Canfor Corporation (TSX:CFP) today reported net income attributable to
shareholders ("shareholder net income") of $28.4 million, or $0.20 per share,
for the third quarter of 2013, compared to $110.3 million, or $0.77 per share,
for the second quarter of 2013 and $20.5 million, or $0.14 per share, for the
third quarter of 2012. For the nine months ended September 30, 2013, the
Company's shareholder net income was $200.6 million, or $1.41 per share,
compared to $5.1 million, or $0.03 per share, reported for the comparable period
of 2012.
The shareholder net income for the third quarter of 2013 included various items
affecting comparability with prior periods, which had an overall net positive
impact on the Company's results of $2.2 million, or $0.02 per share. After
adjusting for such items, the Company's adjusted shareholder net income for the
third quarter of 2013 was $26.2 million, or $0.18 per share, down $61.5 million,
or $0.43 per share, from an adjusted shareholder net income of $87.7 million, or
$0.61 per share, for the second quarter of 2013. Adjusted shareholder net income
for the third quarter of 2012 was $13.6 million, or $0.09 per share.
The Company reported operating income of $49.3 million for the third quarter of
2013, compared to operating income of $128.2 million for the second quarter. The
decline in operating income largely reflected lower lumber sales realizations,
increased market stumpage costs and lower lumber and pulp production volumes,
partly offset by improved sales realizations for the pulp and paper segment.
The following table summarizes selected financial information for the Company
for the comparative periods(1):
(millions of Canadian dollars, Q3 Q2 YTD Q3 YTD
except for per share amounts) 2013 2013 2013 2012 2012
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Sales $755.9 $843.2 $2,385.4 $663.7 $1,942.5
Operating income $ 49.3 $128.2 $ 277.5 $ 18.1 $ 22.3
Net income attributable to equity
shareholders of Company $ 28.4 $110.3 $ 200.6 $ 20.5 $ 5.1
Net income per share attributable to
equity shareholders of Company,
basic and diluted $ 0.20 $ 0.77 $ 1.41 $ 0.14 $ 0.03
Adjusted shareholder net income
(loss) $ 26.2 $ 87.7 $ 184.2 $ 13.6 $ (1.3)
Adjusted shareholder net income
(loss) per share $ 0.18 $ 0.61 $ 1.29 $ 0.09 $ (0.02)
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In a reversal of the trend experienced in the previous quarter, when North
American lumber prices saw a sharp correction after peaking in early April,
lumber prices in the third quarter showed a gradual improvement, supported by
relatively solid global demand that, in part, reflected improving home prices
and low home inventory levels in the U.S. Based on July and August 2013 data
(latest data available), total U.S. housing starts were up 2% from the second
quarter of 2013, averaging 887,000 units SAAR (seasonally adjusted annual rate).
Canadian housing starts rose 4% from the second quarter of 2013 to 194,000 units
SAAR, contributing to a marginal increase in lumber consumption. Continued solid
demand from offshore markets supported steady offshore lumber shipments in the
third quarter.
The average North American benchmark Western Spruce/Pine/Fir ("SPF") 2x4 #2&Btr
price for the third quarter of 2013 was US$328 per Mfbm, down US$7 per Mfbm, or
2%, from the previous quarter, while several other grades saw more significant
declines. Overall average sales realizations were well down compared to the
previous quarter, reflecting lower average prices in both North American and
offshore markets and, to a lesser extent, an average export tax of 5% on
shipments from Canada to the U.S., partly offset by a slightly weaker Canadian
dollar. Price realizations from all markets reflected a carry-over of weaker
market conditions experienced in June into the third quarter. In offshore
markets, where the majority of pricing is negotiated monthly or quarterly in
advance, the carry-over effect on realizations was more marked. Average sales
realizations for Southern Yellow Pine ("SYP") products saw a moderate decrease
from the previous quarter; while the benchmark SYP 2x4 #2 price of US$393 per
Mfbm was down slightly from the second quarter, larger decreases were seen in
wider dimension product prices.
(1) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. Further
details can be found in the Company's unaudited interim consolidated
financial statements.
Lumber shipments and production were down 56.5 million board feet (5%) and 79.5
million board feet (6%), respectively, from the previous quarter, principally
reflecting capital-related downtime and subsequent ramp-ups related to upgrades
at the Company's Elko and Mackenzie sawmills, semi-annual maintenance shuts at
the Company's southern pine operations, as well as an additional day of
statutory downtime in the third quarter. Lumber unit manufacturing costs
increased compared to the previous quarter, principally reflecting market-driven
stumpage increases in unit log costs as well as increased costs associated with
severe flooding in the southeast area of British Columbia in the previous
quarter. Unit manufacturing costs were further impacted by the aforementioned
lower production levels in the current quarter.
Global softwood pulp markets were relatively steady through the quarter, despite
the seasonally slower summer period. Average Northern Bleached Softwood Kraft
("NBSK") pulp list prices were relatively stable in all regions during the third
quarter, with list prices to North America and Europe both up US$10 per tonne,
to US$947 per tonne and US$867 per tonne, respectively. The NBSK pulp price to
China was down US$15 per tonne, averaging US$685 per tonne in the quarter, but
demand from China gathered momentum through the quarter, with the September
price settling at US$695 per tonne. Third quarter average pulp sales
realizations showed a modest increase, mostly as a result of the weaker Canadian
dollar.
The Company's pulp shipments and production levels in the third quarter were
impacted by a scheduled major maintenance outage at the Northwood Pulp Mill and
lower overall operating rates. The Company's operational performance was also
impacted by severe thunderstorms in the Prince George region resulting in power
interruptions and shutdowns at all mill operations. Pulp unit manufacturing
costs for the current quarter increased modestly from the previous quarter,
largely reflecting the lower production levels as well as higher fibre costs,
partially offset by the timing of maintenance spending, lower chemical costs and
seasonally lower energy costs.
The Company continued to preserve its strong financial position, ending the
quarter with cash and cash equivalents of $90 million, and a net debt to
capitalization of 7.5%. For Canfor, excluding Canfor Pulp, net debt to
capitalization at the end of the third quarter was 3.0%.
During the quarter, the Company completed the first phase of the previously
announced purchase of Scotch & Gulf Lumber, LLC ("Scotch Gulf") for $29 million,
representing an initial 25% interest in Scotch Gulf, plus transaction closing
costs and a proportionate share of working capital. Canfor's interest will
increase to 100% by August 2016.
Canfor's collective agreement with the USW expired on June 30, 2013. The
Company and the USW have been actively pursuing negotiations for a new
collective agreement. The USW has served strike notice for certain mills,
however, negotiations are at the mediation stage and as such no strikes or
lockouts can occur. Mediation talks are currently being held in abeyance to
allow the USW to pursue negotiations with other parties.
Commenting on the third quarter performance, Canfor's President and Chief
Executive Officer, Don Kayne, said, "As expected, lumber prices staged a gradual
recovery after reaching their low point in June. We continue to be encouraged by
solid demand for our lumber products in all of our major markets." Kayne added
that additional production volume arising from the Company's recent Elko and
Mackenzie sawmill upgrades will further enhance Canfor's ability to take
advantage of improving market conditions. Regarding the pulp and paper segment's
third quarter results, Kayne said, "With our scheduled maintenance shutdowns now
behind us and our next outage not planned until the second quarter of next year,
we will be focused on enhancing our operational performance in the coming
quarters."
As announced last week, the Company will permanently close its sawmill located
in Quesnel, British Columbia. The Company anticipates that the closure will
occur in March 2014. Canfor also entered into an agreement with West Fraser
Mills Ltd. for an exchange in forest tenure rights, a non-replaceable license
and undercut volumes. Commenting on the recent announcements, Kayne said, "The
timber availability in the Quesnel region following the mountain pine beetle
infestation unfortunately leaves us unable to continue operation of our Quesnel
sawmill." Kayne added "The additional fibre we have been able to secure in the
exchange agreement with West Fraser enhances the fibre requirements for our
Houston facility. We are committed to minimizing the impacts of this closure on
our Quesnel employees."
With respect to the fourth quarter of 2013, North American lumber consumption is
forecast to show a modest improvement before an anticipated seasonal slowdown
late in the period. The repair and remodeling sector is projected to benefit
from a continued appreciation in home value, which encourages home improvement
projects. Offshore markets are projected to remain fairly stable. Export taxes
on shipments to the U.S. remained at 5% for October and will be 0% for November.
NBSK pulp markets are projected to improve modestly in the fourth quarter of
2013, while a risk of price weakness continues to exist from further hardwood
pulp capacity projected to come online in early 2014.
Additional Information and Conference Call
A conference call to discuss the third quarter's financial and operating results
will be held on Thursday, October 31, 2013 at 8:00 AM Pacific time. To
participate in the call, please dial 416-340-8010 or Toll-Free 866-540-8136. For
instant replay access until November 14, 2013, please dial 800-408-3053 and
enter participant pass code 5201618#. The conference call will be webcast live
and will be available at www.canfor.com. This news release, the attached
financial statements and a presentation used during the conference call can be
accessed via the Company's website at
http://www.canfor.com/investor-relations/webcasts.
Forward Looking Statements
Certain statements in this press release constitute "forward-looking statements"
which involve known and unknown risks, uncertainties and other factors that may
cause actual results to be materially different from any future results,
performance or achievements expressed or implied by such statements. Words such
as "expects", "anticipates", "projects", "intends", "plans", "will", "believes",
"seeks", "estimates", "should", "may", "could", and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are based on management's current expectations and beliefs and
actual events or results may differ materially. There are many factors that
could cause such actual events or results expressed or implied by such
forward-looking statements to differ materially from any future results
expressed or implied by such statements. Forward-looking statements are based on
current expectations and the Company assumes no obligation to update such
information to reflect later events or developments, except as required by law.
Canfor is a leading integrated forest products company based in Vancouver,
British Columbia (BC) with interests in BC, Alberta, Quebec, North and South
Carolina and Alabama. The Company produces primarily softwood lumber and also
produces specialized wood products and bleached chemi-thermo mechanical pulp
(BCTMP). Canfor also owns a 50.4% interest in Canfor Pulp Products Inc., which
is one of the largest producers of northern softwood kraft pulp in Canada and a
leading producer of high performance kraft paper. Canfor shares are traded on
the Toronto Stock Exchange under the symbol CFP.
Canfor Corporation
Third Quarter 2013
Management's Discussion and Analysis
This interim Management's Discussion and Analysis ("MD&A") provides a review of
Canfor Corporation's ("Canfor" or "the Company") financial performance for the
quarter ended September 30, 2013 relative to the quarters ended June 30, 2013
and September 30, 2012, and the financial position of the Company at September
30, 2013. It should be read in conjunction with Canfor's unaudited interim
consolidated financial statements and accompanying notes for the quarters ended
September 30, 2013 and 2012, as well as the 2012 annual MD&A and the 2012
audited consolidated financial statements and notes thereto, which are included
in Canfor's Annual Report for the year ended December 31, 2012 (available at
www.canfor.com). The financial information in this interim MD&A has been
prepared in accordance with International Financial Reporting Standards
("IFRS"), which is the required reporting framework for Canadian publicly
accountable enterprises.
Throughout this discussion, reference is made to Operating Income before
Amortization which Canfor considers to be a relevant indicator for measuring
trends in the performance of each of its operating segments and the Company's
ability to generate funds to meet its debt repayment and capital expenditure
requirements. Reference is also made to Adjusted Shareholder Net Income (Loss)
(calculated as Shareholder Net Income (Loss) less specific items affecting
comparability with prior periods - for the full calculation, see reconciliation
included in the section "Analysis of Specific Material Items Affecting
Comparability of Shareholder Net Income (Loss)") and Adjusted Shareholder Net
Income (Loss) per Share (calculated as Adjusted Shareholder Net Income (Loss)
divided by the weighted average number of shares outstanding during the period).
Operating Income before Amortization and Adjusted Shareholder Net Income (Loss)
and Adjusted Shareholder Net Income (Loss) per Share are not generally accepted
earnings measures and should not be considered as an alternative to net income
or cash flows as determined in accordance with IFRS. As there is no standardized
method of calculating these measures, Canfor's Operating Income before
Amortization, Adjusted Shareholder Net Income (Loss) and Adjusted Shareholder
Net Income (Loss) per Share may not be directly comparable with similarly titled
measures used by other companies. Reconciliations of Operating Income before
Amortization to operating income (loss) and Adjusted Shareholder Net Income
(Loss) to Net Income (Loss) reported in accordance with IFRS are included in
this MD&A.
Factors that could impact future operations are also discussed. These factors
may be influenced by both known and unknown risks and uncertainties that could
cause the actual results to be materially different from those stated in this
discussion. Factors that could have a material impact on any future oriented
statements made herein include, but are not limited to: general economic, market
and business conditions; product selling prices; raw material and operating
costs; currency exchange rates; interest rates; changes in law and public
policy; the outcome of labour and trade disputes; and opportunities available to
or pursued by Canfor.
All financial references are in millions of Canadian dollars unless otherwise
noted. The information in this report is as at October 30, 2013.
Forward Looking Statements
Certain statements in this MD&A constitute "forward-looking statements" which
involve known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different from any future results, performance
or achievements expressed or implied by such statements. Words such as
"expects", "anticipates", "projects", "intends", "plans", "will", "believes",
"seeks", "estimates", "should", "may", "could", and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are based on management's current expectations and beliefs and
actual events or results may differ materially. There are many factors that
could cause such actual events or results expressed or implied by such
forward-looking statements to differ materially from any future results
expressed or implied by such statements. Forward-looking statements are based on
current expectations and the Company assumes no obligation to update such
information to reflect later events or developments, except as required by law.
THIRD QUARTER 2013 OVERVIEW
Selected Financial Information and Statistics(1)
(millions of Canadian dollars, Q3 Q2 YTD Q3 YTD
except per share amounts) 2013 2013 2013 2012 2012
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Operating income (loss) by
segment:
Lumber $ 43.8 $ 115.5 $ 247.7 $ 34.8 $ 33.1
Pulp and Paper $ 11.5 $ 18.6 $ 49.0 $ (7.3) $ 15.6
Unallocated and Other(6) $ (6.0) $ (5.9) $ (19.2) $ (9.4) $ (26.4)
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Total operating income $ 49.3 $ 128.2 $ 277.5 $ 18.1 $ 22.3
Add: Amortization $ 44.8 $ 49.6 $ 141.3 $ 43.2 $ 129.3
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Total operating income before
amortization $ 94.1 $ 177.8 $ 418.8 $ 61.3 $ 151.6
Add (deduct):
Working capital movements $ 4.6 $ 96.9 $ 7.0 $ (17.2) $ (21.9)
Defined benefit pension plan
contributions $ (12.9) $ (12.6) $ (39.0) $ (14.8) $ (41.5)
Other operating cash flows,
net(2) $ (10.5) $ (1.9) $ 4.7 $ (4.9) $ 1.6
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Cash from operating activities $ 75.3 $ 260.2 $ 391.5 $ 24.4 $ 89.8
Add (deduct):
Finance expenses paid $ (1.5) $ (7.5) $ (11.5) $ (1.4) $ (11.9)
Distributions paid to non-
controlling interests $ (2.4) $ (2.1) $ (6.9) $ (3.0) $ (15.5)
Capital additions, net(3) $ (74.6) $ (48.8) $(169.8) $ (44.1) $(198.7)
Investment in Scotch & Gulf
Lumber, LLC $ (29.0) $ - $ (29.0) $ - $ -
Loan to Scotch & Gulf Lumber,
LLC $ (34.0) $ - $ (34.0) $ - $ -
Proceeds from sale of Canfor-
LP OSB(6) $ 1.3 $ 76.6 $ 77.9 $ - $ -
Drawdown (repayment) of long-
term debt $ - $ (73.2) $ (73.2) $ - $ 50.1
Other, net $ (16.9) $ 0.3 $ (11.0) $ 10.0 $ 32.7
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Change in cash / operating
loans $ (81.8) $ 205.5 $ 134.0 $ (14.1) $ (53.5)
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ROIC - Consolidated(4) 2.2% 8.8% 15.9% 1.4% 1.3%
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Average exchange rate (US$ per
C$1.00)(5) $ 0.963 $ 0.977 $ 0.977 $ 1.005 $ 0.998
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(1) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. Further
details can be found in the Company's unaudited interim consolidated
financial statements.
(2) Further information on operating cash flows can be found in the
Company's unaudited interim consolidated financial statements.
(3) Additions to property, plant and equipment include the acquisition of
assets from Tembec Industries Ltd. ("Tembec") in the first quarter of 2012,
and are shown net of amount received under Government funding initiatives in
the pulp and paper segment.
(4) Consolidated Return on Invested Capital ("ROIC") is equal to operating
income/loss, plus realized gains/losses on derivatives, equity income/loss
from joint venture and other income/expense, all net of minority interest,
divided by the average invested capital during the year. Invested capital is
equal to capital assets, plus long-term investments and net non-cash working
capital, all excluding minority interest components.
(5) Source - Bank of Canada (average noon rate for the period).
Analysis of Specific Material Items Affecting Comparability of Shareholder
Net Income (Loss)(1)
After-tax impact, net of non-controlling interests
(millions of Canadian dollars, Q3 Q2 YTD Q3 YTD
except per share amounts) 2013 2013 2013 2012 2012
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Shareholder Net Income $ 28.4 $110.3 $200.6 $ 20.5 $ 5.1
Foreign exchange (gain) loss on
long-term debt and investments, net $ (1.0) $ 1.8 $ 3.1 $ (4.0) $ (4.3)
(Gain) loss on derivative financial
instruments $ (2.2) $ 1.0 $ (3.4) $ (4.4) $ (5.3)
Canfor's 50% interest in Canfor-LP
OSB's income, net of tax $ - $ 3.8 $ 12.1 $ - $ -
(Gain) loss on sale of Canfor-LP
OSB(6) $ 1.0 $(33.4) $(32.4) $ - $ -
Change in substantively enacted tax
rate $ - $ 4.2 $ 4.2 $ - $ -
Restructuring charges for management
changes $ - $ - $ - $ 1.5 $ 1.5
Increase in fair value of ABCP $ - $ - $ - $ - $ (1.1)
Costs related to Tembec acquisition $ - $ - $ - $ - $ 2.8
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Net impact of above items $ (2.2) $(22.6) $(16.4) $ (6.9) $ (6.4)
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Adjusted Shareholder Net Income
(Loss) $ 26.2 $ 87.7 $184.2 $ 13.6 $ (1.3)
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Shareholder Net Income (Loss) per
share (EPS), as reported $ 0.20 $ 0.77 $ 1.41 $ 0.14 $ 0.03
Net impact of above items per share $(0.02) $(0.16) $(0.12) $(0.05) $(0.05)
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Adjusted Shareholder Net Income
(Loss) per share $ 0.18 $ 0.61 $ 1.29 $ 0.09 $(0.02)
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(6) The Company completed the sale of its 50% share of the Canfor-LP OSB
Limited Partnership ("Canfor-LP OSB") in the second quarter of 2013 and
recorded a gain of $33.4 million (after tax). As part of the sale, Canfor
may receive additional annual consideration over a 3 year period, starting
June 1, 2013, based on Peace Valley OSB's annual adjusted earnings before
interest, tax, depreciation and amortization. An asset was recorded based on
the fair value of this additional consideration and will be adjusted to
current estimated fair value each reporting period. Based on the estimated
fair value at September 30, 2013, a loss of $1.0 million (after tax) was
recorded in the third quarter of 2013.
The Company reported operating income of $49.3 million for the third quarter of
2013, compared to operating income of $128.2 million for the second quarter. The
decline in operating income largely reflected lower lumber sales realizations,
increased market stumpage costs and lower lumber and pulp production volumes,
partly offset by improved sales realizations for the pulp and paper segment.
In a reversal of the trend experienced in the previous quarter, when North
American lumber prices saw a sharp correction after peaking in early April,
lumber prices in the third quarter showed a gradual improvement, supported by
relatively solid global demand that, in part, reflected improving home prices
and low home inventory levels in the U.S. Based on July and August 2013 data
(latest data available), total U.S. housing starts were up 2% from the second
quarter of 2013, averaging 887,000 units SAAR (seasonally adjusted annual rate).
Canadian housing starts rose 4% from the second quarter of 2013 to 194,000 units
SAAR, contributing to a marginal increase in lumber consumption. Continued solid
demand from offshore markets supported steady offshore lumber shipments in the
third quarter.
The average North American benchmark Western Spruce/Pine/Fir ("SPF") 2x4 #2&Btr
price for the third quarter of 2013 was US$328 per Mfbm, down US$7 per Mfbm, or
2%, from the previous quarter, while several other grades saw more significant
declines. Overall average sales realizations were well down compared to the
previous quarter, reflecting lower average prices in both North American and
offshore markets and, to a lesser extent, an average export tax of 5% on
shipments from Canada to the U.S., partly offset by a slightly weaker Canadian
dollar. Price realizations from all markets reflected a carry-over of weaker
market conditions experienced in June into the third quarter. In offshore
markets, where the majority of pricing is negotiated monthly or quarterly in
advance, the carry-over effect on realizations was more marked. Average sales
realizations for Southern Yellow Pine ("SYP") products saw a moderate decrease
from the previous quarter; while the benchmark SYP 2x4 #2 price of US$393 per
Mfbm was down slightly from the second quarter, larger decreases were seen in
wider dimension product prices.
Lumber shipments and production were down 56.5 million board feet (5%) and 79.5
million board feet (6%), respectively, from the previous quarter, principally
reflecting capital-related downtime and subsequent ramp-ups related to upgrades
at the Company's Elko and Mackenzie sawmills, semi-annual maintenance shuts at
the Company's southern pine operations, as well as an additional day of
statutory downtime in the third quarter. Lumber unit manufacturing costs
increased compared to the previous quarter, principally reflecting market-driven
stumpage increases in unit log costs as well as increased costs associated with
severe flooding in the southeast area of British Columbia in the previous
quarter. Unit manufacturing costs were further impacted by the aforementioned
lower production levels in the current quarter.
Global softwood pulp markets were relatively steady through the quarter, despite
the seasonally slower summer period. Average Northern Bleached Softwood Kraft
("NBSK") pulp list prices were relatively stable in all regions during the third
quarter, with list prices to North America and Europe both up US$10 per tonne,
to US$947 per tonne and US$867 per tonne, respectively. The NBSK pulp price to
China was down US$15 per tonne, averaging US$685 per tonne in the quarter, but
demand from China gathered momentum through the quarter, with the September
price settling at US$695 per tonne. Third quarter average pulp sales
realizations showed a modest increase, mostly as a result of the weaker Canadian
dollar.
The Company's pulp shipments and production levels in the third quarter were
impacted by a scheduled major maintenance outage at the Northwood Pulp Mill and
lower overall operating rates. The Company's operational performance was also
impacted by severe thunderstorms in the Prince George region resulting in power
interruptions and shutdowns at all mill operations. Pulp unit manufacturing
costs for the current quarter increased modestly from the previous quarter,
largely reflecting the lower production levels as well as higher fibre costs,
partially offset by the timing of maintenance spending, lower chemical costs and
seasonally lower energy costs.
Compared to the third quarter of 2012, operating income was up $31.2 million,
driven by improved operating income for both the lumber and pulp and paper
segments. For the most part, the improved results for the lumber segment
reflected higher sales realizations and increased shipments, offset in part by
increased log costs, while the increase in pulp and paper segment earnings was
mostly attributable to improved pulp sales realizations.
OPERATING RESULTS BY BUSINESS SEGMENT
Lumber
Selected Financial Information and Statistics - Lumber(7)
(millions of Canadian dollars Q3 Q2 YTD Q3 YTD
unless otherwise noted) 2013 2013 2013 2012 2012
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Sales $ 529.4 $ 586.8 $1,658.5 $ 454.7 $1,241.9
Operating income before
amortization $ 71.4 $ 145.4 $ 332.5 $ 60.3 $ 108.3
Operating income $ 43.8 $ 115.5 $ 247.7 $ 34.8 $ 33.1
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Negative (positive) impact of
inventory valuation
adjustments(8) $ - $ - $ - $ - $ (13.1)
Costs related to Tembec
acquisition $ - $ - $ - $ - $ 2.5
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Operating income excluding
impact of inventory valuation
adjustments and unusual items $ 43.8 $ 115.5 $ 247.7 $ 34.8 $ 22.5
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Average SPF 2x4 #2&Btr lumber
price in US$(9) $ 328 $ 335 $ 351 $ 300 $ 287
Average SPF price in Cdn$ $ 340 $ 343 $ 359 $ 299 $ 288
Average SYP 2x4 #2 lumber price
in US$(10) $ 393 $ 392 $ 412 $ 322 $ 315
Average SYP price in Cdn$ $ 408 $ 401 $ 422 $ 320 $ 316
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U.S. housing starts (thousand
units SAAR)(11) 887 869 907 781 745
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Production - SPF lumber (MMfbm) 1,043.5 1,119.1 3,227.7 973.9 2,872.0
Production - SYP lumber (MMfbm) 131.3 135.2 401.2 118.6 357.3
Shipments - SPF lumber
(MMfbm)(12) 1,066.4 1,118.2 3,188.8 996.8 2,859.6
Shipments - SYP lumber
(MMfbm)(12) 139.5 142.6 405.4 127.9 378.3
Shipments - wholesale lumber
(MMfbm) 5.2 6.8 19.1 7.9 46.7
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(7) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. Further
details can be found in the Company's unaudited interim consolidated
financial statements.
(8) In accordance with IFRS, Canfor records its log and finished product
inventories at the lower of cost and net realizable value ("NRV"). Changes
in inventory volumes, market prices, foreign exchange rates and costs over
the respective reporting periods can all affect inventory valuation
adjustments, if any, required at each period end.
(9) Western Spruce/Pine/Fir, per thousand board feet (Source - Random
Lengths Publications, Inc.).
(10) Southern Yellow Pine, Eastside, per thousand board feet (Source -
Random Lengths Publications, Inc.).
(11) Source - U.S. Census Bureau, seasonally adjusted annual rate ("SAAR").
U.S. housing starts for Q3 2013 and YTD 2013 do not include data for
September 2013.
(12) Canfor-produced lumber, including lumber purchased for remanufacture.
Overview
Operating income for the lumber segment was $43.8 million for the third quarter
of 2013, a decrease of $71.7 million compared to operating income of $115.5
million in the previous quarter, and a $9.0 million improvement from operating
income of $34.8 million reported for the third quarter of 2012.
Current quarter results compared to the previous quarter reflected lower prices
in most markets, in part reflecting the carry-over of weaker market conditions
from June into the third quarter, as well as higher export taxes, market-driven
stumpage log cost increases, and lower production volumes resulting from capital
projects completed in the current quarter.
The improvement in operating income compared to the third quarter of 2012
reflected higher market prices, lower export taxes and higher operating rates.
Offsetting some of these gains were increased log costs reflecting higher market
stumpage and to a lesser extent, increased costs associated with severe flooding
in the southeast area of British Columbia in the prior quarter, coupled with the
impact on production from the capital projects completed in the current quarter.
Markets
The positive trend in North American lumber prices through the third quarter of
2013 was supported by pent-up housing demand and lower home inventory levels.
Based on July and August 2013 data (latest data available), total U.S. housing
starts averaged 887,000 units(13) SAAR, up 2% from the second quarter and 14%
higher compared to the third quarter of 2012. Single-family starts, where
dimension lumber is mainly consumed, were up 2% from the previous quarter to an
average of 608,000 units (13) SAAR for July and August 2013.
In Canada, lumber consumption increased marginally as Canadian housing starts
averaged 194,000 units(14) SAAR for the quarter, up 8,000 units, or 4%, compared
to the second quarter of 2013. Compared to the same quarter in 2012, Canadian
housing starts were lower by 13% reflecting a slowdown in construction activity
in several regions of the country.
The Company's offshore lumber shipments remained relatively unchanged from the
previous quarter and were up slightly from the third quarter of 2012, supported
principally by solid demand from China, Japan and Korea.
Sales
Sales for the lumber segment for the third quarter of 2013 were $529.4 million,
compared to $586.8 million in the previous quarter reflected both reduced
production as well as overall lower sales realizations. The increase in sales
from $454.7 million in the third quarter of 2012 reflected both improved pricing
and increased shipments resulting from higher production levels. Current quarter
sales also reflected seasonally higher log sales compared to the previous
quarter.
Total shipments in the third quarter of 2013 were just over 1.2 billion board
feet, down 5% from the previous quarter, and up 7% from the third quarter of
2012. Compared to the previous quarter, the decrease in third quarter shipments
principally reflected fewer operating hours resulting from capital and annual
maintenance related downtime, while the increase compared to the same period in
the prior year resulted from higher production levels which included the restart
of the Radium mill at the end of 2012.
Overall sales realizations were down compared to the second quarter of 2013,
reflecting weaker average prices in both North American and offshore markets,
and an average export tax of 5% on shipments to the U.S., partly offset by a
slightly weaker Canadian dollar over the period. For sales to North America, the
average Random Lengths Western SPF 2x4 #2&Btr lumber price moved down US$7 per
Mfbm, or 2%, to US$328 per Mfbm, while some other grades experienced more
significant declines. Price realizations from all markets reflected a carry-over
of weaker market conditions experienced in June into the third quarter, in
contrast to the opposite trend seen in the comparable quarter. In offshore
markets, due to the majority of pricing being negotiated monthly or quarterly in
advance, the carry-over effect on realizations was more marked. Sales
realizations for SYP products experienced a moderate decrease from the previous
quarter; while the benchmark SYP 2x4 #2 price of US$393 per Mfbm was down
slightly from the second quarter, larger decreases were seen in wider dimension
products. The average value of the Canadian dollar compared to the US dollar in
the third quarter was down 1 cent, or 1%, from the previous quarter, benefitting
current quarter sales realizations.
(13) U.S. Census Bureau
(14) CMHC - Canada Mortgage and Housing Corporation
Compared to the third quarter of 2012, sales realizations were also impacted by
the aforementioned carry-over of weaker market conditions from the second
quarter of 2013, but benefited from increased market prices for most grades as
well as lower export taxes and a weaker Canadian dollar. The benchmark North
American Random Lengths Western SPF 2x4 #2&Btr price was up US$28 per Mfbm, or
9%, compared to the third quarter of 2012. Solid year-over-year increases were
also recorded for most other grades and dimensions, with the exception of low
grade prices, which were relatively flat quarter-over-quarter. Offshore pricing
also showed solid increases for most grades, except for low grades, compared to
the same quarter in 2012. SYP products experienced strong gains, with the
benchmark SYP 2X4 #2 price up US$71 per Mfbm, or 22%. Realizations also
benefited from a 4 cent, or 4%, weaker Canadian dollar.
Total residual fibre revenue was down from the second quarter of 2013, primarily
reflecting lower shipments of sawmill residual chips partially offset by a
moderate increase in sawmill residual chip prices tied to higher NBSK pulp sales
realizations and other seasonal factors. Compared to the third quarter of 2012,
total residual fibre revenue was up, reflecting higher shipments of sawmill
residual chips and, to a lesser extent, a market-driven increase in sawmill
residual chip prices.
Operations
Lumber production, at just under 1.2 billion board feet, was down 6% from the
previous quarter, reflecting downtime and the subsequent ramp-ups related to
capital projects at the Company's Elko and Mackenzie sawmills, semi-annual
maintenance shuts at the Company's southern pine operations and an additional
day of statutory downtime in the current quarter. The reduction in current
quarter production also reflected reduced overtime shifts, offset slightly by
productivity improvements at several mills. Compared to the third quarter of
2012, lumber production was up 8% primarily reflecting the restart of the Radium
mill in late 2012 as well as continued productivity improvements from various
capital projects undertaken in the last year.
Overall, the Company's lumber unit manufacturing costs were up compared to the
previous quarter, resulting from an increase in unit log costs coupled with
moderate increases in unit cash conversions costs. The increase in unit log
costs predominantly reflected market-driven increases in stumpage as well as
increased costs associated with severe flooding in the prior quarter. The
increase in unit cash conversion costs largely reflected the lower production
levels relating to planned capital and maintenance downtime in the current
quarter as well as costs related to preparation for additional shifts at the
Company's southern pine operations.
Compared to the third quarter of 2012, unit manufacturing costs were higher,
reflecting higher unit log costs, largely the result of market-related factors
in the B.C. timber pricing system and, to a lesser extent, logging rate
increases. Unit cash conversions costs in the current period also reflected
ongoing dust control initiatives.
Pulp and Paper
Selected Financial Information and Statistics - Pulp and Paper(15, 16)
(millions of Canadian dollars unless Q3 Q2 YTD Q3 YTD
otherwise noted) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Sales $224.6 $255.5 $723.6 $206.3 $695.1
Operating income before amortization $ 28.5 $ 38.0 $104.8 $ 8.4 $ 64.1
Operating income (loss) $ 11.5 $ 18.6 $ 49.0 $ (7.3) $ 15.6
----------------------------------------------------------------------------
Average pulp price delivered to U.S. -
US$(17) $ 947 $ 937 $ 927 $ 853 $ 874
Average price in Cdn$ $ 983 $ 959 $ 949 $ 849 $ 876
----------------------------------------------------------------------------
Production - pulp (000 mt) 274.8 301.6 893.4 276.8 855.8
Production - paper (000 mt) 33.8 35.3 103.9 31.9 94.8
Shipments - pulp (000 mt) 267.5 307.8 883.5 268.9 878.8
Shipments - paper (000 mt) 35.5 37.2 107.7 30.6 97.0
----------------------------------------------------------------------------
(15) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits. Further details can be found in the
Company's unaudited interim consolidated financial statements.
(16) Includes the Taylor pulp mill and 100% of Canfor Pulp Products Inc.,
which is consolidated in Canfor's results. Pulp production and shipment
volumes presented are for both NBSK and bleached chemi-thermo mechanical
pulp ("BCTMP").
(17) Per tonne, NBSK pulp list price delivered to U.S. (Resource Information
Systems, Inc.).
Overview
Operating income for the pulp and paper segment was $11.5 million for the second
quarter of 2013, down $7.1 million from the previous quarter, and up $18.8 from
the third quarter of 2012.
Compared to the previous quarter, results for the pulp and paper segment
reflected lower production and shipment volumes, partially mitigated by a modest
improvement in sales realizations resulting mostly from a weakening of the
Canadian dollar against the US dollar. Results in the current quarter were
impacted by a scheduled maintenance outage at the Northwood Pulp Mill and lower
overall operating rates, which contributed to the lower production volumes and
increased unit manufacturing costs.
Improved results for the pulp and paper segment compared to the third quarter of
2012 principally reflected improved NBSK pulp sales realizations, resulting from
an 11% increase in NBSK pulp list prices and to a lesser extent, a 4% weaker
Canadian dollar. Partially offsetting these favourable impacts were increased
volume to lower-margin regions, principally China, and upward pressure on
discounts in North American markets. Unit manufacturing costs were in line with
the same period in 2012, as higher fibre costs, resulting mainly from increased
sawmill residual chips market prices (linked to NBSK market pulp sales
realizations), were offset by a reduction in chemical and labour costs, the
latter reflecting one-time costs of $3.2 million recorded in the third quarter
of 2012 associated with new five year collective labour agreements. Pulp
shipment and production volumes for the third quarter of 2013 were in line with
the comparable period of the prior year.
Markets
Global softwood pulp markets held up relatively well through the seasonally slow
summer period with stable pricing and demand through the quarter. Global
softwood pulp producer inventory levels were balanced during the quarter,
decreasing to 27 days' supply in September 2013, from 28 days in June 2013 (18).
Market conditions are generally considered balanced when inventories are in the
27-30 days of supply range.
Global shipments of bleached softwood sulphate pulp increased 2% for the first
nine months of 2013(19) compared to the same period in 2012. The improvement in
softwood pulp shipments was primarily driven by increased demand from North
America and Europe, partially offset by reduced demand from China earlier in the
quarter. Looking ahead, global softwood pulp markets are projected to improve
modestly in the fourth quarter of 2013 with steady demand and balanced producer
inventory levels.
Sales
The Company's pulp shipments in the third quarter of 2013 were 267,500 tonnes, a
decrease of 40,300 tonnes, or 13%, from the previous quarter, mostly due to
lower production volumes. Compared to the third quarter of 2012, shipments were
relatively unchanged however, for both periods, shipments were well below
historical levels, due largely to the extended maintenance outages in the third
quarters of both 2013 and 2012.
Average NBSK pulp list prices were relatively stable in all regions during the
third quarter. North American and European NBSK pulp list prices were both up
US$10 per tonne, with the list price to North America averaging US$947 per tonne
while the list price to Europe averaged US$867 per tonne in the quarter. The
North American market continued to experience upward pressure on discounts. The
NBSK pulp price to China declined US$15 per tonne averaging US$685 per tonne in
the quarter, but demand from China gathered momentum through the quarter, with
the September price settling at US$695 per tonne. Current quarter sales
realizations showed a modest increase, mostly as a result of 1% weakening of the
Canadian dollar against the US dollar. Bleached chemi-thermo mechanical pulp
("BCTMP") average sales realizations showed a modest decrease compared to the
previous quarter reflecting continuing downward price pressure for most of the
quarter.
Compared to the third quarter of 2012, NBSK pulp sales realizations were higher,
with an 11% gain in the average NBSK pulp list price to North America and a 4%
weaker Canadian dollar, more than offsetting increased volume to lower-margin
regions, principally China, and higher discounts in North American markets. The
North American average NBSK pulp list price increased US$94 per tonne and the
list price to Europe increased US$90 per tonne. The NBSK pulp list price to
China increased US$55 per tonne. BCTMP sales realizations experienced modest
decreases compared to the third quarter of 2012, principally reflecting lower
market pricing, offset in part by the weaker Canadian dollar.
(18) World 20 data is based on twenty producing countries representing 80%
of world chemical market pulp capacity and is based on information compiled
and prepared by the PPPC.
(19) As reported by Pulp and Paper Products Council ("PPPC") statistics.
Operations
Pulp production in the current quarter was 274,800 tonnes, down 26,800 tonnes,
or 9%, from the previous quarter, and was relatively unchanged when compared to
the third quarter of 2012.
The reduced production in the current quarter reflected completion of the
scheduled major maintenance outage at the Northwood Pulp Mill and lower overall
operating rates compared to both comparable periods. The outage at the Northwood
Pulp Mill included upgrades to the recovery boiler, and impacted production by
32,000 tonnes in the current quarter, in addition to the impact of 12,000 tonnes
in the prior quarter. The Company's operational performance in the current
quarter was also impacted by severe thunderstorms in the Prince George region
which resulted in power interruptions and related shutdown of all operations,
impacting production by 10,000 tonnes. In the third quarter of 2012, production
levels included an extended scheduled outage for maintenance and capital
upgrades at the Company's Prince George Pulp Mill.
Pulp unit manufacturing costs experienced a modest increase from the previous
quarter, largely reflecting the impact of lower production levels and higher
fibre costs, partially offset by the timing of maintenance spending, lower
chemical costs and seasonally lower energy costs. Fibre costs increased
moderately compared to the previous quarter, reflecting higher-cost sawmill
residual chips, where prices are linked to NBSK pulp sales realizations, and
increased whole log chip costs mainly related to pressure on stumpage rates.
Compared to the third quarter of 2012, unit manufacturing costs were largely
unchanged, primarily reflecting the impact of reduced chemical costs and lower
labour costs, offset by higher fibre costs. The higher labour costs in the third
quarter of 2012 reflected one-time costs of $3.2 million associated with
payments made upon ratification of the new five year collective labour
agreements. Fibre costs saw a moderate increase, reflecting increased prices for
sawmill residual chips (linked to NBSK market pulp sales realizations) coupled
with increased prices for higher-cost whole log chips.
Unallocated and Other Items
Selected Financial Information(20)
Q3 Q2 YTD Q3 YTD
(millions of Canadian dollars) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Operating income (loss) of
Panels operations(21) $ 0.1 $ (0.6) $ (1.2) $ (1.9) $ (4.3)
Corporate costs $ (6.1) $ (5.3) $ (18.0) $ (7.5) $ (22.1)
Finance expense, net $ (6.4) $ (6.3) $ (21.5) $ (8.1) $ (25.1)
Foreign exchange gain (loss) on
long-term debt and
investments, net $ 2.3 $ (4.0) $ (5.5) $ 6.5 $ 6.7
Gain (loss) on derivative
financial instruments $ 4.0 $ (2.7) $ 4.6 $ 6.8 $ 7.9
Gain on sale of Canfor-LP OSB
joint venture $ - $ 38.3 $ 38.3 $ - $ -
Other income (expense), net $ (3.9) $ 6.8 $ 4.6 $ 1.4 $ 3.4
----------------------------------------------------------------------------
(20) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. Further
details can be found in the Company's unaudited interim consolidated
financial statements.
(21) The Panels operations include the Company's PolarBoard OSB plant, which
is currently indefinitely idled and its Tackama plywood plant, which was
closed in January 2012.
Corporate costs were $6.1 million for the third quarter of 2013, up $0.8 million
from the previous quarter, primarily reflecting higher share-based compensation
expenses. Corporate costs were down $1.4 million compared to the third quarter
of 2012, largely due to restructuring costs associated with the integration of
Canfor Pulp included in the comparative period of 2012.
Net finance expense for the third quarter of 2013 was $6.4 million, in line with
the previous quarter. Compared to the third quarter of 2012, finance expense was
down $1.7 million, principally reflecting the lower debt level and higher cash
balance through the current quarter. Net finance expense for the 2012 periods
has been restated for adoption of amended IAS 19, Employee Benefits, as further
discussed in the "Changes in Accounting Policies" section later in this
document.
The Company recorded a foreign exchange translation gain on its US dollar
denominated debt of $2.3 million for the third quarter of 2013, as a result of a
slightly stronger Canadian dollar against the US dollar at the close of the
third quarter of 2013 compared to the end of the prior quarter, with the closing
quarter end exchange rate rising by 2% over that period. In the second quarter
of 2013, a weakening of the Canadian dollar at the quarter end close dates
resulted in a translation loss of $4.0 million, while the third quarter of 2012
showed a gain of $6.5 million due to a strengthening of the Canadian dollar
against the US dollar at the respective quarter ends.
The Company uses a variety of derivative financial instruments as partial
economic hedges against unfavourable changes in foreign exchange rates, energy
costs, lumber prices and interest rates. For the third quarter of 2013, the
Company recorded a net gain of $4.0 million related to derivative financial
instruments, primarily reflecting unrealized gains on the US dollar collars,
related to the strengthening of the Canadian dollar at the close of the current
quarter relative to the exchange rate at the close of the second quarter of
2013.
The following table summarizes the gains (losses) on derivative financial
instruments for the comparable periods:
Q3 Q2 YTD Q3 YTD
(millions of Canadian dollars) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Foreign exchange collars and forward
contracts $ 3.9 $(5.4) $(0.1) $ 3.8 $ 4.2
Energy derivatives $ 0.3 $(0.3) $ 0.1 $ 1.5 $ 0.9
Lumber futures $ 0.4 $ 1.4 $ 4.0 $ 1.3 $ 3.9
Interest rate swaps $ (0.6) $ 1.6 $ 0.6 $ 0.2 $(1.1)
----------------------------------------------------------------------------
$ 4.0 $(2.7) $ 4.6 $ 6.8 $ 7.9
----------------------------------------------------------------------------
Other expense, net for the third quarter of 2013 included a $1.4 million
negative fair value adjustment to the Canfor-LP OSB contingent consideration
asset, largely reflecting weaker OSB prices during the quarter. In the previous
quarter, the initial fair value estimate for the contingent consideration
arrangement was included in the gain on sale of the Canfor-LP OSB joint venture
(see further discussion in the "Sale of Peace Valley OSB Joint Venture" section
later in this document). Contributing to other expense in the third quarter of
2013 were unfavourable foreign exchange movements on US dollar denominated cash,
receivables and payables of Canadian operations of $2.7 million, compared to a
favourable movement of $3.2 million in the previous quarter and an unfavourable
movement of $2.5 million in the third quarter of 2012.
Other Comprehensive Income (Loss)
The following table summarizes Canfor's Other Comprehensive Income (Loss) for
the comparable periods(22):
Q3 Q2 YTD Q3 YTD
(millions of Canadian dollars) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Foreign exchange translation
differences for foreign operations $ (5.6) $ 9.1 $ 7.0 $ (7.0) $ (6.5)
Defined benefit actuarial gains
(losses), net of tax $ 17.1 $ 28.4 $ 51.3 $(14.8) $(38.8)
----------------------------------------------------------------------------
Other comprehensive income (loss), net
of tax $ 11.5 $ 37.5 $ 58.3 $(21.8) $(45.3)
----------------------------------------------------------------------------
(22) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits. Further details can be found in the
Company's unaudited interim consolidated financial statements.
In the third quarter of 2013, the Company recorded an after-tax credit to the
statements of other comprehensive income (loss) of $17.1 million in relation to
changes in the valuation of its defined benefit post-employment compensation
plans. The gain principally reflects the return on plan assets coupled with a
higher discount rate used to value the net defined benefit obligation. In the
previous quarter, a credit of $28.4 million (after-tax) was recorded, while an
after-tax charge of $14.8 million was recorded in the third quarter of 2012.
In addition, the Company recorded $5.6 million of other comprehensive loss in
the quarter for foreign exchange differences for foreign operations, reflecting
unfavourable foreign exchange movements during the quarter. The Canadian dollar
weakened over the previous quarter, resulting in other comprehensive income of
$9.1 million, while the strengthening of the Canadian dollar over the third
quarter of 2012 resulted in other comprehensive loss of $7.0 million in that
quarter.
SUMMARY OF FINANCIAL POSITION
The following table summarizes Canfor's cash flow and selected ratios for and as
at the end of the following periods(23):
(millions of Canadian Q3 Q2 YTD Q3 YTD
dollars, except for ratios) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents $ (81.8) $ 165.5 $ 107.0 $ (14.1) $ (36.5)
Operating activities $ 75.3 $ 260.2 $ 391.5 $ 24.4 $ 89.8
Financing activities $ (3.9) $(122.8) $ (118.6) $ (4.4) $ 40.0
Investing activities $(153.2) $ 28.1 $ (165.9) $ (34.1) $ (166.3)
Ratio of current assets to
current liabilities 1.6 : 1 1.4 : 1
Net debt to capitalization 7.5% 19.3%
ROIC - Consolidated 2.2% 8.8% 15.9% 1.4% 1.3%
ROCE - Canfor solid wood
business(24) 2.5% 7.0% 15.3% 2.5% 1.1%
----------------------------------------------------------------------------
(23) Certain prior period amounts have been restated due to the adoption of
IFRS 11, Joint Arrangements. Further details can be found in the Company's
unaudited interim consolidated financial statements.
(24) Return on Capital Employed ("ROCE") for the Canfor solid wood business
represents consolidated ROCE adjusted to remove the Company's interest in
Canfor-LP OSB and pulp and paper operations, including Canfor Pulp and the
Taylor pulp mill. Consolidated ROCE is equal to shareholder net income for
the period plus finance expense, after tax, divided by the average capital
employed during the period (which consists of current and long-term debt and
operating loans, and shareholders' equity, less cash and temporary
investments).
Changes in Financial Position
Cash generated from operating activities was $75.3 million in the third quarter
of 2013, compared to cash generated of $260.2 million in the previous quarter
and $24.4 million in the same quarter of 2012. The decrease in cash generated
from operating activities compared to the previous quarter reflected lower cash
earnings coupled with a seasonal increase in log inventory levels as timber
harvesting resumed subsequent to the Canadian spring break-up period in the
second quarter. Partially offsetting these decreases in operating cash flows
were lower accounts receivable balances, in part reflecting lower lumber prices
and sales volumes compared to the previous quarter, and higher stumpage payable
balances consistent with stumpage rate increases in the current quarter. The
second quarter of 2013 also included seasonally higher reforestation related
payments. Compared to the third quarter of 2012, the increase in cash generated
from operating activities principally reflects higher cash earnings and
favourable working capital movements.
Financing activities used cash of $3.9 million in the current quarter, compared
to $122.8 million in the previous quarter and $4.4 million in the third quarter
of 2012. Finance expenses paid in the current quarter were $1.5 million, down
$6.0 million from the previous quarter and in line with the third quarter of
2012, principally reflecting the timing of scheduled interest payments on
long-term debt. Cash distributions to non-controlling interests were $2.4
million, compared to $2.1 million in the previous quarter and $3.0 million in
the same quarter in the prior year. In the previous quarter, the Company also
repaid its US$75 million 5.42% term debt and repaid $40.0 million outstanding
operating loans.
Investing activities used cash of $153.2 million in third quarter of 2013,
compared to cash generated of $28.1 million in previous quarter and cash used of
$34.1 million in the same quarter in 2012. During the current quarter, Canfor
completed the first phase of the purchase of Scotch & Gulf Lumber, LLC which
included payment of $29.0 million for an initial 25% equity investment plus
transaction closing costs and a proportionate share of working capital and $34.0
million loaned to Scotch & Gulf Lumber, LLC under a term loan agreement (see
further discussion in the "Phased Purchase of Scotch & Gulf Lumber, LLC" section
later in this document). Cash used for capital additions was $74.6 million, up
$25.8 million from the previous quarter and up $20.5 million from the third
quarter of 2012. Capital additions for lumber segment in the current quarter
included the Mackenzie and Elko sawmill rebuilds. In the pulp segment, current
quarter capital expenditures of $26.8 million primarily related to continued
preparation for the turbine upgrades at the Company's Northwood Pulp Mill
planned for early in 2014, work performed on a power boiler precipitator at the
Prince George Pulp Mill as well as maintenance capital related to the scheduled
outages in the current and previous quarter.
Cash used for investing activities in the current quarter also included share
purchases of $17.7 million (see further discussion of the shares purchased under
the Normal Course Issuer Bid in the following "Liquidity and Financial
Requirements" section). Investing activities in the previous quarter also
included $76.6 million in proceeds from the sale of the Company's 50% share in
Canfor-LP OSB joint venture. Both comparative quarters included distributions
received from the Canfor-LP OSB joint venture, with $9.5 million received in the
second quarter of 2013 and $8.5 million received in the third quarter of 2012.
Liquidity and Financial Requirements
At September 30, 2013, the Company on a consolidated basis had cash of $89.9
million and operating loan facilities of $467.5 million which were unused,
except for $25.9 million reserved for several standby letters of credit.
The Company and Canfor Pulp remained in compliance with the covenants relating
to their operating loans and long-term debt during the quarter, and expect to
remain so for the foreseeable future.
Canfor Pulp has US$110.0 million of term debt that is scheduled for repayment on
November 30, 2013, and the Company currently intends to repay this using a
combination of cash on hand and its revolving operating loan facility. Canfor's
$100.0 million term debt is scheduled for repayment on February 13, 2017.
The Company's consolidated net debt to total capitalization at the end of the
third quarter of 2013 was 7.5%. For Canfor, excluding Canfor Pulp, net debt to
capitalization at the end of the third quarter was 3.0%.
On March 5, 2013, the Company commenced a normal course issuer bid whereby it
can purchase for cancellation up to 7,137,621 common shares or approximately 5%
of its issued and outstanding common shares. The normal course issuer bid may
continue until March 4, 2014. During the third quarter of 2013, Canfor purchased
609,700 common shares for $12.5 million. Also during the third quarter of 2013,
$3.8 million was paid for share purchases made late in the previous quarter. For
the nine months ended September 30, 2013, Canfor purchased 1,373,238 common
shares for $26.6 million. Under a separate normal course issuer bid, CPPI
purchased shares from non-controlling shareholders increasing Canfor's ownership
of CPPI to 50.4% by quarter end.
Phased Purchase of Scotch & Gulf Lumber, LLC
On August 9, 2013, the Company completed the first phase of the previously
announced purchase of Scotch & Gulf Lumber, LLC ("Scotch Gulf") for $29.0
million, representing an initial 25% interest in Scotch Gulf, plus transaction
closing costs and a proportionate share of working capital. Canfor's initial
25% interest will increase over a 3 year period to 33% after twelve months, 50%
after eighteen months and 100% at the end of the term in August 2016. Both
Canfor and Scotch Gulf have options under the purchase agreement to accelerate
the final closing of the phased purchase to a date earlier than August 2016
under certain conditions. The aggregate purchase price for Scotch Gulf is US$80
million, plus working capital and transaction closing costs of US$30.5 million.
As part of the transaction, Scotch Gulf borrowed $34.0 million from Canfor in
the form of a term loan that will be repaid from the distribution of cash
earnings over the course of the phased purchase agreement with any net
outstanding amount at August 2016 applied against the final phase purchase price
payment. The term loan has an interest rate equal to the floating rate on
Canfor's principal operating loans plus 1.00% and is secured by Scotch Gulf's
operating assets. At September 30, 2013, the term loan receivable is included in
Long-term Investments and Other on the balance sheet.
Sale of Canfor-LP OSB Joint Venture
On May 31, 2013, the Company completed the sale of its 50% share in Canfor-LP
OSB, which owns the Peace Valley OSB mill, to Louisiana-Pacific Corporation for
cash proceeds of $77.9 million including working capital. A pre-tax gain on sale
of $38.3 million was recorded in the second quarter of 2013 which included
recognition of Canfor's share of the operating income for the first half of
2013.
As part of the sale, Canfor may receive additional annual consideration over a 3
year period, starting June 1, 2013, contingent on Peace Valley OSB's annual
adjusted earnings before interest, tax, depreciation and amortization. The fair
value of the contingent consideration as at the close of the current quarter was
$17.6 million, with the current portion presented in Other Accounts Receivable
and the long-term portion presented in Long-Term Investments and Other. During
the third quarter of 2013, Canfor recognized a $1.4 million negative fair value
adjustment on the contingent consideration.
Canfor's Collective Agreement with the United Steelworkers (USW)
Canfor's collective agreement with the USW expired on June 30, 2013. The
Company and the USW have been actively pursuing negotiations for a new
collective agreement. The USW has served strike notice for certain mills,
however, negotiations are at the mediation stage and as such no strikes or
lockouts can occur. Mediation talks are currently being held in abeyance to
allow the USW to pursue negotiations with other parties.
OUTLOOK
Lumber
With respect to the fourth quarter of 2013, North American lumber consumption is
forecast to show a modest improvement before an anticipated seasonal slowdown
late in the period. The repair and remodeling sector is projected to also
benefit from a continued appreciation in home value, which encourages home
improvement projects. Offshore markets are projected to remain fairly stable.
Export taxes on shipments to the U.S. remained at 5% for October and will be 0%
for November.
Pulp and Paper
NBSK pulp markets are projected to improve modestly in the fourth quarter of
2013. Producer inventories are balanced with steady demand and solid order files
through the first half of the fourth quarter. For the month of October, Canfor
Pulp has announced an increase in the NBSK pulp list price of US$20 per tonne in
all regions and an additional price increase of US$20 per tonne for all regions
effective November 1st. A risk of price weakness continues to exist from further
hardwood pulp capacity projected to come online in early 2014.
OUTSTANDING SHARES
At October 30, 2013, there were 141,379,193 common shares outstanding.
SUBSEQUENT EVENT
On October 24, 2013, the Company announced that it will permanently close its
sawmill located in Quesnel, British Columbia. The Company anticipates that the
closure will occur in March 2014. The accounting impact of severance and
closure costs is currently estimated to be in the range of $18 to $20 million
(before tax).
On October 24, 2013, Canfor also announced that it has entered into an agreement
with West Fraser Mills Ltd. ("West Fraser") for an exchange in forest tenure
rights. Canfor is exchanging 382,194 m3 of replaceable forest license allowable
annual cut in the Quesnel Timber Supply Area with West Fraser in exchange for
receiving 324,500 m3 of replaceable forest license allowable annual cut in the
Morice Timber Supply Area. The companies are also exchanging a non-replaceable
license and undercut volumes.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with International
Financial Reporting Standards requires management to make estimates and
assumptions that affect the amounts recorded in the financial statements. On an
ongoing basis, management reviews its estimates, including those related to
useful lives for amortization, impairment of long-lived assets, certain accounts
receivable, pension and other employee future benefit plans and asset retirement
and deferred reforestation obligations based upon currently available
information. While it is reasonably possible that circumstances may arise which
cause actual results to differ from these estimates, management does not believe
it is likely that any such differences will materially affect the Company's
financial condition.
CHANGES IN ACCOUNTING POLICIES
The Company has adopted the following new and revised standards, along with any
consequential amendments, effective January 1, 2013. These changes were made in
accordance with the applicable transitional provisions.
-- The Company adopted IFRS 11, Joint Arrangements, which redefines joint
operations and joint ventures with a focus on the rights and obligations
of an arrangement, rather than its legal form. Under the new Standard,
joint ventures are accounted for using the equity method accounting as
set out in IAS 28, Investments in Associates and Joint Ventures, whereas
for a joint operation the venturer will recognize its share of the
assets, liabilities, revenue and expenses of the joint operations.
Canfor's 50% interest in Canfor-LP OSB was classified as a joint venture
and accounted for using the equity method. The Company has restated its
comparative period results for adoption of IFRS 11. Further details can
be found in Note 13 to the Company's unaudited interim consolidated
financial statements.
-- The Company adopted the amended IAS 19, Employee Benefits which changes
the recognition and measurement of defined benefit pension expense and
termination benefits and enhances the disclosure of all employee
benefits. Pension benefit cost is split between (i) the cost of benefits
accrued in the current period (service cost) and benefit changes (past-
service costs (including plan amendments, settlements and
curtailments)); and (ii) finance expense or income. Interest cost and
expected return on plan assets, which previously reflected different
rates, has been replaced with a net interest amount that is calculated
by applying one discount rate to the net defined benefit liability
(asset). The Company has restated its comparative period results for
adoption of amended IAS 19. Further details can be found in Note 13 to
the Company's unaudited interim consolidated financial statements.
-- The Company also adopted IFRS 10, Consolidated Financial Statements,
IFRS 13, Fair Value Measurement, and IAS 1, Presentation of Financial
Statements, effective January 1, 2013. These Standards did not result in
material impacts on the amounts recorded in the financial statements of
Canfor.
ACCOUNTING STANDARDS ISSUED AND NOT APPLIED
In May 2011, the International Accounting Standards Board ("IASB") issued IFRS
9, Financial Instruments, which is effective for annual periods beginning on or
after January 1, 2015, with early adoption permitted. IFRS 9 is not expected to
have a material impact on amounts recorded in the financial statements of
Canfor.
Further details of the new accounting Standard and the potential impact on
Canfor can be found in the Company's Annual Report for the year ended December
31, 2012.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended September 30, 2013, there were no changes in the
Company's internal controls over financial reporting that materially affected,
or would be reasonably likely to materially affect, such controls.
RISKS AND UNCERTAINTIES
A comprehensive discussion of risks and uncertainties is included in the
Company's 2012 annual statutory reports which are available on www.canfor.com or
www.sedar.com.
SELECTED QUARTERLY FINANCIAL INFORMATION(25)
----------------------------------------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
2013 2013 2013 2012 2012 2012 2012 2011
----------------------------------------------------------------------------
Sales and income
(millions of
Canadian dollars)
Sales $755.9 $843.2 $786.3 $700.3 $663.7 $685.0 $593.8 576.2
Operating income
(loss) $ 49.3 $128.2 $100.0 $ 49.0 $ 18.1 $ 22.6 $(18.4) $(63.1)
Net income (loss) $ 33.6 $114.3 $ 67.5 $ 24.7 $ 18.8 $ 5.0 $(12.9) $(38.1)
Shareholder net
income (loss) $ 28.4 $110.3 $ 61.9 $ 21.3 $ 20.5 $ 2.6 $(18.0) $(44.1)
Per common share
(dollars)
Shareholder net
income (loss) -
basic and diluted $ 0.20 $ 0.77 $ 0.43 $ 0.15 $ 0.14 $ 0.02 $(0.13) $(0.31)
----------------------------------------------------------------------------
Statistics
Lumber shipments
(MMfbm) 1,211 1,268 1,135 1,149 1,133 1,158 994 974
Pulp shipments
(000 mt) 268 308 308 298 269 282 328 275
----------------------------------------------------------------------------
Average exchange
rate - US$/Cdn$ $0.963 $0.977 $0.991 $1.009 $1.005 $0.990 $0.999 $0.977
----------------------------------------------------------------------------
Average Western
SPF 2x4 #2&Btr
lumber price
(US$) $ 328 $ 335 $ 391 $ 335 $ 300 $ 295 $ 266 $ 238
Average SYP (East)
2x4 #2 lumber
price (US$) $ 393 $ 392 $ 452 $ 386 $ 322 $ 325 $ 298 $ 260
Average OSB price
- North Central
(US$) $ 252 $ 345 $ 418 $ 332 $ 312 $ 235 $ 202 $ 190
Average NBSK pulp
list price
delivered to U.S.
(US$) $ 947 $ 937 $ 897 $ 863 $ 853 $ 900 $ 870 $ 920
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(25) Certain 2012 amounts have been restated due to the adoption of amended
IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. 2011 amounts have
not been restated. Further details can be found in the Company's unaudited
interim consolidated financial statements.
In addition to exposure to changes in product prices and foreign exchange, the
Company's financial results are impacted by seasonal factors such as weather and
building activity. Adverse weather conditions can cause logging curtailments,
which can affect the supply of raw materials to manufacturing facilities. Market
demand also varies seasonally to some degree. For example, building activity and
repair and renovation work, which affects demand for lumber products, is
generally stronger in the spring and summer months. These factors, along with
global supply and demand conditions, affect the Company's shipment volumes.
Other material factors that impact the comparability of the quarters are noted
below(26):
----------------------------------------------------------------------------
After-tax impact, net of non-controlling interests
(millions of
dollars,
except for
per share Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
amounts) 2013 2013 2013 2012 2012 2012 2012 2011
----------------------------------------------------------------------------
Shareholder
net income
(loss), as
reported $ 28.4 $110.3 $61.9 $ 21.3 $ 20.5 $ 2.6 $(18.0) $(44.1)
Foreign
exchange
(gain) loss
on long-term
debt and
investments,
net $ (1.0) $ 1.8 $ 2.3 $ 1.2 $ (4.0) $ 2.4 $ (2.7) $ (3.3)
(Gain) loss on
derivative
financial
instruments $ (2.2) $ 1.0 $(2.2) $ 6.5 $ (4.4) $ 4.2 $ (5.1) $ (6.7)
Canfor's 50%
interest in
Canfor-LP
OSB's income,
net of tax $ - $ 3.8 $ 8.3 $ - $ - $ - $ - $ -
(Gain) loss on
sale of
Canfor-LP OSB $ 1.0 $(33.4) $ - $ - $ - $ - $ - $ -
Change in
substantively
enacted tax
rate $ - $ 4.2 $ - $ - $ - $ - $ - $ -
Net gain on
post
retirement
and pension
plan
amendments $ - $ - $ - $ (8.7) $ - $ - $ - $ -
Restructuring
costs related
to changes in
management
group $ - $ - $ - $ - $ 1.5 $ - $ - $ -
Decrease
(increase) in
fair value of
asset-backed
commercial
paper $ - $ - $ - $ - $ - $ - $ (1.1) $ (0.5)
Costs recorded
in relation
to Tembec
acquisition $ - $ - $ - $ - $ - $ - $ 2.8 $ -
Mill closure
provisions $ - $ - $ - $ - $ - $ - $ - $ 17.0
Asset
impairment
charges $ - $ - $ - $ - $ - $ - $ - $ 5.5
----------------------------------------------------------------------------
Net impact of
above items $ (2.2) $(22.6) $ 8.4 $ (1.0) $ (6.9) $ 6.6 $ (6.1) $ 12.0
----------------------------------------------------------------------------
Adjusted
shareholder
net income
(loss) $ 26.2 $ 87.7 $70.3 $ 20.3 $ 13.6 $ 9.2 $(24.1) $(32.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholder
net income
(loss) per
share (EPS),
as reported $ 0.20 $ 0.77 $0.43 $ 0.15 $ 0.14 $ 0.02 $(0.13) $(0.31)
Net impact of
above items
per share $(0.02) $(0.16) $0.06 $(0.01) $(0.05) $ 0.05 $(0.05) $ 0.09
----------------------------------------------------------------------------
Adjusted net
income (loss)
per share $ 0.18 $ 0.61 $0.49 $ 0.14 $ 0.09 $ 0.07 $(0.18) $(0.22)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(26) Certain 2012 amounts have been restated due to the adoption of amended
IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. 2011 amounts have
not been restated. Further details can be found in the Company's unaudited
interim consolidated financial statements.
Canfor Corporation
Condensed Consolidated Balance Sheets
As at As at
September 30, December 31,
(millions of Canadian dollars, unaudited) 2013 2012
----------------------------------------------------------------------------
(Note 13)
ASSETS
Current assets
Cash and cash equivalents $ 89.9 $ -
Accounts receivable - Trade 126.3 102.7
- Other 48.5 57.5
Inventories (Note 2) 448.2 431.3
Prepaid expenses and other assets 47.5 23.4
Investment in joint venture held for sale
(Note 12) - 75.1
----------------------------------------------------------------------------
Total current assets 760.4 690.0
----------------------------------------------------------------------------
Property, plant and equipment 1,129.9 1,081.7
Timber licenses 542.1 554.6
Goodwill and other intangible assets 88.3 80.4
Long-term investments and other (Note 3) 114.8 44.6
Deferred income taxes, net 6.4 39.3
----------------------------------------------------------------------------
Total assets $ 2,641.9 $ 2,490.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current liabilities
Cheques issued in excess of cash on hand $ - $ 17.1
Operating loans (Note 4(a)) - 27.0
Accounts payable and accrued liabilities 324.7 258.4
Current portion of long-term debt (Note
4(b)) 113.3 184.1
Current portion of deferred reforestation
obligations 37.2 37.3
----------------------------------------------------------------------------
Total current liabilities 475.2 523.9
----------------------------------------------------------------------------
Long-term debt (Note 4(b)) 103.0 100.0
Retirement benefit obligations 223.1 311.7
Deferred reforestation obligations 69.8 78.4
Other long-term liabilities 14.0 13.6
Deferred income taxes, net 207.1 151.1
----------------------------------------------------------------------------
Total liabilities $ 1,092.2 $ 1,178.7
----------------------------------------------------------------------------
EQUITY
Share capital $ 1,115.4 $ 1,126.2
Contributed surplus 31.9 31.9
Retained earnings (deficit) 195.5 (35.1)
Accumulated foreign exchange translation
differences (3.5) (10.5)
----------------------------------------------------------------------------
Total equity attributable to equity holders
of the Company 1,339.3 1,112.5
Non-controlling interests 210.4 199.4
----------------------------------------------------------------------------
Total equity $ 1,549.7 $ 1,311.9
----------------------------------------------------------------------------
Total liabilities and equity $ 2,641.9 $ 2,490.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Subsequent Event (Note 14)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
APPROVED BY THE BOARD
Director, R.S. Smith
Director, R.L. Cliff
Canfor Corporation
Condensed Consolidated Statements of Income
(millions of Canadian 3 months ended 9 months ended
dollars, unaudited) September 30, September 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
(Note 13) (Note 13)
Sales $ 755.9 $ 663.7 $ 2,385.4 $ 1,942.5
Costs and expenses
Manufacturing and product
costs 507.6 449.3 1,508.0 1,325.6
Freight and other
distribution costs 132.2 120.3 403.1 369.8
Export taxes 6.5 10.6 6.5 35.7
Amortization 44.8 43.2 141.3 129.3
Selling and administration
costs 15.0 15.2 46.1 46.1
Restructuring, mill
closure and severance
costs 0.5 7.0 2.9 13.7
----------------------------------------------------------------------------
706.6 645.6 2,107.9 1,920.2
----------------------------------------------------------------------------
Operating income 49.3 18.1 277.5 22.3
Finance expense, net (6.4) (8.1) (21.5) (25.1)
Foreign exchange gain (loss)
on long-term debt and
investments, net 2.3 6.5 (5.5) 6.7
Gain on derivative financial
instruments (Note 6) 4.0 6.8 4.6 7.9
Gain on sale of Canfor-LP
OSB joint venture (Note 12) - - 38.3 -
Other income (expense), net (3.9) 1.4 4.6 3.4
----------------------------------------------------------------------------
Net income before income
taxes 45.3 24.7 298.0 15.2
Income tax expense (Note 7) (11.7) (5.9) (82.6) (4.3)
----------------------------------------------------------------------------
Net income $ 33.6 $ 18.8 $ 215.4 $ 10.9
----------------------------------------------------------------------------
Net income (loss)
attributable to:
Equity shareholders of the
Company $ 28.4 $ 20.5 $ 200.6 $ 5.1
Non-controlling interests 5.2 (1.7) 14.8 5.8
----------------------------------------------------------------------------
Net income $ 33.6 $ 18.8 $ 215.4 $ 10.9
----------------------------------------------------------------------------
Net income per common share:
(in dollars)
Attributable to equity
shareholders of the Company
Basic and diluted (Note 8) $ 0.20 $ 0.14 $ 1.41 $ 0.03
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Other Comprehensive Income (Loss)
(millions of Canadian 3 months ended 9 months ended
dollars, unaudited) September 30, September 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
(Note 13) (Note 13)
Net income $ 33.6 $ 18.8 $ 215.4 $ 10.9
Other comprehensive income
(loss)
Items that will not be
recycled through net
income:
Defined benefit plan
actuarial gains (losses)
(Note 5) 23.1 (19.8) 69.3 (52.0)
Income tax recovery
(expense) on defined
benefit actuarial gains
(losses) (Note 7) (6.0) 5.0 (18.0) 13.2
----------------------------------------------------------------------------
17.1 (14.8) 51.3 (38.8)
Items that may be recycled
through net income:
Foreign exchange
translation differences
for foreign operations (5.6) (7.0) 7.0 (6.5)
----------------------------------------------------------------------------
Other comprehensive income
(loss), net of tax 11.5 (21.8) 58.3 (45.3)
----------------------------------------------------------------------------
Total comprehensive income
(loss) $ 45.1 $ (3.0) $ 273.7 $ (34.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total comprehensive income
(loss) attributable to:
Equity shareholders of the
Company $ 38.3 $ 0.8 $ 253.9 $ (35.4)
Non-controlling interests 6.8 (3.8) 19.8 1.0
----------------------------------------------------------------------------
Total comprehensive income
(loss) $ 45.1 $ (3.0) $ 273.7 $ (34.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Changes in Equity
(millions of Canadian 3 months ended 9 months ended
dollars, unaudited) September 30, September 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
(Note 13) (Note 13)
Share capital
Balance at beginning of
period $ 1,120.2 $ 1,126.2 $ 1,126.2 $ 1,125.9
Common shares issued on
exercise of stock options - - - 0.3
Share purchases (Note 8) (4.8) - (10.8) -
----------------------------------------------------------------------------
Balance at end of period $ 1,115.4 $ 1,126.2 $ 1,115.4 $ 1,126.2
----------------------------------------------------------------------------
Contributed surplus
----------------------------------------------------------------------------
Balance at beginning and end
of period $ 31.9 $ 31.9 $ 31.9 $ 31.9
----------------------------------------------------------------------------
Retained earnings (deficit)
Balance at beginning of
period $ 159.5 $ (61.4) $ (35.1) $ (24.7)
Net income attributable to
equity shareholders of the
Company 28.4 20.5 200.6 5.1
Defined benefit plan
actuarial gains (losses),
net of tax 15.5 (12.7) 46.3 (34.0)
Share purchases (Note 8) (7.7) - (15.8) -
Acquisition of non-
controlling interests (Note
8) (0.2) - (0.5) -
----------------------------------------------------------------------------
Balance at end of period $ 195.5 $ (53.6) $ 195.5 $ (53.6)
----------------------------------------------------------------------------
Accumulated foreign exchange
translation differences
Balance at beginning of
period $ 2.1 $ (5.4) $ (10.5) $ (5.9)
Foreign exchange translation
differences for foreign
operations (5.6) (7.0) 7.0 (6.5)
----------------------------------------------------------------------------
Balance at end of period $ (3.5) $ (12.4) $ (3.5) $ (12.4)
----------------------------------------------------------------------------
Total equity attributable to
equity holders of the
Company $ 1,339.3 $ 1,092.1 $ 1,339.3 $ 1,092.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-controlling interests
Balance at beginning of
period $ 206.7 $ 204.0 $ 199.4 $ 232.8
Net income (loss)
attributable to non-
controlling interests 5.2 (1.7) 14.8 5.8
Defined benefit plan
actuarial gains (losses)
attributable to non-
controlling interests, net
of taxes 1.6 (2.1) 5.0 (4.8)
Distributions to non-
controlling interests (2.4) (3.0) (6.9) (11.6)
Acquisition of non-
controlling interests (Note
8) (0.7) - (1.9) -
Share exchange - - - (25.0)
----------------------------------------------------------------------------
Balance at end of period $ 210.4 $ 197.2 $ 210.4 $ 197.2
----------------------------------------------------------------------------
Total equity $ 1,549.7 $ 1,289.3 $ 1,549.7 $ 1,289.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Cash Flows
(millions of Canadian 3 months ended 9 months ended
dollars, unaudited) September 30, September 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
(Note 13) (Note 13)
Cash generated from (used
in):
Operating activities
Net income $ 33.6 $ 18.8 $ 215.4 $ 10.9
Items not affecting cash:
Amortization 44.8 43.2 141.3 129.3
Income tax expense 11.7 5.9 82.6 4.3
Long-term portion of
deferred reforestation
obligations (10.5) (8.5) (9.3) (6.4)
Foreign exchange (gain)
loss on long-term debt
and investments, net (2.3) (6.5) 5.5 (6.7)
Changes in mark-to-
market value of
derivative financial
instruments (3.2) (3.6) (4.6) (1.9)
Employee future benefits 3.6 3.4 10.3 10.5
Net finance expense 6.4 8.1 21.5 25.1
Gain on sale of joint
venture (Note 12) - - (38.3) -
Other, net - (3.6) (0.9) (6.5)
Defined benefit pension
plan contributions (12.9) (14.8) (39.0) (41.5)
Income taxes paid, net (0.5) (0.8) - (5.4)
Net change in non-cash
working capital (Note 9) 4.6 (17.2) 7.0 (21.9)
----------------------------------------------------------------------------
75.3 24.4 391.5 89.8
----------------------------------------------------------------------------
Financing activities
Change in operating bank
loans - - (27.0) 17.0
Proceeds from long-term
debt - - 3.1 100.0
Repayment of long-term
debt - - (76.3) (49.9)
Finance expenses paid (1.5) (1.4) (11.5) (11.9)
Cash distributions paid to
non-controlling interests (2.4) (3.0) (6.9) (15.5)
Other, net - - - 0.3
----------------------------------------------------------------------------
(3.9) (4.4) (118.6) 40.0
----------------------------------------------------------------------------
Investing activities
Investment in Scotch &
Gulf Lumber, LLC (Note
11) (29.0) - (29.0) -
Loan to Scotch & Gulf
Lumber, LLC (Note 11) (34.0) - (34.0) -
Additions to property,
plant and equipment (74.6) (54.1) (169.8) (152.1)
Share purchases (Note 8) (16.3) - (26.6) -
Acquisition of non-
controlling interests
(Note 8) (1.4) - (2.4) -
Proceeds on sale of
Canfor-LP OSB joint
venture (Note 12) 1.3 - 77.9 -
Distributions from
(advances to) joint
venture (Note 12) - 8.5 16.5 7.5
Reimbursements from
Government under Green
Transformation Program - 10.0 - 19.0
Acquisition of Tembec
assets - - - (65.6)
Share exchange - - - 6.8
Proceeds from redemption
of asset-backed
commercial paper - - - 12.9
Other, net 0.8 1.5 1.5 5.2
----------------------------------------------------------------------------
(153.2) (34.1) (165.9) (166.3)
----------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents(i) (81.8) (14.1) 107.0 (36.5)
Cash and cash equivalents at
beginning of period(i) 171.7 4.2 (17.1) 26.6
----------------------------------------------------------------------------
Cash and cash equivalents at
end of period(i) $ 89.9 $ (9.9) $ 89.9 $ (9.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Cash and cash equivalents include cash on hand less unpresented cheques.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Notes to the Condensed Consolidated Financial Statements
(unaudited, millions of Canadian dollars unless otherwise noted)
1. Basis of Preparation
These condensed consolidated interim financial statements (the "financial
statements") have been prepared in accordance with International Accounting
Standard ("IAS") 34 Interim Financial Reporting, and include the accounts of
Canfor Corporation and its subsidiary entities, hereinafter referred to as
"Canfor" or "the Company".
These financial statements do not include all of the disclosures required by
International Financial Reporting Standards ("IFRS") for annual financial
statements. Additional disclosures relevant to the understanding of these
financial statements, including the accounting policies applied, can be found in
Canfor's Annual Report for the year ended December 31, 2012, available at
www.canfor.com or www.sedar.com.
Canfor's financial results are impacted by seasonal factors such as weather and
building activity. Adverse weather conditions can cause logging curtailments,
which can affect the supply of raw materials to sawmills and pulp mills. Market
demand also varies seasonally to some degree. For example, building activity and
repair and renovation work, which affects demand for solid wood products, are
generally stronger in the spring and summer months. Shipment volumes are
affected by these factors as well as by global supply and demand conditions.
The currency of presentation for these financial statements is the Canadian dollar.
Changes in Accounting Policies
The Company has adopted the following new and revised standards, along with any
consequential amendments, effective January 1, 2013. These changes were made in
accordance with the applicable transitional provisions.
-- The Company adopted IFRS 11, Joint Arrangements, which redefines joint
operations and joint ventures with a focus on the rights and obligations
of an arrangement, rather than its legal form. Under the new Standard,
joint ventures are accounted for using the equity method accounting as
set out in IAS 28, Investments in Associates and Joint Ventures, whereas
for a joint operation the venturer will recognize its share of the
assets, liabilities, revenue and expenses of the joint operations.
Canfor's 50% interest in the Canfor-LP OSB Limited Partnership ("Canfor-
LP OSB") was classified as a joint venture and accounted for using the
equity method. The Company has restated its comparative period results
for adoption of IFRS 11 (Note 13). Canfor sold its 50% interest in the
Canfor-LP OSB to Louisiana Pacific Corporation ("LP") on May 31, 2013
(Note 12).
-- The Company adopted the amended IAS 19, Employee Benefits, which changes
the recognition and measurement of defined benefit pension expense and
termination benefits and enhances the disclosure of all employee
benefits. Pension benefit cost is split between (i) the cost of benefits
accrued in the current period (service cost) and benefit changes (past-
service costs (including plan amendments, settlements and
curtailments)); and (ii) finance expense or income. Interest cost and
expected return on plan assets, which previously reflected different
rates, has been replaced with a net interest amount that is calculated
by applying one discount rate to the net defined benefit liability
(asset). The Company has restated its comparative period results for
adoption of amended IAS 19 (Note 13).
-- The Company also adopted IFRS 10, Consolidated Financial Statements,
IFRS 13, Fair Value Measurement, and IAS 1, Presentation of Financial
Statements, effective January 1, 2013. These Standards did not result in
material impacts on the amounts recorded in the financial statements of
Canfor.
Accounting Standards Issued and Not Applied
In May 2011, the International Accounting Standards Board ("IASB") issued IFRS
9, Financial Instruments, which is effective for annual periods beginning on or
after January 1, 2015, with early adoption permitted. IFRS 9 is not expected to
have a material impact on amounts recorded in the financial statements of
Canfor.
Further details of the new accounting Standard and the potential impact on
Canfor can be found in the Company's Annual Report for the year ended December
31, 2012.
2. Inventories
As at As at
September 30, December 31,
(millions of Canadian dollars) 2013 2012
----------------------------------------------------------------------------
Logs $ 95.3 $ 119.4
Finished products 235.9 205.8
Residual fibre 16.9 11.5
Processing materials and supplies 100.1 94.6
----------------------------------------------------------------------------
$ 448.2 $ 431.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. Long-term Investments and Other
As at As at
September 30, December 31,
(millions of Canadian dollars) 2013 2012
----------------------------------------------------------------------------
Investments 52.5 23.7
Term loan to Scotch & Gulf Lumber, LLC (Note 11) 34.0 -
Contingent consideration (Note 12) 9.9 -
Defined benefit plan assets 1.9 1.4
Investment tax credits 1.6 8.6
Other deposits, loans and advances 14.9 10.9
----------------------------------------------------------------------------
$ 114.8 $ 44.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On August 9, 2013, Canfor completed the first phase of the purchase of Scotch &
Gulf Lumber, LLC ("Scotch Gulf"). Included in Long-term Investments and Other is
Canfor's initial 25% interest in Scotch Gulf and a term loan receivable from
Scotch Gulf. Refer to Note 11 for further discussion of Canfor's investment in
Scotch Gulf.
As part of the sale of the Canfor-LP OSB joint venture, Canfor may receive
additional consideration contingent on Peace Valley OSB's annual adjusted
earnings before interest, tax, depreciation and amortization. The contingent
consideration is revalued to fair value at each reporting period. At the end of
the third quarter, the total fair value of the contingent consideration was
$17.6 million, resulting in a loss of $1.4 million. The current portion of the
contingent consideration is recorded in Other Accounts Receivable (Note 12).
4. Operating Loans and Long-Term Debt
(a) Available Operating Loans
As at As at
September 30, December 31,
(millions of Canadian dollars) 2013 2012
----------------------------------------------------------------------------
Canfor (excluding CPPI)
Total operating loans - Canfor (excluding
CPPI) $ 350.0 $ 350.0
Drawn - (27.0)
Letters of credit (principally unregistered
pension plans) (14.8) (18.0)
----------------------------------------------------------------------------
Total available operating loans - Canfor
(excluding CPPI) $ 335.2 $ 305.0
----------------------------------------------------------------------------
CPPI
Operating loan facility $ 110.0 $ 110.0
Facility for BC Hydro letter of credit 7.5 7.5
----------------------------------------------------------------------------
Total operating loans - CPPI 117.5 117.5
Drawn - -
BC Hydro letters of credit (11.1) (9.2)
----------------------------------------------------------------------------
Total available operating loans - CPPI $ 106.4 $ 108.3
----------------------------------------------------------------------------
Consolidated:
Total operating loans $ 467.5 $ 467.5
Total available operating loans $ 441.6 $ 413.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canfor's principal operating loans, excluding Canfor Pulp Products Inc.
("CPPI"), mature on February 28, 2018. Interest is payable at floating rates
based on the lenders' Canadian prime rate, bankers acceptances, US dollar base
rate or US dollar LIBOR rate, plus a margin that varies with the Company's net
debt to total capitalization ratio.
The terms of CPPI's operating loan facility include interest payable at floating
rates that vary depending on the ratio of net debt to operating earnings before
interest, taxes, depreciation, amortization and certain other non-cash items,
and is based on lenders' Canadian prime rate, bankers acceptances, US dollar
base rate or US dollar LIBOR rate, plus a margin. The facility has certain
financial covenants that stipulate maximum net debt to total capitalization
ratios and minimum net worth amounts based on shareholders' equity. The maturity
date of the facility is November 13, 2016. CPPI has a separate facility with a
maturity date of November 30, 2013 to cover a $7.5 million standby letter of
credit issued to BC Hydro.
As at September 30, 2013, the Company and CPPI were in compliance with all
covenants relating to their operating loans. Substantially all borrowings of
CPPI (operating loans and long-term debt) are non-recourse to other entities
within the Company.
(b) Long-Term Debt
At September 30, 2013, the fair value of the Company's long-term debt, measured
at its amortized cost of $216.3 million, was $217.1 million. The fair value was
determined based on prevailing market rates for long-term debt with similar
characteristics and risk profile.
5. Employee Future Benefits
For the nine months ended September 30, 2013, an amount of $69.3 million (before
tax) was credited to other comprehensive income. The gain reflects the return on
plan assets coupled with a higher discount rate used to value the net defined
benefit obligation at September 30, 2013. For the three months ended September
30, 2013, the gain was $23.1 million (before tax). For the nine months ended
September 30, 2012, an amount of $52.0 million (before tax) was charged to other
comprehensive income. For the three months ended September 30, 2012, the charge
was $19.8 million (before tax).
For the Company's single largest pension plan, a one percentage point increase
in the discount rate used in calculating the actuarial estimate of future
liabilities would reduce the funded deficit by an estimated $58.3 million.
The assumptions used to estimate the changes in net accrued benefit liabilities
were as follows:
----------------------------------------------------------------------------
Pension Benefit Plans
Discount rate
September 30, 2013 4.70%
June 30, 2013 4.60%
December 31, 2012 4.20%
September 30, 2012 4.30%
June 30, 2012 4.65%
December 31, 2011 5.00%
Rate of return on plan assets
9 months ended September 30, 2013 6.60%
6 months ended June 30, 2013 3.20%
9 months ended September 30, 2012 6.60%
6 months ended June 30, 2012 2.60%
----------------------------------------------------------------------------
Other Benefit Plans
Discount rate
September 30, 2013 4.80%
June 30, 2013 4.70%
December 31, 2012 4.40%
September 30, 2012 4.50%
June 30, 2012 4.90%
December 31, 2011 5.30%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Financial Instruments
Canfor's cash and cash equivalents, accounts receivable, other deposits, loans
and advances, operating loans, accounts payable and accrued liabilities, and
long-term debt are measured at amortized cost subsequent to initial recognition.
Derivative instruments are measured at fair value. IFRS 13, Fair Value
Measurement, requires classification of financial instruments within a hierarchy
that prioritizes the inputs to fair value measurement.
The three levels of the fair value hierarchy are:
Level 1 - Unadjusted quoted prices in active markets for identical assets or
liabilities;
Level 2 - Inputs other than quoted prices that are observable for the asset
or liability, either directly or indirectly;
Level 3 - Inputs that are not based on observable market data.
The following table summarizes Canfor's financial instruments measured at fair
value at September 30, 2013 and December 31, 2012, and shows the level within
the fair value hierarchy in which they have been classified:
Fair Value As at As at
Hierarchy September 30, December 31,
(millions of Canadian dollars) Level 2013 2012
----------------------------------------------------------------------------
Financial assets
Held for trading
Derivative financial instruments Level 2 $ 0.5 $ 0.7
Loans and Receivables
Royalty receivable Level 3 6.2 6.5
Contingent consideration Level 3 17.6 -
----------------------------------------------------------------------------
$ 24.3 $ 7.2
----------------------------------------------------------------------------
Financial liabilities
Held for trading
Derivative financial instruments Level 2 $ 0.1 $ 4.8
----------------------------------------------------------------------------
$ 0.1 $ 4.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The royalty receivable and contingent consideration are measured at fair value
at each reporting period and are presented in Other Accounts Receivable and
Long-term Investments and Other on the consolidated balance sheet. The fair
value of the royalty receivable is determined by discounting future expected
cash flows based on energy price assumptions and future sales volume assumptions
until the termination of the royalty agreement in September 2015. The fair value
of the contingent consideration is determined by discounting future expected
cash flows based on forecast OSB prices, sales volumes and margins for the Peace
Valley OSB mill (Note 12).
The Company uses a variety of derivative financial instruments to reduce its
exposure to risks associated with fluctuations in foreign exchange rates, lumber
prices, energy costs, electricity sales and floating interest rates on certain
long-term debt. At September 30, 2013, the fair value of derivative financial
instruments was a net asset of $0.4 million (December 31, 2012 - net liability
of $4.1 million). The fair value of these financial instruments was determined
based on prevailing market rates for instruments with similar characteristics.
The following table summarizes the gain (loss) on derivative financial
instruments for the three and nine month periods ended September 30, 2013 and
2012:
3 months ended 9 months ended
September 30, September 30,
(millions of Canadian dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Foreign exchange collars and forward
contracts $ 3.9 $ 3.8 $ (0.1) $ 4.2
Energy derivatives 0.3 1.5 0.1 0.9
Lumber futures 0.4 1.3 4.0 3.9
Interest rate swaps (0.6) 0.2 0.6 (1.1)
----------------------------------------------------------------------------
$ 4.0 $ 6.8 $ 4.6 $ 7.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes the fair value of the derivative financial
instruments included in the balance sheet at September 30, 2013 and December 31,
2012:
As at As at
September 30, December 31,
(millions of Canadian dollars) 2013 2012
----------------------------------------------------------------------------
Foreign exchange collars and forward
contracts $ (0.1) $ 0.3
Energy derivatives 0.1 0.3
Lumber futures - (4.1)
Interest rate swaps 0.4 (0.6)
----------------------------------------------------------------------------
Total asset (liability), net 0.4 (4.1)
Less: current portion asset (liability), net - (3.5)
----------------------------------------------------------------------------
Long-term portion asset (liability), net $ 0.4 $ (0.6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. Income Taxes
3 months ended 9 months ended
September 30, September 30,
(millions of Canadian dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Current $ 1.9 $ 1.5 $ (11.6) $ (0.7)
Deferred (13.6) (7.4) (71.0) (3.6)
----------------------------------------------------------------------------
Income tax expense $ (11.7) $ (5.9) $ (82.6) $ (4.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The reconciliation of income taxes calculated at the statutory rate to the
actual income tax provision is as follows:
3 months ended 9 months ended
September 30, September 30,
(millions of Canadian dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Income tax expense at statutory rate
2013 - 25.75% (2012 - 25.0%)(1) $ (11.7) $ (6.2) $ (76.7) $ (3.8)
Add (deduct):
Non-taxable income related to non-
controlling interests in limited
partnerships 0.2 0.2 0.3 1.5
Entities with different income tax
rates and other tax adjustments (0.4) (0.5) (4.9) (2.7)
Permanent difference from capital
gains and losses and other non-
deductible items 0.2 0.7 4.1 0.6
Change in substantively enacted tax
rate(1) - - (5.4) -
Tax recovery at rates other than
statutory rate - (0.1) - 0.1
----------------------------------------------------------------------------
Income tax expense (11.7) (5.9) (82.6) (4.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In the second quarter of 2013, the British Columbia Provincial
Government increased the corporate tax rate from 10% to 11%.
In addition to the amounts recorded to net income, a tax expense of $6.0 million
was recorded to other comprehensive income for the three month period ended
September 30, 2013 (three months ended September 30, 2012 - tax recovery of $5.0
million) in relation to the actuarial gains (losses) on defined benefit employee
compensation plans. For the nine months ended September 30, 2013, the tax
expense was $18.0 million (nine months ended September 30, 2012 - tax recovery
of $13.2 million).
8. Earnings Per Share and Normal Course Issuer Bid
Basic net income (loss) per share is calculated by dividing the net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. As at September 30, 2013 and 2012, there
were no outstanding stock options.
3 months ended 9 months ended
September 30, September 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
Weighted average number of
common shares 141,607,876 142,752,431 142,245,452 142,747,976
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On March 5, 2013, the Company commenced a normal course issuer bid whereby it
can purchase for cancellation up to 7,137,621 common shares or approximately 5%
of its issued and outstanding common shares. The normal course issuer bid may
continue until March 4, 2014. During the third quarter of 2013, Canfor purchased
609,700 common shares for $12.5 million. Also during the third quarter of 2013,
$3.8 million was paid for share purchases made late in the previous quarter. For
the nine months ended September 30, 2013, Canfor purchased 1,373,238 common
shares for $26.6 million. Under a separate normal course issuer bid, CPPI
purchased shares from non-controlling shareholders increasing Canfor's ownership
of CPPI to 50.4% by quarter end.
9. Net Change in Non-Cash Working Capital
3 months ended 9 months ended
September 30, September 30,
(millions of Canadian dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Accounts receivable $ 30.3 $ 16.6 $ (10.4) $ (10.3)
Inventories (41.1) (35.9) (16.1) (17.5)
Prepaid expenses (3.1) 2.0 (14.5) (11.4)
Accounts payable, accrued liabilities
and current portion of deferred
reforestation obligations 18.5 0.1 48.0 17.3
----------------------------------------------------------------------------
Net decrease (increase) in non-cash
working capital $ 4.6 $ (17.2) $ 7.0 $ (21.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. Segment Information
Canfor has two reportable segments (lumber segment and pulp and paper segment)
which offer different products and are managed separately because they require
different production processes and marketing strategies.
Sales between segments are accounted for at prices that approximate fair value.
These include sales of residual fibre from the lumber segment to the pulp and
paper segment for use in the pulp production process.
The Company's panels business does not meet the criteria to be reported fully as
a separate segment and is included in Unallocated & Other below. On May 31,
2013, Canfor sold its 50% share of Canfor-LP OSB (Note 12). Prior to completion
of the sale, the Company's share of Canfor-LP OSB's 2013 sales and operating
income was $43.5 million and $16.1 million, respectively. As a result of the
classification of Canfor's investment in Canfor-LP OSB as held for sale, these
amounts were not included in the segment results of the Company. For the three
and nine months ended September 30, 2012, the results of Canfor-LP OSB were
presented in equity income (loss).
(millions of Pulp & Unallocated Elimination
Canadian dollars) Lumber Paper & Other Adjustment Consolidated
----------------------------------------------------------------------------
3 months ended
September 30, 2013
Sales to external
customers $ 529.4 224.6 1.9 - $ 755.9
Sales to other
segments $ 32.7 - - (32.7) $ -
Operating income
(loss) $ 43.8 11.5 (6.0) - $ 49.3
Amortization $ 27.6 17.0 0.2 - $ 44.8
Capital
expenditures(1) $ 45.5 26.8 2.3 - $ 74.6
----------------------------------------------------------------------------
3 months ended
September 30, 2012
Sales to external
customers $ 454.7 206.3 2.7 - $ 663.7
Sales to other
segments $ 27.4 - - (27.4) $ -
Operating income
(loss) $ 34.8 (7.3) (9.4) - $ 18.1
Amortization $ 25.5 15.7 2.0 - $ 43.2
Capital
expenditures(1) $ 24.1 30.0 - - $ 54.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9 months ended
September 30, 2013
Sales to external
customers $1,658.5 723.6 3.3 - $ 2,385.4
Sales to other
segments $ 99.3 - - (99.3) $ -
Operating income
(loss) $ 247.7 49.0 (19.2) - $ 277.5
Amortization $ 84.8 55.8 0.7 - $ 141.3
Capital
expenditures(1) $ 121.2 42.5 6.1 - $ 169.8
Identifiable assets $1,706.7 784.7 150.5 - $ 2,641.9
----------------------------------------------------------------------------
9 months ended
September 30, 2012
Sales to external
customers $1,241.9 695.1 5.5 - $ 1,942.5
Sales to other
segments $ 85.8 - - (85.8) $ -
Operating income
(loss) $ 33.1 15.6 (26.4) - $ 22.3
Amortization $ 75.2 48.5 5.6 - $ 129.3
Capital
expenditures(1) $ 76.1 76.0 - - $ 152.1
Identifiable assets $1,527.3 795.1 174.5 - $ 2,496.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Capital expenditures represent cash paid for capital assets, excluding
acquisition of Tembec assets in 2012. Pulp & Paper includes capital
expenditures by CPPI in 2012 that were financed by the federal government-
funded Green Transformation Program.
11. Phased Purchase of Scotch & Gulf Lumber, LLC
On August 9, 2013, the Company completed the first phase of the purchase of
Scotch Gulf for $29.0 million, representing an initial 25% interest in Scotch
Gulf, plus transaction closing costs and a proportionate share of working
capital. Canfor's initial 25% interest will increase over a 3 year period to 33%
after twelve months, 50% after eighteen months and 100% at the end of the term.
Both Canfor and Scotch Gulf have options under the purchase agreement to
accelerate the final closing of the phased purchase to a date earlier than
August 2016 under certain conditions. The aggregate purchase price for Scotch
Gulf is US$80.0 million, plus working capital and transaction closing costs of
US$30.5 million.
As part of the transaction, Scotch Gulf borrowed $34.0 million from Canfor in
the form of a term loan that will be repaid from the distribution of cash
earnings over the course of the phased purchase agreement with any net
outstanding amount at August 2016 applied against the final phase purchase price
payment. The term loan has an interest rate equal to the floating rate on
Canfor's principal operating loans plus 1.00% and is secured by Scotch Gulf's
operating assets. At September 30, 2013, the term loan receivable is included in
Long-term Investments and Other on the balance sheet (Note 3).
12. Sale of Canfor-LP OSB Joint Venture
On May 31, 2013, the Company completed the sale of its 50% share in Canfor-LP
OSB, which owns the Peace Valley OSB mill, to LP for cash proceeds of $77.9
million including working capital. A pre-tax gain on sale of $38.3 million was
recorded in the second quarter of 2013 which included recognition of Canfor's
share of the operating income for the first half of 2013.
As part of the sale, Canfor may receive additional annual consideration over a 3
year period, starting June 1, 2013, contingent on Peace Valley OSB's annual
adjusted earnings before interest, tax, depreciation and amortization. At
September 30, 2013, the fair value of the contingent consideration is $17.6
million, with the current portion presented in Other Accounts Receivable and the
long-term portion presented in Long-Term Investments and Other (Note 3). During
the third quarter of 2013, Canfor recognized a $1.4 million negative fair value
adjustment on the contingent consideration in other expense.
13. Transition to New Accounting Standards
Effective January 1, 2013, the Company adopted IFRS 11, Joint Arrangements, and
as a result reclassified its 50% interest in Canfor-LP OSB from a jointly
controlled entity to a joint venture. The Company's interest in Canfor-LP OSB
was previously accounted for using the proportionate consolidation method
accounting and upon adoption of the new Standard was accounted for using the
equity method of accounting. The comparative period financial statements have
been restated for adoption of IFRS 11 with impacts to the financial statements
discussed below.
The adoption of IFRS 11 resulted in a decrease in sales of $49.8 million and a
decrease in operating income of $3.6 million for the nine months ended September
30, 2012 (for the three months ended September 30, 2012, a decrease of $20.1
million and a decrease of $4.0 million, respectively). IFRS 11 had no impact on
net income or other comprehensive income in the comparative periods. Further,
adoption of IFRS 11 resulted in a decrease in cash flow from operating
activities of $8.0 million and an increase in cash flow from investing
activities of $7.5 million for the nine months ended September 30, 2012 (for the
three months ended September 30, 2012, a decrease in operating activities of
$9.5 million and an increase in cash flow from investing activities of $8.5
million).
Also effective January 1, 2013, the Company adopted amended IAS 19, Employee
Benefits, which amends certain requirements for defined benefit plans and
termination benefits. The comparative period financial statements have been
restated for adoption of revised IAS 19 with impacts to the financial statements
discussed below.
The adoption of amended IAS 19 resulted in a decrease in operating income of
$0.9 million, an increase of finance expense of $6.9 million and a decrease in
income tax expense of $1.9 million for the nine months ended September 30, 2012
(for the three months ended September 30, 2012, a decrease of $0.2 million, an
increase of $2.3 million and a decrease of $0.6 million, respectively). Amended
IAS 19 decreased net income and increased other comprehensive income by $5.9
million (after-tax) for the nine months ended September 30, 2012 (for the three
months ended September 30, 2012, a decrease to net income and an increase to
other comprehensive income of $1.9 million (after-tax), respectively). The
impact on earnings per share for the nine months ended September 30, 2012 was a
decrease of $0.05 per share (three months ended September 30, 2012 - decrease of
$0.02 per share).
The impacts to the current period condensed consolidated statement of income
(loss) and the current period condensed consolidated statement of other
comprehensive income (loss) as a result of amended IAS 19, Employee Benefits,
are comparable to the impacts in the 2012 period (disclosed above). Refer to the
Company's first quarter 2013 interim financial statements for impacts to the
condensed consolidated opening balance sheet at January 1, 2012 and the
comparative balance sheet at December 31, 2012.
14. Subsequent Event
On October 24, 2013, the Company announced that it will permanently close its
sawmill located in Quesnel, British Columbia. The Company anticipates that the
closure will occur in March 2014. The accounting impact of severance and
closure costs is currently estimated to be in the range of $18 to $20 million
(before tax).
On October 24, 2013, Canfor also announced that it has entered into an agreement
with West Fraser Mills Ltd. ("West Fraser") for an exchange in forest tenure
rights. Canfor is exchanging 382,194 m3 of replaceable forest license allowable
annual cut in the Quesnel Timber Supply Area with West Fraser in exchange for
receiving 324,500 m3 of replaceable forest license allowable annual cut in the
Morice Timber Supply Area. The companies are also exchanging a non-replaceable
license and undercut volumes.
FOR FURTHER INFORMATION PLEASE CONTACT:
Canfor Corporation - Media Contact
Christine Kennedy
Vice President, Public Affairs & Corporate Communications
(604) 661-5225
Christine.Kennedy@canfor.com
Canfor Corporation - Investor Contact
Pat Elliott
Vice President & Treasurer
(604) 661-5441
Patrick.Elliott@canfor.com
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