West Fraser Timber Co. Ltd. (TSX:WFT) today reported earnings after discontinued
operations of $39 million or $0.89 per share on sales of $719 million in the
fourth quarter of 2010 and earnings after discontinued operations of $166
million or $3.84 per share, on sales of $2,886 million for 2010.
"Markets are still somewhat uneven, reflecting the fragile nature of the
recovery. However, our mills ran well despite some challenging weather
conditions and we are generally pleased with the results." said Hank Ketcham,
the Company's Chairman, President and CEO.
The results compare with previous periods as follows:
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($ millions except earnings per 2010 2009
share ("EPS")) YTD Q4 Q3 YTD Q4
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Sales 2,886 719 707 2,353 570
EBITDA(1) 438 75 109 80 56
Operating earnings from continuing
operations 257 38 63 (181) (2)
Earnings from continuing operations 170 27 46 (194) 8
Earnings after discontinued
operations 166 39 45 (341) (20)
Diluted EPS after discontinued
operations ($) 3.84 0.89 1.04 (7.96) (0.47)
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Operational Results
In the quarter the Company's lumber operations generated operating earnings of
$20 million (Q3 - $22 million) and EBITDA of $39 million (Q3 - $49 million). The
Company's lumber operations benefited in 2010 from improved prices supported by
continuing constrained supply and increased Chinese demand for SPF lumber.
The panel segment, which includes plywood, LVL and MDF, generated operating
earnings in the quarter of $2 million (Q3 - $14 million) and EBITDA of $6
million (Q3 - $20 million) as plywood prices came under downward pressure as a
result of increasing supplies of U.S. plywood into the Canadian market.
Pulp and paper operations generated operating earnings in the quarter of $30
million (Q3 - $41 million) and EBITDA of $44 million (Q3 - $55 million). Pulp
prices weakened during the quarter with the NBSK benchmark averaging 3% lower
than in the third quarter.
Outlook
Although 2010 results represented a significant improvement to those achieved in
2009, the absence of a meaningful recovery of the U.S. housing market and
continuing threats to global economic recovery leads to a cautious outlook for
2011. SPF lumber and pulp prices are likely to be positively influenced by
continuing strong demand from Asia while SYP lumber and panel markets will
continue to struggle until a turnaround in U.S. housing occurs. Although many
analysts expect some improvement in U.S. housing there are a number of factors,
notably high rates of foreclosures and significant shadow inventories, that
could undermine any meaningful recovery.
"Despite some market uncertainties, we are well positioned to benefit from the
eventual recovery. Our low-cost, highly-efficient facilities allow us to operate
at high rates and generate value for our shareholders throughout the recovery
cycle." said Hank Ketcham.
Annual Financial Statements and Management's Discussion & Analysis ("MD&A")
The Company's consolidated financial statements for the year ended December 31,
2010 and related MD&A is available on the Company's website: www.westfraser.com
and on the System for Electronic Document Analysis and Retrieval ("SEDAR") at
www.sedar.com under the Company's profile.
Increased Dividend Declared
The Board of Directors of the Company has declared a dividend of $0.14 per share
on the Common shares and the Class B Common shares in the capital of the
Company, payable on April 1, 2011 to shareholders of record on March 18, 2011.
The Company
West Fraser is an integrated wood products company producing lumber, wood chips,
LVL, MDF, plywood, pulp and newsprint. The Company has operations in western
Canada and the southern United States.
Forward-Looking Statements
This News Release contains historical information, descriptions of current
circumstances and statements about potential future developments including
anticipated improvement in U.S. housing starts and its potential effect on the
Company's results. The latter, which are forward-looking statements and are
included under the heading "Outlook", are presented to provide reasonable
guidance to the reader but their accuracy depends on a number of assumptions and
is subject to various risks and uncertainties. Actual outcomes and results will
depend on a number of factors that could affect the ability of the Company to
execute its business plans, including those matters described in the 2010 annual
Management's Discussion & Analysis under "Risks and Uncertainties", in
particular under the heading "Product Demand and Price Fluctuations", and may
differ materially from those anticipated or projected. 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 circumstances except as required by applicable securities laws.
Conference Call
Investors are invited to listen to the quarterly conference call on Friday,
February 18, 2011 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time) by dialing
1-866-226-1792 (toll free North America). The call may also be accessed through
West Fraser's website at www.westfraser.com.
West Fraser shares trade on the Toronto Stock Exchange under the symbol: "WFT".
(1) Throughout this News Release, reference is made to EBITDA (defined as
operating earnings plus amortization and asset impairments). Management of the
Company believes that, in addition to earnings, EBITDA is a useful performance
indicator and is a useful complementary measure of cash available prior to debt
service, capital expenditures and income taxes. However, EBITDA is not a
generally accepted earnings measure under Canadian generally accepted accounting
principles ("GAAP") and does not have a standardized meaning prescribed by
Canadian GAAP. Investors are cautioned that EBITDA should not be considered as
an alternative to earnings or cash flow, as determined in accordance with
Canadian GAAP. As there is no standardized method of calculating EBITDA, the
Company's method of calculating EBITDA may differ from the methods used by other
entities and, accordingly, the Company's use of that term may not be directly
comparable to similarly titled measures used by other entities.
2010 MANAGEMENT'S DISCUSSION & ANALYSIS
This discussion and analysis by West Fraser's management ("MD&A") should be read
in conjunction with the 2010 annual audited consolidated financial statements
and accompanying notes. Dollar amounts are expressed in Canadian currency,
unless otherwise indicated.
This MD&A contains historical information, descriptions of current circumstances
and statements about potential future developments and anticipated financial
results. The latter, which are forward-looking statements, are presented to
provide reasonable guidance to the reader but their accuracy depends on a number
of assumptions and is subject to various risks and uncertainties.
Forward-looking statements are included under the headings "Annual Results by
Product Segment" (description of anticipated harvesting rate adjustments) and
"Business Outlook" (U.S. housing market expectations and consequences and
projected demand for various products). As well, Table L ("Earnings Sensitivity
to Key Variables") and descriptions of announced but not implemented actions
such as projected capital expenditures should be considered as forward-looking
statements. Actual outcomes and results of these statements will depend on a
number of factors which are noted in this MD&A, and may differ materially from
those anticipated or projected. 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 circumstances except as
required by applicable securities laws.
Throughout this MD&A reference is made to EBITDA (defined as operating earnings
plus amortization and asset impairments). Management of the Company believes
that, in addition to earnings, EBITDA is a useful performance indicator and is a
useful complementary measure of cash available prior to debt service, capital
expenditures and income taxes. EBITDA is not a generally accepted earnings
measure under Canadian generally accepted accounting principles ("CGAAP") and
does not have a standardized meaning prescribed by CGAAP. Investors are
cautioned that EBITDA should not be considered as an alternative to earnings or
cash flow, as determined in accordance with CGAAP. As there is no standardized
method of calculating EBITDA, the Company's method of calculating EBITDA may
differ from the methods used by other entities and, accordingly, the Company's
use of that term may not be directly comparable to similarly titled measures
used by other entities.
This MD&A includes references to benchmark prices over selected periods for
products of the type produced by West Fraser. These benchmark prices do not
necessarily reflect the prices obtained by West Fraser for those products during
such period.
For definitions of various abbreviations and technical terms used in this MD&A
please see the Glossary of Industry Terms found in our Annual Report.
The information in this MD&A is as at February 17, 2011, unless otherwise indicated.
Matters Affecting Comparisons
This MD&A includes certain comparisons of the results for the year ended
December 31, 2010 to the results for the years ended December 31, 2009 and 2008,
and the results for the fourth quarter of 2010 (the "current quarter") compared
to those of the third quarter of 2010 (the "previous quarter") and the fourth
quarter of 2009.
In October 2009, the Company announced its decision to permanently close its
Eurocan mill, the linerboard and kraft paper operation in Kitimat, B.C. and, in
January 2010, the mill ceased operations. Accordingly, current and prior period
results for this operation have been reclassified to discontinued operations.
Annual Results
Sales and Earnings Comparison ($ millions, except as stated) Table A
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Year ended December 31 2010 2009 2008
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Sales by Segment
Lumber 1,622 1,285 1,645
Panels 401 391 428
Pulp & Paper 863 677 790
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Total 2,886 2,353 2,863
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EBITDA 438 80 114
Amortization (181) (245) (254)
Asset impairments - (17) -
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Operating earnings 257 (182) (140)
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Operating Earnings by Segment
Lumber 125 (190) (191)
Panels 37 14 (9)
Pulp & Paper 132 (5) 56
Corporate and Other (37) - 4
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Total 257 (181) (140)
Less certain unusual items:
Restructuring charges - 5 -
Asset impairments - 17 -
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Adjusted operating earnings(1) 257 (159) (140)
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Earnings - continuing
operations 170 (194) (134)
Earnings - after discontinued
operations 166 (341) (137)
Diluted earnings per share -
continuing operations - $ 3.93 (4.54) (3.12)
Diluted earnings per share -
after discontinued operations
- $ 3.84 (7.96) (3.20)
Cash dividends per share - $ 0.18 0.23 0.56
Total assets 2,815 2,813 3,412
Long-term debt 300 416 616
Cdn$1.00 converted to US$ -
average 0.971 0.876 0.938
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1. Adjusted operating earnings refers to total operating earnings less
certain unusual items. Adjusted operating earnings is not a generally
accepted earnings measure and should not be considered as an alternative
to earnings as determined in accordance with CGAAP. The Company's use of
this term may not be directly comparable with similarly titled measures
used by other companies.
Selected Quarterly Information
($ millions, except earnings per share ("EPS") amounts which are
in $) Table B
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Q4-10 Q3-10 Q2-10 Q1-10 Q4-09 Q3-09 Q2-09 Q1-09
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Sales(1) 719 707 772 688 570 612 612 558
Earnings(1) 27 46 62 35 8 (100) (23) (80)
Earnings
after
discontinued
operations 39 45 63 20 (20) (199) (39) (83)
Basic
EPS(1) 0.62 1.08 1.46 0.80 0.18 (2.34) (0.53) (1.86)
Diluted
EPS(1) 0.61 1.07 1.44 0.79 0.18 (2.34) (0.53) (1.86)
Basic EPS
after
discontinued
operations 0.90 1.05 1.48 0.45 (0.47) (4.64) (0.91) (1.94)
Diluted
EPS after
discontinued
operations 0.89 1.04 1.46 0.45 (0.47) (4.64) (0.91) (1.94)
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1. From continuing operations.
The early stages of the economic recovery in the U.S., Canada, Asia and other
regions of the world had a positive effect on the Company's 2010 results.
Housing in the U.S. continues to be plagued by high inventories of unsold homes,
high foreclosure rates and low prices. These factors, combined with high
unemployment, continued to depress new home construction and demand for building
products in the U.S. The relative strength of the Canadian housing market and
increased demand for lumber in China, combined with supply curtailments, helped
support the SPF lumber market. Pulp markets strengthened significantly from late
2009 through to the middle of 2010 when demand slowed somewhat. Supply
constraints resulting from an earthquake in Chile in the early part of the year
helped bolster prices for all pulp grades. In the second quarter new pulp
production started up which created downward pressure on prices especially for
hardwood kraft and BCTMP. Average benchmark prices for all products were higher
in 2010 compared to 2009. Partially offsetting increases in U.S.
dollar-denominated prices was the effect of the rising value of the Canadian
dollar, which averaged US$0.97 compared to US$0.88 in 2009.
In 2009, as a result of weak lumber and pulp markets, the Company took
significant market-related downtime in its lumber, MDF and LVL operations and,
to a lesser extent, in its plywood and pulp operations. With the improvement in
prices in 2010 the Company's Canadian sawmills and the plywood and pulp mills
operated at or near capacity. The Company's MDF, LVL plants and several of its
U.S. sawmills continued to operate on a curtailed basis.
In January 2010 the Company closed its linerboard and kraft paper mill at
Kitimat, B.C. As a result of the closure, the mill's employees were either
relocated or received severance payments and selected assets and inventories
have been sold. Further asset sales and closure activities will continue into
2011.
In 2010 the Company reinstated its capital expenditure program which had been
substantially suspended in 2008 and 2009 due to the poor economic conditions.
Expenditures under the program are expected to total $230 million with
approximately two-thirds to be spent in 2011. The program is focused on
projects, mainly in the Company's lumber operations, that are intended to
significantly improve efficiency and profitability. In addition, the Company has
allocated the majority of the $88 million of credits earned by it in 2009 under
the Canadian Pulp and Paper Green Transformation Program (the "Green
Transformation Program"). In 2010 the Company also completed a
previously-announced purchase of a long-term timber quota in the Kamloops
region. This acquisition is expected to benefit the Company's operations in 100
Mile House, Chasm and Williams Lake.
In 2010 the Company renegotiated and extended its revolving credit facility. The
replacement $500 million facility is committed until December 2014 and is
arranged with a syndicate of nine Canadian and U.S. banks.
Long-term debt includes US$300 million of senior notes. These notes are
translated into Canadian dollars at the end of each reporting period by applying
the prevailing exchange rate. In 2010 this resulted in an exchange gain of $17
million compared to a gain of $50 million in 2009 and a loss of $68 million in
2008. Gains and losses from the translation of other foreign
currency-denominated items are included in other income. For 2010 these items
resulted in a $7 million translation loss compared to a $9 million translation
loss in 2009 and a $24 million translation gain in 2008.
In the fourth quarter of 2010 the Company recorded an increased income tax
provision of $10 million ($0.22 per share) relating to a change in Canadian tax
legislation that denies a deduction for certain payments related to share
options.
In 2009 the Company recorded a valuation allowance which resulted in a reduction
to the tax recovery of $114 million ($2.66 per share) as well as asset
impairment and restructuring charges of $22 million ($0.37 per share) related to
certain indefinitely idled sawmills.
In 2010 the Company's Board of Directors increased the dividend, which is
typically paid quarterly, from an annualized rate of $0.12 per share to $0.24
per share.
On February 17, 2011 the Company's Board of Directors further increased the
quarterly dividend to $0.14 per share ($0.56 on an annualized basis).
Annual Results by Product Segment
Lumber Segment Table C
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2010 2009
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Production (MMfbm)
SPF 3,318 2,883
SYP 1,365 1,269
Shipments (MMfbm)
SPF 3,341 3,042
SYP 1,352 1,307
Wood chip production
SPF (M ODTs) 1,736 1,549
SYP (M green tons) 1,782 1,732
Sales ($ millions) 1,622 1,285
EBITDA ($ millions) 228 (31)
EBITDA margin (%) 13 n/a
Operating earnings ($ millions) 125 (190)
Less certain unusual items:
Restructuring charge - 5
Asset impairments - 17
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Adjusted operating earnings ($ millions)(1) 125 (168)
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Capital expenditures ($ millions) 47 10
Benchmark price (US$ per Mfbm)
SPF #2 & Better 2x4(2) 256 182
SYP #2 West 2x4(3) 303 242
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1. Adjusted operating earnings refers to total operating earnings less
certain unusual items. Adjusted operating earnings is not a generally
accepted earnings measure and should not be considered as an alternative
to earnings as determined in accordance with CGAAP. The Company's use of
this term may not be directly comparable with similarly titled measures
used by other companies.
2. Source: Random Lengths - 2x4, #2 & Better - Net FOB mill.
3. Source: Random Lengths - 2x4 - Net FOB mill Westside.
Operating earnings in the Company's lumber segment improved markedly, compared
to the losses sustained in the prior year due to higher prices for both SPF and
SYP lumber and higher operating rates and shipping volumes.
The severe downturn in new home construction in the U.S. that began in 2006
extended through 2010 and this was reflected in continued low demand for lumber
from U.S. sources. Housing starts in the U.S. improved only slightly to 587,600
in 2010 from 554,000 starts reported for 2009, and mortgage foreclosures and
delinquencies remained high. Lumber demand in Canada remained fairly strong on
average for the year although demand declined in the second half as housing
starts, particularly in eastern Canada, fell. Canadian exports of SPF lumber
moved higher in 2010 compared to the prior year as a result of a substantial
increase in purchases of lumber by buyers in China. Overall the demand for both
SPF and SYP lumber remained low compared to historic levels.
Despite this continued low level of demand, average prices for both SPF and SYP
lumber increased substantially in 2010 compared to the previous year, as the
combination of continuing production curtailments, inventory restocking for both
SPF and SYP lumber, and the increasing demand for SPF lumber in China brought
the market more into balance. Benchmark prices for SPF lumber averaged
US$256/mfbm in 2010, 41% higher than the average of US$182 in 2009. Similarly
the benchmark price for SYP lumber increased 25% in 2010 averaging US$303/mfbm
compared to an average of US$242 in 2009.
SPF lumber producers in Canada operated at an average rate of approximately 75%
of capacity in 2010. In the first quarter many North American distributors began
to restock lumber inventories in anticipation of an improved spring building
season. Also, very poor weather conditions in the southern U.S. caused
significant SYP lumber production curtailments which temporarily tightened
supply. The increased demand, coupled with the constrained supply both in Canada
and the U.S., caused SPF prices to increase dramatically through April, reaching
a peak of US$320/mfbm. Midway through the second quarter, SPF prices declined to
below US$250/mfbm as production increased and inventory restocking subsided. SPF
prices remained soft through late in the fourth quarter when they again moved
higher. Throughout the year, however, growing demand from China helped provide
support for higher SPF prices.
Canadian dollar mill net realizations were adversely affected during 2010 by a
stronger Canadian dollar which averaged US$0.97 in the year compared to US$0.88
in 2009.
The SYP lumber benchmark price increased significantly early in 2010 as
extensive rains across the southern U.S. caused widespread logging suspensions
and SYP lumber production curtailments. In addition, inventory restocking by
many SYP distributors and retailers put upward pressure on prices, which peaked
at US$448/mfbm in April. However, prices began to fall later in the second
quarter as SYP lumber production became more balanced with demand.
Total lumber shipments increased approximately 8% from 2009 levels. Of the
Company's total SPF shipments, approximately 16% by volume was delivered to
customers outside of North America compared to 12% in 2009. In the two largest
of these export markets, China and Japan, shipments increased from 2009 levels
by 80% and 12% respectively. Shipments of SYP lumber increased only modestly in
2010, approximately 3%, reflecting continued poor demand in the U.S. Inventories
of both SPF and SYP lumber were well controlled in the year.
SPF lumber production increased approximately 15% from 2009 levels as the
Canadian sawmills operated near capacity for most of the year. Average unit cash
costs for SPF lumber declined slightly from 2009 levels as lower cash conversion
costs offset increased variable compensation costs. SYP lumber production
increased approximately 8% from 2009 levels. The U.S. sawmills operated at
approximately 68% of capacity, a slight increase from 2009 operating rates.
Average unit cash costs increased slightly, reflecting higher log costs.
Amortization costs were lower in 2010 compared to 2009 reflecting lower
amortization rates on selected assets and certain assets becoming fully
amortized.
In 2009 asset impairment charges of $17 million and restructuring charges of $5
million were recorded relating to certain sawmills that were indefinitely
curtailed. No such charges were recorded in 2010.
Total export taxes on SPF lumber shipped to the U.S. increased approximately 26%
as a result of higher SPF lumber prices and higher shipments. In the second
quarter the composite lumber price on which the export tax rate is determined
under the SLA increased to a level that triggered lower export tax rates in May
and July and no export tax in June. In all other months the base export tax rate
of 15% applied to shipments of SPF lumber to the U.S. In months where shipments
from B.C. or Alberta exceed a prescribed surge volume the applicable export tax
rate is increased by 50% for all shipments to the U.S. from that province for
that month. For several months in 2010 and 2009 shipments from the province of
Alberta exceeded the surge volume limits and were subject to the higher export
tax rate.
The Company continued to process a large portion of poorer quality mountain pine
beetle-killed logs in its B.C. mills and, to a lesser extent, in its Alberta
mills. It has been able to reduce an anticipated substantial decline in lumber
recovery and poorer grade mix attributable to the low quality beetle-killed logs
through a concentrated management focus on improving the manufacturing process,
including significant capital expenditures and technological innovations.
Capital spending in 2010 in the lumber segment totalled $47 million compared to
$10 million in 2009, reflecting a continuing focus on cash preservation. A
significant portion of the total invested in 2010 related to the acquisition of
a long-term timber quota in the interior of B.C. This acquisition will improve
the long-term timber supply for certain of the Company's sawmills in the area.
The balance of the capital expenditures were for selected plant and equipment
upgrades. In the later part of 2010 the Company announced the approval of a $230
million capital expenditure program, the majority of which is to be invested in
high-return projects in the Company's Canadian and U.S. lumber operations.
Panels Segment
Table D
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2010 2009
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Plywood (MMsf 3/8" basis)
Production 791 745
Shipments 800 757
MDF (MMsf 3/4" basis)
Production 192 195
Shipments 188 205
LVL (Mcf)
Production 1,918 1,643
Shipments 1,894 1,644
Sales ($ millions) 401 391
EBITDA ($ millions) 57 48
EBITDA margin (%) 14 12
Operating earnings ($ millions) 37 14
Capital expenditures ($ millions) 2 1
Benchmark price
Plywood (per Msf 3/8" basis)(1) Cdn$ 334 329
MDF (per Msf 3/4" basis)(2) US$ 536 489
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1. Source: Crow's Market Report - Delivered Toronto.
2. Source: Resource Information Systems, Inc. - MDF Western U.S. - Net FOB
mill.
The Company's plywood, MDF and LVL operations comprise the panels segment. The
demand and price for each of these products is influenced, although by differing
degrees, by new home construction in the U.S. and Canada.
Operating earnings increased as a result of higher prices and shipments for both
plywood and LVL, partially offset by lower MDF shipments compared to 2009. Lower
amortization in 2010 also contributed $15 million to improved operating earnings
as certain assets became fully amortized and certain amortization rates
declined.
The Company's plywood is primarily sold in Canada with eastern Canada being a
significant market. The Canadian housing market remained relatively strong
through most of 2010, supporting demand and prices. Although average benchmark
prices rose only 1% to $334/msf compared to $329 in 2009, plywood prices rallied
to a high of $401 in the second quarter. As the Canadian dollar strengthened
close to par with the U.S. dollar, U.S. produced plywood entered the Canadian
market, resulting in increased supply and causing prices to decline. In
addition, housing starts in Canada declined in the second half of the year,
putting further pressure on prices.
Plywood production increased 6% compared to 2009, reflecting improved
productivity and an absence of market curtailments. Weak markets in 2009
resulted in short market curtailments at two of the Company's three plywood
mills.
The Company's LVL plant continues to operate at curtailed levels due to ongoing
poor demand for LVL although production in 2010 increased 17% over the previous
year to 1.9 million cu. ft. This represents approximately 60% of capacity.
Average unit cash costs were substantially unchanged from 2009 levels.
The market for LVL is largely dependant on new home construction in Canada and
the U.S. With continuing low housing starts in the U.S., demand was not
sufficient to operate this plant at full capacity.
The increase in the 2010 benchmark MDF price of nearly 10%, to US$536/msf, was
more than offset by the higher value of the Canadian dollar. However, lower
average unit cash costs in 2010 resulted in improved results.
The Company's two MDF plants operated at approximately 65% of capacity in the
year, in response to the continuing poor demand for MDF.
Pulp & Paper Segment
Table E
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(From continuing operations) 2010 2009
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Sales ($ millions) 863 677
EBITDA ($ millions) 187 60
EBITDA margin (%) 22 9
Operating earnings ($ millions) 132 (5)
Capital expenditures ($ millions) 7 6
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In 2010 the Company's Eurocan mill, a linerboard and kraft paper mill located at
Kitimat, B.C. was permanently closed. As such, the current and comparative
results from this business are no longer included in the results of the pulp &
paper segment but rather in discontinued operations.
Operating earnings in the pulp & paper segment improved significantly in 2010
compared to 2009 as a result of higher prices for NBSK and BCTMP pulp and
newsprint as well as higher operating rates and increased shipments for pulp and
newsprint.
In 2009 the Government of Canada confirmed an allocation of credits totalling
$88 million to West Fraser under the Green Transformation Program. The Program
provides funding for approved capital projects to improve the energy efficiency
and environmental performance of Canadian pulp and paper mills. In early 2010
the Company began the application process for approval of several projects and
as of December 31, 2010 projects having a total value of $76 million have been
formally approved. Under the Program these credits must be used by March 31,
2012.
In 2010 capital spending, excluding any spending under the Green Transformation
Program, was $7 million, similar to the previous year.
Pulp(1)
Table F
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2010 2009
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Production - NBSK (Mtonnes) 525 523
Shipments - NBSK (Mtonnes) 504 514
Production - BCTMP (Mtonnes) 616 501
Shipments - BCTMP (Mtonnes) 623 544
Benchmark price - NBSK (per tonne)(2) US$ 960 718
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1. For Cariboo Pulp & Paper Company, represents West Fraser's 50% share.
2. Source: Resource Information Systems, Inc. - U.S. list price, delivered
U.S.
The average benchmark price for NBSK pulp in 2010 increased to US$960 compared
to US$718 in 2009, although approximately one-third of this increase was
effectively offset by the strengthening of the Canadian dollar in 2010.
Pulp markets were very strong in 2010 with benchmark NBSK pulp prices reaching
US$1,020 per tonne in June and July of 2010. The rapid increase in price in the
first half of the year was related in part to supply constraints resulting from
the Chilean earthquake that occurred early in the year. In the third quarter
supply reached normal levels and prices began to decline. BCTMP prices increased
in proportion to NBSK pulp prices through the first half of the year. However,
near the end of the second quarter, BCTMP volumes exported to China declined
considerably on lower demand and new capacity startups up in China. Prices
realized for BCTMP declined substantially in response. BCTMP exports to China
increased to more normal levels later in the year as demand strengthened and the
new capacity was absorbed into the market.
Total pulp production in 2010 was 1,141 Mtonnes, an annual record for the Company.
NBSK pulp production was similar to 2009 levels despite the planned maintenance
shutdowns in 2010 at the Hinton and Cariboo NBSK mills. In 2009 only the Cariboo
mill took a planned maintenance shutdown as maintenance shutdowns are on an
18-month rotation at the Hinton mill. Both mills operated well and the Cariboo
mill established a new annual production record.
BCTMP production was substantially higher in 2010 than in 2009 and annual
production records were established at both the Quesnel and Slave Lake mills.
Production at the Quesnel BCTMP mill was interrupted in the second quarter for
scheduled maintenance downtime, resulting in approximately 18,000 tonnes of lost
production. In 2009 both mills took market-related downtime, reducing production
by approximately 80,000 tonnes. In past years the Slave Lake mill has reduced
production because of very high electricity prices in Alberta. In 2010 the lost
production as a result of these electricity price-related curtailments amounted
to approximately 9,000 tonnes compared to approximately 17,000 tonnes in 2009.
Average unit cash costs were marginally lower in 2010 compared to 2009 as
increases in fibre, electricity and packaging costs were offset by lower
chemical and natural gas costs. Fixed costs were also lower on a per-unit basis
due to higher production in 2010.
Newsprint(1)
Table G
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2010 2009
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Production (Mtonnes) 131 111
Shipments (Mtonnes) 137 104
Benchmark price - (per tonne)(2) US$ 607 560
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1. Represents West Fraser's 50% share of ANC.
2. Source: Resource Information Systems, Inc. - delivered U.S. 48.8 gram.
Although average benchmark newsprint prices increased approximately 8% from 2009
levels, the strengthening Canadian dollar more than offset the benefit of the
increase. Expressed in Canadian dollar terms, the average benchmark price was 2%
lower in 2010 compared to 2009. Both newsprint demand and capacity in North
America remained at low levels in 2010 as in 2009.
Production increased in 2010 to normal levels compared to 2009 when significant
downtime was taken to complete press modifications to the newsprint machine.
Unit cash costs were approximately 9% lower in 2010 compared to 2009 as a result
of lower chemical, natural gas, and maintenance cost as well as the higher
production volumes, offset in part by higher fibre and electricity costs.
Discontinued Operations
The Eurocan linerboard and kraft paper mill ceased operations in the first
quarter of 2010. Since the closure all finished inventory was sold or committed
to specific customers. In the fourth quarter the Company sold both paper
machines and related assets to two unrelated parties. Further asset sales are
currently being considered.
The operating loss for 2010 includes the results from operations of the mill up
to the date of closure, the costs of closing the mill including severance,
contract cancellations and other related closure costs, as well as the sale of
linerboard and kraft paper inventories during the year. Other income in the year
includes the gain on the sale of the two paper machines and related equipment.
The operating loss for 2009 includes a loss of approximately $29 million related
to the manufacture and sale of linerboard and kraft paper. The remainder of the
operating loss relates to asset impairment and restructuring charges that were
recorded as a result of the closure of the mill.
As at December 31, 2010 the assets and liabilities associated with the Eurocan
business are as follows:
Table H
--------------------------------------------------
($ millions) December 31, 2010
--------------------------------------------------
Current assets 4
Non-current assets 1
--------------------------------------------------
Total assets 5
--------------------------------------------------
--------------------------------------------------
Current liabilities (8)
Non-current liabilities (8)
--------------------------------------------------
Total liabilities (16)
--------------------------------------------------
--------------------------------------------------
The summarized results for the discontinued Eurocan operation are as follows:
Table I
-----------------------------------------------------------------------
($ millions) 2010 2009
-----------------------------------------------------------------------
Sales 71 259
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Operating loss (20) (211)
Other income 15 -
-----------------------------------------------------------------------
Loss before income tax (5) (211)
Income tax recovery 1 65
-----------------------------------------------------------------------
Loss (4) (146)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Cash flows from operating and investing activities 31 9
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Production (Mtonnes) 29 422
Shipments (Mtonnes) 121 401
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Production and shipments declined in 2010 compared to 2009 as a result of the
permanent closure of the mill in January 2010. In 2009 Eurocan ran near capacity
with the exception of market-related downtime in the second quarter.
Corporate and Other
Selling, general and administration expense includes an expense of $34 million
related to equity-based compensation plans compared to $3 million in 2009. This
expense varies directly with changes in the market price of the Company's Common
shares during the reporting period.
The Company maintains various equity-based compensation plans, including stock
options and phantom share units, the value of which are based, in whole or in
part, on the market price of the Company's Common shares.
Excluding the expense related to equity-based compensation, selling, general and
administrative expense increased approximately 12% compared to 2009 reflecting
increased variable compensation and employee benefit costs.
Other income included a $7 million loss compared to a $9 million loss in 2009
related to the translation of foreign currency-denominated items other than
foreign currency-denominated long-term debt. Also included in other income in
2010 was a loss of $5 million on derivative financial instruments compared to a
loss of $1 million in 2009.
4th Quarter Results
Table J
---------------------------------------------------------------------------
Q4 - 2010 Q3 - 2010 Q4 - 2009
---------------------------------------------------------------------------
Production
Lumber (MMfbm)
SPF 804 827 742
SYP 355 373 284
---------------------------------------------------------------------------
1,159 1,200 1,026
Plywood (MMsf 3/8" basis) 190 203 183
MDF (MMsf 3/4" basis) 44 52 46
LVL (Mcf) 382 362 466
BCTMP (Mtonnes) 161 160 158
NBSK (Mtonnes) 142 143 133
Newsprint (Mtonnes) 33 34 33
Linerboard and Kraft Paper (Mtonnes) - - 120
Shipments
Lumber (MMfbm)
SPF 832 837 742
SYP 355 382 273
---------------------------------------------------------------------------
1,187 1,219 1,015
Plywood (MMsf 3/8" basis) 208 218 194
MDF (MMsf 3/4" basis) 42 46 44
LVL (Mcf) 387 363 442
BCTMP (Mtonnes) 181 131 128
NBSK (Mtonnes) 134 120 120
Newsprint (Mtonnes) 34 33 34
Linerboard and Kraft Paper (Mtonnes) - 8 130
---------------------------------------------------------------------------
Sales and Earnings Comparison ($
millions, except as stated)
Sales by Segment
Lumber 397 398 301
Panels 92 105 92
Pulp & Paper 230 204 177
---------------------------------------------------------------------------
Total 719 707 570
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating Earnings by Segment
Lumber 20 22 (22)
Panels 2 14 8
Pulp & Paper 30 41 16
Corporate & Other (14) (14) (4)
---------------------------------------------------------------------------
Operating Earnings 38 63 (2)
Interest expense (6) (6) (5)
Exchange gain on long-term debt 10 10 6
Other income (expense) (3) 1 2
Recovery of (provision for) income
taxes (12) (22) 7
---------------------------------------------------------------------------
Earnings from continuing operations 27 46 8
Earnings from discontinued operations 12 (1) (28)
---------------------------------------------------------------------------
Earnings 39 45 (20)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Cdn$1.00 converted to US$ - average 0.987 0.962 0.946
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Table K shows selected average benchmark prices during the current quarter
compared to the previous quarter and the fourth quarter of 2009 for products of
the type produced by West Fraser, although these prices do not necessarily
reflect the prices obtained by it.
Table K
---------------------------------------------------------------------------
Average Benchmark Prices (in US$,
except plywood) Q4 - 2010 Q3 - 2010 Q4 - 2009
---------------------------------------------------------------------------
SPF 2x4 random length (per Mfbm)(1) 269 222 206
SYP #2 West 2x4 (per Mfbm)(2) 270 248 246
Plywood (per Msf 3/8" basis)(3)Cdn$ 301 327 322
MDF (per Msf 3/4" basis)(4) 547 563 480
Newsprint (per tonne)(5) 640 635 505
NBSK (per tonne)(6) 967 1,000 820
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Sources:
1. Random Lengths - 2x4, #2 & Better - Net FOB mill.
2. Random Lengths - 2x4 - Net FOB mill Westside.
3. Crow's Market Report - Delivered Toronto.
4. Resource Information Systems, Inc. - MDF Western U.S. - Net FOB mill.
5. Resource Information Systems, Inc. - U.S. delivered 48.8 gram.
6. Resource Information Systems, Inc. - U.S. list price, delivered U.S.
Operating earnings for the quarter declined compared to the previous quarter
mainly due to lower pulp and panel earnings as a result of lower prices for
pulp, plywood and MDF. Earnings were also affected by the value of the Canadian
dollar which strengthened slightly against the U.S. dollar in the current
quarter to average US$0.987. Corporate and other costs were similar in total to
the prior quarter. The equity-based compensation expense in the fourth quarter
was $20 million compared to $8 million in the previous quarter but this
difference was substantially offset by variable employee compensation charges of
earlier quarters being reallocated to the operating segments.
Compared to the fourth quarter of 2009 operating earnings were $40 million
higher largely due to improved pricing for all products except plywood. The
benefit of higher U.S. dollar-denominated prices for lumber, MDF, pulp and
newsprint were partially offset by the increase in the value of the Canadian
dollar which averaged US$0.987 compared to US$0.946 in the comparable quarter
last year. Corporate and other costs were higher in the current quarter compared
to the fourth quarter of 2009 reflecting an increase in equity-based
compensation expense as the market value of the Company's Common shares
increased.
The current quarter's results include an exchange gain on long-term debt of $10
million as a result of the increase in the value of the Canadian dollar at
quarter end compared to the previous quarter-end value. Other expense for the
quarter was $3 million compared to other income of $1 million in the previous
quarter which included a gain on the sale of certain assets.
Although average U.S. dollar-denominated benchmark prices for both SPF and SYP
lumber were higher in the current quarter than in the previous quarter,
operating earnings for the lumber segment were slightly lower. Mill net returns
for SPF lumber did not fully reflect the increase in the benchmark price due to
sales mix and timing of sales and lumber shipments. Mill net returns for SYP
lumber were similar in the current quarter compared to the previous quarter as
the prices for wider dimensions did not improve as the benchmark price
strengthened. Average benchmark prices and mill nets for both SPF and SYP were
higher in the quarter than in the fourth quarter of 2009, reflecting improved
markets in the U.S. and China.
Lumber production and shipments were down slightly in the current quarter
compared to the previous quarter as there were fewer operating days in the
current quarter. Production was higher in the current quarter compared to the
comparable quarter in the previous year as the SPF mills in Canada operated near
capacity in the current quarter and were somewhat curtailed in the fourth
quarter of 2009. Also, the SYP mills in the U.S. operated at higher rates in the
current quarter than in the comparable quarter last year. Shipments were up for
both SPF and SYP compared to the fourth quarter of 2009 as lumber demand was
somewhat stronger in the current quarter and, in the case of SPF lumber, export
shipments to China and Japan were higher in the current quarter than in the
fourth quarter of 2009.
Operating earnings for the lumber segment were similar to the previous quarter
but substantially higher than in the comparable period in 2009, a reflection of
improved markets and increased production in 2010. Operating earnings in the
current quarter included reduced amortization relating to fully depreciated
assets and changes in amortization rates but this was offset by an allocation of
administrative charges that had been previously recorded in the corporate
segment.
Operating earnings for panels were down from the previous quarter, largely as a
result of lower plywood and MDF prices as well as lower production and shipment
volumes in the current quarter. Operating earnings in the current quarter were
reduced by an allocation of administrative charges that had been previously
recorded in the corporate segment. This was offset by lower amortization
charges.
Compared to the same quarter in 2009 panel operating earnings were lower due to
lower prices for plywood, which were only partially offset by higher MDF prices
and higher plywood shipments in the current quarter. Current quarter operating
earnings were also affected by the allocation of administrative charges that had
been previously recorded in the corporate segment, offset by lower amortization
charges.
Pulp and paper operating earnings were lower in the current quarter compared to
the previous quarter due to lower sales prices. Production in the current
quarter was similar to the previous quarter but pulp shipments were
significantly higher than in the third quarter. The higher shipments offset in
part the effect of the lower pulp prices. Average unit pulp cash costs were
largely unchanged from the prior quarter.
Compared to the same quarter in 2009 operating earnings were higher as a result
of higher prices and higher production and shipments. Average unit pulp cash
costs were similar to the comparable quarter in 2009 as higher fibre costs were
offset by lower chemical, natural gas and other costs.
Business Outlook
The Company's lumber operations benefited in 2010 from improved prices supported
by continuing constrained supply and increased Chinese demand for SPF lumber.
The Company expects conditions in 2011 to remain generally similar to 2010 as a
slow U.S. housing recovery is expected to continue to impede the start-up of a
significant amount of currently-idled production capacity. Key risks to a
continued recovery of lumber markets include increased lumber production without
a balancing increase in demand, possible disruptions to the U.S. housing
recovery including the effect of foreclosures and other factors that would
increase an already significant oversupply of housing inventory, a contraction
of mortgage credit, or a reduction of offshore demand, including from China. In
the absence of such disruptions, the Company's lumber operations are well
positioned to achieve results comparable to 2010.
On January 18, 2011, the U.S. filed a request for arbitration under the SLA
2006, claiming that B.C. has not applied the timber pricing system grandfathered
in the agreement. Canada is preparing a defence to the claim but it is not
possible at this time to predict the outcome, the value of the claim or the
timing of the resolution.
Plywood represents the most significant portion of the Company's panels segment,
and its results in 2011 will depend on the strength of the Canadian housing
market, particularly in eastern Canada which is the Company's traditional
plywood market, as well as whether U.S. manufactured plywood will continue to be
sold into Canada. U.S. plywood producers are expected to continue shipping to
Canada as long as U.S. housing starts remain low and the Canadian dollar remains
strong. Analysts are generally predicting a slow but gradual recovery of U.S.
housing but the Canadian dollar is not expected to significantly weaken in the
short term. As a result, the Company will carefully monitor the Canadian plywood
market and be ready to adjust production levels if necessary.
Demand for NBSK and BCTMP pulp continued to be strong through most of 2010 and,
although some volatility may occur, the Company expects demand and supply to be
reasonably well balanced throughout 2011. The most significant risks to this
segment's earnings are a slow down or disruption of demand from China, a major
market, or the restarting of significant portions of currently-curtailed
production. Capital improvements supported by the Green Transformation Program
are expected to be substantially completed during 2011 although the production,
efficiency and earnings benefits related to these projects will not be
experienced until after 2011.
Earnings Sensitivity to Key Variables
(based on year-end capacities(1) - $ millions except where otherwise stated)
Table L
---------------------------------------------------------------------------
Factor Variation Change in Earnings
---------------------------------------------------------------------------
Lumber price(2),(3) US$10 (per Mfbm) 40
Plywood price(2),(3) Cdn$50 (per Msf) 31
MDF price(3) US$50 (per Msf) 11
NBSK price(3) US$50 (per tonne) 19
BCTMP price(3) US$50 (per tonne) 23
Newsprint price US$50 (per tonne) 5
U.S. - Canadian $ exchange
rate(4) US$0.01 (per Cdn $) 12
Sawlog cost Cdn$1 (per m(3)) 15
---------------------------------------------------------------------------
---------------------------------------------------------------------------
1. Assumes exchange rate of Cdn$1.00 per US$1.00 and an income tax rate of
26.5%.
2. Change does not include any potential change in log costs.
3. Change does not include any potential change in wood chip prices.
4. Excludes exchange impact on translation of U.S. dollar denominated debt
and other monetary items; assumes no change in commodity prices.
Capital Structure and Liquidity
The capital structure of the Company consists of Common share equity and
long-term debt. In addition, the Company maintains a committed revolving credit
facility that is available to meet additional funding requirements.
The Common share equity consists of 40,054,242 Common shares and 2,781,478 Class
B Common shares for a total of 42,835,720 shares issued and outstanding as at
February 8, 2011.
Class B Common shares are equal in all respects to Common shares and are
exchangeable on a one-for-one basis for Common shares. Common shares are listed
for trading on the Toronto Stock Exchange while Class B Common shares are not.
In addition, as of February 8, 2011 there were 2,181,372 share purchase options
outstanding with exercise prices ranging from $24.71 to $51.56 per Common share.
West Fraser maintains a $500 million revolving credit facility which is
committed until December 2014. In December 2010 the Company and participating
banks amended this facility to extend its maturity, reduce total allowed
borrowings from $600 million and to allow for additional borrowings of up to
$150 million, subject to sourcing new lenders for this additional amount. To
date the Company has not sought to access this additional facility. Security
pledged to the banks and other lenders in early 2010 remains in place for as
long as the Company's credit ratings by Standard & Poor's and Moody's remain
below BBB- and Baa3 respectively. Copies of the credit agreement and the
December 2010 amendment are available at www.sedar.com.
On December 31, 2010 the balance owing under the credit facility, net of
deferred financing costs, was $9 million (2009 - $79 million) and letters of
credit in the amount of $35 million were also supported by this facility,
leaving approximately $450 million available for further use.
West Fraser's cash requirements, other than for operating purposes, are
primarily for interest payments, repayment of debt, additions to property,
plant, equipment and timber, acquisitions and payment of dividends. In normal
business cycles and in years without a major acquisition or debt repayment, cash
on hand and cash provided by operations have been sufficient to meet these
requirements.
During the year, the Company was able to reduce its net debt by $357 million,
including a scheduled $100 million repayment of its long-term debt.
Summary of Financial Position ($ millions, except as otherwise indicated)
Table M
---------------------------------------------------------------------------
As at December 31 2010 2009
---------------------------------------------------------------------------
Cash(1) 161 (10)
Current assets 800 704
Current liabilities 375 495
Ratio of current assets to current liabilities 2.1 1.4
Net debt 148 505
Shareholders' equity 1,765 1,618
Net debt to capitalization(2) - % 8 24
---------------------------------------------------------------------------
---------------------------------------------------------------------------
1. Cash consists of cash and short-term investments less cheques issued in
excess of funds on deposit.
2. Net debt (total debt less cash) divided by net debt plus shareholders'
equity.
As shown in Table N, West Fraser is rated by three leading rating agencies. In
2010 the Company's ratings were upgraded by Standard & Poor's from BB to BB+ and
its Outlook was changed from Negative to Stable based on the Company's low
leverage and good operating performance. Dominion Bond Rating Service also
changed its outlook to Stable, a reflection of the Company's much-improved
financial profile despite the U.S. housing market remaining depressed. Moody's
rating and outlook remained unchanged from 2009.
Debt Ratings Table N
-------------------------------------------------------
Agency Rating Outlook
-------------------------------------------------------
Dominion Bond Rating Service BB(high) Stable
Moody's Ba1 Negative
Standard & Poor's BB+ Stable
-------------------------------------------------------
-------------------------------------------------------
Selected Cash Flow Items ($ millions) Table O
-----------------------------------------------------------------------
For the year ended December 31 2010 2009
-----------------------------------------------------------------------
Operating Activities
Cash provided before working capital change 321 31
Non-cash working capital change 49 65
-----------------------------------------------------------------------
Cash provided by operating activities 370 96
-----------------------------------------------------------------------
Financing Activities
Debt and operating loans (165) (98)
Dividends and other (13) (10)
-----------------------------------------------------------------------
Cash used in financing activities (178) (108)
-----------------------------------------------------------------------
Investing Activities
Additions to property, plant, equipment & timber (56) (18)
Other 3 7
-----------------------------------------------------------------------
Cash used in investing activities (53) (11)
-----------------------------------------------------------------------
Change in cash from continuing operations 139 (23)
-----------------------------------------------------------------------
Change in cash from discontinued operations 31 9
-----------------------------------------------------------------------
Change in cash 170 (14)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Contractual Obligations as at December 31, 2010 ($ millions)(1) Table P
---------------------------------------------------------------------------
There-
2011 2012 2013 2014 2015 after Total
---------------------------------------------------------------------------
Long-term debt - 1 - 299(2) - 1 301
Operating leases 2 2 - - - - 4
Asset purchase commitments 29(3) - - - - - 29
---------------------------------------------------------------------------
Total 31 3 - 299 - 1 334
---------------------------------------------------------------------------
---------------------------------------------------------------------------
1. Contractual obligations means an agreement related to debt, leases and
enforceable agreements to purchase goods or services on specified terms,
but does not include asset retirement obligations, energy purchases
under various agreements, accounts payable in the ordinary course of
business or contingent amounts payable.
2. Represents U.S. dollar denominated debt of US$300 million.
3. $28 million of this total is expected to be refunded by the Government
of Canada as part of the Green Transformation Program.
Significant Management Judgments Affecting Financial Results
The preparation of financial statements requires management to make estimates
and assumptions, and to select accounting policies, that affect the amounts
reported in the financial statements. The significant accounting policies
followed by West Fraser are disclosed in Note 1 to its audited consolidated
financial statements. The following judgments are considered the most
significant.
Asset Valuation
As required by CGAAP, West Fraser assesses the carrying value of an asset when
there are indicators of impairment. The assessment compares the estimated future
cash flows of the asset to the carrying value of the asset. If the carrying
value of the asset exceeds the estimated future cash flows relating to the
asset, the carrying value is written down to fair value. In 2010 there were no
asset impairment charges recorded. In 2009 asset impairment charges of $140
million related to the Eurocan mill and $17 million related to certain sawmill
assets were recorded. The 2009 charges related to the Eurocan mill are included
in "Loss from discontinued operations".
West Fraser reviews the amortization periods for its manufacturing equipment and
machinery to ensure that the periods appropriately reflect anticipated
obsolescence and technological change. Current amortization periods for
manufacturing equipment range from 10 to 20 years with sawmill equipment
amortized over a maximum of 15 years. Timber rights are amortized over periods
of up to 40 years.
Goodwill is not amortized. West Fraser compares the carrying value of goodwill
and related assets, at least once a year, to the estimated discounted cash flows
from the assets to which the goodwill relates. If it is determined that the
carrying value is more than the estimated discounted cash flows, the carrying
value of goodwill will be adjusted accordingly. West Fraser tested its goodwill
for impairment in 2010 and concluded that the carrying value of the goodwill is
not impaired. The testing of goodwill impairment involves significant estimates
including future production and sales volumes, product selling prices, foreign
currency exchange rates, operating costs, capital expenditures and the
appropriate discount rate to apply. In all cases, West Fraser has used its best
estimates of these projected amounts and values. Given the current global
economic uncertainty and the volatility of the markets for West Fraser's
products, it is possible that the Company's estimates will be adjusted in the
future and that these adjusted estimates could result in the future impairment
of goodwill.
West Fraser also reviews the carrying value of future income tax assets at least
annually to ensure that the carrying value is appropriate. The key factors
considered are the Company's prior history of profitability, future expectations
of profitability and the timing of expiry of tax loss carryforwards. In 2010 a
valuation allowance was recorded which resulted in an increase to the tax
provision of $6 million (2009 - $114 million).
Reforestation Obligation and Other Asset Retirement Obligations
In Canada, provincial regulations require timber quota holders to carry out
reforestation to ensure re-establishment of the forest after harvesting.
Reforested areas must be tended for a period sufficient to ensure that they are
well-established. The time to meet regulatory requirements depends on a variety
of factors.
In West Fraser's operating areas, the time to meet reforestation standards
usually spans 12 to 15 years from the time of harvest. In the year that
harvesting takes place, the Company records a liability for the estimated total
cost of the future reforestation activities. This liability is reviewed, at
least annually, and adjusted to management's current estimate of the total cost
to complete the remainder of the reforestation activities. In 2010 the review of
the reforestation obligation resulted in a decrease of $1 million (2009 -
decrease of $16 million).
West Fraser records the estimated fair value of a liability for other asset
retirement obligations, such as landfill closures, in the period when a
reasonable estimate of fair value can be made. These estimates are reviewed by
the Company at least annually, and adjusted as appropriate. In 2010 the review
resulted in a reduction of the liability of $5 million (2009 - increase to the
liability of $1 million).
Defined Benefit Plan Assumptions
West Fraser maintains several defined benefit pension plans for many of its
employees. The annual funding requirements and pension expenses are based on
various assumptions determined by the Company, with the advice of its actuaries,
as well as on actual investment returns on the pension fund assets and changes
to the employee groups in the pension plans. The Company takes a long-term,
conservative view in making assumptions with respect to the funding of the
pension plans.
Defined Benefit Pension Plan Obligation Assumptions Table Q
-------------------------------------------------------------
2010 2009
-------------------------------------------------------------
Discount rate 5.50% 6.50%
Expected rate of return on plan assets 6.50% 7.00%
Rate of increase in future compensation 3.50% 3.50%
-------------------------------------------------------------
-------------------------------------------------------------
Impact of a 0.5% Change in Key Assumptions ($ millions) Table R
---------------------------------------------------------------------
Pension Plans
---------------------------------------------------------------------
Obligation Expense
Discount rate
Decrease in assumption 73 4
Increase in assumption (62) (3)
Expected rate of return on plan assets
Decrease in assumption n/a 4
Increase in assumption n/a (4)
Rate of increase in future compensation
Decrease in assumption (15) (1)
Increase in assumption 15 1
---------------------------------------------------------------------
---------------------------------------------------------------------
New Accounting Pronouncements
International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board confirmed that
International Financial Reporting Standards ("IFRS") will replace CGAAP for
publicly accountable profit-oriented enterprises effective January 1, 2011. IFRS
requires that in the year of implementation the comparative financial statements
be restated to conform to the standards.
Update on IFRS Conversion Plan
The Company has substantially completed its IFRS conversion plan and has adopted
IFRS effective January 1, 2011. Regular progress reporting to the Audit
Committee of the Board of Directors on the status of the IFRS implementation
project has taken place.
The project plan consisted of three major phases:
-- Assessment phase - This phase involved identifying the differences
between CGAAP and IFRS. These differences were then analysed to
determine the possible effect on the Company including changes required
to existing accounting policies and information systems, together with
analysis of policy choices under IFRS.
-- Design phase - During this phase additional specialist personnel were
identified to assist as necessary on system and process changes.
Training requirements for staff were completed. In addition, optional
exemptions for first time adopters of IFRS and accounting policy choices
under IFRS were evaluated.
-- Implementation phase - This phase included execution of changes to
information systems and business processes, obtaining authorization for
recommended exemptions for first time adopters and for accounting policy
choices.
Implementation of changes to ensure that information systems are capable of dual
reporting of CGAAP and IFRS information for 2010 has been completed.
The expected effect of accounting policy choices and system changes on
disclosure controls and internal controls over financial reporting is being
monitored and control changes have been made where necessary.
The adoption of IFRS is not expected to materially affect debt covenant
calculations or affect cash flows.
The Company's financial statements for the quarter ending March 31, 2011 will be
the first quarterly financial statements that comply with IFRS. The Company's
transition date is January 1, 2010 (the "Transition Date") and the Company has
prepared its opening IFRS balance sheet as at that date. The Company will
ultimately prepare its opening balance sheet and financial statements for 2010
and 2011 by applying the existing IFRS with an effective date of December 31,
2011 or earlier. The standard-setting body of IFRS has significant ongoing
projects that could affect the ultimate differences between CGAAP and IFRS and
these changes could have a material effect on the Company's financial
statements. Accordingly, the opening balance sheet and reconciliations may
differ from those presented in this MD&A.
Estimated adjustments to earnings on adoption of IFRS
For the year ended December 31, 2010
Table S
---------------------------------------------------------------------------
Earnings after
$ millions Continuing Discontinued discontinued
(unaudited) Notes operations operations operations
---------------------------------------------------------------------------
Earnings
reported under
CGAAP $ 169.8 $ (3.6) $ 166.2
Adjustments to
earnings
PPE(1)
amortization 2 13.6 - 13.6
Employee future
benefits 3 1.0 3.5 4.5
Asset
retirement
obligations 4 (1.6) 1.9 0.3
Share option
expense 5 3.7 - 3.7
Restructuring
charges 6 - 6.0 6.0
Deferred tax on
above items 7 (4.7) (3.2) (7.9)
---------------------------------------------------------------------------
Adjustments to
earnings 12.0 8.2 20.2
---------------------------------------------------------------------------
Earnings
reported under
IFRS $ 181.8 $ 4.6 $ 186.4
---------------------------------------------------------------------------
---------------------------------------------------------------------------
1. PPE - property, plant, and equipment (and timber under CGAAP)
Estimated adjustments to Shareholders' equity on adoption of IFRS
Table T
---------------------------------------------------------------------------
As at
As at January 1, 2010
$ millions (unaudited) Notes December 31, 2010 (Transition Date)
---------------------------------------------------------------------------
Equity reported under CGAAP $ 1,765.2 $ 1,618.2
Opening balance sheet
adjustments (195.2) -
PPE - impairment 2 (94.8)
PPE - asset retirement
obligation 4 1.8
Employee future benefits 3 (106.8)
Asset retirement obligations 4 (15.2)
Share option liability 5 (16.6)
Restructuring liability 6 (6.0)
Deferred tax on above items 7 42.4
Adjustments to earnings (Table
S) 20.2 -
---------------------------------------------------------------------------
(175.0) (195.2)
Cumulative translation
adjustment 8 2.7 -
Employee future benefits -
actuarial losses (net of tax) 3 (59.1) -
---------------------------------------------------------------------------
Accumulated other comprehensive
earnings (56.4) -
---------------------------------------------------------------------------
Equity reported under IFRS $ 1,533.8 $ 1,423.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Estimated adjustments to the balance sheet on adoption of IFRS
As at January 1, 2010 (Transition Date)
Table U
---------------------------------------------------------------------------
$ millions
(unaudited) Notes CGAAP Adjustments IFRS
---------------------------------------------------------------------------
ASSETS
Current assets
Cash and short-
term
investments $ 12.0 $ - $ 12.0
Accounts
receivable 200.6 - 200.6
Income taxes
receivable 67.6 - 67.6
Inventories 407.7 - 407.7
Prepaid
expenses 9 15.8 (4.6) 11.2
---------------------------------------------------------------------------
703.7 (4.6) 699.1
Property,
plant, and
equipment 2,4,9 1,624.1 (591.7) 1,032.4
Timber 9 - 499.7 499.7
Goodwill 263.7 - 263.7
Other
intangible
assets 9 - 89.8 89.8
Deferred
pension costs 3 132.7 (106.3) 26.4
Other assets 9 88.9 (86.2) 2.7
---------------------------------------------------------------------------
$ 2,813.1 $ (199.3) $ 2,613.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------
LIABILITIES
Current
liabilities
Cheques
issued in
excess of funds
on deposit 21.8 - 21.8
Operating loans 78.7 - 78.7
Accounts
payable and
accrued
liabilities 5,6 252.6 22.6 275.2
Current
portion of
asset
retirement
obligations 4 41.5 (3.2) 38.3
Current portion
of long-term
debt 100.3 - 100.3
---------------------------------------------------------------------------
494.9 19.4 514.3
Long-term debt 315.9 - 315.9
Other
liabilities 3,4 166.9 18.9 185.8
Deferred income
taxes 7 217.2 (42.4) 174.8
---------------------------------------------------------------------------
1,194.9 (4.1) 1,190.8
SHAREHOLDERS'
EQUITY
Share capital 599.7 - 599.7
Accumulated
other
comprehensive
earnings 8 (59.8) 59.8 -
Retained
earnings 1,078.3 (255.0) 823.3
---------------------------------------------------------------------------
1,618.2 (195.2) 1,423.0
---------------------------------------------------------------------------
$ 2,813.1 $ (199.3) $ 2,613.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Notes to Tables R, S and T
(figures are in millions of dollars except where indicated - unaudited)
1. IFRS 1 - Elected exemptions
In accordance with IFRS 1 First-time Adoption of International Financial
Reporting Standards ("IFRS 1"), the Company has elected to apply the following
exemptions from full retrospective application of IFRS.
i. Business combinations
The Company has elected to apply the business combination exemption in IFRS 1 to
business combinations that occurred before January 1, 2010. Accordingly, the
CGAAP purchase cost accounting values carry forward under IFRS.
ii. Fair value as deemed cost
The Company has elected to apply the fair value as deemed cost exemption to
items of property, plant, equipment and timber that were impaired under IFRS at
the transition date. The result is that the asset cost base is restated to fair
value for the items on which the exemption was applied.
iii. Employee future benefits
The Company has elected to recognize the January 1, 2010 cumulative unamortized
actuarial gains and losses in opening retained earnings for the Company's
employee benefit plans.
iv. Cumulative translation differences
The Company has elected to set the cumulative translation balance, which was
included in accumulated other comprehensive earnings, to zero at January 1, 2010
by absorbing it into opening retained earnings.
v. Decommissioning liabilities
The Company has elected to apply the IFRS 1 exemption to its decommissioning
liabilities included in the cost of property, plant and equipment.
2. Property, plant, equipment and timber impairment
IFRS requires the assessment of asset impairment to be based on discounted cash
flows while CGAAP only requires discounting if the carrying value of assets
exceeds the undiscounted cash flows.
The differences in methodology resulted in $94.8 million of asset impairment
charges through Transition Date retained earnings. Depreciation expense for the
year ended December 31, 2010 will be reduced by $13.6 million under IFRS due to
the impairments.
3. Employee future benefits
The significant differences between CGAAP and IFRS are as follows:
i. The Company elected to recognize the January 1, 2010 cumulative deferred
actuarial gains and losses in opening retained earnings for the Company's
defined benefit pension plans under IFRS 1.
ii. Under CGAAP the Company used an October 31st measurement date, while IFRS
requires a December 31st measurement date.
iii. The Company has chosen to adjust actuarial gains and losses after the
Transition Date to other comprehensive earnings. Under CGAAP these amounts are
deferred and amortized over the average remaining service period of the affected
employees within certain limits.
The differences in methodology resulted in a reduction of deferred pension costs
of $106.3 million and an increase in post retirement obligations of $0.5 million
on the Transition Date. The employee future benefit expense for the year ended
December 31, 2010 was reduced by $4.5 million under IFRS. A charge to
accumulated other comprehensive earnings of $59.1 million for actuarial gains
and losses related to the year ended December 31, 2010 was recorded.
4. Asset retirement obligations
Under CGAAP asset retirement obligations are discounted at the rate in effect at
the time the liability was recorded. IFRS requires asset retirement obligations
to be discounted at each balance sheet date based on the discount rate in effect
at that date.
The differences in methodology resulted in an increase to asset retirement
obligations of $15.2 million and an increase in property, plant and equipment of
$1.8 million on the Transition Date. The asset retirement obligation adjustment
for the year ended December 31, 2010 resulted in a $0.3 million decrease in
expenses.
5. Share option liability
The determination of fair value of the Company's share option liability under
CGAAP is based on the intrinsic value method which uses the balance sheet date
share price to calculate the liability. IFRS requires the use of a share option
valuation model to fair value the share option liability.
The differences in methodology resulted in an increase to the liability of $16.6
million on the Transition Date. The share option adjustment for the year ended
December 31, 2010 resulted in a $3.7 million decrease in share option expense.
6. Restructuring charges
Under CGAAP the company was required to record certain restructuring charges
related to discontinued operations in the first quarter of 2010. IFRS required
these charges to be recorded in the fourth quarter of 2009 upon the announcement
of the mill closure.
The difference in methodology resulted in an increase to accounts payable and
accrued liabilities of $6.0 million on the Transition Date. The restructuring
charge adjustment for the year ended December 31, 2010 resulted in a $6.0
million decrease in expenses.
7. Deferred income taxes
The deferred income tax adjustments reflect the change in temporary differences
resulting from the effect of the IFRS adjustments described in these notes. The
Transition Date adjustments resulted in a decrease in deferred taxes of $42.4
million. The deferred tax adjustment for the year ended December 31, 2010
resulted in a $7.9 million increase in tax expense.
8. Cumulative translation adjustment
The Company has elected to set the cumulative translation balance, which was
included in accumulated other comprehensive earnings, to zero at January 1, 2010
by absorbing the $59.8 million into opening retained earnings. The cumulative
translation adjustment for the year ended December 31, 2010 resulted in a $2.7
million increase in accumulated other comprehensive earnings as a result of
foreign currency translations of IFRS adjustments to the Company's U.S.
operations.
9. Reclassifications
The following balance sheet items were reclassified to comply with the listed
IFRS standards:
Table V
----------------------------------------------------------------------------
Applicable
IFRS
From To Description Amount Standard
----------------------------------------------------------------------------
Prepaid Expenses PPE Shutdown accruals $ 4.6 IAS 16 Property,
Plant and
Equipment
----------------------------------------------------------------------------
PPE Intangibles Timber $ 499.7 IAS 38
Intangible
Assets
----------------------------------------------------------------------------
PPE Intangibles Software $ 3.9 IAS 38
Intangible
Assets
----------------------------------------------------------------------------
Other Assets PPE Other assets $ 0.3 IAS 16 Property,
Plant and
Equipment
----------------------------------------------------------------------------
Other Assets Intangibles Power purchase $ 80.5 IAS 38
agreement Intangible
Assets
----------------------------------------------------------------------------
Other Assets Intangibles Timber deposits $ 5.4 IAS 38
Intangible
Assets
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Risks and Uncertainties
Product Demand and Price Fluctuations
West Fraser's financial results are primarily dependent on the demand for, and
selling prices of, its products, which are subject to significant fluctuations.
The demand and prices for lumber, panels, pulp, paper, wood chips and other wood
products are highly volatile and are affected by factors such as global economic
conditions including the strength of the U.S. housing market, the growing
importance of the Asian market, changes in industry production capacity, changes
in world inventory levels and other factors beyond West Fraser's control. In
addition, unemployment levels, interest rates and the rate of mortgage
foreclosures have a significant effect on residential construction and
renovation activity, which in turn influences the demand for, and price of,
building materials such as lumber and panel products.
West Fraser cannot predict future market conditions, demand or pricing for any
of its products due to factors outside its control. Prolonged or severe weakness
in the market for any of its principal products would adversely affect West
Fraser's financial condition. West Fraser's earnings sensitivity to changes in
certain product prices is set out in Table L.
Foreign Currency Exchange Rates
West Fraser sells the majority of its products at prices denominated in U.S.
dollars or based on prevailing U.S. dollar prices. A significant portion of its
operational costs and expenses are incurred in Canadian dollars. Therefore, an
increase in the value of the Canadian dollar relative to the U.S. dollar reduces
the revenue in Canadian dollar terms realized by West Fraser from sales made in
U.S. dollars, which reduces operating margin and the cash flow available to fund
operations. West Fraser is also exposed to the risk of exchange rate
fluctuations in the period between sale and payment. West Fraser also has a
substantial amount of long-term debt repayable in U.S. dollars which is valued
in Canadian dollars at the end of each reporting period applying the prevailing
exchange rate. Exchange rate fluctuations result in exchange gains or losses.
This results in significant earnings sensitivity to changes in the Canadian/U.S.
dollar exchange rate as disclosed in Table L. The Canadian/U.S. dollar exchange
rate is affected by a broad range of factors which makes future rates difficult
to accurately predict.
Operations
Availability of Fibre and Changes in Stumpage Fees
Substantially all of West Fraser's Canadian log requirements are harvested from
Crown lands. Provincial governments prescribe the methodologies that determine
the amounts of stumpage fees that are charged in respect of harvesting on Crown
lands and changes to the methodologies or rates may adversely affect the
Company's results.
West Fraser relies on log supply agreements in the U.S. which are subject to log
availability and based on market prices. Based on year-end capacity,
approximately 25% of the aggregate log requirements for West Fraser's U.S.
sawmills are supplied under long-term agreements with the balance purchased on
the open market. Changes in market conditions for these logs may adversely
affect West Fraser's results.
Operational Curtailments and Transportation Limitations
From time to time, West Fraser suspends operations at one or more of its
facilities or logging operations in response to market conditions, environmental
risks, or other operational issues, including, but not limited to, power
failures, equipment breakdowns, adverse weather conditions, labour disruptions
and fire hazards. These unscheduled operational suspensions could have a
material adverse effect on West Fraser's financial condition. If wood chip
production is reduced because of sawmill production curtailments, improved
lumber manufacturing efficiencies or any other reason, pulp and paper operations
may incur additional costs to acquire additional wood chips or be forced to
reduce production. Conversely, pulp and paper mill production curtailments may
require sawmills to find other ways to dispose of residual wood fibre and may
result in curtailment or suspension of lumber production.
West Fraser relies primarily on third parties for the delivery of raw materials
and the transportation of its products. From time to time, West Fraser must also
respond to rail car and truck shortages that limit raw material deliveries to it
and product deliveries to its customers, which may have a material adverse
effect on West Fraser's business.
Labour Relations
West Fraser employs a unionized workforce in a number of its operations.
Walkouts or strikes by employees could result in lost production and sales,
higher costs and supply constraints that could have a material adverse impact on
West Fraser's business. Also, West Fraser depends on a variety of third parties
that employ unionized workers to provide critical services to the Company.
Labour disputes experienced by these third parties could lead to disruptions at
Company facilities.
Environment
West Fraser's operations are subject to regulation by federal, provincial, state
and local environmental authorities, including industry-specific environmental
regulations relating to air emissions and pollutants, wastewater (effluent)
discharges, solid waste, landfill operations, forestry practices, site
remediation and the protection of endangered species and critical habitat. West
Fraser has incurred, and will continue to incur, capital expenditures and
operating costs to comply with environmental laws and regulations. No assurance
can be given that changes in these laws and regulations or their application
will not have a material adverse effect on West Fraser's business, operations,
financial condition and operational results. Similarly, no assurance can be
given that capital expenditures necessary for future compliance with existing
and new environmental laws and regulations could be financed from West Fraser's
available cash flow. West Fraser may discover currently unknown environmental
problems, contamination, or conditions relating to its past or present
operations. This may require site or other remediation costs to maintain
compliance or correct violations or result in governmental or private claims for
damage to person, property or the environment, which could have a material
adverse effect on West Fraser's business, financial condition and operational
results.
West Fraser has in place internal programs under which all its forestry and
manufacturing operations are audited for compliance with laws and accepted
standards and with its management systems. West Fraser's woodlands operations in
Canada, and the harvesting operations of its key U.S. suppliers, are third-party
certified to internationally-recognized sustainable forest management standards.
West Fraser's operations and its ability to sell its products could be adversely
affected if those operations did not, or were perceived by the public as failing
to, comply with applicable laws and standards, including responsible
environmental and sustainable forestry standards.
Natural Disasters
West Fraser's operations are subject to adverse natural events such as forest
fires, severe weather conditions, timber disease and insect infestation, and
earthquake activity. These events could damage or destroy West Fraser's physical
facilities or its timber supply and similar events could also affect the
facilities of its suppliers or customers. Any such damage or destruction could
adversely affect West Fraser's financial results. Although West Fraser believes
it has reasonable insurance arrangements in place to cover certain of such
incidents, there can be no assurance that these arrangements will be sufficient
to fully protect the Company against such losses. As is common in the industry,
West Fraser does not insure loss of standing timber for any cause.
Mountain Pine Beetle
The long-term effect of the mountain pine beetle infestation on West Fraser's
Canadian operations is uncertain. The potential effects include a reduction of
future AAC levels to below current and pre-infestation AAC levels, a diminished
grade and volume of lumber recoverable from beetle-killed logs, decreased
quality of wood chips produced from such logs, and increased production costs.
The timing and extent of the future effect on West Fraser's timber supply,
lumber grade and recovery, wood chip quality and production costs will depend on
a variety of factors and at this time cannot be reasonably determined.
First Nations Claims
The Company relies on provincial governments to adequately discharge obligations
to First Nations groups in order to preserve the validity of actions dealing
with public rights, including the granting of Crown timber harvesting rights.
West Fraser cannot assure that First Nations claims will not in the future have
a material adverse effect on its timber harvesting rights or its ability to
exercise or renew them or secure other timber harvesting rights.
Regulatory
West Fraser's operations are subject to extensive general and industry-specific
federal, provincial, state, municipal and other local laws and regulations,
including those governing forestry, exports, taxes, employees, labour standards,
occupational health and safety, waste disposal, environmental protection and
remediation, protection of endangered and protected species and land use and
expropriation. West Fraser is required to obtain approvals, permits and licences
for its operations, which may impose conditions that must be complied with. If
it is unable to extend or renew, or is delayed in extending or renewing, a
material approval, permit or licence, West Fraser's operations or financial
condition could be adversely affected. There is no assurance that these laws,
regulations or government policy, or the administrative interpretation or
enforcement of existing laws and regulations, will not change in the future in a
manner that may require West Fraser to incur significant capital expenditures or
could adversely affect its operations or financial condition. Failure to comply
with applicable laws or regulations, including approvals, permits and licences,
could result in fines, penalties or enforcement actions, including orders
suspending or curtailing its operations or requiring corrective measures or
remedial actions.
Competition
Markets for West Fraser's products are highly competitive. Its ability to
maintain or improve the cost of producing and delivering products to those
markets is crucial. Factors such as cost and availability of raw materials,
energy and labour, the ability to maintain high operating rates and low per-unit
manufacturing costs, and the quality of its final products and its customer
service all affect West Fraser's earnings.
Trade Restrictions
A substantial portion of the Company's products that are manufactured in Canada
are exported for sale. The Company's financial results are dependent on
continued access to the export markets and tariffs and other trade barriers that
restrict or prevent access represent a continuing risk to the Company. West
Fraser's Canadian softwood lumber exports to the U.S. are currently subject to
export duties imposed under the Softwood Lumber Agreement of 2006. National
economic protectionist measures more commonly arise during periods of broad
economic downturn and so current global economic conditions could result in the
adoption of additional trade barriers.
Financial
The Company relies on long-term borrowings and access to revolving credit in
order to finance its ongoing operations. Any change in availability of credit in
the market, as would happen during an economic downturn, could affect the
Company's ability to access markets. Although the Company has no immediate needs
for new credit, in the future the Company may need to get into public or private
debt markets to issue new debt to replace or partially replace current
borrowings.
Disclosure Controls and Internal Controls Over Financial Reporting
Controls and Procedures
In accordance with the requirements of National Instrument 52-109 Certification
of Disclosure in Issuers' Annual and Interim Filings, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, acknowledges
responsibility for the design and operation of disclosure controls and
procedures and internal controls over financial reporting, and the requirement
to evaluate the effectiveness of these controls on an annual basis.
Management evaluated the effectiveness of these controls at the end of the
reporting period and based on this evaluation concluded that the Company's
internal controls over financial reporting and the disclosure controls and
procedures were effective as at December 31, 2010.
Changes in Internal Controls Over Financial Reporting
There has been no change in West Fraser's internal controls over financial
reporting during the year ended December 31, 2010 that has materially affected,
or is reasonably likely to materially affect, the Company's internal controls
over financial reporting.
West Fraser Timber Co. Ltd.
Consolidated Balance Sheets
(in millions of Canadian dollars - unaudited)
As at As at
December 31, 2010 December 31, 2009
--------------------------------------------------------------------------
Assets
Current assets
Cash and short-term $ $
investments 163.1 12.0
Accounts receivable 246.0 200.6
Income taxes receivable - 67.6
Inventories (note 3) 372.4 407.7
Prepaid expenses 18.4 15.8
--------------------------------------------------------------------------
799.9 703.7
Property, plant,
equipment and timber 1,501.8 1,624.1
Deferred pension costs 168.0 132.7
Goodwill 263.7 263.7
Other assets (note 4) 81.6 88.9
--------------------------------------------------------------------------
$ 2,815.0 $ 2,813.1
--------------------------------------------------------------------------
Liabilities
Current liabilities
Cheques issued in excess
of funds on deposit $ 2.4 $ 21.8
Operating loans (note 6) 8.8 78.7
Accounts payable and
accrued liabilities 258.0 252.6
Current portion of asset
retirement obligations 47.6 41.5
Income taxes payable 58.3 -
Current portion of long-
term debt (note 6) 0.3 100.3
--------------------------------------------------------------------------
375.4 494.9
Long-term debt (note 6) 299.5 315.9
Other liabilities (note
7) 160.6 166.9
Future income taxes 214.3 217.2
--------------------------------------------------------------------------
1,049.8 1,194.9
--------------------------------------------------------------------------
Shareholders' equity
Share capital 600.5 599.7
Accumulated other
comprehensive earnings (72.1) (59.8)
Retained earnings 1,236.8 1,078.3
--------------------------------------------------------------------------
1,765.2 1,618.2
--------------------------------------------------------------------------
$ 2.815.0 $ 2,813.1
--------------------------------------------------------------------------
Contingency (note 12)
Number of Common shares and Class B Common shares outstanding at February
8, 2011 was 42,835,720.
West Fraser Timber Co. Ltd.
Consolidated Statements of Earnings and Comprehensive Earnings
(in millions of Canadian dollars - unaudited)
October 1 to December 31 January 1 to December 31
2010 2009 2010 2009
---------------------------------------------------------------------------
Sales $ 719.1 $ 570.2 $ 2,885.9 $ 2,352.5
---------------------------------------------------------------------------
Costs and expenses
Cost of products
sold 467.9 373.4 1,806.7 1,724.6
Freight and other
distribution costs 112.3 94.4 441.2 396.3
Export taxes 16.7 13.3 59.7 47.3
Amortization 37.1 58.0 181.2 244.7
Selling, general
and administration 46.9 28.1 140.4 98.8
Asset impairments - - - 16.9
Restructuring
charges - 5.2 - 5.2
---------------------------------------------------------------------------
680.9 572.4 2,629.2 2,533.8
---------------------------------------------------------------------------
Operating earnings 38.2 (2.2) 256.7 (181.3)
Other
Interest expense -
net (5.8) (4.8) (26.6) (26.5)
Exchange gain on
long-term debt 10.3 5.9 16.9 50.1
Other income
(expense) (3.8) 1.5 (8.4) (3.7)
---------------------------------------------------------------------------
Earnings from
continuing
operations before
income taxes 38.9 0.4 238.6 (161.4)
Recovery of
(provision for)
income taxes (note
9) (12.3) 7.4 (68.8) (33.0)
---------------------------------------------------------------------------
Earnings from
continuing
operations 26.6 7.8 169.8 (194.4)
Earnings from
discontinued
operations (note 2) 12.1 (27.9) (3.6) (146.4)
---------------------------------------------------------------------------
Earnings $ 38.7 $ (20.1) $ 166.2 $ (340.8)
---------------------------------------------------------------------------
Earnings per share
(dollars) (note 10)
Basic from
continuing
operations $ 0.62 $ 0.18 $ 3.97 $ (4.54)
Diluted from
continuing
operations $ 0.61 $ 0.18 $ 3.93 $ (4.54)
Basic after
discontinued
operations $ 0.90 $ (0.47) $ 3.88 $ (7.96)
Diluted after
discontinued
operations $ 0.89 $ (0.47) $ 3.84 $ (7.96)
---------------------------------------------------------------------------
Comprehensive earnings
Earnings $ 38.7 $ (20.1) $ 166.2 $ (340.8)
Other comprehensive
earnings:
Foreign exchange
translation on
investment in
self-sustaining
foreign operations (8.2) (12.5) (12.3) (61.5)
---------------------------------------------------------------------------
Comprehensive
earnings $ 30.5 $ (32.6) $ 153.9 $ (402.3)
---------------------------------------------------------------------------
West Fraser Timber Co. Ltd.
Consolidated Statement of Changes in Equity
(in millions of Canadian dollars - unaudited)
Issued capital
----------------------
Translation
Number of of foreign Retained Total
shares Amount operations earnings equity
---------------------------------------------------------------------------
Balance - January 1,
2009 42,805,086 $ 599.4 $ 1.7 $ 1,428.9 $ 2,030.0
Changes in equity
for 2009
Foreign exchange
translation loss on
investment
in self-sustaining
foreign operations - - (61.5) - (61.5)
Issuance of Common
shares 10,723 0.3 - - 0.3
Earnings for the
year - - - (340.8) (340.8)
Dividends - - - (9.8) (9.8)
---------------------------------------------------------------------------
Balance - December
31, 2009 42,815,809 599.7 (59.8) 1,078.3 1,618.2
Changes in equity
for 2010
Foreign exchange
translation loss on
investment
in self-sustaining
foreign operations - - (12.3) - (12.3)
Issuance of Common
shares 19,103 0.8 - - 0.8
Earnings for the
year - - - 166.2 166.2
Dividends - - - (7.7) (7.7)
---------------------------------------------------------------------------
Balance - December
31, 2010 42,834,912 $ 600.5 $ (72.1) $ 1,236.8 $ 1,765.2
---------------------------------------------------------------------------
West Fraser Timber Co. Ltd.
Consolidated Statements of Cash Flows
(in millions of Canadian dollars - unaudited)
October 1 to December 31 January 1 to December 31
2010 2009 2010 2009
---------------------------------------------------------------------------
Cash flows from
operating
activities
Earnings from
continuing
operations $ 26.6 $ 7.8 $ 169.8 $ (194.4)
Items not affecting
cash
Amortization 37.1 58.0 181.2 244.7
Asset impairments - - - 16.9
Loss (gain) on
asset sales 0.1 (0.2) (2.6) (1.9)
Change in deferred
maintenance 4.4 2.9 15.1 9.0
Change in deferred
charges (44.5) (35.2) (32.3) (53.3)
Exchange gain on
long-term debt (10.3) (5.9) (16.9) (50.1)
Change in
reforestation
obligations 3.5 (9.3) 3.7 (18.3)
Change in other
long-term
liabilities (4.2) 0.6 1.6 2.2
Future income taxes 10.3 5.2 (0.6) 69.6
Other 0.1 0.6 1.9 6.3
---------------------------------------------------------------------------
23.1 24.5 320.9 30.7
Net change in non-
cash working
capital items (62.7) (71.2) 49.3 65.5
---------------------------------------------------------------------------
(39.6) (46.7) 370.2 96.2
---------------------------------------------------------------------------
Cash flows from
financing
activities
Repayment of long-
term debt - (132.7) (100.3) (150.1)
Proceeds from
(repayment of)
operating loans (4.0) 79.2 (64.2) 52.0
Dividends (2.6) (1.2) (7.7) (9.8)
Other (2.3) 0.1 (5.6) 0.3
---------------------------------------------------------------------------
(8.9) (54.6) (177.8) (107.6)
---------------------------------------------------------------------------
Cash flows from
investing
activities
Additions to
property, plant,
equipment and
timber (12.7) (6.5) (56.3) (17.8)
Proceeds from
disposals of
property, plant,
equipment and
timber (0.1) 0.2 2.7 2.2
Decrease in other
assets 0.9 3.0 0.6 4.9
---------------------------------------------------------------------------
(11.9) (3.3) (53.0) (10.7)
---------------------------------------------------------------------------
Change in cash from
continuing
operations (60.4) (104.6) 139.4 (22.1)
Change in cash from
discontinued
operations (note 2) 8.2 24.4 31.1 8.6
Cash - beginning of
period 212.9 70.4 (9.8) 3.7
---------------------------------------------------------------------------
Cash - end of
period $ 160.7 $ (9.8) $ 160.7 $ (9.8)
---------------------------------------------------------------------------
Cash consists of
Cash and short-term
investments $ 163.1 $ 12.0 $ 163.1 $ 12.0
Cheques issued in
excess of funds on
deposit (2.4) (21.8) (2.4) (21.8)
---------------------------------------------------------------------------
$ 160.7 $ (9.8) $ 160.7 $ (9.8)
---------------------------------------------------------------------------
Supplemental
information
Interest paid $ 13.4 $ 13.0 $ 29.6 $ 29.4
---------------------------------------------------------------------------
Income taxes
received (paid) -
net $ (1.5) $ (3.4) $ 66.1 $ 18.8
---------------------------------------------------------------------------
West Fraser Timber Co. Ltd.
Notes to Consolidated Financial Statements
(figures are in millions of dollars except where indicated - unaudited)
1. Basis of presentation
These interim consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP") for interim
financial statements and do not contain all of the information that is required
for annual financial statements. Accordingly, they should be read in conjunction
with the consolidated annual financial statements for the year ended December
31, 2010, which can be obtained on the Company's website at www.westfraser.com
and on the System for the Electronic Document Analysis and Retrieval ("SEDAR")
at www.sedar.com under the Company's profile.
2. Discontinued operations
In October 2009, the Company announced its decision to permanently close the
Kitimat linerboard and kraft paper mill. In January 2010, the mill ceased
operations. Accordingly, current and prior period results for this operation
have been reclassified to discontinued operations.
The results of the discontinued operations are as follows:
October 1 to December 31 January 1 to December 31
2010 2009 2010 2009
---------------------------------------------------------------------------
Sales $ 1.3 $ 76.9 $ 71.8 $ 259.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating earnings
(loss) 2.3 (41.0) (20.3) (211.0)
Gain on foreign
currency contracts - - - 9.8
Other income
(expense) 14.6 0.6 15.8 (9.9)
---------------------------------------------------------------------------
Earnings (loss)
before income tax 16.9 (40.4) (4.5) (211.1)
Income tax recovery
(provision) (4.8) 12.5 0.9 64.7
---------------------------------------------------------------------------
Earnings (loss) $ 12.1 $ (27.9) $ (3.6) $ (146.4)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Cash flows from
operating
activities $ (6.4) $ 24.4 $ 16.4 $ 9.7
Cash flows from
investing
activities 14.6 - 14.7 (1.1)
---------------------------------------------------------------------------
Increase in cash $ 8.2 $ 24.4 $ 31.1 $ 8.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------
3. Inventories
Inventories at December 31, 2010 were written down by $3.8 million (September
30, 2010 - $8.5 million; December 31, 2009 - $16.0 million) to reflect net
realizable value being lower than cost.
4. Other assets
December 31, 2010 December 31, 2009
-------------------------------------------------------------------------
Power purchase agreement - net $ 73.2 $ 80.5
Advances for timber and timber
deposits 3.4 5.7
Investments and other 5.0 2.7
-------------------------------------------------------------------------
$ 81.6 $ 88.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Restructuring charges
Restructuring charges relate to the closure of the Kitimat linerboard and kraft
paper mill and certain indefinitely idled sawmills. A reconciliation of
restructuring charges included in accounts payable and accrued liabilities is as
follows:
October 1 to January 1 to
December 31, 2010 December 31, 2010
-------------------------------------------------------------------------
Accrued liability - beginning of
period $ 11.4 $ 34.1
Paid during the period (6.5) (35.1)
Change in estimate (0.4) 5.5
-------------------------------------------------------------------------
Accrued liability - end of period $ 4.5 $ 4.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. Long-term debt and operating loans
Long-term debt
December 31, 2010 December 31, 2009
-------------------------------------------------------------------------
Term note due March 2010;
interest at floating rates $ - $ 100.0
US$300 million senior notes due
October 2014; interest at 5.2% 298.4 315.3
Note payable due in instalments to
2020; interest at 5.5% 2.7 2.7
-------------------------------------------------------------------------
301.1 418.0
Less: Current portion (0.3) (100.3)
Deferred financing costs (1.3) (1.8)
-------------------------------------------------------------------------
$ 299.5 $ 315.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating loans
The Company has $505 million (2009 - $605.0 million) in revolving lines of
credit available, of which $8.8 million (net of deferred financing costs of $6.2
million) was drawn as at December 31, 2010 (2009 - $78.7 million - net of
deferred financing costs of $2.2 million). Interest is payable at floating rates
based on Prime, US base, Bankers' Acceptances or LIBOR at the Company's option.
The Company has also issued letters of credit in the amount of $35.4 million
(2009 - $33.4 million) that are supported by this facility. The revolving lines
of credit include a $500 million committed facility maturing in December 2014.
The $500 million committed facility and the US$300 million senior notes are
secured by the Company's assets.
7. Other liabilities
December 31, 2010 December 31, 2009
-------------------------------------------------------------------------
Post-retirement obligations $ 70.1 $ 65.7
Timber damage deposits 13.9 15.6
Reforestation obligations - long-term 54.4 51.9
Other asset retirement obligations -
long-term 15.2 26.0
Other long-term obligations 7.0 7.7
-------------------------------------------------------------------------
$ 160.6 $ 166.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. Employee future benefits
The total pension expense for the Company's defined benefit pension plans is
$8.4 million for the three months ended December 31, 2010 (three months ended
December 31, 2009 - $4.6 million) and $31.7 million for the twelve months ended
December 31, 2010 (twelve months ended December 31, 2009 - $33.4 million).
9. Income taxes
The Company's effective tax rate on earnings from continuing operations is
different from the statutory rates as follows:
October 1 to December 31
2010 2009
Amount % Amount %
---------------------------------------------------------------------------
Income taxes at
statutory rates $ (11.1) (28.5) $ (0.1) (30.0)
Non-taxable amounts 5.6 14.4 0.8 171.4
Rate differentials
between
jurisdictions and
on specified
activities 7.3 18.7 3.4 728.6
Rate differential
on loss carry-backs - - 2.1 458.6
Change in
deductibility of
cash payments on
share options (9.7) (24.9) - -
Valuation allowance (5.0) (12.9) (3.3) (707.2)
Other 0.6 1.6 4.5 964.3
---------------------------------------------------------------------------
$ (12.3) (31.6) $ 7.4 1,585.7
---------------------------------------------------------------------------
---------------------------------------------------------------------------
January 1 to December 31
2010 2009
Amount % Amount %
---------------------------------------------------------------------------
Income taxes at
statutory rates $ (68.0) (28.5) $ 48.4 30.0
Non-taxable amounts 6.8 2.9 8.1 5.0
Rate differentials
between
jurisdictions and
on specified
activities 10.4 4.3 12.7 7.9
Rate differential
on loss carry-backs - - 5.8 3.6
Reduction in
statutory income
tax rates - - 4.7 2.9
Change in
deductibility of
cash payments on
share options (9.7) (4.1) - -
Valuation allowance (5.8) (2.4) (113.8) (70.5)
Other (2.5) (1.0) 1.1 0.7
---------------------------------------------------------------------------
$ (68.8) (28.8) $ (33.0) (20.4)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
10. Earnings per share
Basic earnings per share are calculated based on earnings available to Common
shareholders, as set out below, using the weighted average number of Common
shares and Class B common shares outstanding. Diluted earnings per share assume
the exercise of share options, using the treasury stock method.
When there is a net loss, the exercise of stock options would result in a
calculated diluted earnings per share that is anti-dilutive. Accordingly, these
shares have not been included in the total weighted average shares for the
purpose of calculating diluted earnings per share.
October 1 to December 31
2010 2009
From After From After
continuing discontinued continuing discontinued
operations operations operations operations
---------------------------------------------------------------------------
Earnings available
to shareholders $ 26.6 $ 38.7 $ 7.8 $ (20.1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Weighted average
number of shares
Basic 42,828,502 42,828,502 42,807,980 42,807,980
Share options 476,995 476,995 - -
---------------------------------------------------------------------------
Diluted 43,305,497 43,305,497 42,807,980 42,807,980
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Earnings per share
(dollars)
Basic $ 0.62 $ 0.90 $ 0.18 $ (0.47)
Diluted $ 0.61 $ 0.89 $ 0.18 $ (0.47)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
January 1 to December 31
2010 2009
From After From After
continuing discontinued continuing discontinued
operations operations operations operations
---------------------------------------------------------------------------
Earnings available
to shareholders $ 169.8 $ 166.2 $ (194.4) $ (340.8)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Weighted average
number of shares
Basic 42,822,949 42,822,949 42,807,980 42,807,980
Share options 426,938 426,938 - -
---------------------------------------------------------------------------
Diluted 43,249,887 43,249,887 42,807,980 42,807,980
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Earnings per share
(dollars)
Basic $ 3.97 $ 3.88 $ (4.54) $ (7.96)
Diluted $ 3.93 $ 3.84 $ (4.54) $ (7.96)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
11. Segmented information
Pulp & Corporate Consolid-
Lumber Panels paper & other ed
--------------------------------------------------------------------------
October 1, 2010
to December 31,
2010
Sales at
market
prices
To external
customers $ 396.8 $ 92.0 $ 230.3 $ - $ 719.1
-----------
To other
segments 21.6 2.3 - -
--------------------------------------------------------------
$ 418.4 $ 94.3 $ 230.3 $ -
--------------------------------------------------------------
EBITDA (1) $ 38.9 $ 6.2 $ 43.9 $ (13.7) $ 75.3
Amortization (18.6) (3.8) (13.9) (0.8) (37.1)
--------------------------------------------------------------------------
Operating
earnings 20.3 2.4 30.0 (14.5) 38.2
Interest income
(expense) - net (3.8) (0.4) (1.7) 0.1 (5.8)
Exchange gain on
long-term debt - - - 10.3 10.3
Other
expense (0.4) (0.3) (2.4) (0.7) (3.8)
--------------------------------------------------------------------------
Earnings from
continuing
operations
before
income taxes $ 16.1 $ 1.7 $ 25.9 $ (4.8) $ 38.9
--------------------------------------------------------------------------
October 1, 2009
to December 31,
2009
Sales at
market
prices
To external
customers $ 300.8 $ 92.0 $ 177.4 $ - $ 570.2
-----------
To other
segments 23.1 1.6 - -
--------------------------------------------------------------
$ 323.9 $ 93.6 $ 177.4 $ -
--------------------------------------------------------------
EBITDA (1) $ 11.3 $ 16.9 $ 30.5 $ (2.9) $ 55.8
Amortization (32.8) (9.5) (14.8) (0.9) (58.0)
Asset
impairments - - - - -
--------------------------------------------------------------------------
Operating
earnings (21.5) 7.4 15.7 (3.8) (2.2)
Interest income
(expense) - net (3.9) (0.6) (1.7) 1.4 (4.8)
Exchange gain on
long-term debt - - - 5.9 5.9
Other income
(expense) 5.5 0.2 1.0 (5.2) 1.5
--------------------------------------------------------------------------
Earnings from
continuing
operations
before
income taxes $ (19.9) $ 7.0 $ 15.0 $ (1.7) $ 0.4
---------------------------------------------------------------------------
1. Non GAAP measure:
EBITDA is defined as operating earnings plus amortization and asset
impairments.
Pulp & Corporate Consolid-
Lumber Panels paper & other ed
--------------------------------------------------------------------------
January 1,
2010 to
December 31,
2010
Sales at
market
prices
To
external
customers $ 1,621.4 $ 401.2 $ 863.3 $ - $ 2,885.9
-------------
To other
segments 93.6 8.2 - -
--------------------------------------------------------------
$ 1,715.0 $ 409.4 $ 863.3 $ -
--------------------------------------------------------------
EBITDA (1) $ 228.4 $ 57.0 $ 187.2 $ (34.7) $ 437.9
Amorti-
zation (103.2) (19.9) (55.0) (3.1) (181.2)
---------------------------------------------------------------------------
Operating
earnings 125.2 37.1 132.2 (37.8) 256.7
Interest income
(expense) - net (16.7) (2.8) (7.2) 0.1 (26.6)
Exchange
gain on
long-term
debt - - - 16.9 16.9
Other
income
(expense) (0.2) (1.0) (7.5) 0.3 (8.4)
---------------------------------------------------------------------------
Earnings
from
continuing
operations
before
income
taxes $ 108.3 $ 33.3 $ 117.5 $ (20.5) $ 238.6
---------------------------------------------------------------------------
January 1,
2009 to
December 31,
2009
Sales at
market
prices
To
external
customers $ 1,285.0 $ 390.4 $ 677.1 $ - $ 2,352.5
-------------
To other
segments 95.3 6.7 - -
--------------------------------------------------------------
$ 1,380.3 $ 397.1 $ 677.1 $ -
--------------------------------------------------------------
EBITDA (1) $ (31.3) $ 48.3 $ 60.2 $ 3.1 $ 80.3
Amorti-
zation (141.3) (34.6) (65.3) (3.5) (244.7)
Asset
impair-
ments (16.9) - - - (16.9)
---------------------------------------------------------------------------
Operating
earnings (189.5) 13.7 (5.1) (0.4) (181.3)
Interest income -
net (expense) (18.1) (3.0) (6.4) 1.0 (26.5)
Exchange
gain on
long-term
debt - - - 50.1 50.1
Other
income
(expense) 3.5 (0.9) (5.4) (0.9) (3.7)
---------------------------------------------------------------------------
Earnings
from
continuing
operations
before
income
taxes $ (204.1) $ 9.8 $ (16.9) $ 49.8 $ (161.4)
---------------------------------------------------------------------------
1. Non GAAP measure:
EBITDA is defined as operating earnings plus amortization and asset
impairments.
The geographic distribution of property, plant, equipment, timber and goodwill
and external sales is as follows:
Property, plant,
equipment,
timber and goodwill by
geographic Sales by
area geographic area (2)
2010 2009 2010 2009
---------------------------------------------------------------------------
Canada $ 1,574.4 $ 1,657.1 $ 704.1 $ 594.3
United States 191.1 230.7 1,409.8 1,161.1
China - - 354.3 274.4
Other Asia - - 281.8 213.4
Other - - 135.9 109.3
---------------------------------------------------------------------------
$ 1,765.5 $ 1,887.8 $ 2,885.9 $ 2,352.5
---------------------------------------------------------------------------
2. Sales are attributed to areas based on the location of product delivery
by the Company.
12. Contingency
On January 18, 2011 the United States requested arbitration with Canada 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 Canada and B.C. are complying with their obligations
under the SLA and intends to cooperate fully with the B.C. and Canadian
governments in defending this claim. The results of the arbitration process are
not determinable at this point in time and accordingly no provision has been
recorded by the Company.
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