbia forestry companies. Although the Company owned
over 50% of the common shares of Seaboard, the shareholders had entered into
agreements that limited the Company's ability to control Seaboard's strategic
decisions. In addition, net earnings of Seaboard were distributed based on a
percentage of shipments of product by the shareholders and not based on common
share ownership. The Company accounted for its investment in Seaboard using the
equity method with the investment adjusted for earnings of Seaboard based on the
Company's percentage of earnings as determined based on its shipment percentage
and decreased for distributions made by Seaboard.
On January 5, 2011 Seaboard became a wholly owned subsidiary of the Company and
its accounts were consolidated from the date of change in control.
(f) Property, plant and equipment and logging roads and bridges:
Property, plant and equipment and logging roads and bridges are recorded at cost
or deemed cost less accumulated depreciation and accumulated impairment losses.
Depreciation on machinery and equipment is provided on the basis of hours
operated relative to the asset's lifetime estimated operating hours.
Depreciation on all other assets is provided on a straight-line basis (ranging
from 2.5% to 33%) over the estimated useful lives of the assets.
Road and bridge amortization is computed on the basis of timber cut relative to
available timber.
Depreciation and amortization methods, useful lives and residual values are
reviewed annually and adjusted if appropriate.
Maintenance costs are recorded as expenses during the period as incurred, with
the exception of programs that extend the useful life of the asset or increase
its value, which are then capitalized.
As part of its transition to IFRSs, the Company elected to measure a property at
its Hammond sawmill site at its fair value and use that fair value as its deemed
cost at the date of transition, January 1, 2010.
(g) Borrowing costs:
Borrowing costs directly attributable to the acquisition, construction or
production of qualifying assets, which are assets that necessarily take a
substantial period of time to get ready for their intended use, are added to the
cost of those assets, until such time as the assets are substantially ready for
their intended use.
All other borrowing costs are recognized in profit or loss in the period in
which they are incurred.
(h) Timber licences and other intangible assets:
Timber licences and other intangible assets are recorded at cost less
accumulated depletion or amortization and accumulated impairment losses. Timber
licence depletion is computed on the basis of timber cut relative to available
timber. Tree farm and forest licences are depleted on a straight-line basis over
40 years. Amortization on other intangible assets is provided on a straight-line
basis over five years being the estimated useful lives of the assets.
Amortization rates are reviewed annually to ensure they are aligned with
estimates of remaining economic useful lives of the associated intangible
assets.
(i) Goodwill:
Goodwill is measured at cost less accumulated impairment losses. See note 3(a)
for the policy on measurement of goodwill at initial recognition. In respect of
acquisitions prior to January 1, 2010, goodwill is included on the basis of its
deemed cost, which represents the amount recognized under previous Canadian
GAAP.
(j) Reforestation and other decommissioning provisions:
Forestry legislation in British Columbia requires the Company to incur the cost
of reforestation on its forest, timber and tree farm licences and to deactivate
logging roads once harvesting is complete and access is no longer required.
Accordingly, the Company records the fair value of the costs of reforestation
and road deactivation in the period in which the timber is cut, with the fair
value of the liability determined with reference to the present value of
estimated future cash flows.
Provisions are measured at the expected value of future cash flows, discounted
to their present value and determined according to the probability of
alternative estimates of cash flows occurring for each operation. The
measurement under IAS 37, Provisions, Contingent Liabilities and Contingent
Assets, is based on best estimate and can be based on internal or external
costs, depending upon which is most likely. Significant judgements and estimates
are involved in forming expectations of future activities and the amount and
timing of the associated cash flows. Those expectations are formed based on
existing regulatory requirements and the expertise of Registered Professional
Foresters and Engineers employed or contracted by the Company. Examples of
considerations include the specifics of the areas logged and the treatments
prescribed for those areas, as well as the timing and success rates of the
planned activities in terms of reforestation; and road structure and terrain for
road deactivation.
Discount rates reflect the risks specific to the decommissioning provision.
Adjustments are made to decommissioning provisions each period for changes in
the timing or amount of cash flows, changes in the discount rate and the
unwinding of the discount. As such, the discount rate reflects the current
risk-free rate given that risks are incorporated into the future cash flow
estimates.
In periods subsequent to the initial measurement, changes in the liability
resulting from the passage of time (accretion expense) are recognized as Finance
costs and revisions to fair value calculations are recognized as Production
costs in net earnings as they occur.
(k) Environmental costs:
Environmental expenditures are expensed or capitalized depending upon their
future economic benefit. Expenditures that prevent future environmental
contamination are capitalized as plant and equipment. Expenditures that relate
to an existing condition caused by past operations are expensed. Liabilities are
recorded when rehabilitation efforts are likely to occur and the costs can be
reasonably estimated.
Provisions are measured at the expected value of future cash flows, discounted
to their present value and determined according to the probability of
alternative estimates of cash flows using a current pre-tax rate that reflects
the risks specific to the liability. The unwinding of the discount is recognized
as a Finance Cost in net earnings.
(l) Income taxes:
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using substantively enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
substantive enactment date. Deferred tax assets are recognized to the extent
that it is considered to be probable that they will be realized.
(m) Share-based compensation:
The Company has a Share Option Plan, a Share Appreciation Rights ("SAR") Plan, a
Deferred Share Unit ("DSU") Plan and a Total Shareholder Return ("TSR") Plan for
directors, officers and certain other eligible employees. The Company follows
the fair value method of accounting for share options, SARs, DSUs and TSRs.
Compensation expense is recorded for share options over the vesting period based
on the estimated fair market value of the option at the date of grant with a
corresponding increase to contributed surplus. In accordance with IFRS 2,
Share-based Payment, no compensation cost has been recognized for share options
granted prior to November 7, 2002. No share options have been granted after
November 7, 2002.
Compensation expense is recorded for SARs over the vesting period based on the
estimated fair value of the SARs at the date of grant. Fair value is measured
using a Black-Scholes option pricing model and is adjusted to reflect the number
of SARs expected to vest.
Compensation expense is recorded for DSUs at the time of the grant, as the DSU
Plan allows for immediate vesting, based on the fair value at the date of the
grant.
Compensation expense is recorded for TSRs over the performance period based on
the estimated fair value of the TSRs at the date of the grant. Fair value is
measured using a combination of call options which are valued using a
Black-Scholes pricing model.
The fair value of the SARs, DSUs and TSRs are subsequently measured at each
reporting date with any changes in fair value reflected in the Long-term
incentive compensation in net earnings. Liabilities are recorded in Trade
accounts payable and accrued liabilities and in Other liabilities on the
Statement of Financial Position.
(n) Employee future benefits:
The estimated costs for defined benefit pensions and other post-retirement
benefits provided to employees by the Company are accrued using actuarial
methods and assumptions, including Management's best estimates of the discount
rate, future investment earnings, salary escalation, and health care costs.
The actuarial liability, and the associated annual cost of accruing benefits for
the defined benefit pension plans and other post-retirement benefits is
calculated using the projected accrued benefit cost method pro-rated on service.
For the purpose of calculating the expected return on plan assets, those assets
are valued at fair value.
Actuarial gains and losses arise from actual experience being different from the
assumptions, or changes in actuarial assumptions used to determine the actuarial
liability. Actuarial gains and losses are recognized in Retained earnings
through Other comprehensive income in the year they arise.
All actuarial gains and losses at January 1, 2010, the date of transition to
IFRSs, were recognized in Retained earnings.
(o) Sales recognition and presentation policies:
The Company recognizes sales to external customers when the product is shipped
and title passes. Sales are recorded on a gross basis, before freight, wharfage
and handling costs, and export taxes.
(p) Finance income and finance costs:
Finance income comprises net interest income on funds invested.
Finance costs comprise net interest expense on borrowings, the unwinding of the
discount on decommissioning provisions, the amortization of prepaid finance
costs and other related transaction costs.
(q) Functional currency:
The functional and presentation currency of the parent is Canadian dollars.
(r) Foreign currency transactions:
Transactions in foreign currencies are effectively translated at exchange rates
at the transaction date. Monetary assets and liabilities denominated in foreign
currencies are revalued at each reporting date.
Foreign currency gains or losses arising on revaluation are recognized in Net
earnings. Where revaluations relate to trade accounts receivable those foreign
currency gains or losses adjust sales revenue; where revaluations relate to
trade accounts payable those foreign currency gains or losses adjust production
costs.
(s) Foreign operations:
i. Foreign operations with a functional currency of the Canadian dollar:
Transactions in foreign currencies are effectively translated at exchange rates
at the transaction date. Monetary assets and liabilities denominated in foreign
currencies are revalued at each reporting date. Non-monetary assets and
liabilities denominated in foreign currencies measured at historical cost are
translated using the transaction date exchange rate.
Foreign currency gains or losses arising on revaluation are recognized in Net
earnings. Where revaluations relate to trade accounts receivable those foreign
currency gains or losses adjust sales revenue; where revaluations relate to
trade accounts payable those foreign currency gains or losses adjust production
costs.
ii. Foreign operations with a functional currency of the U.S. dollar:
Revenues and expenses denominated in foreign currencies are translated to
Canadian dollars at average rates for the period, which approximate the
transaction date.
Foreign currency denominated assets and liabilities are translated into Canadian
dollars at exchange rates in effect at the reporting date. Since January 1,
2010, related unrealized gains and losses are included in the Foreign currency
translation differences - foreign operations in Other comprehensive income and
in the Translation Reserve in equity.
Unrealized foreign exchange gains and losses residing in the Translation Reserve
will be released to net earnings upon the reduction of the net investment in
foreign operations through the sale, reduction or substantial liquidation of an
investment position.
When the settlement of a monetary item receivable from or payable to a foreign
operation is neither planned nor likely in the foreseeable future, foreign
exchange gains and losses arising from such a monetary item are considered to
form part of a net investment in the foreign operation and are recognized in
Other comprehensive income and presented in the Translation Reserve in equity.
iii. Hedge of a net investment in a foreign operation:
Long-term obligations denominated in foreign currencies are from time to time
designated as a hedge of the Company's investments in foreign operations and
with resulting unrealized foreign exchange gains and losses recognized in Other
Comprehensive Income in to the extent that the hedge is effective and presented
in the Translation Reserve in equity. To the extent that the hedge is
ineffective, such differences are recognized in Other foreign exchange gain
(loss) in net earnings. When the Company terminates the designation of the
hedging relationship and discontinues its use of hedge accounting any
accumulated unrealized foreign exchange gains and losses remain in the
Translation Reserve. Unrealized foreign exchange gains and losses arising
subsequent to termination of the designation of the hedge relationship are
recorded in Other foreign exchange gain (loss) in net earnings. When the hedged
net investment is disposed of, the relevant amount in the Translation Reserve is
reclassified to Net earnings as part of the gain or loss on disposal.
(t) Net earnings (loss) per share:
Basic earnings (loss) per share are computed by dividing net earnings by the
weighted average shares outstanding during the reporting period. Diluted
earnings (loss) per share are computed using the treasury stock method.
(u) Impairment of non-financial assets, goodwill and related measurement
uncertainty:
At each reporting date, the Company assesses its non-financial assets to
determine whether there are any indications of impairment. Impairment tests are
carried out annually for goodwill.
The Company conducts a review of external and internal sources of information to
assess for any indications of impairment. External factors include adverse
changes in expected future prices, costs and other market and economic factors.
Internal factors include changes in the expected useful life of the asset or
changes to the planned capacity of the asset. If any indication of impairment
exists, an estimate of the asset's recoverable amount is calculated. The
recoverable amount is determined as the higher of the fair value less direct
costs to sell for the asset and the asset's value in use. If the carrying amount
of the asset exceeds its recoverable amount, the asset is impaired and an
impairment loss is charged to net earnings to reduce the carrying amount in the
Statement of Financial Position to its recoverable amount.
Fair value is determined as the amount that would be obtained from the sale, net
of direct selling costs, of the asset in an arm's length transaction between
knowledgeable and willing parties.
Value in use is determined as the present value of the estimated future cash
flows expected to arise from the continued use of the asset in its present form
and its eventual disposal. Value in use is determined by applying assumptions
specific to the Company's continued use of the asset and cannot take into
account future capital enhancements.
In testing for indications of impairment and performing impairment calculations,
assets are considered as collective groups, referred to as cash generating units
("CGUs"). CGUs are the smallest identifiable group of assets, liabilities and
associated goodwill that generate cash inflows that are largely independent of
the cash inflows from other assets or groups of assets. Impairment losses
recognized for a CGU are first allocated to reduce the carrying amount of
goodwill, if any, assigned to the CGU, and then to reduce the carrying amounts
of the other assets in the CGU on a pro-rata basis.
Impairment assessments are based on a range of estimates and assumptions,
including lumber and chip sales prices, operating rates of the assets, raw
material and conversion costs, sales volumes, the level of export taxes, and an
appropriate discount rate. The Company has analyzed external data in determining
appropriate assumptions.
For non-financial assets other than goodwill, impairments previously recognized
may be reversed if the internal and external factors and estimates that led to
the initial recognition of an impairment in a prior period indicate that the
loss has decreased or no longer exists. An impairment loss is reversed if the
recoverable amount exceeds the current carrying amount. The reversal is only to
a maximum of the carrying amount that would have been recorded had the
impairment loss not been recognized originally. An impairment loss for goodwill
is not reversed.
(v) Future accounting changes:
IFRS 9, Financial Instruments, replaces the multiple classification and
measurement models in IAS 39, Financial Instruments: Recognition and
Measurement, with a single model that has only two classification categories:
amortized cost and fair value. 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.
4. Seasonality of operating results:
Quarterly trends normally reflect the seasonality of the Company's operations.
Logging operations are seasonal due to a number of factors including weather,
ground conditions and fire season woods closures. Generally, the Company's B.C.
Coastal logging divisions experience higher production levels in the latter half
of the first quarter, throughout the second and third quarters and in the first
half of the fourth quarter. Logging activity in the B.C. Interior is generally
higher in the first half of the first quarter, slows during spring thaw and
increases in the third and fourth quarters. Sawmill operations are less seasonal
than logging operations but are dependent on the availability of logs from
logging operations, including those from suppliers. In addition, the market
demand for lumber and related products is generally lower in the winter due to
reduced construction activity, which increases during the spring, summer and
fall.
5. Acquisition:
On January 5, 2011, all partners in the Seaboard General Partnership ("the SGP")
withdrew with the exception of Interfor. The SGP was wound-up on January 7, 2011
and continues shipping operations as Seaboard Shipping Company Limited
("Seaboard") which became a wholly- owned subsidiary of Interfor. Seaboard's
accounts are included in the consolidated financial statements of the Company
from the date of change in control.
This acquisition has been accounted for using the purchase method. At the date
of change in control the identifiable assets acquired and liabilities and
residual equity assumed were recorded at fair value based on management's best
estimates and allocated as follows:
Assets acquired:
Cash $ 4,846
Other current assets 1,950
Employee future benefits 1,333
----------------------------------------------------------------------------
8,129
Liabilities assumed:
Current liabilities (5,422)
Deferred income taxes (307)
Residual equity assumed:
Contributed surplus (2,068)
Withdrawing partners' share of actuarial gains and losses
recognized through Other Comprehensive Income 4
----------------------------------------------------------------------------
Previous carrying value of investment in associate $ 336
----------------------------------------------------------------------------
There was no cash consideration provided and the net assets acquired were
exactly equal to the existing interest in the SGP at the date of change in
control.
6. Payable to associate company:
On July 30, 2010 the SGP made an advance to its partners, with the Company's
share of the advance being $6,896,000. A second advance was made on December 30,
2010 and Interfor received an additional $8,842,000. The Company signed
unsecured promissory notes in respect of each of these advances, payable on
demand on or before January 3, 2011 and non-interest bearing until January 3,
2011.
On January 3, 2011, the SGP declared an income distribution to its partners, of
which the Company's share of $15,738,000 was received by way of setoff against
the promissory note payable to the SGP. In accordance with equity accounting,
the income distribution was recorded as a reduction of the investment in
associate company.
7. Inventories:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Mar. 31, 2011 Dec. 31, 2010 Jan. 1, 2010
----------------------------------------------------------------------------
Logs $ 41,578 $ 39,107 $ 31,011
Lumber 37,295 27,353 24,301
Other 5,051 5,302 4,847
----------------------------------------------------------------------------
$ 83,924 $ 71,762 $ 60,159
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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, 2011 was $7,339,000 (December 31, 2010 -
$6,253,000; January 1, 2010 - $8,483,000).
8. Cash, bank indebtedness and long-term debt:
(a) Bank indebtedness:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian SSCo SISCO
Operating Operating Operating
March 31, 2011 Facility Facility Facility Total
----------------------------------------------------------------------------
Available line of credit $ 65,000 $ 2,000 $ 3,000 $ 70,000
Maximum borrowing available 65,000 1,403 153 66,556
Operating Line drawings - - - -
Outstanding letters of credit
included in line utilization 4,945 - 128 5,073
Unused portion of line 60,055 1,403 25 61,483
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, 2010
----------------------------------------------------------------------------
Available line of credit $ 65,000 $ - $ - $ 65,000
Maximum borrowing available 65,000 - - 65,000
Operating Line drawings - - - -
Outstanding letters of credit
included in line utilization 4,756 - - 4,756
Unused portion of line 60,244 - - 60,244
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
and a maximum ratio of total debt to total capitalization and a minimum net
worth calculation. The maturity date is July 28, 2012. As at March 31, 2011,
there were no drawings under the Operating Line (December 31, 2010 - $nil).
On January 5, 2011 the Company acquired full control of Seaboard and its
wholly-owned subsidiaries, Seaboard Shipping Company Limited ("SSCo") and
Seaboard International Shipping Company ("SISCO") (see note 5). Seaboard has
demand facilities with a Canadian bank which are secured by a general assignment
of accounts receivable, inventory and insurance. The demand lines may be drawn
in either CAD$ or US$ and bear interest at either the bank prime rate plus a
margin for CAD$ borrowings or the U.S. base rate plus a margin for $US
borrowings. Borrowing levels under the line are subject to a borrowing base
calculation dependent on certain accounts receivable. As at March 31, 2011 there
were no drawings under these lines other than letters of credit.
(b) Long-term debt:
The Revolving Term Line may be drawn in either CAD$ 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
Revolving Term Line matures on July 28, 2013.
As at March 31, 2011, the Revolving Term Line was drawn by US$30,200,000
(December 31, 2010 - US$30,200,000) revalued at the quarter-end exchange rate to
$29,282,000 (December 31, 2010 - $30,037,000), and $133,000,000 (December 31,
2010 - $126,000,000) for total drawings of $162,282,000 (December 31, 2010 -
$156,037,000) leaving an unused available line of $37,718,000.
The US$30,200,000 drawing under the line has been designated as a hedge against
the Company's investment in its U.S. operations and unrealized foreign exchange
gains of $755,000 (March 31, 2010 - $1,063,000) arising on revaluation of the
Revolving Term Line for the quarter ending March 31, 2011 were recognized in
Other comprehensive income.
(1) EBITDA represents earnings before interest, taxes, depreciation, depletion
and amortization.
Minimum principal amounts due on long-term debt within the next five years are
follows:
----------------------------------------------------------------------------
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Twelve months ending
March 31, 2012 $ -
March 31, 2013 -
March 31, 2014 162,282
March 31, 2015 -
March 31, 2016 -
----------------------------------------------------------------------------
$ 162,282
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Share capital:
The transactions in share capital are described below:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number
------------------------------------
Class A Class B Total Amount
----------------------------------------------------------------------------
Balance, December 31, 2009 46,101,476 1,015,779 47,117,255 $ 288,580
Shares issued on exercise of
options 236,200 - 236,200 862
----------------------------------------------------------------------------
Balance, December 31, 2010 46,337,676 1,015,779 47,353,455 289,442
Shares issued on exercise of
options 187,000 - 187,000 876
----------------------------------------------------------------------------
Balance, March 31, 2011 46,524,676 1,015,779 47,540,455 $ 290,318
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. Depreciation, depletion and amortization:
Depreciation, depletion and amortization can be allocated by function as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, 2011 Mar. 31, 2010
----------------------------------------------------------------------------
Production $ 11,453 $ 10,837
Selling and administration 247 246
----------------------------------------------------------------------------
$ 11,700 $ 11,083
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Restructuring costs:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, 2011 Mar. 31, 2010
----------------------------------------------------------------------------
Severance costs $ 185 $ 33
Contractor buyout 665 -
----------------------------------------------------------------------------
$ 850 $ 33
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Restructuring costs of $850,000 in the first quarter, 2011 resulted from the
buyout of a logging contractor's Bill 13 entitlements and severance costs
related to early retirement of hourly workers.
During the first quarter, 2010 the Company revised estimated severance accruals
and recorded $33,000 in additional restructuring costs.
12. Finance costs:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, 2011 Mar. 31, 2010
----------------------------------------------------------------------------
Interest on borrowing $ 1,860 $ 2,043
Accretion expense 178 201
Amortization of prepaid finance
costs 236 321
----------------------------------------------------------------------------
$ 2,274 $ 2,565
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Other income (expense):
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, 2011 Mar. 31, 2010
----------------------------------------------------------------------------
Gain (loss) on disposal of surplus
property, plant and equipment $ 29 $ (8)
Other (expense) - (17)
----------------------------------------------------------------------------
$ 29 $ (25)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In the first quarter, 2011, the Company disposed of surplus equipment which
generated $29,000 in proceeds and a gain of $29,000.
In the first quarter of 2010, minor disposals of surplus equipment resulted in
proceeds of $14,000 and a loss of $8,000.
14. Net earnings (loss) per share:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months Mar. 31, 2011 3 Months Mar. 31, 2010
------------------------------ ------------------------------
Per Per
Net loss Shares share Net loss Shares share
--------------------------------------------- ------------------------------
Basic loss per
share $ (1,730) 47,389 $ (0.04) $ (3,824) 47,117 $ (0.08)
Share options - 19(i) - - 57(i) -
--------------------------------------------- ------------------------------
Diluted loss
per share $ (1,730) 47,389 $ (0.04) $ (3,824) 47,117 $ (0.08)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Where the addition of share options to the total shares outstanding has
an anti-dilutive impact on the diluted earnings (loss) per share
calculation, those share options have not been included in the total shares
outstanding for purposes of the calculation of diluted earnings (loss) per
share.
15. Segmented information:
The Company manages its business as a single operating segment, solid wood. The
Company purchases and harvests logs which are then manufactured into lumber
products at the Company's sawmills, or sold. Substantially all of the Company's
operations are located in British Columbia, Canada and the U.S. Pacific
Northwest, U.S.A.
In the first quarter, 2011 the Company acquired complete control of SGP. SGP was
wound up on early January, 2011 but continued operations as Seaboard and its
accounts were consolidated from the date of change in control on January 5,
2011. Other sales revenues in sales by product line include the ocean freight
revenues of Seaboard.
The Company sales to both foreign and domestic markets are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, 2011 Mar. 31, 2010
----------------------------------------------------------------------------
Canada $ 51,115 $ 40,597
United States 64,882 60,528
China and Taiwan 31,324 13,897
Japan 20,667 11,809
Other export 11,757 13,108
----------------------------------------------------------------------------
$ 179,745 $ 139,939
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sales by product line are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 Months 3 Months
Mar. 31, 2011 Mar. 31, 2010
----------------------------------------------------------------------------
Lumber $ 132,528 $ 107,618
Logs 20,849 17,435
Wood chips and other by products 16,413 13,151
Ocean freight and other 9,955 1,735
----------------------------------------------------------------------------
$ 179,745 $ 139,939
----------------------------------------------------------------------------
----------------------------------------------------------------------------
16. Financial instruments:
The Company employs financial instruments such as foreign currency forward and
option contracts to manage exposure to fluctuations in foreign exchange rates.
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, 2011, the Company has outstanding obligations to sell a maximum
of US$36,500,000 at an average rate of CAD$0.9876 to the USD$1.00 and sell
Japanese yen 145,000,000 at an average rate of yen 82.62 to the US$1.00 during
2011. All foreign currency gains or losses to March 31, 2011 have been
recognized in net earnings and the fair value of these foreign currency
contracts being an asset of $686,000 (measured based on Level 2 of the fair
value hierarchy) has been recorded in trade accounts receivable and other
(December 31, 2010 - $492,000 asset recorded in Trade accounts receivable and
other and $18,000 liability recorded in Trade accounts payable and accrued
liabilities measured based on Level 2 of the fair value hierarchy).
17. Contingencies:
(a) Softwood Lumber Agreement:
On January 18, 2011 U.S. trade representatives 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 Company believes that
B.C. and Canada are complying with their obligations under the SLA.
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, 2011.
(b) Storm damage:
In the latter half of September 2010, heavy rains and strong winds on northern
Vancouver Island and the B.C. Central Coast triggered severe power outages,
mudslides, road washouts and flooding, with a state of emergency declared in
several populated areas. Some logging areas were impacted by these severe storms
with bridge and culvert damage, road washouts and slides in reforested areas.
Due to the remoteness and magnitude of the areas impacted it has been difficult
to fully assess the extent of the damage and its related costs. The Company
continues to pursue provincial and federal government assistance. Certain losses
are covered by insurance and as at March 31, 2011, a receivable of $486,000 has
been set up for recovery of qualifying expenditures, net of the insurance
deductible. During the first quarter, 2011, the Company recorded business
interruption insurance recoveries of $2,211,000 as a reduction in Production
costs in net earnings and an additional receivable. These advances were received
in April 2011, together with an additional $439,000 which was recorded against
insurance receivable for property damage. The Company is actively working with
its insurers to ensure maximum recovery of future restoration expenditures and
business interruption losses.
18. Subsequent event:
On April 8, 2011 the Company closed a public offering of 8,222,500 Class A
Subordinate Voting shares at a price of $7.00 per share for gross proceeds to
Interfor of $57,557,500.
19. Explanation of transition to IFRS:
As stated in note 2 (a), these are the Company's first consolidated interim
financial statements prepared in accordance with IFRSs.
The accounting policies set out in note 3 have been applied in preparing the
interim financial statements for the three months ended March 31, 2011, the
comparative information presented in these interim financial statements for both
the three months ended March 31, 2010 and year ended December 31, 2010 and in
the preparation of an opening IFRS Statement of Financial Position at January 1,
2010 (the Company's date of transition).
In preparing its opening IFRS Statement of Financial Position, the Company has
adjusted amounts reported previously in financial statements prepared in
accordance with Canadian GAAP. An explanation of how the transition from
previous GAAP to IFRSs has affected the Company's financial position, financial
performance and cash flows is set out in the following tables and the notes that
accompany the tables.
Reconciliation of equity
----------------------------------------------------------------------------
IFRSs
(thousands of Canadian Previous Re- IFRSs
dollars) Note GAAP classify Adjustment IFRSs
----------------------------------------------------------------------------
January 1, 2010
Assets
Current assets:
Cash and cash
equivalents $ 3,802 $ - - $ 3,802
Trade accounts
receivable and other 32,951 - - 32,951
Income taxes recoverable 230 - - 230
Inventories 60,159 - - 60,159
Prepayments 7,777 - - 7,777
Deferred tax assets a 2,974 (2,974) - -
----------------------------------------------------------------------------
107,893 (2,974) - 104,919
Investment in associate
company b, j - 8,775 (920) 7,855
Employee future benefits c, i - 6,998 (6,026) 972
Other investments and
assets b, c 17,060 (15,896) - 1,164
Property, plant and
equipment d, k 357,501 (2,445) 15,748 370,804
Logging roads and bridges 16,485 - - 16,485
Timber licences 67,010 - - 67,010
Other intangible assets d - 2,445 - 2,445
Goodwill 13,078 - - 13,078
Asset classified as held
for sale 3,424 - - 3,424
----------------------------------------------------------------------------
$ 582,451 $ (3,097) $ 8,802 $ 588,156
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRSs
(thousands of Canadian Previous Re- IFRSs
dollars) Note GAAP classify Adjustment IFRSs
----------------------------------------------------------------------------
March 31,2010
Assets
Current assets:
Cash and cash
equivalents $ 9,628 - - $ 9,628
Trade accounts
receivable and other 31,386 - - 31,386
Income taxes recoverable - - - -
Inventories 66,715 - - 66,715
Prepayments 6,288 - - 6,288
Deferred tax assets a 2,825 (2,825) - -
----------------------------------------------------------------------------
116,842 (2,825) - 114,017
Investment in associate
company b, j - 7,043 (1,194) 5,849
Employee future benefits c, i - 7,156 (6,706) 450
Other investments and
assets b, c 16,872 (14,473) - 2,399
Property, plant and
equipment d, k 346,400 (2,077) 15,748 360,071
Logging roads and bridges 16,302 - - 16,302
Timber licences 82,154 - - 82,154
Other intangible assets d - 2,077 - 2,077
Goodwill 13,078 - - 13,078
Asset classified as held
for sale 3,424 - - 3,424
----------------------------------------------------------------------------
$ 595,072 $ (3,099) $ 7,848 $ 599,821
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRSs
(thousands of Canadian Previous Re- IFRSs
dollars) Note GAAP classify Adjustment IFRSs
----------------------------------------------------------------------------
December 31, 2010
Assets
Current assets:
Cash and cash
equivalents $ 9,301 $ - - $ 9,301
Trade accounts
receivable and other 45,961 - - 45,961
Income taxes recoverable - - - -
Inventories 71,762 - - 71,762
Prepayments 8,334 - - 8,334
Deferred tax assets a 3,627 (3,627) - -
----------------------------------------------------------------------------
138,985 (3,627) - 135,358
Investment in associate
company b, j - 17,124 (1,050) 16,074
Employee future benefits c, i - 8,054 (7,539) 515
Other investments and
assets b, c 28,618 (25,982) - 2,636
Property, plant and
equipment d, k 333,989 (1,723) 15,724 347,990
Logging roads and bridges 17,063 - - 17,063
Timber licences 80,154 - - 80,154
Other intangible assets d - 1,723 - 1,723
Goodwill 13,078 - - 13,078
Asset classified as held
for sale - - - -
----------------------------------------------------------------------------
$ 611,887 $ (4,431) $ 7,135 $ 614,591
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRSs IFRSs
(thousands of Canadian Previous Re- Adjust-
dollars) Note GAAP classify ment IFRSs
----------------------------------------------------------------------------
January 1, 2010
Liabilities and Equity
Current liabilities:
Trade accounts payable and
accrued liabilities e, n $ 43,510 $ (6,772) $ 1,744 $ 38,482
Reforestation liability e - 6,772 - 6,772
Income taxes payable - - - -
Payable to associate company 3,096 - - 3,096
----------------------------------------------------------------------------
46,606 - 1,744 48,350
Reforestation liability m 14,724 - 1,864 16,588
Long-term debt 144,525 - - 144,525
Employee future benefits c, i - 4,583 845 5,428
Other liabilities and c, m,
provisions n 15,316 (4,706) 1,246 11,856
Deferred income taxes a, p 3,286 (2,974) (312) -
Equity:
Share capital
Class A subordinate voting
shares 284,500 - - 284,500
Class B common shares 4,080 - - 4,080
Contributed surplus 5,408 - - 5,408
Reserves h (24,855) 24,855 - -
Retained earnings h, q 88,861 (24,855) 3,415 67,421
----------------------------------------------------------------------------
357,994 - 3,415 361,409
----------------------------------------------------------------------------
$582,451 $ (3,097) $ 8,802 $ 588,156
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRSs IFRSs
(thousands of Canadian Previous Re- Adjust-
dollars) Note GAAP classify ment IFRSs
----------------------------------------------------------------------------
March 31,2010
Liabilities and Equity
Current liabilities:
Trade accounts payable and
accrued liabilities e, n $ 48,469 $ (6,720) $ 1,667 $ 43,416
Reforestation liability e - 6,720 - 6,720
Income taxes payable 43 - - 43
Payable to associate company - - - -
----------------------------------------------------------------------------
48,512 - 1,667 50,179
Reforestation liability m 17,078 - 2,139 19,217
Long-term debt 161,677 - - 161,677
Employee future benefits c, i - 4,623 1,138 5,761
Other liabilities and c, m,
provisions n 15,380 (4,897) 946 11,429
Deferred income taxes a, p 2,825 (2,825) - -
Equity:
Share capital
Class A subordinate voting
shares 284,500 - - 284,500
Class B common shares 4,080 - - 4,080
Contributed surplus 5,408 - - 5,408
Reserves h (29,860) 24,855 - (5,005)
Retained earnings h, q 85,472 (24,855) 1,958 62,575
----------------------------------------------------------------------------
349,600 - 1,958 351,558
----------------------------------------------------------------------------
$595,072 $ (3,099) $ 7,848 $599,821
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRSs IFRSs
(thousands of Canadian Previous Re- Adjust-
dollars) Note GAAP classify ment IFRSs
----------------------------------------------------------------------------
December 31, 2010
Liabilities and Equity
Current liabilities:
Trade accounts payable and
accrued liabilities e, n $ 58,267 $ (9,785) $ 1,571 $ 50,053
Reforestation liability e - 9,785 - 9,785
Income taxes payable 230 - - 230
Payable to associate company 15,738 - - 15,738
----------------------------------------------------------------------------
74,235 - 1,571 75,806
Reforestation liability m 15,017 - 2,308 17,325
Long-term debt 156,037 - - 156,037
Employee future benefits c, i - 4,348 1,467 5,815
Other liabilities and c, m,
provisions n 15,695 (5,152) 1,615 12,158
Deferred income taxes a, p 3,627 (3,627) - -
Equity:
Share capital
Class A subordinate voting
shares 285,362 - - 285,362
Class B common shares 4,080 - - 4,080
Contributed surplus 5,408 - - 5,408
Reserves h (32,501) 24,855 - (7,646)
Retained earnings h, q 84,927 (24,855) 174 60,246
----------------------------------------------------------------------------
347,276 - 174 347,450
----------------------------------------------------------------------------
$611,887 $ (4,431) $ 7,135 $614,591
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of comprehensive income (loss):
----------------------------------------------------------------------------
(thousands of Previous IFRSs IFRSs
Canadian dollars) Note GAAP Reclassify Adjustment IFRSs
----------------------------------------------------------------------------
Three months ended
March 31, 2010
Sales $ 139,939 $ - $ - $ 139,939
Costs and Expenses:
Production f, i, k,
m 125,187 (201) 213 125,199
Selling and
administration 4,169 - - 4,169
Long term
incentive
compensation
expense n 415 - (326) 89
Export taxes 1,829 - - 1,829
Amortization of
plant and
equipment 6,489 - - 6,489
Depletion and
amortization of
timber, roads
and other f 4,915 (321) - 4,594
----------------------------------------------------------------------------
143,004 (522) (113) 142,369
----------------------------------------------------------------------------
Operating earnings
(loss) before
restructuring
costs (3,065) 522 113 (2,430)
Restructuring costs 33 - - 33
----------------------------------------------------------------------------
Operating earnings
(loss) (3,098) 522 113 (2,463)
Finance costs f - (2,565) - (2,565)
Interest expense on
long-term debt f (1,905) 1,905 - -
Other interest
expense f (138) 138 - -
Other foreign
exchange gain
(loss) 7 - - 7
Other income
(expense) (25) - - (25)
Equity in earnings
of associate
company j 1,365 - 10 1,375
----------------------------------------------------------------------------
(696) (522) 10 (1,208)
----------------------------------------------------------------------------
Earnings (loss)
before income
taxes (3,794) - 123 (3,671)
Income taxes
(recovery):
Current 40 - - 40
Deferred p (445) - 558 113
----------------------------------------------------------------------------
(405) - 558 153
----------------------------------------------------------------------------
Net loss (3,389) - (435) (3,824)
Other comprehensive
loss:
Foreign currency
translation
differences -
foreign operations (5,005) - - (5,005)
Defined benefit
plan actuarial
losses i - - (984) (984)
Equity share of
associate's
defined benefit
plan actuarial
losses j - - (284) (284)
Income tax
recovery on
other
comprehensive
losses p - - 246 246
----------------------------------------------------------------------------
(5,005) - (1,022) (6,027)
----------------------------------------------------------------------------
Total comprehensive
loss for the
period $ (8,394) $ - $ (1,457) $ (9,851)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss per share,
basic and diluted $ (0.07) $ - $ (0.01) $ (0.08)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(thousands of Previous IFRSs IFRSs
Canadian dollars) Note GAAP Reclassify Adjustment IFRSs
----------------------------------------------------------------------------
Year ended
December 31, 2010
Sales $ 625,618 $ - $ - $ 625,618
Costs and Expenses:
Production f, i, k,
m 557,122 (787) 216 556,551
Selling and
administration 17,508 - - 17,508
Long term
incentive
compensation
expense n 1,873 - 93 1,966
Export taxes 7,427 - - 7,427
Amortization of
plant and
equipment 28,117 - - 28,117
Depletion and
amortization of
timber, roads
and other f 19,008 (1,129) - 17,879
----------------------------------------------------------------------------
631,055 (1,916) 309 629,448
----------------------------------------------------------------------------
Operating earnings
(loss) before
restructuring
costs (5,437) 1,916 (309) (3,830)
Restructuring costs 1,578 - - 1,578
----------------------------------------------------------------------------
Operating earnings
(loss) (7,015) 1,916 (309) (5,408)
Finance costs f - (10,441) - (10,441)
Interest expense on
long-term debt f (7,944) 7,944 - -
Other interest
expense f (581) 581 - -
Other foreign
exchange gain
(loss) (280) - - (280)
Other income
(expense) (25) - - (25)
Equity in earnings
of associate
company j 11,446 - (15) 11,431
----------------------------------------------------------------------------
2,616 (1,916) (15) 685
----------------------------------------------------------------------------
Earnings (loss)
before income
taxes (4,399) - (324) (4,723)
Income taxes
(recovery):
Current 60 - - 60
Deferred p (525) - 935 410
----------------------------------------------------------------------------
(465) - 935 470
----------------------------------------------------------------------------
Net loss (3,934) - (1,259) (5,193)
Other comprehensive
loss:
Foreign currency
translation
differences -
foreign operations (7,646) - - (7,646)
Defined benefit
plan actuarial
losses i - - (2,490) (2,490)
Equity share of
associate's
defined benefit
plan actuarial
losses j - - (115) (115)
Income tax
recovery on
other
comprehensive
losses p - - 623 623
----------------------------------------------------------------------------
(7,646) - (1,982) (9,628)
----------------------------------------------------------------------------
Total comprehensive
loss for the
period $ (11,580) $ - $ (3,241) $ (14,821)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss per share,
basic and diluted $ (0.08) $ - $ (0.03) $ (0.11)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Presentation reclassifications:
(a) Deferred taxes:
Under Canadian GAAP deferred taxes are split between current and non-current
components on the basis of either the underlying asset or liability or the
expected reversal of items not related to an asset or liability.
Under IFRS deferred tax assets and liabilities are classified as non-current.
Consequently, current deferred tax assets under Canadian GAAP have been
reclassified against non-current deferred tax liabilities to conform to IFRS
requirements.
(b) Investment in associate company:
Under Canadian GAAP separate disclosure of investments accounted for on the
equity basis is required but may be disclosed in either the financial statements
or the notes to the financial statements.
Under IAS 1, Presentation of Financial Statements, investments accounted for
using the equity method must be disclosed separately in the Statement of
Financial Position.
The Company's investment in an associate company has been reclassified from
Other investments and assets as a separate line item on the Statement of
Financial Position to conform to IFRS requirements.
(c) Employee future benefits:
Employee benefit plan assets and obligations have been reclassified from Other
investments and assets and Other liabilities and provisions to highlight items
where there has been a significant transitional IFRS adjustment in accordance
with IAS 34, Interim Financial Reporting.
(d) Other intangible assets, net of accumulated amortization:
Under Canadian GAAP computer software acquired or developed for use is treated
as a component of Property, plant and equipment.
Under IAS 38, Intangible Assets, computer software acquired or developed for use
meets the definition of an intangible asset and is therefore reclassified from
Property, plant and equipment on the Statement of Financial Position.
(e) Reforestation liability, current:
IAS 1, Presentation of Financial Statements, requires the separate disclosure of
provisions, where significant. Consequently, the current portion of
reforestation liability has been reclassified from Trade accounts payable and
other accrued liabilities.
(f) Finance costs:
Under IFRS 7, Financial Instruments: Disclosures, interest expense on
borrowings, the unwinding of the discount on provisions (accretion expense), the
amortization of prepaid financing costs and other related transaction costs are
disclosed as finance costs.
Under Canadian GAAP, interest expense on borrowings was disclosed separately,
accretion expense was included in Production costs and the amortization of
prepaid financing costs were included in Depletion and amortization of timber,
roads and other.
To comply with IFRS, these items have been reclassified to Finance costs on the
Statement of Comprehensive Income.
(g) Interest paid:
Cash flows relating to interest paid have been classified as financing
activities in the Statement of Cash Flows.
First-time adoption elections and changes due to IFRS:
(h) Currency translation differences:
Retrospective application of IFRS would require the Company to determine
cumulative currency translation differences in accordance with IAS 21, The
Effects of Changes in Foreign Exchange Rates, from the date a foreign subsidiary
was formed or acquired. IFRS 1, First-time Adoption of International Financial
Reporting Standards, permits cumulative translation gains and losses to be reset
to zero at the transition date. The Company elected to reset all cumulative
translation gains and losses to zero in the opening retained earnings at January
1, 2010.
The impact on the Statement of Financial Position is summarized as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Jan. 1, 2010 Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Reserve increase $ 24,855 $ 24,855 $ 24,855
----------------------------------------------------------------------------
Reduction to retained earnings $ (24,855) $ (24,855) $ (24,855)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Employee future benefits:
IFRS 1 provides the option to retrospectively apply the corridor approach under
IAS 19, Employee Benefits, for the recognition of actuarial gains and losses, or
to recognize all cumulative gains and losses deferred under Canadian GAAP in
opening retained earnings as at the transition date. The Company elected to
recognize all cumulative actuarial gains and losses that existed at its
transition date of January 1, 2010 in opening retained earnings for all of its
employee benefit plans.
Under Canadian GAAP actuarial gains and losses that arise in calculating the
present value of the defined benefit obligations and the fair value of plan
assets are recognized on a systematic and consistent basis subject to a minimum
required amortization based on a "corridor" approach. The corridor was 10% of
the greater of the accrued benefit obligation at the beginning of the year and
the fair value of plan assets at the beginning of the year. The unamortized net
actuarial gains and losses in excess of the corridor is amortized as a component
of pension expense on a straight-line basis over the expected average remaining
service life of active participants. Actuarial gains and losses below the 10%
corridor are deferred.
Under IFRS the Company elected to recognize all actuarial gains and losses
immediately Other comprehensive income without recycling to the income statement
in subsequent periods. As a result, actuarial gains and losses are not amortized
to the income statement but rather are recorded directly to other comprehensive
income at the end of each period. Consequently, the Company adjusted its pension
expense to remove the amortization of actuarial gains and losses.
Under Canadian GAAP when a defined benefit plan gives rise to an accrued benefit
asset, a provision is recognized for any excess of the accrued benefit asset
over the expected future benefit. The accrued benefit asset is presented in the
Statement of Financial Position net of the provision. A change in the provision
is recognized in earnings for the period in which the change occurs.
IFRS also limits the recognition of the net benefit asset under certain
circumstances to the amount that is recoverable. Since the Company has elected
to recognize all actuarial gains and losses in Other comprehensive income,
changes in the provision are recognized in other comprehensive income in the
period in which the change occurs. The Company did not have a provision in
respect of its benefit assets for any of the periods presented.
The impact on the Statement of Financial Position was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Jan. 1, 2010 Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Employee benefit assets $ (6,026) $ (6,706) $ (7,539)
Employee benefit obligations (845) (1,138) (1,467)
Related tax effect 1,718 1,962 2,251
----------------------------------------------------------------------------
Reduction to retained earnings $ (5,153) $ (5,882) $ (6,755)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of
Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 months ended Year ended
Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Production expense (recovery) $ (11) $ (355)
Other comprehensive loss:
Defined benefit plan
actuarial losses 984 2,490
----------------------------------------------------------------------------
Reduction to comprehensive
income before income taxes $ 973 $ 2,135
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(j) Investment in associate company:
In applying the equity method of accounting for an investment in an associate
company both Canadian GAAP and IFRS require the accounting policies of the
associate entity to be consistent with those of the parent company. As such, the
employee defined benefit asset of the associate company has been adjusted to
reflect the same policies as described in Note 19 (i) for employee future
benefits and the Company has reflected its proportionate share of the
associate's after-tax adjustments to earnings and comprehensive income.
The impact on the Statement of Financial Position was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Jan. 1, 2010 Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Investment in associate
decrease $ (920) $ (1,194) $ (1,050)
----------------------------------------------------------------------------
Reduction to retained earnings $ (920) $ (1,194) $ (1,050)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 months ended Year ended
Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Equity in losses (income) $ (10) $ 15
Other comprehensive loss:
Equity share of associate's
defined benefit plan
actuarial losses 284 115
----------------------------------------------------------------------------
Reduction to comprehensive
income before income taxes $ 274 $ 130
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(k) Property, plant and equipment:
IFRS 1 allows a company to elect to measure an item of property, plant and
equipment at the date of transition at its fair value and use that fair value as
its deemed cost at that date. The Company identified a property at its Hammond
sawmill site which it elected to use fair value as its deemed cost. As at
January 1, 2010 the fair value of the property was estimated to be $16,320,000
with a historical cost of $572,000.
In addition, the Company reversed certain costs related to the transfer of
equipment from one sawmill site to another which, under previous GAAP, qualified
for capital treatment, but under IFRS do not.
The impact on the Statement of Financial Position was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Jan. 1, 2010 Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Property, plant and equipment
increase $ 15,748 $ 15,748 $ 15,724
Related tax effect (1,969) (1,969) (1,963)
----------------------------------------------------------------------------
Increase in retained earnings $ 13,779 $ 13,779 $ 13,761
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of
Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 months ended Year ended
Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Production expense increase $ - $ 24
----------------------------------------------------------------------------
Reduction to comprehensive
income before income taxes $ - $ 24
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(l) Borrowing costs:
IAS 23, Borrowing Costs, requires an entity to capitalize the borrowing costs
for qualifying assets for which the commencement date for capitalization is on
or after January 1, 2009. Early adoption is permitted. IFRS 1 contains an
exemption allowing companies to apply this standard to assets for which the
commencement date is the later of January 1, 2009 and the date of transition.
The Company elected to take this IFRS 1 exemption and, therefore, borrowing
costs prior to January 1, 2010 are expensed.
(m) Decommissioning provisions:
The Company's logging activities give rise to obligations for reforestation and
deactivation of logging roads. In addition, the Company has also recognized some
environmental provisions.
Provisions are measured at the expected value of future cash flows, discounted
to their present value and determined according to the probability of
alternative estimates of cash flows occurring for each operation. Canadian GAAP
requires the provision to be measured at fair value based on the amount a third
party would charge for performing the remediation work. The measurement under
IAS 37, Provisions, Contingent Liabilities and Contingent Assets, is based on
"best estimate". The best estimate calculation can be based on internal or
external costs, depending upon which is most likely.
Discount rates used under Canadian GAAP for decommissioning provisions (known as
asset retirement obligations under Canadian GAAP) are based on the Company's
credit-adjusted risk-free rate. Adjustments are made to decommissioning
provisions for changes in the timing or amount of the cashflows and the
unwinding of the discount. Changes in estimates that decrease provisions are
discounted using the discount rate applied upon initial recognition of the
liability; changes in estimates that increase the provision are discounted using
the current discount rate.
Discount rates used under IFRS reflect the risks specific to the decommissioning
provision. Adjustments are made to decommissioning provisions each period for
changes in the timing or amount of cash flows, changes in the discount rate and
the unwinding of the discount. As such, the discount rate reflects the current
risk-free rate given that risks are incorporated into the future cash flow
estimates.
The impact on the Statement of Financial Position was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Jan. 1, 2010 Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Reforestation liability, non-
current increase $ (1,864) $ (2,139) $ (2,308)
Other liabilities and
provisions increase (915) (864) (1,018)
Related tax effect 695 751 832
----------------------------------------------------------------------------
Reduction to retained earnings $ (2,084) $ (2,252) $ (2,494)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 months ended Year ended
Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Production expense increase $ 224 $ 547
----------------------------------------------------------------------------
Reduction to comprehensive
income before income taxes $ 224 $ 547
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(n) Share-based payments:
The Company has granted certain cash-settled share-based payments to certain
employees. The Company accounted for these share-based payment arrangements by
reference to their intrinsic value under Canadian GAAP.
Under IFRSs the related liability has been adjusted to reflect the fair value of
the outstanding cash-settled share-based payments. The fair value is estimated
by applying an option pricing model and until the liability is settled the fair
value of the liability is remeasured at each reporting date, with changes in
fair value recognized as the awards vest. Additionally, IFRS requires an
estimate of the number of awards expected to vest, which is revised if
subsequent information indicates that actual forfeitures are likely to differ
from the estimate.
As a result, the Company adjusted expenses associated with cash-settled
share-based payments to reflect the changes of the fair values of these awards.
The impact on the Statement of Financial Position was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Jan. 1, 2010 Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Trade accounts payable and
accrued liabilities increase $ (1,744) $ (1,667) $ (1,571)
Other liabilities and
provisions increase (331) (82) (597)
Related tax effect 519 437 542
----------------------------------------------------------------------------
Reduction to retained earnings $ (1,556) $ (1,312) $ (1,626)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 months ended Year ended
Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Long term incentive
compensation expense
(recovery) $ (326) $ 93
----------------------------------------------------------------------------
Reduction to (increase in)
comprehensive income before
income taxes $ (326) $ 93
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(o) Business combinations:
IFRS 1 provides the option to apply IFRS 3, Business Combinations,
retrospectively or prospectively from the date of transition of January 1, 2010.
The retrospective basis would require restatement of all business combinations
that occurred prior to the transition date. The Company elected not to
retrospectively apply IFRS 3 to business combinations that occurred prior to its
transition date and such business combinations have not been restated. Any
goodwill arising on such business combinations prior to the transition date has
not been adjusted from the carrying value previously determined under Canadian
GAAP as a result of applying these exemptions.
(p) Income taxes:
Due to the cyclical nature of the wood products industry and the economic
conditions over the last several years, the Company has not recognized the
benefit of deferred tax assets in excess of deferred tax liabilities under
Canadian GAAP or IFRS.
The above changes had the following impact on deferred income tax liabilities
based on a tax rate of 25 percent:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Jan. 1, 2010 Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Employee future benefits $ 1,718 $ 1,962 $ 2,251
Property, plant and equipment (1,969) (1,969) (1,963)
Decommissioning provisions 695 751 832
Share-based payments 519 437 542
Reduction of deferred income
tax assets for loss carry-
forwards not recognized (651) (1,181) (1,662)
----------------------------------------------------------------------------
Reduction to deferred income
tax liability and increase in
retained earnings $ 312 $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 months ended Year ended
Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Deferred income tax expense
increase $ 558 $ 935
Income tax recovery on other
comprehensive losses (246) (623)
----------------------------------------------------------------------------
Reduction to comprehensive
income $ 312 $ 312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
First-time adoption elections and changes due to IFRS:
(q) Retained earnings:
The above changes had the following impact on retained earnings:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Jan. 1, 2010 Mar. 31, 2010 Dec. 31, 2010
----------------------------------------------------------------------------
Employee future benefits $ (5,153) $ (5,882) $ (6,755)
Investment in associate company (920) (1,194) (1,050)
Property, plant and equipment 13,779 13,779 13,761
Decommissioning provisions (2,084) (2,252) (2,494)
Share-based payments (1,556) (1,312) (1,626)
Tax reduction of deferred
income tax assets for loss
carry-forwards not recognized (651) (1,181) (1,662)
----------------------------------------------------------------------------
Reduction to retained earnings
due to IFRS adjustments 3,415 1,958 174
Reclassifications due to IFRS
Currency translation
adjustments (24,855) (24,855) (24,855)
----------------------------------------------------------------------------
Reduction to retained earnings $ (21,440) $ (22,897) $ (24,681)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The impact on the Statement of Comprehensive Income was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3 months ended Year ended
Mar. 31, 2010 Dec. 31, 2010
Production expense increase
Employee future benefits $ (11) $ (355)
Decommissioning provisions 224 547
Property, plant and equipment - 24
----------------------------------------------------------------------------
213 216
Long term incentive
compensation expense
(recovery) (326) 93
Equity in earnings of associate
company reduction (increase) (10) 15
Deferred income tax expense
(recovery) 558 935
----------------------------------------------------------------------------
Increase to net loss 435 1,259
----------------------------------------------------------------------------
Other comprehensive loss
increase:
Defined benefit plan
actuarial losses 984 2,490
Equity share of associate's
defined benefit plan
actuarial losses 284 115
Income tax recovery on other
comprehensive losses (246) (623)
----------------------------------------------------------------------------
Increase in other comprehensive
loss 1,022 1,982
----------------------------------------------------------------------------
Increase in comprehensive loss $ 1,457 $ 3,241
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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