MONTREAL, May 2 /CNW Telbec/ - Consolidated sales for the three-month period ended March 29, 2008 were $593 million, down from $714 million in the comparable period of the prior year. The Company generated a net loss of $42 million or $0.49 per share in the months of January and February 2008 and a net loss of $17 million or $0.17 per share during the month of March 2008. This compares to a net loss of $45 million or $0.54 per share in the comparable three-month period of the prior year. The financial results of the most recent quarter include two distinct components due to a financial recapitalization that occurred on February 29, 2008, triggering the requirement for the Company to implement "fresh start" accounting as of that date. Earnings before unusual items, interest, income taxes, depreciation, amortization and other non-operating expenses (EBITDA) was negative $1 million for the three-month period ended March 29, 2008, as compared to EBITDA of $24 million a year ago and negative EBITDA of $16 million in the prior quarter.
Business Segment Results
------------------------
The Forest Products segment generated negative EBITDA of $31 million on sales of $153 million. This compares to negative EBITDA of $22 million on sales of $152 million in the prior quarter. Sales remained relatively unchanged, with seasonally higher by-product sales offsetting lower prices and volumes for lumber and engineered wood. US $ reference prices for random lumber decreased by approximately US $24 per mbf while stud lumber decreased by US $22 per mbf. Currency provided a partial offset as the Canadian $ averaged US $0.997, a 2% decrease from US $1.018 in the prior quarter. The net price effect was a decrease in EBITDA of $3 million or $12 per mbf. Operating costs were higher as the colder winter months normally have a negative impact on sawmill operating efficiencies. During the quarter, the Company incurred $2 million of lumber export taxes, down from $3 million in the prior quarter. Lower selling prices generated the lower export taxes. Lumber export taxes are payable based on the 2006 agreement between Canada and the United States. Applicable export tax rates vary based upon selling prices. During the March quarter, the Company incurred a tax of 5% on Eastern shipments and 15% on Western shipments, unchanged from the prior quarter.
The Pulp segment generated EBITDA of $42 million on sales of $369 million for the quarter ended March 2008 compared to EBITDA of $21 million on sales of $311 million in the December 2007 quarter. Higher volumes and selling prices for all grades of pulp generated the $58 million increase in sales. US $ reference prices increased for all grades of pulp. Currency was also favourable, as the Canadian $ averaged US $0.997, a 2% decrease from US $1.018 in the prior quarter. The total price effect was an increase of $52 per tonne, increasing EBITDA by $25 million. Mill level costs decreased by $7 million, primarily due to lower maintenance costs. In the prior quarter, the Company incurred 26,900 tonnes of maintenance downtime, including 8,300 tonnes related to equipment failures at the Tarascon paper pulp mill and the Temiscaming specialty pulp mill. This compares to only 200 tonnes of downtime taken in the most recent quarter. The reduction in costs would have been greater if not for increases in energy, chemicals and transportation. As well, the stronger Euro led to a $7 million increase in the reported costs of the three French pulp mills. Inventories were at 25 days of supply at the end of March, up from only 24 days at the end of December. These are relatively low levels indicative of the strength of the current pulp market.
The Paper segment generated negative EBITDA of $7 million on sales of $98 million. This compares to negative EBITDA of $12 million on sales of $99 million in the prior quarter. The sales decrease of $1 million was due to higher effective prices offset by lower shipments. The US $ reference price for newsprint increased by US $46 per tonne while the reference price for coated bleached board increased by US $23 per short ton. Currency favourably impacted sales as the Canadian $ averaged US $0.997, a 2% decrease from US $1.018 in the prior quarter. The net price effect was an increase of $53 per tonne, increasing EBITDA by $7 million. Manufacturing costs remained relatively unchanged from those of the prior quarter. The Company incurred 17,100 tonnes of market related downtime and 500 tonnes of maintenance downtime in the March 2008 quarter compared to 17,400 tonnes of market related downtime and 3,700 tonnes of maintenance downtime in the prior quarter.
Recapitalization
----------------
On February 29, 2008, the Company completed a financial recapitalization
plan with the following key financial elements:
- Conversion of US $1.2 billion of Tembec's Unsecured Senior Notes into
new equity.
- Implementation of a new 4-year term loan of US $300 million to provide
additional liquidity.
- Reduction of Tembec's annual interest expense by approximately
$67 million.
Tembec's trade creditors, as well as its obligations to employees,
including under its pension and benefit plans, were unaffected by the
recapitalization.
Outlook
-------
Overall, the March quarterly operating results were an improvement over
the previous quarter, but remained well below acceptable levels. The extremely
low US $ lumber selling prices experienced over the last several months offset
most of the gains in pulp. As well, higher prices for fossil fuel are
increasing the cost of transportation, chemicals as well as direct energy
purchases. Looking ahead, lumber markets will remain challenging as there are
no clear signs of a US housing recovery nor adequate production curtailments
to balance the market. Pulp markets are expected to remain robust and price
increases have already been announced for the June quarter. Newsprint prices
increased in the March quarter and additional increases are anticipated during
the June quarter. As for the Company, it will continue to focus on
controllable items such as costs and operating efficiency. With the
recapitalization transaction successfully concluded, management can turn its
full attention to managing the business. Despite the significant reduction in
interest expense, the Company is not yet cash flow positive and this will be
an area of considerable focus in the coming quarters.
Tembec is a large, diversified and integrated forest products company
which stands as the global leader in sustainable forest management practices.
With operations principally located in North America and in France, the
Company employs approximately 8,000 people. Tembec's common shares are listed
on the Toronto Stock Exchange under the symbol TMB and warrants under TMB.WT.
Additional information on Tembec is available on its website at
www.tembec.com.
This press release includes "forward-looking statements" within the
meaning of securities laws. Such statements relate to the Company's or
management's objectives, projections, estimates, expectations or predictions
of the future and can be identified by words such as "anticipate", "estimate",
"expect", " will" and "project" or variations of such words. These statements
are based on certain assumptions and analyses made by the Company in light of
its experience and its perception of future developments. Such statements are
subject to a number of risks and uncertainties, including, but not limited to,
changes in foreign exchange rates, product selling prices, raw material and
operating costs and other factors identified in our periodic filings with
securities regulatory authorities. Many of these risks are beyond the control
of the Company and, therefore, may cause actual actions or results to
materially differ from those expressed or implied herein The Company disclaims
any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
-------------------------------------------------------------------------
TEMBEC INC.
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
(unaudited) (in millions of dollars)
The The
Company Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mar. 29, Feb. 29 Sep. 29,
2008 2008 2007
(Note 1) (Audited)
-------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 65 $ 116 $ 14
Accounts receivable 376 344 347
Inventories 501 474 436
Prepaid expenses 22 20 15
Current assets from discontinued
operations (note 2) 5 5 18
-------------------------------------------------------------------------
969 959 830
Investments 29 29 28
Fixed assets 685 688 1,584
Other assets 46 44 146
Future income taxes - - 67
-------------------------------------------------------------------------
$ 1,729 $ 1,720 $ 2,655
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities:
Bank Indebtedness $ 9 $ 7 $ -
Operating bank loans 71 62 89
Accounts payable and accrued charges 348 351 363
Interest payable - - 17
Current portion of long-term debt
(note 3) 21 21 26
Current liabilities related to
discontinued operations (note 2) 3 2 6
-------------------------------------------------------------------------
452 443 501
Long-term debt (note 3) 429 414 1,314
Other long-term liabilities and
credits (note 4) 229 231 125
Future income taxes 26 24 93
Minority interest - - 5
Redeemable preferred shares - - 26
Non-current liabilities related to
discontinued operations (note 2) 39 38 25
Shareholders' equity:
Share capital (note 5) 570 570 831
Contributed surplus 1 - 9
Accumulated other comprehensive loss - - (3)
Deficit (17) - (271)
-------------------------------------------------------------------------
554 570 566
-------------------------------------------------------------------------
$ 1,729 $ 1,720 $ 2,655
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TEMBEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------
(unaudited) (in millions of dollars, unless otherwise noted)
The Company The Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
One Two Three Five Six
month months months months months
to to to to to
Mar. 29, Feb. 29, Mar. 31, Feb. 29, Mar. 31,
2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Sales $ 188 $ 405 $ 714 $ 950 1,363
Freight and sales
deductions 22 48 80 111 155
Lumber export
taxes (note 6) 1 1 5 4 8
Cost of sales 156 335 570 804 1,096
Selling, general
and administrative 9 22 35 48 66
Depreciation and
amortization 8 30 43 72 88
Recovery of lumber
duties (note 7) - - - - (238)
Restructuring and
asset impairment
charges (note 7) - (1) - - 29
Gain on land sales
and other (note 7) - - (4) (20) (12)
-------------------------------------------------------------------------
Operating earnings
(loss) from
continuing
operations (8) (30) (15) (69) 171
Interest, foreign
exchange and other
(note 8) (9) 1 36 32 22
Exchange loss (gain)
on long-term debt 16 7 (13) (9) 48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss)
from continuing
operations
before income
taxes and
share of
earnings of
related
companies (15) (38) (38) (92) 101
Income tax expense
(recovery) (note 9) - 3 (1) 6 (5)
Share in earnings
of related companies - - (2) - (3)
-------------------------------------------------------------------------
Net earnings (loss)
from continuing
operations (15) (41) (35) (98) 109
Loss from
discontinued
operation (note 2) (2) (1) (10) (4) (16)
-------------------------------------------------------------------------
Net earnings (loss) $ (17) $ (42) $ (45) $ (102) $ 93
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings (loss)
per share from
continuing
operations
(note 5) $ (0.15) $ (0.47) $ (0.42) $ (1.14) $ 1.27
Basic and
diluted loss
per share from
discontinued
operations
(note 5) $ (0.02) $ (0.02) $ (0.12) $ (0.05) $ (0.19)
Basic and diluted
earnings (loss)
per share
(note 5) $ (0.17) $ (0.49) $ (0.54) $ (1.19) $ 1.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TEMBEC INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
-------------------------------------------------------------------------
(unaudited) (in millions of dollars)
The Company The Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
One Two Three Five Six
month months months months months
to to to to to
Mar. 29, Feb. 29, Mar. 31, Feb. 29, Mar. 31,
2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings (loss) $ (17) $ (42) $ (45) $ (102) $ 93
Other comprehensive
income (loss):
Exchange
translation of
foreign
subsidiaries - - - - -
-------------------------------------------------------------------------
Comprehensive
income (loss) $ (17) $ (42) $ (45) $ (102) $ 93
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
-------------------------------------------------------------------------
The Company The Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
One Two Three Five Six
month months months months months
to to to to to
Mar. 29, Feb. 29, Mar. 31, Feb. 29, Mar. 31,
2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Retained earnings
(deficit),
beginning of
period $ - $ (331) $ (84) $ (271) $ (249)
Adjustment
resulting from
a change in
accounting policies - - - - 27
-------------------------------------------------------------------------
Restated
retained
earnings
(deficit),
beginning of
period - (331) (84) (271) (222)
Net earnings (loss) (17) (42) (45) (102) 93
-------------------------------------------------------------------------
(17) (373) (129) (373) (129)
Adjustment for
fresh start - 373 - 373 -
-------------------------------------------------------------------------
Retained earnings
(deficit),
end of period $ (17) $ - $ (129) $ - $ (129)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TEMBEC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
(unaudited) (in millions of dollars)
The Company The Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
One Two Three Five Six
month months months months months
to to to to to
Mar. 29, Feb. 29, Mar. 31, Feb. 29, Mar. 31,
2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows
from operating
activities:
Net earnings
(loss) $ (17) $ (42) $ (45) $ (102) $ 93
Adjustments for:
Loss from
discontinued
operations
(note 2) 2 1 10 4 16
Depreciation
and
amortization 8 30 43 72 88
Unrealized
foreign
exchange
and others
(note 8) 2 (2) 4 (2) 6
Exchange
loss
(gain) on
long-term
debt 16 7 (13) (9) 48
Future
income taxes
(recovery)
(note 9) - 3 (1) 6 (43)
Utilization
(recognition)
of investment
tax credits (2) (3) - (7) 33
Restructuring
and asset
impairment
charges (note 7) - (1) - - 17
Gain on land
sales and
other (note 7) - - (4) (20) (12)
Differences
between cash
contributions
and pension expense (2) (4) (7) (8) (8)
Other 1 3 - 5 -
-------------------------------------------------------------------------
8 (8) (13) (61) 238
Changes in
non-cash
working capital:
Accounts
receivable (21) (9) (43) 22 (19)
Inventories (21) (32) (64) (54) (105)
Prepaid expenses (1) (8) (5) (4) (8)
Accounts payable
and accrued charges (18) (4) 10 (26) (12)
-------------------------------------------------------------------------
(61) (53) (102) (62) (144)
-------------------------------------------------------------------------
(53) (61) (115) (123) 94
-------------------------------------------------------------------------
Cash flows from
investing activities:
Reduced
participation
in joint venture - - - (5) -
Additions to fixed
assets (4) (10) (15) (23) (28)
Proceeds on land sales - - 2 17 11
Decrease in
investments - 2 - 2 -
Other - - 2 1 -
-------------------------------------------------------------------------
(4) (8) (11) (8) (17)
Cash flows
from financing
activities:
Change in
operating
bank loans 9 (97) 6 (27) (87)
Increase in
long-term
debt - 295 23 300 40
Repayments of
long-term
debt (1) (3) (6) (5) (9)
Increase
(decrease)
in other
long-term
liabilities (2) (1) 2 (3) (3)
Recapitalization
fees and other - (36) (2) (36) (1)
-------------------------------------------------------------------------
6 158 23 229 (60)
Cash generated
(used) by
continuing
operations (51) 89 (103) 98 17
Cash used by
discontinued
operations
(note 2) (2) (1) (8) (4) (13)
-------------------------------------------------------------------------
Foreign exchange
on cash and
cash equivalents
held in foreign
currencies - 1 - 1 -
-------------------------------------------------------------------------
Net increase
(decrease) in
cash and cash
equivalents (53) 89 (111) 95 4
Cash and cash
equivalents,
net of bank
indebtedness,
beginning
of period 109 20 141 14 26
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash
equivalents,
net of bank
indebtedness,
end of period $ 56 $ 109 $ 30 $ 109 30
-------------------------------------------------------------------------
Supplemental
information:
Interest paid $ - $ 44 $ 44 $ 48 $ 65
Income taxes
paid (recovered) $ - $ (1) $ 2 $ (1) $ 2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TEMBEC INC.
CONSOLIDATED BUSINESS SEGMENT INFORMATION
-------------------------------------------------------------------------
(unaudited) (in millions of dollars)
The Company
Month ended
March 29, 2008
-------------------------------------------------------------------------
Corpo-
Forest Chemi- rate Conso-
products Pulp Paper cals & other lidated
-------------------------------------------------------------------------
Sales:
External $ 36 $ 112 $ 32 $ 8 $ - $ 188
Internal 14 4 - 1 - 19
-------------------------------------------------------------------------
50 116 32 9 - 207
Earnings (loss)
before
the following (10) 13 (1) - (2) -
Depreciation
and amortization 3 5 - - - 8
Other items (note 7) - - - - - -
Operating earnings
(loss) from
continuing
operations (13) 8 (1) - (2) (8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net fixed
asset additions - 3 1 - - 4
-------------------------------------------------------------------------
The Predecessor
Two months ended
February 29, 2008
-------------------------------------------------------------------------
Corpo-
Forest Chemi- rate Conso-
products Pulp Paper cals & other lidated
-------------------------------------------------------------------------
Sales:
External $ 76 $ 240 $ 66 $ 23 $ - $ 405
Internal 27 13 - - 1 41
-------------------------------------------------------------------------
103 253 66 23 1 446
Earnings
(loss) before
the following (21) 29 (6) 2 (5) (1)
Depreciation
and amortization 10 13 6 - 1 30
Other items (note 7) (1) 1 (1) - - (1)
Operating earnings
(loss) from
continuing
operations (30) 15 (11) 2 (6) (30)
-------------------------------------------------------------------------
Net fixed asset
additions 1 9 1 - (1) 10
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Predecessor
Quarter ended
March 31, 2007
-------------------------------------------------------------------------
Corpo-
Forest Chemi- rate Conso-
products Pulp Paper cals & other lidated
-------------------------------------------------------------------------
Sales:
External $ 174 $ 364 $ 133 $ 43 $ - $ 714
Internal 39 18 - 1 1 59
-------------------------------------------------------------------------
213 382 133 44 1 773
Earnings
(loss) before
the following (21) 43 7 3 (8) 24
Depreciation and
amortization 14 18 9 1 1 43
Other items (note 7) (4) - - - - (4)
Operating earnings
(loss) from
continuing
operations (31) 25 (2) 2 (9) (15)
-------------------------------------------------------------------------
Net fixed asset
additions 3 10 1 1 - 15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company
Month ended
March 29, 2008
-------------------------------------------------------------------------
Corpo-
Forest Chemi- rate Conso-
products Pulp Paper cals & other lidated
-------------------------------------------------------------------------
Sales:
External $ 36 $ 112 $ 32 $ 8 $ - $ 188
Internal 14 4 - 1 - 19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
50 116 32 9 - 207
Earnings
(loss) before
the following (10) 13 (1) - (2) -
Depreciation and
amortization 3 5 - - - 8
Other items (note 7) - - - - - -
Operating earnings
(loss) from
operations (13) 8 (1) - (2) (8)
-------------------------------------------------------------------------
Net fixed asset
additions - 3 1 - - 4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Predecessor
Five months ended
February 29, 2008
-------------------------------------------------------------------------
Corpo-
Forest Chemi- rate Conso-
products Pulp Paper cals & other lidated
-------------------------------------------------------------------------
Sales:
External $ 196 $ 533 $ 165 $ 56 $ - $ 950
Internal 59 31 - 1 2 93
-------------------------------------------------------------------------
255 564 165 57 2 1,043
Earnings (loss)
before the
following (43) 50 (18) 4 (10) (17)
Depreciation
and amortization 23 31 15 1 2 72
Other items (note 7) (18) (3) (1) - 2 (20)
Operating earnings
(loss) from
continuing
operations (48) 22 (32) 3 (14) (69)
-------------------------------------------------------------------------
Net fixed asset
additions 2 19 2 1 (1) 23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Predecessor
Six months ended
March 31, 2007
-------------------------------------------------------------------------
Corpo-
Forest Chemi- rate Conso-
products Pulp Paper cals & other lidated
-------------------------------------------------------------------------
Sales:
External $ 344 $ 669 $ 265 $ 85 $ - $ 1,363
Internal 73 40 - 2 1 116
-------------------------------------------------------------------------
417 709 265 87 1 1,479
Earnings
(loss) before
the following (34) 65 16 5 (14) 38
Depreciation and
amortization 28 38 18 2 2 88
Other items (note 7) (250) 29 - - - (221)
Operating earnings
(loss) from
continuing operations 188 (2) (2) 3 (16) 171
-------------------------------------------------------------------------
Net fixed asset
additions 6 19 2 1 - 28
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------
(unaudited) (in millions of dollars, unless otherwise noted)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1. Basis of Presentation
Plan of Arrangement
On December 19, 2007, Tembec Inc. (the "Predecessor") announced a proposed
recapitalization transaction and had executed support agreements with an ad
hoc committee of noteholders.
On January 25, 2008, details of the proposed recapitalization were
provided in an information circular and distributed to noteholders and
existing shareholders.
On February 22, 2008, the plan of arrangement and recapitalization
(the "Plan") was approved by noteholders and existing shareholders.
On February 29, 2008, the Predecessor implemented the plan having the
following key elements:
- Conversion of US $1.2 billion of Tembec's senior unsecured debt into
equity of the "Company";
- Noteholders received 88% of the equity of the Company in full
settlement of their notes;
- An additional 7% of the equity of the Company was allocated to
noteholders who backstopped the new loan described below;
- Existing shareholders received 5% of the equity of the Company and
"cashless" warrants to acquire additional shares; and
- A new four year term loan of US $300 million was implemented to provide
additional liquidity.
The Company's balance sheet as at February 29, 2008 has been prepared
under the provisions of the Canadian Institute of Chartered Accountants
("CICA") Handbook Section ("HB") 1625, "Comprehensive Revaluation of Assets
and Liabilities" ("fresh start accounting"). Under fresh start accounting, the
Company was required to determine its enterprise value. The enterprise value
of $570 million was determined based on the fair value of the unsecured debt
converted into equity and of the issuance of common shares and cashless
warrants to the shareholders of the Predecessor. In conjunction with the
Predecessor's reorganization proceedings, independent third party valuations
were also obtained to assist with the allocation of the fair value to the
individual assets and liabilities.
The Predecessor's financial information has been presented to provide
additional information for the reader. In reviewing the Predecessor's
financial information, readers are reminded that they do not reflect the
effects of the financial reorganization or the application of its accounting
described below. Certain amounts presented in the Predecessor's financial
information have been reclassified to conform with the presentation adopted by
the Company.
The following table summarizes the impact of adjustments required to
implement the Plan and to reflect the adoption of fresh start accounting:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Feb. 29, Feb. 29,
2008 Adjustments 2008
----------------------------
Balance Plan of Equity Fresh Balance
prior Arrange- and Other Start after
to Plan ment Financing Accoun- Plan
Implemen- Trans- ting
tation actions
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash
equivalents $ 15 $ - $ 101(3) $ - $ 116
Accounts receivable 341 - - 3(5e) 344
Inventories 488 - - (14)(5a) 474
Prepaid expenses 20 - - - 20
Current assets from
discontinued
operations 5 - - - 5
-------------------------------------------------------------------------
869 - 101 (11) 959
Investments 30 - - (1)(5b) 29
Fixed assets 1,515 - - (827)(5a) 688
Other assets 194 - (12)(2) (114)(5c) 44
- - (24)(3) - -
Future income taxes 45 - - (45)(5e) -
-------------------------------------------------------------------------
$ 2,653 $ - $ 65 $ (998) $ 1,720
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and
Shareholders'
equity
Current
liabilities:
Bank
Indebtedness $ 7 $ - $ - $ - $ 7
Operating bank
loans 227 - (165)(3) - 62
Accounts payable
and accrued
charges 354 - (4)(3) 1(5e) 351
Interest payable 25 - (25)(3) - -
Current portion of
long-term debt 21 - - - 21
Current liabilities
related to
discontinued
operations 2 - - - 2
-------------------------------------------------------------------------
636 - (194) 1 443
Long-term debt 1,302 (1,181)(1) 295(3) - 414
- - (2)(4) - -
Unamortized financing
items (2) 2(1) (24)(3) 24(5c) -
Other long-term
liabilities 125 - - 106(5d) 231
Future income taxes 77 - - (53)(5e) 24
Redeemable preferred
shares 26 - (26)(4) - -
Non-current liabilities
related to discontinued
operations 25 - - 13(5d) 38
Shareholders' equity:
Share capital 831 - 558(2) (819)(6a) 570
Contributed Surplus 9 1,179(1) (570)(2) (618)(6b) -
- - 28(4) (28)(6b)
Accumulated other
comprehensive loss (3) - - 3(6b) -
Deficit (373) - - 373(6b) -
-------------------------------------------------------------------------
464 1,179 16 (1,089) 570
-------------------------------------------------------------------------
$ 2,653 $ - $ 65 $ (998) $ 1,720
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Plan of Arrangement Adjustments
In conjunction with the Plan of Arrangement approved by the Ontario
Superior Court of Justice, certain amounts classified as "Accounts payable and
accrued liabilities" and "Long-term debt" were subject to recapitalization.
Liabilities subject to recapitalization recorded as at February 29, 2008
amounted to $1,179 million.
Under the Plan of Arrangement, the capital reorganization provided for the
following:
(1) The cancellation of the Indentures and the irrevocable extinguishment
and elimination of all of the Noteholders' entitlements with respect
to the Existing Notes and the Indentures. Such Noteholders' were
entitled to their pro rata share, based on the face amount of
Existing Notes held, of 45% of the recapitalized equity of the
Company. In addition, Noteholders had an opportunity to participate
as lenders in the New Loan and be entitled to an additional 43% of
the recapitalized equity of the Company (see below).
Equity and Other Financial Transactions Adjustments
(2) As part of the Plan of Arrangement, Noteholders received 95% or
95 million New Common Shares of the recapitalized equity of the
Company having a fair value of $542 million of the total of
$570 million. Issuance costs amounted to $12 million.
(3) As part of the Plan of Arrangement, Qualifying Noteholders had the
opportunity to participate in the New Loan in a maximum principal
amount of US $300 million. Gross proceeds of $295 million were used
to pay $4 million of fees and $25 million of unpaid Noteholders
interest to the end of December. An amount of $165 million was set
aside to repay the CIT facility. The balance will be used for capital
expenditures and general corporate purposes. Fees amounted to
$24 million.
(4) The Company refinanced the 6% Investissement Quebec notes having a
total carrying value of $20 million with a new $18 million 6% note
having a maturity of September 30, 2011. The Class B Series 2 and
Class B Series 4 Shares totalling $26 million were cancelled without
consideration.
Fresh Start Accounting Ajustments
As a result of the substantial realignment of equity and non-equity
interests, the identifiable assets and liabilities of the Company have been
revalued to reflect the expected fair values of such assets and liabilities,
as required under the CICA Handbook Section 1625 - Comprehensive Revaluation
of Assets and Liabilities ("CICA 1625"). The process of undertaking such a
comprehensive revaluation is commonly referred to as "fresh start accounting".
The Company was required to perform a comprehensive balance sheet
revaluation under the provisions of CICA 1625. Under fresh start accounting,
the Company performed an assessment of the fair value of identifiable assets
and liabilities, whether or not previously recorded. The adjustments were to
revalue assets and liabilities that met the recognition criteria under
Canadian Generally Accepted Accounting Principles ("GAAP") on a new cost
basis. Under CICA 1625, goodwill is not recorded even if the net fair value of
identifiable assets and liabilities is less than the fair value of the Company
equity upon the Implementation Date.
For purpose of this unaudited consolidated balance sheet, the fair values
ascribed to the assets and liabilities are fair values as at February 29, 2008
and are based on the guidance provided in CICA Handbook Section 1581- Business
Combinations. These fair values are subject to change to the extent of further
valuation reports and analysis.
(5) The fair value adjustments are as follows:
(a) The carrying value of "inventories" relating to slow moving spare
parts and "fixed assets" are adjusted to reflect estimated fair
value;
(b) "Investments" are adjusted to fair value;
(c) "Other assets" and "Deferred credits" including deferred
financing costs, goodwill, timber and cutting rights are adjusted
to nil;
(d) "Pension assets" and employee future benefit obligations included
in "other long-term liabilities" are adjusted to reflect the
accrued benefit obligation based on management's best estimate
assumptions on a going forward basis; plan assets are adjusted to
fair value;
(e) "Future income taxes" have been adjusted to reflect the tax
effects of differences between the fair value of identifiable
assets and liabilities and their estimated tax bases and the
benefits of any unused tax losses and other deductions to the
extent that these amounts are more likely than not to be
realized. The resulting future income tax amounts have been
measured based on the rates substantively enacted that are
expected to apply when the temporary differences reverse or the
unused tax losses and other reductions are realized. This future
income tax liability does not represent an actual cash tax
liability due by the Company. In addition, the Company has
reflected a valuation allowance against certain of its estimated
future income tax assets. Any reversal of this valuation
allowance in future periods will result in a credit to
shareholders' equity. The estimated future income tax assets are
based on numerous assumptions and dependent upon complex tax
issues including the quantum of debt forgiveness that must be
recognized by the Company. Consequently, the actual future income
tax assets may depart from the ones disclosed herein;
(6) Shareholders' equity adjustments relate to:
(a) the net fair value adjustment to assets and liabilities; and
(b) the reclassification of the "Deficit" and other "Shareholders'
equity" balances that arose prior to the fresh start to share
capital.
Significant accounting policies
These consolidated financial statements are prepared in accordance with
Canadian GAAP, which require management to make assumptions and estimates that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. The Company has adopted the
significant policies and their methods of application of the Predecessor. The
detailed accounting policies are as noted in the most recent annual audited
financial statements of the Predecessor.
Changes in accounting policies
The Company adopted the new recommendation of the CICA Handbook
Section 3031, Inventories. This section which is effective for year ends
beginning January 1, 2008, requires that inventories be measured at the lower
of cost and net realizable value. The implementation of this new policy did
not have an impact on the results of the Company.
The Company adopted the new recommendations of the CICA Handbook
Section 3862, Financial Instruments-Disclosures, Section 3863, Financial
Instruments-Presentation, and Section 1535, Capital Disclosures. These new
Handbook sections are effective for interim and annual financial statements
beginning on or after October 1, 2007. Section 3862 requires an increased
emphasis on disclosing the nature and the extent of risk arising from
financial instruments and how the Company manages those risks. Section 3863,
establishes standards for presentation of financial instruments and
non-financial derivatives. Sections 3862 and 3863 replaced Section 3861,
Financial Instruments-Disclosures and Presentation. Section 1535 requires the
Company to disclose information to enable users of its financial statements to
evaluate the Company's objectives, policies and processes for managing
capital. Other than the additional disclosure in the notes to these financial
statements, the adoption of these Sections had no impact on the financial
results of the Company.
Business of the Company
The Company operates an integrated forest products business. The
performance of each segment is evaluated by the management of the Company
against short-term and long-term financial objectives as well as
environmental, safety and other key criteria. The Forest Products segment
consists primarily of forest and sawmill operations, which produce lumber and
building materials. The Pulp segment includes the manufacturing and marketing
activities of a number of different types of pulps. The Paper segment consists
primarily of production and sales of newsprint and bleached board. The
Chemicals segment consists primarily of the transformation and sale of resins
and pulp by-products. Intersegment transfers of wood chips, pulp and other
services are recorded at transfer prices agreed to by the parties, which are
intended to approximate fair market value. The accounting policies used in
these business segments are the same as those described in the annual audited
consolidated financial statements of the Predecessor.
2. Discontinued operations
In July 2007, the Predecessor indefinitely idled its coated paper facility
in St. Francisville, Louisiana. Despite efforts to restructure the operation,
the mill's financial performance remained relatively poor. As a result of the
change in circumstances, the Predecessor recorded an asset impairment charge
of $173 million in the June 2007 quarter. The Predecessor has not identified a
feasible restructuring plan to resume operations at the facility. As well, the
Predecessor has retained the services of an outside party to actively seek the
sale of the site. As this operation is the only coated paper facility owned by
the Predecessor, its financial results have been reclassified as discontinued
operations. Comparative figures have also been reclassified to exclude the
coated paper results from the Predecessor's continuing operations.
Condensed earnings from discontinued operations related to the
St. Francisville facility are as follows:
The Company The Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
One Two Three Five Six
month months months months months
to to to to to
Mar. 29, Feb. 29, Mar. 31 Feb. 29, Mar. 31
2008 2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales $ - $ 1 $ 76 $ 2 $ 151
Operating loss $ (1) $ - $ (10) $ (4) $ (14)
Financial Expenses $ 1 $ 1 $ - $ - $ 2
Loss from
discontinued
operations $ (2) $ (1) $ (10) $ (4) $ (16)
-------------------------------------------------------------------------
Loss per common
share from
discontinued
operations $ (0.02) $ (0.02) $ (0.12) $ (0.05) $ (0.19)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Condensed cash flows from discontinued operations related to the
St. Francisville facility are as follows:
The Company The Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
One Two Three Five Six
month months months months months
to to to to to
Mar. 29, Feb. 29, Mar. 31 Feb. 29, Mar. 31
2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows from
operating
activities $ (2) $ (1) $ (7) $ (4) $ (10)
Cash flows from
investing
activities - - (1) - (3)
-------------------------------------------------------------------------
Cash flows used by
discontinued
operations $ (2) $ (1) $ (8) $ (4) $ (13)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
3. Long-term debt
The Prede-
The Company cessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mar. 29, Feb. 29, Sept. 29,
Maturity 2008 2008 2007
-------------------------------------------------------------------------
Tembec Inc. - 6% unsecured
notes 09/2012 $ 18 $ 18 $ -
Tembec Inc. - 6% unsecured
notes 09/2009 - - 20
Tembec Industries -
US $300 million,
libor + 7% 02/2012 306 295 -
Tembec Industries -
US $350 million 8.625%
unsecured senior notes 06/2009 - - 348
Tembec Industries -
US $500 million 8.5%
unsecured senior notes 02/2011 - - 498
Tembec Industries -
US $350 million 7.75%
unsecured senior notes 03/2012 - - 348
Tembec SAS 12/2013 22 20 20
Tembec Envirofinance SAS 06/2017 35 33 32
Tembec Energie SAS 12/2014 10 10 10
Proportionate share -
Marathon (50%) 09/2008 5 5 7
Proportionate share -
Temlam (50%) 06/2015 42 42 39
Other Various 12 12 21
-------------------------------------------------------------------------
450 435 1,343
Less current portion 21 21 26
Less unamortized financing
costs - - 3
-------------------------------------------------------------------------
$ 429 $ 414 $ 1,314
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating bank loans
On February 29, 2008, the Company entered into a loan agreement with a
syndicate of lenders for a revolving operating credit facility of $205 million
maturing December 15, 2011 secured by all of the assets of the Company's
material North American subsidiaries. This facility has a first priority
charge over receivables and inventory having a carrying value of $650 million
and a second priority charge over the remainder of the assets having a
carrying value of $857 million. Interest is calculated based either on prime
rate or banker's acceptances rate. As at March 29, 2008, there were no
drawings on this facility and $41 million was reserved for letters of credit.
The French operations are supported by several mill specific "receivable
factoring" agreements. As such, the borrowing base fluctuates periodically,
depending on shipments and cash receipts. As at March 29, 2008, the amount
available was $95 million, of which $37 million was unused.
The joint ventures maintain their own operating lines, without recourse to
the Company, to meet working capital and liquidity requirements.
Long-term debt
On February 29, 2008, the Company entered into a loan agreement with a
syndicate of lenders for a non-revolving term loan of US $300 million due
February 28, 2012 secured by all of the assets of the Company's material North
American subsidiaries. This facility has a first priority charge over all
assets except receivables and inventories, where it has a second priority
charge. Interest is calculated based either on prime rate or libor rate.
4. Other long-term liabilities and credits
The The
Company Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mar. 29, Feb. 29, Sept. 29,
2008 2008 2007
-------------------------------------------------------------------------
Accrued benefit liability - pension
benefit plans $ 169 $ 172 $ 63
Accrued benefit liability - other
benefit plans 44 44 38
Balance payable on acquisition
of Jager Building Systems Inc. 3 3 3
Reforestation - BC operations 9 8 6
Environmental and other asset
retirement obligations 2 2 4
Deferred government assistance - - 4
Deferred gain on sale of assets - - 4
Other 2 2 3
-------------------------------------------------------------------------
$ 229 $ 231 $ 125
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Share capital
In accordance with the Plan of Arrangement, the Company reorganized its
capital structure as follows:
Authorized
Unlimited number of common voting shares, without par value
Unlimited number of non-voting Class A Preferred shares issuable in series
without par value, with other attributes to be determined at time of issuance.
11,111,111 warrants convertible in equal amount of common shares and
expiring March 3, 2012. The warrants shall be deemed to be exercised and shall
be automatically converted into new common shares when the 20-day
volume-weighted average trading price of a single common share reaches or
exceeds $12.00 or immediately prior to any transaction that would constitute a
change of control.
(a) Common shares and warrants issued
------------------------------------------------------
------------------------------------------------------
Issued and fully paid:
100,000,000 Common Shares $ 564
11,095,839 Warrants 6
------------------------------------------------------
$ 570
------------------------------------------------------
------------------------------------------------------
(b) Earnings per share
The following table provides the reconciliation between basic and diluted
earnings (loss) per share:
The Company The Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
One Two Three Five Six
month months months months months
to to to to to
Mar. 29, Feb. 29, Mar. 31, Feb. 29, Mar. 31,
2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations $ (15) $ (41) $ (35) $ (98) $ 109
Net earnings
(loss) $ (17) $ (42) $ (45) $ (102) $ 93
Weighted
average
number of
common
shares
outstanding 100,000,000 85,616,232 85,616,232 85,616,232 85,616,232
Dilutive
effects:
Employees stock
options - - - - -
Weighted
average number
of diluted
common shares
outstanding 100,000,000 85,616,232 85,616,232 85,616,232 85,616,232
Basic and
diluted
earnings (loss)
per share from
continuing
operations $ (0.15) $ (0.47) $ (0.42) $ (1.14) $ 1.27
Basic and
diluted earnings
(loss) per
share $ (0.17) $ (0.49) $ (0.54) $ (1.19) $ 1.08
-------------------------------------------------------------------------
The diluted loss per share is the same as the basic loss per share as the
dilutive factors result in a decrease in the loss per share. In the case of
diluted earnings per share, the diluting factors are not significant enough to
effect a decrease in the earnings per share.
(c) Stock-based compensation
Under the Long-Term Incentive Plan, the Company may, from time to time,
grant options to its employees. The plan provides for the issuance of common
shares at an exercise price equal to the market price of the Company's common
shares on the date of the grant. These options vest over a five-year period
and expire ten years from the date of issue. No options were granted during
the period. The compensation expense recorded was not significant.
The following table summarizes the changes in options outstanding and the
impact on weighted average per share exercise price during the period.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
-------------------------------------------------------------------------
Balance, beginning of
fiscal year 3,668,019 $ 6.28 4,829,239 $ 7.35
Options expired (53,611) 4.31 (102,202) 5.62
-------------------------------------------------------------------------
Balance, end of December 3,614,408 6.31 4,727,037 7.38
-------------------------------------------------------------------------
Options expired (144,389) 6.88 (62,269) 10.94
-------------------------------------------------------------------------
Balance, prior to
recapitalization 3,470,019 6.28 4,664,768 7.34
-------------------------------------------------------------------------
Cancellation of old
options (3,470,019) 6.28 - -
-------------------------------------------------------------------------
Issuance of new options 202,650 107.56 - -
-------------------------------------------------------------------------
Balance, end of March 202,650 $ 107.56 4,664,768 $ 7.34
-------------------------------------------------------------------------
Following the recapitalization, the number of options outstanding under
the Predecessor were changed from 3,470,019 to 202,650 and the weighted
average exercise price moved from $6.28 to $107.56 per share.
6. Lumber export taxes
Effective October 12, 2006, the Governments of Canada and the United
States implemented an agreement for the settlement of the softwood lumber
dispute. The Softwood Lumber Agreement ("SLA") requires that an export tax be
collected by the Government of Canada, which is based on the price and volume
of lumber shipped. The SLA had an effective date of October 12, 2006, at which
time the U.S. Department of Commerce ("USDOC") revoked all existing
countervailing and antidumping duty orders on softwood lumber shipped to the
U.S. from Canada.
7. Other Items
2008
Restructuring and asset impairment charges:
During the February 2008 period, the Predecessor recorded a non cash
charge of $1 million relating to the writedown of fixed assets at its
Temiscaming facility. As well, $2 million of mill closure provisions were
reversed.
During the December 2007 quarter, the Predecessor recorded a non-cash
charge of $2 million relating to the writedown of its investment in the failed
Gaspesia project. As well, $1 million of mill closure provisions were
reversed.
Gain on land sales and other:
During the December 2007 quarter, the Predecessor completed the sale of a
number of land properties and recorded a gain of $16 million. As well, the
Predecessor reduced its participation in the equity of AV Cell Inc. from 50%
to 25% and recorded a gain of $4 million. The Predecessor also ceased applying
the proportionate consolidation method to this investment and began applying
the equity method.
2007
Restructuring and asset impairment charges:
During the December 2006 quarter, the Predecessor announced the permanent
closure of the Smooth Rock Falls, Ontario, pulp mill. The facility had been
idled since the end of July 2006. The Predecessor recorded a charge of
$29 million relating to special termination pension benefits, severance and
other relating items.
Recovery of lumber duties:
During the December 2006 quarter, the Predecessor recorded net proceeds of
$238 million pertaining to the recovery of lumber duties on deposit with the
USDOC that had accumulated since May 2002. The amount received by the
Predecessor corresponds to approximately 82% of the total amount deposited. In
addition, the Predecessor received a further $30 million, which corresponds to
approximately 82% of the interest accrued on the deposits since May 2002. This
latter amount was recorded as interest income.
Gain on land sales and other:
The Predecessor completed the sale of a number of land and other
properties and recorded a net gain of $4 million in the March 2007 quarter and
$8 million in the December 2006 quarter.
Also, during the December 2006 quarter, the Predecessor completed the sale
of its small pine lumber operation located in Brassac, France. The transaction
had no significant effect on the Predecessor's financial statements.
The following table provides an analysis of the other items by business
segment:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008
Forest Corporate Conso-
products Pulp Paper & other lidated
-------------------------------------------------------------------------
Investments $ - $ (4) $ - $ 2 $ (2)
Gain on land sales (16) - - - (16)
Other (2) 1 (1) - (2)
-------------------------------------------------------------------------
$ (18) $ (3) (1) $ 2 $ (20)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007
Forest Conso-
products Pulp lidated
-------------------------------------------------------------------------
Lumber duties $ (238) $ - $ (238)
Pensions - 17 17
Gain on land sales (12) - (12)
Severance, other labour-related
and idling costs - 12 12
-------------------------------------------------------------------------
$ (250) $ 29 $ (221)
-------------------------------------------------------------------------
The mill closure provisions are no longer significant and therefore not
reported.
8. Interest, foreign exchange, and other
The Company The Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
One Two Three Five Six
month months months months months
to to to to to
Mar. 29, Feb. 29, Mar. 31, Feb. 29, Mar. 31,
2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Interest on
long-term debt $ 3 $ 1 $ 30 $ 27 $ 60
Interest on
short-term debt - 2 2 4 5
Interest income -
lumber duties - - - - (30)
Interest income -
other (1) - (2) (1) (5)
-------------------------------------------------------------------------
2 3 30 30 30
Amortization of
deferred
financing costs - 1 2 2 3
Loss (gain) on
consolidation of
foreign integrated (1) (3) 2 (4) 3
Other foreign
exchange items (11) (1) - 2 (17)
Bank charges and
other financing
expenses 1 1 2 2 3
-------------------------------------------------------------------------
(11) (2) 6 2 (8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ (9) $ 1 $ 36 $ 32 $ 22
-------------------------------------------------------------------------
9. Income Taxes
The Company The Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
One Two Three Five Six
month months months months months
to to to to to
Mar. 29, Feb. 29, Mar. 31, Feb. 29, Mar. 31,
2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Earnings (loss)
from continuing
operations before
income taxes and
share in earnings
of related
companies $ (15) $ (38) $ (38) $ (92) $ 101
-------------------------------------------------------------------------
Income taxes based
on combined
federal and
provincial income
tax rates of 31.9%
(2007 - 33.3%) $ (5) $ (12) $ (12) $ (29) $ 34
Increase (decrease)
resulting from:
Future income
taxes adjustment
due to rate
enactments - 1 - 4 -
Change in
valuation
allowance 4 14 13 35 (42)
Rate differential
between
juristictions - 1 - 2 (3)
Non taxable
portion of
exchange loss
(gain) on long-
term debt - - (2) (2) 6
Non deductible
loss (gain) on
consolidation
of foreign
integrated
subsidiaries 1 (1) - (1) -
Other permanent
differences - - - (3) -
-------------------------------------------------------------------------
- 15 11 35 (39)
-------------------------------------------------------------------------
Income tax expense
(recovery) $ - $ 3 $ (1) $ 6 $ (5)
-------------------------------------------------------------------------
Income taxes:
Curent $ - $ - $ - $ - $ 38
Future - 3 (1) 6 (43)
-------------------------------------------------------------------------
Income taxes
expense (recovery) $ - $ 3 $ (1) $ 6 $ (5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. Employee Future Benefits
The following table presents the Company's future benefit costs:
The Company The Predecessor
-------------------------------------------------------------------------
One Two Three Five Six
month months months months months
to to to to to
Mar. 29, Feb. 29, Mar. 31, Feb. 29, Mar. 31,
2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Defined benefit
pension plans $ 1 $ 2 $ 5 $ 6 $ 10
Other employee
future benefit
plans - 1 2 2 3
Defined
contribution and
other retirement
plans 1 2 3 5 6
-------------------------------------------------------------------------
2 5 10 13 19
Portion included
in Restructuring
charge - mill
closure (note 7) - - - - 17
-------------------------------------------------------------------------
$ 2 $ 5 $ 10 $ 13 $ 36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. Financial Instruments
Recognition and measurement
The Company has classified its cash and cash equivalents as
held-for-trading. Accounts receivable are classified as loans and receivables.
The Company's investments consist mainly of equity investments, which are
excluded from the CICA standard, and of loans receivable which are classified
as loans and receivables. Bank indebtedness, operating bank loans, accounts
payable and accrued charges, long-term debt, including interest payable, and
redeemable preferred shares of the Predecessor are classified as other
liabilities, all of which are measured at amortized cost. The Company has
elected to measure all derivatives and embedded derivatives at fair value and
the Company has maintained its policy not to use hedge accounting.
Fair value
The carrying amount of cash and cash equivalents, accounts receivable,
operating bank loans and accounts payable and accrued charges approximates
their fair values because of the near-term maturity of those instruments. The
fair value of long-term debt that is actively traded is based on the closing
trading value at the respective period-end dates. The fair value of the
long-term debt that is not actively traded, balance payable on acquisition of
companies and redeemable preferred shares of the Predecessor has been
determined based on management's best estimate of fair value to renegotiate
these financial instruments with similar terms at the respective year-end
dates.
The carrying value and the fair value of long-term debt, balance payable
on acquisition of companies and redeemable preferred shares of the Predecessor
were as follows:
The Company The Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mar. 29, Feb. 29, Sep. 29,
2008 2008 2007
-------------------------------------------------------------------------
Carrying value $ 453 $ 438 $ 1,372
Fair value $ 453 $ 438 $ 645
-------------------------------------------------------------------------
Financial Risk Management
Overview
The Company has exposure to the following risks from its use of financial
instruments:
- Credit Risk
- Liquidity Risk
- Market Risk
- Foreign Currency Rate Risk
- Interest Rate Risk
- Commodity Price and Operational Risk
The Board of Directors has overall responsibility for the establishment
and oversight of the Company's risk management policy. The policy defines the
method by which the Company manages its risk through properly and prudently
administering the Company's financial assets, liabilities and derivatives.
Internal Audit measures the adequacy of the business control systems through
the execution of an Internal Audit Plan approved by the Audit Committee.
Credit risk management
Credit risk arises from the possibility that entities to which the Company
sells products may experience financial difficulty and be unable to fulfill
their contractual obligations. The Company does not have a significant
exposure to any individual customer or counterparty. As required in the Risk
Management Policy, the Company reviews a new customer's credit history before
extending credit and conducts regular reviews of its existing customers'
credit performance. All credit limits are subject to evaluation and revision
at any time based on changes in levels of credit worthiness and must be
reviewed at least once per year. Sales orders cannot be processed unless a
credit limit has been properly approved. The Company may require payment
guarantees, such as letters of credit, or obtains credit insurance coverage.
Bad debt write-offs have been insignificant in the past. The allowance for
doubtful accounts for the Company as at March 29, 2008 and February 29, 2008
and for the Predecessor as at September 29, 2007, remained unchanged at
$3 million.
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit
exposure. The maximum exposure to credit risk at the reporting date was:
The Company The Predecessor
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mar. 29, Feb. 29, Sep. 29,
2008 2008 2007
-------------------------------------------------------------------------
Loans and receivables $ 399 $ 367 $ 380
Cash and cash equivalents $ 65 $ 116 $ 14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity risk management
Liquidity risk arises from the possibility that the Company will not be
able to meet its financial obligations as they fall due. The Company has an
objective of maintaining liquidity equal to 12 months of capital expenditures,
interest and principal repayments and seasonal working capital requirements,
which would require approximately $200 million of liquidity.
Exposure to liquidity risk
A liquidity reserve in the form of cash and undrawn revolving credit
facilities is maintained to assist in the solvency and financial flexibility
of the Company. Liquidity reserves totalled $266 million at March 29, 2008.
Repayments of amounts due within one year may also be funded by normal
collection of current trade accounts receivable and cash on hand.
The following are the contractual maturities of financial liabilities,
including interest payments and excluding the impact of netting agreements:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contrac-
tual 6 More
Carrying Cash Months 6-12 1-2 2-5 Than
Amount Flows or Less Months Years Years 5 Years
-------------------------------------------------------------------------
Secured
Bank
Loans $ 385 $ 520 $ 21 $ 21 $ 44 $ 416 $ 18
Unsecured
Loans 65 68 9 5 11 26 17
Operating
Bank
Loans 71 71 71 - - - -
Trade and
Others 351 351 351 - - - -
Bank
Overdraft 9 9 9 - - - -
-------------------------------------------------------------------------
$ 881 $ 1,019 $ 461 $ 26 $ 55 $ 442 $ 35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign currency rate risk management
The Company is exposed to currency risk on sales, purchases and long-term
debt that are denominated in a currency other than the respective functional
currencies of foreign and domestic operations, primarily the Canadian $ and
Euro. The currencies in which these transactions primarily are denominated are
Canadian $, US $ and Euro.
The Company's revenues for most of its products are affected by
fluctuations in the relative exchange rates of the Canadian $, the US $ and
the Euro. The prices for many products, including those sold in Canada and
Europe are generally driven by US $ reference prices of similar products. The
Company generates approximately $2.2 billion of US $ denominated sales
annually from its Canadian and European operations. As a result, any decrease
in the value of the US $ relative to the Canadian $ and the Euro reduces the
amount of revenues realized on sales in local currency. In addition, since
business units purchase the majority of their production inputs in local
currency, fluctuations in foreign exchange can significantly affect the unit's
relative cost position when compared to competing manufacturing sites in other
currency jurisdictions. This could result in the unit's inability to maintain
its operations during periods of low prices and/or demand.
Sensitivity analysis
Based on 2008 planned sales volumes and prices, the following table
illustrates the impact of a 1% change in the value of the US $ versus the
Canadian $ and the Euro. For illustrative purposes, an increase of 1% in the
value of the US $ is assumed. A decrease would have the opposite effects of
those shown below.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales increase $ 22
Cost of sales increase 3
-------------------------------------------------------------------------
Gross margin 19
Loss on US $ debt translation 3
-------------------------------------------------------------------------
Pre-tax earnings increase 16
Tax expense increase 5
-------------------------------------------------------------------------
Net earnings increase $ 11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Direct US $ purchases of raw materials, supplies and services provide a
partial offset to the impact on sales. This does not include the potential
indirect impact of currency on the cost of items purchased in the local
currency.
Interest expense on the Company's US $ denominated debt provides a small
offset to its total US $ exposure. To further reduce the impact of
fluctuations in the value of the US $, the Company has adopted a policy of
hedging up to 50% of its anticipated US $ receipts for up to 36 months in
duration. The Company does not currently hold any significant foreign exchange
contracts.
Interest rate risk management
Interest rate risk is the risk that the fair value or future cash flows of
a financial instrument will fluctuate because of changes in market interest
rates.
Sensitivity analysis
At March 29, 2008, if interest rates had been 100-basis points higher
(lower), related to the US $300 million term loan, net earnings and equity
would have increased (decreased) by $3 million annually.
Commodity price and operational risk management
The Company's financial performance is dependent on the selling prices of
its products. The markets for most lumber, pulp and paper products are
cyclical and are influenced by a variety of factors. These factors include
periods of excess product supply due to industry capacity additions, periods
of decreased demand due to weak general economic activity, inventory
de-stocking by customers, and fluctuations in currency exchange rates. During
periods of low prices, the Company is subject to reduced revenues and margins,
resulting in substantial declines in profitability and possibly net losses.
The Company may periodically purchase lumber, pulp and newsprint price hedges
to mitigate the impact of price volatility. The Company does not currently
hold any significant product price hedges.
The manufacturing activities conducted by the Company's operations are
subject to a number of risks including availability and price of fibre and
competitive prices for purchased energy and raw materials. To mitigate the
impact of price fluctuations, the Company may periodically purchase hedges.
The Company does not currently hold any significant hedges.
12. Capital management
It is the Company's objective to manage its capital to ensure adequate
capital resources exist to support operations while maintaining its business
growth. The Company sets the amount of capital in proportion to risk. The
Company manages the capital structure and makes adjustment to it in light of
changes in economic conditions and the risk of characteristics of the
underlying assets.
The Company monitors capital on the basis of net debt to total
capitalization ratio. Net debt is calculated as total debt (long-term debt
plus bank indebtedness/operating lines) less cash and cash equivalents. Total
capitalization includes net debt plus shareholders' equity, deferred credits
and other.
The Company's strategy, which is unchanged from September 29, 2007, is to
maintain the net debt to total capitalization ratio at 40% or less. The
objective is to keep a strong balance sheet and maintain the ability of the
Company to access capital markets at favourable rates. The debt to total
capitalization ratio for the Company as at March 29, 2008 and February 29,
2008 and for the Predecessor as at September 29, 2007 were 35%, 31% and 63%
respectively.
The significant decrease in the net debt to total capitalization ratio
resulted primarily from the recapitalization transaction that occurred on
February 29, 2008.
13. Subsequent Event
On April 14, 2008, the Aditya Birla Group purchased from the Company 20%
of the 25% equity interest it held in the issued and outstanding shares in the
capital stock of both AV Nackawic and AV Cell. The loan previously made to AV
Cell was also reimbursed. As a result, the Company received proceeds of
$16 million and will record a gain of $1 million in the quarter ending June
28, 2008.
14. Comparative figures
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted.
