VANCOUVER, BRITISH COLUMBIA--(Marketwired - Nov. 6, 2014) - INTERFOR CORPORATION ("Interfor" or the "Company") (TSX:IFP) reported net earnings of $11.0 million, or $0.16 per share, and EBITDA(1) of $45.4 million for the third quarter of 2014. These figures compare with net earnings and EBITDA(1) of $7.4 million and $47.3 million respectively in the second quarter of 2014 and a loss of $130,000 and EBITDA(1) of $24.6 million in the third quarter of 2013. Sales revenue amounted to $373 million in the third quarter compared with $390 million in the second quarter and $273 million in the third quarter last year.

Lumber production in the third quarter was 567 million board feet, down 15 million board feet or 3% compared with the second quarter. Adjusting for the production of the Beaver-Forks operation which was closed permanently at the end of the second quarter, production was up 7 million board feet compared with the second quarter and up 143 million board feet relative to the third quarter of 2013.

Net earnings in the third quarter include $0.7 million of expenses associated with the wind-down of the Beaver-Forks operation.

Long-term incentive compensation expense of $3.6 million was recorded in the third quarter compared with a recovery of $0.4 million in the second quarter.

In the third quarter, Interfor generated $40.1 million of cash from operations before working capital changes and $69.0 million after working capital changes were considered. Capital spending amounted to $22.4 million during the quarter.

The Company reduced its net debt during the quarter to $203.6 million or 24.4% of invested capital, leaving $163.7 million of availability under its credit facilities.

Average commodity lumber prices varied by species and dimension in the third quarter. The Western SPF 2x4 benchmark price increased US$22 to US$357, rebounding from a year-to-date low in June, while the SYP Eastside 2x4 benchmark price improved US$33 to US$438. Prices for wide dimension SYP fell US$15 to US$60 depending on width as demand for those products adjusted to seasonal factors. The HF Stud 2x4 9' benchmark price dropped US$24 to US$385 as supply outpaced demand while 8' was up US$13. Demand for lumber in China was steady in spite of tighter credit conditions while price levels softened by approximately 5%. Prices in Japan were 5-7% lower as the market adjusted to the recent VAT increase as well as increases in domestic supply and a drop in the value of the ¥en.

Higher log costs in the BC Interior and Coastal regions affected margins in those areas in the third quarter while lower log prices positively impacted results in the US Pacific Northwest.

The Canadian dollar weakened by almost 5% against the US dollar during the quarter, closing at US$0.8922 versus US$0.9367 in the second quarter, which had a positive impact on the Company's earnings in the quarter.

North American commodity lumber prices during the fourth quarter should continue to reflect the slow but steady increase in U.S. housing demand. Demand and prices in China are expected to remain stable in the fourth quarter. Japan is expected to remain soft as the housing market adjusts to the VAT increase and changes in currency values.

Interfor's Board of Directors has approved a $50 million capital project to upgrade the Company's sawmill in Castlegar, BC.

The project will convert the Castlegar mill to a 2 line operation with state-of-the-art technology and optimization. "We expect significant improvements in lumber recovery, productivity and grade outturns as well as lower conversion costs as a result of the investment," said Duncan Davies, Interfor's President & CEO. The project will also eliminate the need for approximately $20 million in maintenance-related capital spending over the next four years.

Rated capacity of the mill calculated on a full two shift basis will be in the range of 210 million board feet per year compared with the current level of 185 million board feet. Proforma cash payback on the project is less than three years.

Interfor has a long history with capital projects of a similar nature including rebuilds of the Company's sawmills at Port Angeles (2006), Adams Lake (2009), and most recently, Grand Forks (2012). Each of these projects was delivered on-time and on-budget and generated returns in excess of proforma.

The project is scheduled for completion in the fourth quarter of 2015 and will require approximately 30 days of operational downtime during the construction period. Full operating performance is targeted for the first quarter of 2016.

(1) EBITDA adjusted to exclude long-term incentive compensation, other expense (income) and costs associated with the Beaver-Forks operations

FORWARD-LOOKING STATEMENTS

This release contains information and statements that are forward-looking in nature, including, but not limited to, statements containing the words "will" and "is expected" and similar expressions. Such statements involve known and unknown risks and uncertainties that may cause Interfor's actual results to be materially different from those expressed or implied by those forward-looking statements. Such risks and uncertainties include, among others: general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign-currency exchange rates, and other factors referenced herein and in Interfor's Annual Report and Management Information Circular available on www.sedar.com. The forward-looking information and statements contained in this report are based on Interfor's current expectations and beliefs. Readers are cautioned not to place undue reliance on forward-looking information or statements. Interfor undertakes no obligation to update such forward-looking information or statements, except where required by law.

ABOUT INTERFOR

Interfor is a growth-oriented lumber company with operations in Canada and the United States. The Company has annual production capacity of 2.4 billion board feet and offers one of the most diverse lines of lumber products to customers around the world. For more information about Interfor, visit our website at www.interfor.com.

There will be a conference call on Friday, November 7, 2014 at 8:00 a.m. (Pacific Time) hosted by INTERFOR CORPORATION for the purpose of reviewing the Company's release of its third quarter 2014 financial results.

The dial-in number is 1-866-233-4585. The conference call will also be recorded for those unable to join in for the live discussion, and will be available until November 21, 2014. The number to call is 1-866-245-6755, Passcode 911243.

Financial and Operating Highlights (1)

 

 

For the 3 months

 

For the 9 months

 

 

 

ended September 30,

 

ended September 30,

 

 

Unit

2014

 

2013

 

2014

 

2013

 

Financial Highlights(2)

 

 

 

 

 

 

 

 

 

Total sales

$mm

373.1

 

272.7

 

1,058.2

 

789.9

 

 

Lumber

$mm

303.0

 

212.2

 

858.6

 

623.1

 

 

Logs

$mm

34.4

 

36.6

 

107.4

 

95.3

 

 

Wood chips and other residual products

$mm

28.3

 

18.4

 

76.4

 

52.5

 

 

Ocean freight and other

$mm

7.4

 

5.5

 

15.8

 

19.0

 

Operating earnings

$mm

20.1

 

2.3

 

37.2

 

38.8

 

Net earnings (loss)

$mm

11.0

 

(0.1

)

45.9

 

30.8

 

Net earnings (loss) per share, basic and diluted

$/share

0.16

 

(0.00

)

0.70

 

0.55

 

EBITDA(3)

$mm

40.9

 

18.4

 

121.1

 

84.3

 

Adjusted EBITDA(3)

$mm

45.4

 

24.6

 

131.9

 

97.8

 

Adjusted EBITDA margin(3)

%

12.2

%

9.0

%

12.5

%

12.4

%

 

 

Total assets

$mm

1,058.3

 

812.3

 

1,058.3

 

812.3

 

Total long-term debt

$mm

229.8

 

163.0

 

229.8

 

163.0

 

Pre-tax return on total assets(3)

%

7.8

%

1.1

%

8.6

%

7.2

%

Net debt to invested capital(3)

%

24.4

%

23.1

%

24.4

%

23.1

%

 

 

Operating Highlights

 

 

 

 

 

 

 

 

 

Lumber production

million fbm

567

 

447

 

1,644

 

1,255

 

Lumber sales

million fbm

595

 

446

 

1,662

 

1,261

 

Lumber - average selling price(4)

$/thousand fbm

509

 

476

 

517

 

494

 

Log sales(5)

thousand cubic metres

380

 

353

 

1,083

 

943

 

Logs - average selling price(5)

$/cubic metre

75

 

93

 

85

 

87

 

Notes:

(1)

Figures in this table may not add due to rounding.

(2)

Financial information presented for interim periods in this MD&A is prepared in accordance with IFRS but is unaudited.

(3)

Refer to the Non-GAAP Measures section of this MD&A for definitions and reconciliations of these measures to figures reported in the Company's consolidated financial statements.

(4)

Gross sales before export taxes.

(5)

For B.C. operations only.

Summary of Third Quarter 2014 Financial Performance

Sales

Interfor realized $373.1 million of total sales, up 36.8% from $272.7 million in the third quarter of 2013, driven by the sale of 595 million board feet of lumber at an average price of $509 per mfbm. Lumber sales volume and average selling price increased 149 million board feet and 6.9%, respectively, over the same quarter of 2013.

The growth in lumber sales volume was primarily in the U.S. market, where sales increased by 157 million board feet or 59.1% over the third quarter of 2013. This growth is mostly attributable to the acquisition of two sawmills in the first quarter of 2014, higher operating rates and the draw-down of lumber inventories.

The increase in the average selling price of lumber is primarily related to increased demand and strengthening of the U.S. dollar against the Canadian dollar by 4.9%, partially offset by an increased proportion of Southern Yellow Pine sales.

Log sales of $34.4 million represents a decrease of $2.2 million or 6.0% compared to the same quarter of 2013. An increased sales volume was more than offset by a 19.2% decrease in the average selling price on B.C. log sales, which accounted for 82.8% of total log sales revenue in the quarter.

Sales of wood chips and other residual products increased to $28.3 million, up $9.9 million over the comparable quarter of 2013. This increase mainly reflects the 26.8% increase in lumber production from Q3'13.

Operations

Production costs increased by $80.2 million or 33.5% over the third quarter of 2013, explained primarily by the 33.4% increase in lumber sales volume.

Depreciation of plant and equipment was $14.2 million, up 38.5% from the third quarter of 2013. The majority of this increase is explained by the inclusion of depreciation on the two sawmills acquired in the first quarter of 2014 and higher operating rates.

Depletion and amortization of timber, roads and other was $6.9 million, up 16.2% from the comparable quarter of 2013. This increase is mostly related to amortization of a non-competition agreement associated with the acquisition of Tolleson Ilim Lumber Company ("Tolleson").

Corporate and Other

Selling and administration expenses were $8.7 million, up $1.1 million from the third quarter of 2013. This increase reflects the growth of Interfor's operations in the U.S. Southeast.

The $3.6 million on long term incentive compensation reflects the impact of a higher market price for Interfor Common Shares during the quarter on the Company's share-based incentive compensation plans.

Income Taxes

The Company recorded income tax expense of $5.5 million, including $0.3 million related to current taxes, primarily in respect of its U.S. operations.

Net Earnings

The Company recorded net earnings of $11.0 million or $0.16 per share, higher compared to a net loss of $0.1 million or $0.00 per share in the third quarter of 2013. This improvement reflects sales growth and a higher profit margin on production.

Summary of Year-to-Date 2014 Financial Performance

Sales

Interfor realized $1,058.2 million of total sales, up 34.0% from $789.9 million in the first nine months of 2013, driven by the sale of 1.7 billion board feet of lumber at an average price of $517 per mfbm. Lumber sales volume and average selling price increased 400 million board feet and 4.7%, respectively, over the same period of 2013.

The growth in lumber sales volume was primarily in the U.S. market, where sales increased by 376 million board feet or 49.4% over the first nine months of 2013. This growth is mostly attributable to the six sawmills in Georgia acquired since March of 2013 as well as increased demand.

The increase in the average selling price of lumber is primarily related to increased demand and the strengthening of the U.S. dollar against the Canadian dollar by 6.9%, partially offset by an increased proportion of Southern Yellow Pine sales.

Log sales of $107.4 million represents an increase of $12.1 million or 12.7% compared to the same period of 2013. This sales growth benefited from a 14.8% increase in B.C. log sales volume.

Sales of wood chips and other residual products increased to $76.4 million, up $23.9 million over the comparable period of 2013. This increase mainly reflects the 31.0% increase in lumber production over the same period in the prior year.

Operations

Production costs increased by $231.3 million or 34.6% over the first nine months of 2013, explained primarily by the 31.7% and 14.8% increases in lumber and B.C. log sales volumes, respectively. The stronger U.S. dollar as noted above also contributed to this increase.

Depreciation of plant and equipment was $40.5 million, up 43.6% from the year-to-date period of 2013. The majority of this increase is explained by the inclusion of depreciation on the six mills in the U.S. Southeast acquired since March 2013, and higher operating rates.

Depletion and amortization of timber, roads and other was $20.2 million, up 20.3% from the similar period of 2013. Amortization of the non-competition agreement associated with the Tolleson acquisition contributed to this increase.

Corporate and Other

Selling and administration expenses were $26.6 million, up $4.7 million from the first nine months of 2013. This increase reflects the growth of our operations into the U.S. Southeast and includes $1.4 million of non-recurring expenses related to the Tolleson acquisition.

Long term incentive compensation expense was $10.1 million, down $3.6 million from the comparable 2013 period, reflecting changes in the fair value of the Company's share-based incentive compensation plans.

Income Taxes

The Company recorded an income tax recovery of $16.4 million, comprised of $1.2 million of current tax expense net of a $17.6 million deferred tax recovery. The deferred tax recovery includes two notable items: i) recognition of $19.3 million of previously unrecognized deferred tax assets related to its U.S. operations and associated with accounting for the acquisition of Tolleson; and ii) an $8.5 million recovery related to the Beaver-Forks restructuring and impairment charges.

Net Earnings

The Company recorded net earnings of $45.9 million or $0.70 per share, higher compared to net earnings of $30.8 million or $0.55 per share in the year-to-date period of 2013. Excluding the $14.2 million impact of the restructuring and impairment charges associated with curtailment of the Beaver-Forks operation in Q2'14 and recognition of $19.3 million of previously unrecognized deferred tax assets related to U.S. operations in Q1'14, net earnings in YTD'14 would have been $40.8 million.

Summary of Quarterly Results (1)

 

 

 

 

 

2014

 

2013

 

2012

 

 

 

Unit

Q3

 

Q2

 

Q1

 

Q4

 

Q3

 

Q2

 

Q1

 

Q4

 

Financial Performance (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total sales

 

$mm

373.1

 

390.2

 

294.8

 

315.3

 

272.7

 

274.7

 

242.5

 

222.4

 

 

Lumber

 

$mm

303.0

 

325.2

 

230.4

 

249.2

 

212.2

 

219.5

 

191.4

 

173.3

 

 

Logs

 

$mm

34.4

 

35.4

 

37.6

 

41.3

 

36.6

 

32.6

 

26.1

 

24.5

 

 

Wood chips and other residual products

 

$mm

28.3

 

25.8

 

22.4

 

20.0

 

18.4

 

17.4

 

16.6

 

15.9

 

 

Ocean freight and other

 

$mm

7.4

 

3.8

 

4.4

 

4.9

 

5.4

 

5.2

 

8.4

 

8.7

 

Operating earnings (loss)

 

$mm

20.1

 

3.8

 

13.3

 

13.7

 

2.3

 

19.3

 

17.2

 

(2.4

)

Net earnings (loss)

 

$mm

11.0

 

7.4

 

27.5

 

11.4

 

(0.1

)

15.8

 

15.2

 

(3.8

)

Net earnings (loss) per share, basic and diluted

 

$/share

0.16

 

0.11

 

0.43

 

0.18

 

(0.00

)

0.28

 

0.27

 

(0.07

)

EBITDA(2)

 

$mm

40.9

 

47.8

 

32.3

 

31.4

 

18.4

 

35.3

 

30.6

 

13.0

 

Adjusted EBITDA(2)

 

$mm

45.4

 

47.3

 

39.2

 

36.2

 

24.6

 

36.1

 

37.1

 

19.3

 

Shares outstanding - end of period

 

million

66.7

 

66.7

 

66.7

 

63.1

 

63.1

 

55.9

 

55.9

 

55.9

 

Shares outstanding - weighted average

 

million

66.7

 

66.7

 

63.8

 

63.1

 

55.9

 

55.9

 

55.9

 

55.9

 

 

 

Operating Performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lumber production

 

million fbm

567

 

582

 

495

 

470

 

447

 

418

 

390

 

347

 

Lumber sales

 

million fbm

595

 

628

 

439

 

500

 

446

 

433

 

383

 

384

 

Lumber - average selling price(3)

 

$/thousand fbm

509

 

518

 

525

 

498

 

476

 

507

 

500

 

452

 

Log sales(4)

 

thousand cubic metres

380

 

305

 

398

 

397

 

353

 

301

 

289

 

267

 

Logs - average selling price(4)

 

$/cubic metre

75

 

103

 

82

 

92

 

93

 

90

 

76

 

76

 

Average USD/CAD exchange rate(5)

 

1 USD in CAD

1.0890

 

1.0905

 

1.1033

 

1.0491

 

1.0385

 

1.0233

 

1.0080

 

0.9914

 

Closing USD/CAD exchange rate(5)

 

1 USD in CAD

1.1208

 

1.0676

 

1.1053

 

1.0636

 

1.0303

 

1.0518

 

1.0160

 

0.9949

 

Notes:

 

(1)

Figures in this table may not add due to rounding.

 

(2)

Refer to the Non-GAAP Measures section of this MD&A.

 

(3)

Gross sales before export taxes.

 

(4)

For B.C. operations.

 

(5)

Based on Bank of Canada foreign exchange rates.

 

The Company's quarterly financial trends are most impacted by seasonality, levels of lumber production, log costs, market prices for lumber and the USD/CAD foreign currency exchange rate.

Logging operations are seasonal due to a number of factors including weather, ground conditions and fire season closures. Generally, the Company's B.C. Coast logging division experiences higher production levels in the latter half of the first quarter, throughout the second and third quarters and in the first half of the fourth quarter. Logging activity in the B.C. Interior is generally higher in the first half of the first quarter, slows during spring break-up and increases in the third and fourth quarters. Sawmill operations are dependent on the availability of logs from our logging operations and our suppliers. In addition, the market demand for lumber and related products is generally lower in the winter due to reduced construction activity, which increases during the spring, summer and fall.

U.S. housing starts surged, supporting higher lumber prices and positive net earnings in the first quarter of 2013. Mid-way through the second quarter of 2013, supply outstripped demand, and lumber prices dropped, ending the quarter at levels close to those of early 2012. Late in the third quarter of 2013, lumber prices started to rise in response to demand from China and improving U.S. housing starts. Three sawmills acquired on March 1, 2013, and one sawmill acquired on July 1, 2013, contributed to growth in production, sales and earnings from 2012. Production, sales and earnings have also benefited since the acquisition of two sawmills on March 14, 2014. The permanent closure of the Beaver sawmill impacted production and sales in Q3'14.

The volatility of the Canadian dollar against the U.S. dollar also impacted results, given that historically over 75% of the Canadian operation's lumber sales are to the U.S. and export markets priced in U.S. dollars. A weaker Canadian dollar increases the lumber sales realizations in Canada, and increases net earnings of U.S. operations when translated to Canadian dollars.

Liquidity

Balance Sheet

Interfor strengthened its financial position throughout the third quarter of 2014. Net debt at quarter-end of $203.6 million, or 24.4% of invested capital, was $62.8 million higher than at December 31, 2013, due primarily to borrowings for the Tolleson acquisition.

As at September 30, 2014, the Company had net working capital of $127.7 million and available capacity on operating and term facilities of $163.7 million. These resources, in addition to cash generated from operations, will be used to support working capital requirements, debt servicing commitments and capital expenditures. We believe that Interfor will have sufficient liquidity to fund operating and capital requirements for the foreseeable future.

Cash Flow from Operating Activities

In the first nine months of 2014, the Company generated $118.0 million of cash flow from operations before changes in working capital, up $29.5 million from the comparable period of 2013. Incremental cash flow generated from increased sales was partially offset by a small reduction in profit margin on production and a $4.7 million increase in selling and administration costs. The increase in selling and administration costs includes $1.4 million of a non- recurring nature related to the Tolleson acquisition.

Total cash generated from operations after changes in working capital was $126.7 million, with $8.7 million of cash released from operating working capital. In the comparable period of 2013, $24.4 million of cash was used in operating working capital, leading to $64.1 million of total cash generated from operations.

Cash Flow from Investing Activities

Investing activities totaled $176.4 million in the year-to-date period of 2014, including $124.4 million related to the Tolleson acquisition, $31.5 million for mill improvements and $19.8 million for development of logging roads. Discretionary mill improvements of $15.0 million during the period included work on a new kiln and crane at the Thomaston sawmill and a Weinig moulder at the Gilchrist sawmill.

Investing activities totaled $169.9 million in the comparable period of 2013, including $86.6 million related to the acquisition of Rayonier's Wood Products Business, $33.8 million for the acquisition of the Thomaston sawmill and $49.8 million on capital expenditures.

Cash Flow from Financing Activities

Net drawings on the Company's long-term debt facilities were $76.4 million over the first nine months of 2014, leading to total cash from financing activities of $70.5 million. This includes US$112.5 million drawn from the Company's Revolving Term Line and Operating Line to fund the Tolleson acquisition.

In the same period of 2013, net drawings on the Company's long-term debt facilities were $26.9 million with total cash from financing activities of $102.9 million. This includes $82.4 million of net cash proceeds raised from the issuance of 7,187,500 Common Shares.

Capital Resources

The following table summarizes Interfor's credit facilities and availability as of September 30, 2014:

 

 

Revolving

Senior

U.S.

 

 

Operating

Term

Secured

Operating

 

Thousands of Canadian dollars

Line

Line

Notes

Line

Total

Available line of credit and maximum borrowing available

65,000

250,000

56,040

33,624

404,664

Less:

 

 

 

 

 

 

Drawings

-

173,724

56,040

-

229,764

 

Outstanding letters of credit included in line utilization

10,606

-

-

633

11,239

Unused portion of facility

54,394

76,276

-

32,991

163,661

Interfor continues to maintain its disciplined focus on monitoring discretionary capital expenditures, optimizing inventory levels and matching production with offshore and domestic demand. Based on current pricing, cash flow projections and existing credit lines, the Company believes it has sufficient liquidity to meet all of its financial obligations.

Transactions Between Related Parties

The Company did not have any transactions between related parties in the nine months ended September 30, 2014.

Off-Balance Sheet Arrangements

The Company has off-balance sheet arrangements which include letters of credit and surety performance bonds, primarily for timber sales. At September 30, 2014, such instruments aggregated $31.4 million (December 31, 2013 - $26.7 million). Off-balance sheet arrangements have not had, and are not reasonably likely to have, any material impact on the Company's current or future financial condition, results of operations or cash flows.

Financial Instruments and Other Instruments

From time to time, the Company employs financial instruments, such as interest rate swaps and foreign currency forward and option contracts, to manage exposure to fluctuations in interest rates and foreign exchange rates. The Company also trades lumber futures to manage price risk. The Company's policy is not to use derivatives for trading or speculative purposes. Risk management strategies and relationships are formally documented and assessed on a regular, ongoing basis to ensure derivatives are effective in offsetting changes in fair values or cash flows of hedged items. The counter-parties for all derivative contracts, except lumber futures, are the Company's Canadian bankers who are highly-rated and, hence, the risk of credit loss on such instruments is mitigated.

Outstanding Shares

As of November 5, 2014, Interfor had 66,730,455 Common Shares issued and outstanding. These shares are listed on the Toronto Stock Exchange under the symbol IFP.

Controls and Procedures

There have been no changes in the Company's internal controls over financial reporting ("ICFR") during the three months ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, its ICFR. During this period, additional procedures were performed to ensure key financial internal controls remained in place during and after the conversion to a new financial reporting system.

Critical Accounting Estimates

There were no significant changes to the Company's critical accounting estimates during the quarter ended September 30, 2014. Interfor's critical accounting estimates are described in its MD&A for the year ended December 31, 2013, filed under the Company's profile on www.sedar.com.

Accounting Policy Changes

A number of new standards, and amendments to existing standards and interpretations, were not yet effective for the quarter ended September 30, 2014, and have not been applied in preparing the Company's unaudited interim condensed consolidated financial statements. The following pronouncements are considered by the Company to be the most significant of several pronouncements that may affect the financial statements.

IFRS 9, Financial Instruments, will replace the multiple classification and measurement models in IAS 39, Financial Instruments: Recognition and Measurement, with a single model that has only two classification categories: amortized cost and fair value. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company does not expect this standard to have a significant effect on its financial statements.

IFRS 15, Revenue from Contracts with Customers, will replace all existing IFRS revenue requirements. Application is required for annual periods beginning on or after January 1, 2017, with earlier adoption permitted. The Company has not yet completed an assessment of the impact, if any, of this standard on its financial statements.

Non-GAAP Measures

This MD&A makes reference to the following non-GAAP measures: EBITDA, Adjusted EBITDA, Pre-tax return on total assets and Net debt to invested capital, which are used by the Company and certain investors to evaluate operating performance and financial position. These non-GAAP measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. The following table provides a reconciliation of these non-GAAP measures to figures as reported in the Company's unaudited interim condensed consolidated financial statements prepared in accordance with IFRS:

 

For the 3 months

 

For the 9 months

 

 

ended September 30,

 

ended September 30,

 

Thousands of Canadian dollars

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

Net earnings (loss)

10,994

 

(130

)

45,877

 

30,808

 

Add:

 

 

 

 

 

 

 

 

 

Depreciation of plant and equipment

14,151

 

10,220

 

40,460

 

28,166

 

 

Depletion and amortization of timber, roads and other

6,888

 

5,930

 

20,213

 

16,808

 

 

Restructuring costs, capital asset and timber write-downs

26

 

-

 

23,272

 

322

 

 

Finance costs

2,347

 

2,762

 

6,647

 

6,972

 

 

Other foreign exchange loss (gain)

1,015

 

(524

)

1,005

 

1,039

 

 

Income tax expense (recovery)

5,524

 

180

 

(16,390

)

231

 

EBITDA

40,945

 

18,438

 

121,084

 

84,346

 

Add:

 

 

 

 

 

 

 

 

 

Long term incentive compensation

3,579

 

6,139

 

10,069

 

13,636

 

 

Other expense (income)

213

 

(19

)

40

 

(227

)

 

Beaver sawmill post-closure wind-down costs

712

 

-

 

712

 

-

 

Adjusted EBITDA

45,449

 

24,558

 

131,905

 

97,755

 

 

 

 

 

 

 

 

 

 

Pre-tax return on total assets

 

 

 

 

 

 

 

 

Operating earnings before restructuring and

 

 

 

 

 

 

 

 

capital asset write-downs

20,119

 

2,269

 

60,451

 

39,145

 

Total assets(1)

1,036,343

 

794,316

 

941,236

 

722,173

 

Pre-tax return on total assets(2)

7.8

%

1.1

%

8.6

%

7.2

%

 

 

 

 

 

 

 

 

 

Net debt to invested capital

 

 

 

 

 

 

 

 

Net debt

 

 

 

 

 

 

 

 

 

Long term debt

229,764

 

162,993

 

229,764

 

162,993

 

 

Cash and cash equivalents

(26,194

)

(12,736

)

(26,194

)

(12,736

)

Total net debt

203,570

 

150,257

 

203,570

 

150,257

 

Invested capital

 

 

 

 

 

 

 

 

 

Net debt

203,570

 

150,257

 

203,570

 

150,257

 

 

Shareholders' equity

629,874

 

498,974

 

629,874

 

498,974

 

Total invested capital

833,444

 

649,231

 

833,444

 

649,231

 

Net debt to invested capital

24.4

%

23.1

%

24.4

%

23.1

%

Notes:

(1)

Opening total assets for three month periods; average of opening and closing total assets for nine month periods.

(2)

Annualized rate.

Risks and Uncertainties

The Company is exposed to many risks and uncertainties in conducting its business including, but not limited to: price volatility; availability of log supply; competition; government regulation; foreign currency exchange fluctuations; environmental matters; and labour disruption. These risks and uncertainties are described in the Company's MD&A for the year ended December 31, 2013, filed under the Company's profile on www.sedar.com. Except as noted below, there have been no significant changes to the Company's risks and uncertainties during the nine mo nth period ended September 30, 2014.

On June 26, 2014 the Supreme Court of Canada ("SCC") released its ruling on the Tsilhqot'in vs. British Columbia. To the extent that this defines for the first time the criteria upon which Aboriginal title rests is a positive development. It is also an important motivation for the federal and provincial governments to move forward on the treaty process in British Columbia.

The SCC ruling applies to two percent of the Tsilhqot'in traditional territory in a remote are a of Central B.C. - far removed from Interfor's operations. To date, Aboriginal title has not been established in any of Interfor's tenures; and doing so will likely be a lengthy and complex process. The Company will continue to manage its operations within the existing legal framework while paying close attention to the direction provided by the Province and First Nations regarding the application of this ruling. Therefore, risks and uncertainties remain consistent with those referenced above.

The Company's operations in B.C. account for approximately 40% of its total lumber production. Interfor has a number of agreements and initiatives with First Nations in B.C., and as such, remains committed to working with First Nations to develop economic opportunities of mutual benefit.

Additional Information

Additional information relating to the Company and its operations can be found on its website at www.interfor.com, in the Annual Information Form and on SEDAR at www.sedar.com.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

 

For the three and nine months ended September 30, 2014 and 2013 (unaudited)

 

(thousands of Canadian dollars except earnings per share)

3 Months

 

3 Months

 

9 Months

 

9 Months

 

 

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Sept. 30, 2014

 

Sept. 30, 2013

 

 

 

Sales

$

373,124

 

$

272,707

 

$

1,058,183

 

$

789,904

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

319,706

 

 

239,462

 

 

900,391

 

 

669,132

 

 

Selling and administration

 

8,681

 

 

7,540

 

 

26,599

 

 

21,871

 

 

Long term incentive compensation expense

 

3,579

 

 

6,139

 

 

10,069

 

 

13,636

 

 

Export taxes

 

-

 

 

1,147

 

 

-

 

 

1,146

 

 

Depreciation of plant and equipment (note 9)

 

14,151

 

 

10,220

 

 

40,460

 

 

28,166

 

 

Depletion and amortization of timber, roads and other (note 9)

 

6,888

 

 

5,930

 

 

20,213

 

 

16,808

 

 

 

 

353,005

 

 

270,438

 

 

997,732

 

 

750,759

 

 

 

Operating earnings before restructuring costs

 

20,119

 

 

2,269

 

 

60,451

 

 

39,145

 

 

 

Restructuring costs (note 10)

 

(26

)

 

-

 

 

(23,272

)

 

(322

)

Operating earnings

 

20,093

 

 

2,269

 

 

37,179

 

 

38,823

 

 

 

Finance costs (note 11)

 

(2,347

)

 

(2,762

)

 

(6,647

)

 

(6,972

)

Other foreign exchange gain (loss)

 

(1,015

)

 

524

 

 

(1,005

)

 

(1,039

)

Other income (expense)

 

(213

)

 

19

 

 

(40

)

 

227

 

 

 

 

(3,575

)

 

(2,219

)

 

(7,692

)

 

(7,784

)

 

 

Earnings before income taxes

 

16,518

 

 

50

 

 

29,487

 

 

31,039

 

Income tax expense (recovery):

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

272

 

 

217

 

 

1,208

 

 

96

 

 

Deferred (note 4)

 

5,252

 

 

(37

)

 

(17,598

)

 

135

 

 

 

 

5,524

 

 

180

 

 

(16,390

)

 

231

 

 

 

Net earnings (loss)

$

10,994

 

$

(130

)

$

45,877

 

$

30,808

 

 

 

Net earnings (loss) per share, basic and diluted (note 12)

$

0.16

 

$

(0.00

)

$

0.70

 

$

0.55

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

For the three and nine months ended September 30, 2014 and 2013 (unaudited)

 

 

 

3 Months

 

3 Months

 

9 Months

 

9 Months

 

 

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Sept. 30, 2014

 

Sept. 30, 2013

 

 

 

Net earnings (loss)

$

10,994

 

$

(130

)

$

45,877

 

$

30,808

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Items that will not be reclassified subsequently to Net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit plan actuarial gain (loss)

 

(2,223

)

 

2,383

 

 

(2,532

)

 

4,890

 

 

 

Items that are or may be reclassified subsequently to Net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation differences - foreign operations

 

13,062

 

 

(2,022

)

 

9,641

 

 

4,408

 

 

Gain (loss) in fair value of interest rate swaps (note 14)

 

328

 

 

(362

)

 

111

 

 

218

 

 

Reclassification of loss in fair value of interest rate swaps to net earnings (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

(note 14)

 

-

 

 

58

 

 

-

 

 

58

 

 

Deferred income tax recovery on other comprehensive income

 

-

 

 

-

 

 

-

 

 

212

 

 

Total items that are or may be reclassified subsequently to Net earnings

 

13,390

 

 

(2,326

)

 

9,752

 

 

4,896

 

Total other comprehensive income, net of tax

 

11,167

 

 

57

 

 

7,220

 

 

9,786

 

 

 

Total comprehensive income (loss)

$

22,161

 

$

(73

)

$

53,097

 

$

40,594

 

 

 

See accompanying notes to consolidated financial statements

 

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the three and nine months ended September 30, 2014 and 2013 (unaudited)

 

(thousands of Canadian dollars)

3 Months

 

3 Months

 

9 Months

 

9 Months

 

 

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Sept. 30, 2014

 

Sept. 30, 2013

 

 

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

$

10,994

 

$

(130

)

$

45,877

 

$

30,808

 

 

Items not involving cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation of plant and equipment (note 9)

 

14,151

 

 

10,220

 

 

40,460

 

 

28,166

 

 

 

Depletion and amortization of timber, roads and other (note 9)

 

6,888

 

 

5,930

 

 

20,213

 

 

16,808

 

 

 

Income tax expense (recovery)

 

5,524

 

 

180

 

 

(16,390

)

 

231

 

 

 

Finance costs (note 11)

 

2,347

 

 

2,762

 

 

6,647

 

 

6,972

 

 

 

Reforestation liability

 

(1,834

)

 

(739

)

 

20

 

 

2,039

 

 

 

Other assets

 

112

 

 

(1

)

 

577

 

 

44

 

 

 

Provisions and other liabilities

 

1,384

 

 

2,703

 

 

(244

)

 

3,413

 

 

 

Write-down of plant and equipment (note 10)

 

-

 

 

-

 

 

20,468

 

 

-

 

 

 

Unrealized foreign exchange (gain) loss

 

365

 

 

(851

)

 

331

 

 

126

 

 

 

Other

 

213

 

 

(4

)

 

50

 

 

(121

)

 

 

 

40,144

 

 

20,070

 

 

118,009

 

 

88,486

 

 

Cash generated from (used in) operating working capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable and other

 

6,514

 

 

2,143

 

 

(801

)

 

(4,784

)

 

 

Inventories

 

14,042

 

 

(7,876

)

 

11,245

 

 

(35,693

)

 

 

Prepayments

 

174

 

 

(650

)

 

(3,303

)

 

(3,054

)

 

 

Trade accounts payable and provisions

 

8,371

 

 

1,621

 

 

4,509

 

 

19,625

 

 

 

Income taxes paid

 

(237

)

 

(93

)

 

(2,945

)

 

(512

)

 

 

 

69,008

 

 

15,215

 

 

126,714

 

 

64,068

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

(13,778

)

 

(10,084

)

 

(31,470

)

 

(24,278

)

 

Additions to logging roads

 

(8,178

)

 

(5,112

)

 

(19,781

)

 

(12,287

)

 

Additions to timber and other intangible assets

 

(474

)

 

(581

)

 

(2,440

)

 

(13,224

)

 

Proceeds on disposal of property, plant and equipment

 

(447

)

 

219

 

 

1,640

 

 

371

 

 

Acquisition (note 4)

 

-

 

 

(33,766

)

 

(124,421

)

 

(120,407

)

 

Deposit held in escrow for acquisition

 

-

 

 

33,150

 

 

-

 

 

-

 

 

Investments and other assets

 

154

 

 

171

 

 

98

 

 

(73

)

 

 

 

(22,723

)

 

(16,003

)

 

(176,374

)

 

(169,898

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank indebtedness

 

(4,400

)

 

-

 

 

-

 

 

-

 

 

Issuance of capital stock

 

-

 

 

82,350

 

 

-

 

 

82,350

 

 

Interest payments

 

(1,870

)

 

(1,715

)

 

(5,134

)

 

(4,952

)

 

Financing transaction costs

 

-

 

 

(51

)

 

(736

)

 

(1,445

)

 

Additions to long-term debt (notes 4 and 7)

 

62,076

 

 

90,666

 

 

362,007

 

 

289,770

 

 

Repayments of long-term debt (note 7)

 

(88,167

)

 

(162,532

)

 

(285,634

)

 

(262,866

)

 

 

 

(32,361

)

 

8,718

 

 

70,503

 

 

102,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange gain on cash and cash equivalents held in a foreign currency

 

631

 

 

280

 

 

634

 

 

715

 

Increase (decrease) in cash

 

14,555

 

 

8,210

 

 

21,477

 

 

(2,258

)

 

 

Cash and cash equivalents, beginning of period

 

11,639

 

 

4,526

 

 

4,717

 

 

14,994

 

 

 

Cash and cash equivalents, end of period

$

26,194

 

$

12,736

 

$

26,194

 

$

12,736

 

 

 

See accompanying notes to consolidated financial statements

 

 

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

September 30, 2014 and December 31, 2013 (unaudited)

(thousands of Canadian dollars)

 

Sept. 30,

 

 

Dec. 31,

 

 

 

2014

 

 

2013

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

26,194

 

$

4,717

 

Trade accounts receivable and other

 

71,640

 

 

62,735

 

Inventories (note 6)

 

151,131

 

 

149,509

 

Prepayments

 

16,583

 

 

11,374

 

 

 

265,548

 

 

228,335

 

Employee future benefits

 

2,541

 

 

3,980

Other investments and assets

 

3,530

 

 

3,960

Property, plant and equipment (notes 4 and 10)

 

527,980

 

 

460,930

Logging roads and bridges

 

20,984

 

 

16,224

Timber licences

 

80,391

 

 

84,344

Other intangible assets (note 4)

 

24,573

 

 

2,420

Goodwill (note 4)

 

132,799

 

 

23,715

Deferred income taxes

 

-

 

 

218

 

 

 

$

1,058,346

 

$

824,126

 

Liabilities and Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Trade accounts payable and provisions

$

124,834

 

$

98,017

 

Reforestation liability

 

12,475

 

 

11,754

 

Income taxes payable

 

562

 

 

395

 

 

 

137,871

 

 

110,166

 

Reforestation liability

 

21,095

 

 

20,662

Long-term debt (note 7)

 

229,764

 

 

145,479

Employee future benefits

 

8,350

 

 

7,006

Provisions and other liabilities

 

25,003

 

 

25,676

Deferred income taxes (notes 4 and 10)

 

6,389

 

 

-

Equity:

 

 

 

 

 

 

Share capital (note 8)

 

490,363

 

 

428,723

 

Contributed surplus

 

7,476

 

 

7,476

 

Translation reserve

 

10,202

 

 

561

 

Hedge reserve

 

278

 

 

167

 

Retained earnings

 

121,555

 

 

78,210

 

 

 

 

629,874

 

 

515,137

 

 

 

$

1,058,346

 

$

824,126

 

Commitment (note 15)

 

 

 

 

 

 

See accompanying notes to consolidated financial statements

On behalf of the Board:

 

 

L. Sauder

D. Whitehead

 

Director

Director

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

 

For the nine months ended September 30, 2014 and 2013 (unaudited)

 

 

(thousands of Canadian dollars)

Common
Shares

 

Class B
Share Capital

 

Contributed
Surplus

 

Translation
Reserve

 

 

Hedging
Reserve

 

Retained
Earnings

 

Total

 

Balance at December 31, 2013

$

428,723

 

$

-

 

$

7,476

 

$

561

 

 

$

167

 

$

78,210

 

$

515,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings for the period

 

-

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

45,877

 

 

45,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation differences, net of tax

 

-

 

 

-

 

 

-

 

 

9,641

 

 

 

-

 

 

-

 

 

9,641

 

Defined benefit plan actuarial loss

 

-

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

(2,532

)

 

(2,532

)

Loss in fair value of interest rate swaps (note 14)

 

-

 

 

-

 

 

-

 

 

-

 

 

 

111

 

 

-

 

 

111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued in business combination (notes 4 and 8)

 

61,640

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

-

 

 

61,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2014

$

490,363

 

$

-

 

$

7,476

 

$

10,202

 

 

$

278

 

$

121,555

 

$

629,874

 

 

 

Balance at December 31, 2012

$

342,285

 

$

4,080

 

$

7,476

 

$

(7,818

)

 

$

(132

)

$

30,139

 

$

376,030

 

 

 

Net earnings for the period

 

-

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

30,808

 

 

30,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation differences, net of tax

 

-

 

 

-

 

 

-

 

 

4,620

 

 

 

-

 

 

-

 

 

4,620

 

Defined benefit plan actuarial gain

 

-

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

4,890

 

 

4,890

 

Gain in fair value of interest rate swaps (note 14)

 

-

 

 

-

 

 

-

 

 

-

 

 

 

218

 

 

-

 

 

218

 

Reclassification of loss in fair value of interest rate swaps to net earnings (note 14)

 

-

 

 

-

 

 

-

 

 

-

 

 

 

58

 

 

-

 

 

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share issuance, net of share issue expenses

 

82,350

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

-

 

 

82,350

 

Share exchange

 

4,080

 

 

(4,080

)

 

-

 

 

-

 

 

 

-

 

 

-

 

 

-

 

 

 

 

 

Balance at September 30, 2013

$

428,715

 

$

-

 

$

7,476

 

$

(3,198

)

 

$

144

 

$

65,837

 

$

498,974

 

 

 

See accompanying notes to consolidated financial statements

 

INTERFOR CORPORATION

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(Tabular amounts expressed in thousands except number of shares and per share amounts)

Three and nine months ended September 30, 2014 and 2013 (unaudited)

1. Nature of operations:

Interfor Corporation and its subsidiaries (the "Company" or "Interfor") produce wood products in British Columbia, the U.S. Pacific Northwest and the U.S. Southeast for sale to markets around the world.

Interfor Corporation is incorporated under the Business Corporations Act (British Columbia) with shares listed on the Toronto Stock Exchange. Its head office, principal address and records office are located at Suite 3500, 1055 Dunsmuir Street, Vancouver, British Columbia, Canada, V7X 1H7.

These condensed consolidated interim financial statements as at and for the three and nine months ended September 30, 2014, comprise the Company and its subsidiaries.

2. Basis of Preparation:

(a) Statement of compliance:

These condensed consolidated interim financial statements, including comparatives, have been prepared in accordance with IAS 34 Interim Financial Reporting using accounting policies consistent with the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and Interpretations of the International Financial Reporting Interpretations Committee ("IFRIC"). These condensed consolidated interim financial statements were approved by the Board of Directors on November 5, 2014.

(b) Basis of measurement:

These condensed consolidated interim financial statements have been prepared on the historical cost basis except for the following items in the Statement of Financial Position:

  1. Derivative financial instruments are measured at fair value;
  2. Liabilities for cash-settled share-based payment arrangements are measured at fair value; and
  3. Employee benefit plan assets and liabilities are recognized as the net of the fair value of the plan assets and the present value of the benefit obligations on a plan by plan basis.

The functional and presentation currency of the parent company is the Canadian Dollar.

3. Significant accounting policies:

These condensed consolidated interim financial statements have been prepared using the significant accounting policies and methods of computation consistent with those applied in the Company's December 31, 2013, annual consolidated financial statements, which are available on www.sedar.com. The adoption of new accounting standards or interpretations under IFRS had no effect on these financial statements.

4. Acquisition:

On March 14, 2014, a wholly-owned subsidiary of Interfor acquired all of the outstanding common shares of Tolleson Ilim Lumber Company ("Tolleson") from Ilim Timber Continental, S.A. ("Ilim"), pursuant to a Share Purchase Agreement for total consideration estimated to value $188,545,000. Tolleson, through its wholly-owned subsidiary, owns and operates two sawmills in Perry and Preston, Georgia, and a remanufacturing facility in Perry, Georgia. This acquisition is consistent with Interfor's strategy of adding capacity in attractive regional markets.

The acquisition has been accounted for as a business combination and the estimated value of consideration transferred is allocated on a preliminary basis as follows:

 

 

 

 

Assets acquired:

 

 

 

 

Cash and cash equivalents

$

2,484

 

 

Other current assets

 

16,790

 

 

Property, plant and equipment

 

86,561

 

 

Other intangible assets

 

22,190

 

 

Goodwill

 

107,419

 

 

 

235,444

 

Liabilities assumed:

 

 

 

 

Current liabilities

 

(15,929

)

 

Long term provisions and other liabilities

 

(6,697

)

 

Deferred income taxes

 

(24,273

)

 

 

 

$

188,545

 

 

 

 

 

Consideration funded by:

 

 

 

 

Current liabilities

$

2,086

 

 

Operating Line

 

24,964

 

 

Revolving Term Line

 

99,855

 

 

Share capital (3,680,000 Common Shares)

 

61,640

 

 

 

 

$

188,545

 

As part of the acquisition, the Company entered into a non-competition agreement with Ilim under which Ilim and its associates are prohibited from carrying on various activities within Canada and the U.S. that would be in competition with the Company's operating activities for a period of five years from the acquisition date. An intangible asset of $22,190,000 was recognized in respect of this non-competition agreement, which will be amortized to expense over its five year term.

The goodwill of $107,419,000 recognized in the transaction is calculated as the excess of the estimated purchase consideration transferred over the preliminary fair values of the identifiable assets acquired and liabilities assumed. The factors that contribute to the recognition of goodwill include Tolleson's historical cash flows and income levels, reputation in its markets, management team strength, efficiency of operations, and future cash flows and income growth projections. None of the goodwill is expected to be tax deductible.

In conjunction with recognizing a $24,273,000 deferred tax liability in accounting for the acquisition of Tolleson, the Company recognized $19,253,000 of previously unrecognized deferred tax assets related to its U.S. operations. The recognition of these deferred income tax assets is included within the $16,591,000 deferred income tax recovery in the Company's Consolidated Statements of Earnings in the first quarter, 2014.

The Company incurred acquisition related costs of $99,000 during the third quarter, 2014, and $1,403,000 for the first nine months, 2014, which are included in Selling and administration expenses in the Company's Consolidated Statements of Earnings.

5. Seasonality of operating results:

Quarterly trends normally reflect the seasonality of the Company's operations. Logging operations are seasonal due to a number of factors including weather, ground conditions and fire season woods closures. Generally, the Company's B.C. Coastal logging division experiences higher production levels in the latter half of the first quarter, throughout the second and third quarters and in the first half of the fourth quarter. Logging activity in the B.C. Interior is generally higher in the first half of the first quarter, slows during spring break-up and increases in the third and fourth quarters. Sawmill operations are less seasonal than logging operations but are dependent on the availability of logs from logging operations, including those from suppliers. In addition, the market demand for lumber and related products is generally lower in the winter due to reduced construction activity, which increases during the spring, summer and fall.

6. Inventories:

 

Sept. 30, 2014

 

Dec. 31, 2013

 

Logs

$

65,938

 

$

89,170

Lumber

 

74,272

 

 

51,449

Other

 

10,921

 

 

8,890

 

$

151,131

 

$

149,509

Inventory expensed in the period includes production costs, depreciation of plant and equipment, and depletion and amortization of timber, roads and other. The inventory write-down in order to record inventory at the lower of cost and net realizable value at September 30, 2014 was $10,553,000 (December 31, 2013 - $7,926,000).

7. Cash and borrowings:

September 30, 2014

Operating
Line

 

Revolving
Term
Line

 

Senior
Secured Notes

 

U.S.
Operating
Line

 

Total

Available line of credit

$

65,000

 

$

250,000

 

$

56,040

 

$

33,624

 

$

404,664

Drawings

 

-

 

 

173,724

 

 

56,040

 

 

-

 

 

229,764

Outstanding letters of credit included in line utilization

 

10,606

 

 

-

 

 

-

 

 

633

 

 

11,239

Unused portion of line

$

54,394

 

$

76,276

 

$

-

 

$

32,991

 

$

163,661

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available line of credit

$

65,000

 

$

200,000

 

$

53,180

 

$

21,272

 

$

339,452

Drawings

 

936

 

 

90,619

 

 

53,180

 

 

744

 

 

145,479

Outstanding letters of credit included in line utilization

 

7,529

 

 

-

 

 

-

 

 

-

 

 

7,529

Unused portion of line

$

56,535

 

$

109,381

 

$

-

 

$

20,528

 

$

186,444

(a) Operating Line:

The Canadian operating line of credit ("Operating Line") may be drawn in either CAD$ or US$ advances, and bears interest at bank prime plus a margin or, at the Company's option, at rates for Bankers' Acceptances or LIBOR based loans plus a margin, and in all cases dependent upon a financial ratio of total debt divided by twelve months' trailing EBITDA1. Borrowing levels under the Operating Line are subject to a borrowing base calculation dependent on certain accounts receivable and inventories.

The Operating Line is secured by a general security agreement which includes a security interest in all accounts receivable and inventories, charges against timber tenures, and mortgage security on sawmills. The Operating Line is subject to certain financial covenants including a minimum working capital requirement, a maximum ratio of total debt to total capitalization and a minimum net worth calculation. The Operating Line matures on February 27, 2017.

As at September 30, 2014, the Operating Line was drawn by $10,606,000, being outstanding letters of credit (December 31, 2013 - drawings of $8,465,000).

During the first quarter, 2014, the Company drew US$22,500,000 under its Operating Line to fund its acquisition in the U.S. (see note 4), which it designated as a hedge against the Company's investment in its U.S. operations and recognized unrealized foreign exchange gains of $72,000 in Other comprehensive income for the first quarter, 2014 (2013 - $nil), after which this borrowing was transferred to the Revolving Term Line facility.

1 EBITDA represents earnings before interest, taxes, depreciation, depletion and amortization.

(b) Revolving Term Line:

The Revolving Term Line may be drawn in either CAD$ or US$ advances, and bears interest at bank prime plus a margin or, at the Company's option, at rates for Bankers' Acceptances or LIBOR based loans plus a margin, and in all cases dependent upon a financial rat io of total debt divided by twelve months' trailing EBITDA1. The Revolving Term Line matures on February 27, 2017.

The Revolving Term Line is secured by a general security agreement which includes a security interest in all accounts receivable and inventories, charges against timber tenures, and mortgage security on sawmills. The term line is subject to certain financial covenants including a minimum working capital requirement, a maximum ratio of total debt to total capitalization and a minimum net worth calculation.

On March 31, 2014, the Company increased the credit available under its Revolving Term Line from $200,000,000 to $250,000,000. All other terms and conditions of this line remained unchanged.

As at September 30, 2014, the Revolving Term Line was drawn by US$155,000,000 (December 31, 2013 - US$85,200,000), revalued at the quarter-end exchange rate to $173,724,000 (December 31, 2013 - $90,619,000). During the first quarter, 2014, the Company drew US$90,000,000 under its Revolving Term Line to fund its acquisition in the U.S. (see note 4), which it designated as a hedge against the Company's investment in its U.S. operations. As at September 30, 2014, total drawings under the Revolving Term Line designated as hedges against the Company's investment in its U.S. operations totalled US$155,000,000. Unrealized foreign exchange losses of $4,943,000 for the nine months ended September 30, 2014, (September 30, 2013 - $2,190,000 loss) arising on revaluation of the Revolving Term Line were recognized in Foreign currency translation differences in Other comprehensive income. For the third quarter, 2014, an unrealized exchange loss of $8,668,000 (Quarter 3, 2013 - $2,451,000 gain) was recognized in Other comprehensive income.

1 EBITDA represents earnings before interest, taxes, depreciation, depletion and amortization.

(c) Senior Secured Notes:

The Series A Senior Secured Notes ("Senior Secured Notes") bear interest at 4.33% and are subject to certain financial covenants including a minimum working capital requirement, a maximum ratio of total debt to total capitalization and a minimum net worth calculation. Payments of US$16,667,000 are required on each of June 26, 2021 and 2022, with the balance due on June 26, 2023.

As at September 30, 2014, Senior Secured Notes of US$50,000,000 were outstanding (December 31, 2013 - US$50,000,000) and revalued at the quarter-end exchange rate to $56,040,000 (December 31, 2013 - $53,180,000).

The Senior Secured Notes have been designated as a hedge against the Company's investment in its U.S. operations and unrealized foreign exchange losses of $2,860,000 (September 30, 2013 - $1,030,000 gain) arising on their revaluation were recognized in Foreign currency translation differences in Other comprehensive income for the nine months ended September 30, 2014. For the third quarter, 2014, an unrealized exchange loss of $2,660,000 (Quarter 3, 2013 - $1,075,000 gain) was recognized in Other comprehensive income.

(d) U.S. Operating Line:

The U.S. Operating Line is secured by accounts receivable and inventories of wholly-owned subsidiary, Interfor U.S. Inc., and matures on April 28, 2015. The U.S. Operating Line is subject to a minimum net worth calculation, with borrowing levels subject to a collateral calculation dependent upon certain accounts receivable and inventories.

On March 21, 2014, the Company increased the credit available under this agreement from US$20,000,000 to US$30,000,000.

As at September 30, 2014, the U.S. Operating Line was drawn by US$565,000 representing outstanding letters of credit, revalued at the quarter-end exchange rate to $633,000 (December 31, 2013 - $744,000).

Minimum principal amounts due on long-term debt within the next five years are as follows:

Twelve months ending

 

 

 

September 30, 2015

$

-

 

September 30, 2016

 

-

 

September 30, 2017

 

173,724

 

September 30, 2018

 

-

 

September 30, 2019

 

-

 

$

173,724

8. Share capital:

The transactions in share capital are described below:

 

Number

 

 

 

Common

 

Class B

 

Total

 

Amount

Balance, December 31, 2012

54,847,176

 

1,015,779

 

55,862,955

 

$ 346,365

Share exchange

1,015,779

 

(1,015,779

)

-

 

-

Shares issued for cash, net of share issue costs

7,187,500

 

-

 

7,187,500

 

82,358

Balance, December 31, 2013

63,050,455

 

-

 

63,050,455

 

428,723

Shares issued in business combination (see Note 4)

3,680,000

 

-

 

3,680,000

 

61,640

Balance, September 30, 2014

66,730,455

 

-

 

66,730,455

 

$ 490,363

On June 30, 2013, the Company closed a public offering of 7,187,500 Class A Subordinate Voting shares at a price of $12.00 per share for net cash proceeds of $82,358,000.

On August 23, 2013, the Company's controlling shareholder, Sauder Industries Limited ("SIL") exercised its right under the Company's Articles to exchange its Class B Common Shares for Class A Subordinate Voting Shares on a share for share basis without any cash or non-cash consideration. As a result of the exchange by SIL, all remaining Class B Shares were automatically converted to Class A Shares.

On March 14, 2014, the Company issued 3,680,000 Class A Subordinate Voting shares as a result of the acquisition of Tolleson Lumber Company (see note 4) at the listed share price of $16.75 per share as at March 14, 2014.

On May 6, 2014, the Company eliminated its Class B Common Shares, known as Multiple Voting Shares, and redesignated its Class A Subordinate Voting Shares as Common Shares.

9. Depreciation, depletion and amortization:

Depreciation, depletion and amortization can be allocated by function as follows:

 

3 Months

 

3 Months

 

9 Months

 

9 Months

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Production

$

19,555

 

$

15,920

 

$

57,579

 

$

44,223

Selling and administration

 

1,484

 

 

230

 

 

3,094

 

 

751

 

$

21,039

 

$

16,150

 

$

60,673

 

$

44,974

 

 

10. Restructuring costs:

 

 

 

 

 

 

 

 

 

 

 

 

3 Months

 

3 Months

 

9 Months

 

9 Months

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Write-down of plant and equipment

$

-

 

$

-

 

$

20,468

 

$

-

Severance

 

26

 

 

-

 

 

1,131

 

 

322

Other

 

-

 

 

-

 

 

1,673

 

 

-

 

$

26

 

$

-

 

$

23,272

 

$

322

During the second quarter, 2014, the Company curtailed its Beaver-Forks operation, located on the Olympic Peninsula in Washington, indefinitely. As a result, the Company recorded provisions for severance, remediation, and an onerous contract totaling $2,242,000, an impairment charge of $20,468,000 on the plant and equipment to reduce the carrying value of these assets to estimated fair values, partially offset by a deferred tax recovery of $8,487,000. The Beaver-Forks operation was permanently closed in the third quarter, 2014.

During the first nine months, 2014, the Company also recorded other severance costs of $562,000 (September 30, 2013 - $322,000), and $26,000 for the third quarter, 2014 (Quarter 3, 2013 - $nil).

11. Finance costs:

 

3 Months

 

3 Months

 

9 Months

 

9 Months

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Interest on borrowing

$

1,975

 

$

2,260

 

$

5,604

 

$

5,676

Interest (income) on defined benefit obligations

 

(10

)

 

48

 

 

(44

)

 

144

Loss in fair value of interest rate swaps

 

-

 

 

124

 

 

-

 

 

124

Accretion expense

 

151

 

 

168

 

 

490

 

 

371

Amortization of prepaid finance costs

 

231

 

 

162

 

 

597

 

 

657

 

$

2,347

 

$

2,762

 

$

6,647

 

$

6,972

12. Net earnings per share:

 

3 Months Sept. 30, 2014

3 Months Sept. 30, 2013

 

 

Net earnings

Weighted
Average
Number of
Shares

Per share

Net earnings (loss)

 

Weighted
Average
Number of
Shares

Per share

 

Issued shares at June 30

 

 

66,730

 

 

 

 

 

55,863

 

 

 

Effect of shares issued on:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

-

 

 

 

 

 

78

 

 

 

Basic and diluted earnings per share

$

10,994

66,730

$

0.16

$

(130

)

55,941

$

(0.00

)

 

 

 

 

 

 

 

 

 

9 Months Sept. 30, 2014

9 Months Sept. 30, 2013

 

 

Net earnings

Weighted
Average
Number of
Shares

Per share

Net earnings

 

Weighted
Average
Number of
Shares

Per share

 

 

 

Issued shares at December 31

 

 

63,050

 

 

 

 

 

55,863

 

 

 

Effect of shares issued on:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

-

 

 

 

 

 

26

 

 

 

 

March 14, 2014

 

 

2,710

 

 

 

 

 

-

 

 

 

Basic and diluted earnings per share

$

45,877

65,760

$

0.70

$

30,808

 

55,889

$

0.55

 

The Company has no dilutive securities.

13. Segmented information:

The Company manages its business as a single operating segment, solid wood. The Company purchases and harvests logs which are then manufactured into lumber products at the Company's sawmills, or sold. Substantially all of the Company's operations are located in British Columbia, Canada, and the Pacific Northwest and Southeast regions of the U.S.A.

Sales by market are as follows:

 

3 Months

 

3 Months

 

9 Months

 

9 Months

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Sept. 30, 2014

 

Sept. 30, 2013

 

United States

$

229,196

 

$

130,385

 

$

617,608

 

$

394,039

Canada

 

64,989

 

 

54,364

 

 

175,955

 

 

165,279

China/Taiwan

 

47,037

 

 

37,490

 

 

130,622

 

 

91,826

Japan

 

27,533

 

 

30,318

 

 

95,891

 

 

88,910

Other export

 

4,369

 

 

20,150

 

 

38,107

 

 

49,850

 

$

373,124

 

$

272,707

 

$

1,058,183

 

$

789,904

 

 

 

 

 

 

 

 

 

 

 

 

Sales by product line are as follows:

 

3 Months

 

3 Months

 

9 Months

 

9 Months

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Sept. 30, 2014

 

Sept. 30, 2013

 

Lumber

$

303,020

 

$

212,222

 

$

858,636

 

$

623,107

Logs

 

34,380

 

 

36,592

 

 

107,375

 

 

95,345

Wood chips and other by-products

 

28,262

 

 

18,446

 

 

76,441

 

 

52,464

Ocean freight and other

 

7,462

 

 

5,447

 

 

15,731

 

 

18,988

 

$

373,124

 

$

272,707

 

$

1,058,183

 

$

789,904

14. Financial instruments:

At September 30, 2014, the fair value of the Company's long-term debt approximated its carrying value of $229,764,000 (December 31, 2013 - $145,479,000) measured based on Level 2 of the fair value hierarchy.

As at September 30, 2014, the Company has outstanding obligations to sell a maximum of US$13,200,000 at an average rate of CAD$1.1001 to US$1.00 during 2014 and ¥101,155,000 at an average rate of ¥101.155 to US$1.00 during 2014. Unrealized foreign currency gains or losses to September 30, 2014, have been recognized in Other foreign exchange gain (loss) in Net earnings and the fair value of these foreign currency contracts, being a liability of $183,000 (measured based on Level 2 of the fair value hierarchy), has been recorded in Trade accounts payable and provisions (December 31, 2013 - $136,000 asset).

On April 14, 2014, the Company entered into two new interest rate swaps, each with a notional value of US$25 million and maturing on April 14, 2016. Under the terms of these swaps, the Company pays an amount based on a fixed annual interest rate of 0.58% and receives a 90 day LIBOR which is recalculated at set interval dates. The intent of the interest rate swaps is to convert floating-rate interest expense to fixed-rate interest expense.

At September 30, 2014, the fair value of the Company's four interest rate swaps, designated as cash flow hedges, being an asset of $277,000 (measured based on Level 2 of the fair value hierarchy), has been recorded in Trade accounts receivable and other (December 31, 2013 - $166,000 asset) and a gain of $111,000 (September 30, 2013 - $218,000 gain) has been recognized in Other comprehensive income for the first nine months of 2014. For the third quarter, 2014, a gain of $328,000 was recognized in Other comprehensive income (Quarter 3, 2013 - $362,000 loss recognized in Other comprehensive income, and a loss of $124,000 recognized in Finance costs including the reclassification of a loss in fair value of interest rate swaps of $58,000 from Other comprehensive income to Finance costs).

15. Commitment:

Upon acquisition of the Thomaston sawmill operations from Keadle Lumber Enterprises, Inc., the Company agreed to pay an additional US$7,000,000, contingent upon receipt of an upgrade to the air permit which will allow the Company to operate a second shift . Receipt of this approval was received on February, 28, 2014, with the payment to be made February 27, 2015. The liability, revalued at the quarter-end exchange rate to $7,846,000, is included in Trade accounts payable and provisions as at September 30, 2014.

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