Hardwoods Distribution Income Fund Announces 2008 Fourth Quarter and Year-End Results
TRADING SYMBOL: Toronto Stock Exchange - HWD.UN
Hardwoods Distribution Income Fund will hold a conference call to discuss
fourth quarter and year-end financial results on March 26, 2009 at 8:00
a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by
dialing: 1-800-594-3790 or 416-644-3421. A replay will be available until
Thursday April 9, 2009 at: 1-877-289-8525 or 416-640-1917 (Passcode
21301543 followed by the number sign).
LANGLEY, BC, March 25 /CNW/ - Hardwoods Distribution Income Fund (the
"Fund") today reported financial results for the fourth quarter and 12 months
of 2008. The Fund's results are based on the performance of Hardwoods
Specialty Products LP and Hardwoods Specialty Products USLP (collectively
"Hardwoods") - one of North America's largest wholesale distributors of
hardwood lumber and related sheet good products. Hardwoods serves over 2,000
industrial customers through a network of 29 distribution centres in nine
regions of the US and Canada.
2008 Overview
(For the 12 months ended December 31, 2008)
- Full-year revenue declined 22.7% to $256.3 million year-over-year, as
a result of deteriorating economic conditions
- Gross profit percentage was 18.0% compared to 18.9% in 2007
- Full-year EBITDA was $5.9 million compared to $21.3 million in 2007
- The Fund recorded a net loss of $36.2 million, primarily due to the
non-cash writedown of goodwill and other intangible assets
- The Fund closed a total of seven satellite branches and implemented
other cost-saving measures, helping to reduce selling and
administrative expenses by $2.0 million, despite incurring a $1.8
million increase in bad debt expense and $1.5 million in one-time
restructuring and reorganization costs in 2008
- The Fund reduced its bank indebtedness (net of cash) by $7.7 million
- The Fund further expanded its successful new line of green building
products
"Business conditions continued to deteriorate in the fourth quarter of
2008 as the global economic crisis worsened," said Maurice Paquette, President
and CEO of Hardwoods. "The US and Canadian economies are now in full recession
and we are seeing the impact in reduced demand across virtually all of the
sectors and regions that we serve. Our sales declined in each quarter of 2008,
and with a shrinking market came increased competition for the remaining
available sales, putting downward pressure on our margins. We also experienced
an increase in bad debts with economic conditions forcing some of our
customers out of business."
"In this environment, our ability to adapt quickly to changing economic
realities has proved essential," said Mr. Paquette. "Throughout 2008, we
closed a total of seven satellite branches, reducing both our branch network
and employee count by 19%. In addition, we sublet underutilized warehouse
space to reduce our premises expense, reduced our trucking contracts to save
on freight, adjusted our US medical plan to reduce company-funded costs,
cancelled our year-end bonus program for management and staff, and implemented
a salary freeze."
"We also made a number of timely corporate moves through the year," added
Mr. Paquette. "In March, we reorganized our business to achieve significant
tax savings and we have since announced the reorganization of our Canadian
holdings to ensure that the Fund will not be paying the new income trust tax
that comes into effect in 2011. We also sold our remaining US currency hedge
contracts for a profit just weeks in advance of a sharp decline in the value
of the Canadian dollar, which would have turned these hedges into significant
liabilities. In September, we secured a new US credit agreement on favourable
terms, an important move in an increasingly challenging credit environment.
Finally, we made the difficult but necessary decision to reduce and ultimately
suspend cash distributions in recognition of the deteriorating economic
environment. Through this and a variety of other measures, we have succeeded
in reducing our long-term debt from $39.2 million two years ago, to $17.5
million at December 31, 2008. Going forward, the suspension of distributions
will enable us to continue conserving cash flow as we responsibly manage our
business through this difficult time."
"Overall, we believe we have taken the right steps to align our business
with the new economic realities. As we move forward, we will continue to
rationalize our costs in line with the slower sales pace and to manage the
increased risk of bad debt that comes with the current economic environment."
"Our strategy will not be entirely defensive, however," added Mr.
Paquette. "Following a positive initial response to our green building
products in 2008, we have now created the new Hardwoods "Greenbelt" label and
we are expanding our line-up of environmentally friendly products with a mix
of both imported and domestic products. We are marketing these new products to
our existing industrial customer base, as well as to architects and building
project specifiers looking for "green" product solutions. In addition, we are
continuing to work closely with customers to find innovative product and
service solutions that help support their businesses through the current
downturn. We also continue to service customers across all of our geographic
regions. Although we closed seven satellite branches in 2008, we kept all of
our regional hub centres open, enabling us to provide sales and product
support to customers in all regions."
"Hardwoods is facing challenges with tight covenants on its financing at
a time when our business is under pressure. We will continue to take all steps
possible to respond to these issues. Overall, our focus remains on positioning
Hardwoods to survive this recession, and to maintain a strong market position
that will enable us to participate fully in the eventual recovery," said Mr.
Paquette.
Summary of Results
Selected Unaudited Consolidated Financial Information (in thousands of
Canadian dollars except where noted)
3 months 3 months
Year ended Year ended ended ended
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
---- ---- ---- ----
Total sales $ 256,301 $ 331,765 $ 56,650 $ 68,767
Sales in the US
(US$) 156,398 210,785 29,270 46,643
Sales in Canada 89,581 105,171 19,423 23,665
Gross profit 46,096 62,737 9,485 12,488
Gross profit % 18.0% 18.9% 16.7% 18.2%
Selling and
administrative
expenses (41,425) (43,360) (10,915) (10,024)
Realized gain on
foreign currency
contracts 1,247 1,883 - 648
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Earnings before
interest, taxes,
depreciation and
amortization and
non-controlling
interest ("EBITDA") 5,918 21,260 (1,430) 3,112
Add (deduct):
Amortization (1,471) (1,866) (326) (437)
Interest (1,219) (2,402) (284) (487)
Non-cash foreign
currency gains
(losses) (333) 641 1,498 (634)
Intangibles
impairment (8,612) - (3,144) -
Goodwill
impairment (82,083) - - -
Non-controlling
interest 20,031 (109) 4,881 277
Income tax
recovery
(expense) 31,526 (1,905) 3,341 284
-------------------------------------------------------------------------
Net earnings
(loss) for
the period $ (36,243) $ 15,619 $ (12,941) $ 2,115
-------------------------------------------------------------------------
Basic and fully
diluted earnings
(loss) per
Class A Unit $ (2.515) $ 1.084 $ (0.898) $ 0.147
Average Canadian
dollar exchange
rate for
one US dollar 1.0660 1.075 1.2115 0.9812
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Distributable Cash and Cash Distributions
Selected Unaudited Consolidated Financial Information
(in thousands of dollars except per unit amounts)
3 months 3 months
Year ended Year ended ended ended
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
---- ---- ---- ----
Net cash provided
by operating
activities $ 20,229 $ 20,629 $ 6,028 $ 10,514
Decrease in
non-cash operating
working capital (14,836) (2,777) (7,679) (7,291)
----------- ----------- ----------- -----------
Cash flow from
operations before
changes in
non-cash
operating working
capital 5,393 17,852 (1,651) 3,223
Capital
expenditures (425) (571) (79) (18)
----------- ----------- ----------- -----------
Distributable
Cash $ 4,968 $ 17,281 $ (1,730) $ 3,205
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Distributions
relating to
the period:
Class A Units $ 7,565(1) $ 12,355 $ - $ 3,243
Class B Units(2) - - - -
----------- ----------- ----------- -----------
Total Units $ 7,565 $ 12,355 $ - $ 3,243
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
-------------------------------------------------------------------------
Outstanding units
and per
unit amounts:
Class A Units
outstanding 14,410,000 14,410,000 14,410,000 14,410,000
Class B Units
outstanding 3,602,500 3,602,500 3,602,500 3,602,500
----------- ----------- ----------- -----------
Total Units
outstanding 18,012,500 18,012,500 18,012,500 18,012,500
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Distributable
Cash per
Total Units $ 0.276 $ 0.959 $ (0.096) $ 0.178
Distributions
relating to
the period:
Class A Units $ 0.525(1) $ 0.857 $ - $ 0.225
Class B Units(2) $ - $ - $ - $ -
Total Units $ 0.420 $ 0.686 $ - $ 0.180
Payout ratio(3) 152.3% 71.5% 0.0% 101.2%
-------------------------------------------------------------------------
March 23, 2004
to December 31,
2008
----
Cumulative
since inception:
Distributable
Cash 75,617
Distributions
relating to
the period 66,754
Payout ratio(3) 88.3%
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(1) Includes the cash distributions of $0.075 per Class A Unit per month
which relate to the operations of the Fund for January to June 2008,
and cash distributions of $0.025 per Class A Unit per month which
relate to the operations of the Fund for July to September 2008.
(2) On January 10, 2006, Hardwoods Specialty Products LP and Hardwoods
Specialty Products US LP, limited partnerships in each of which the
Fund owns an 80% interest, announced that quarterly distributions
were suspended on the Class B LP and Class B US LP units. The Class B
LP units and Class B US LP units represent a 20% interest in
Hardwoods Specialty Products LP and Hardwoods Specialty Products US
LP, respectively. No distributions are to be paid on the Class B LP
units and Class B US LP units unless distributions in stipulated
minimum amounts are paid on the units in the limited partnerships
held by the Fund, and in certain other circumstances. Accordingly, no
distributions have been declared since the third quarter of 2005 to
the non-controlling interests. No liability for distributions payable
to the non-controlling interests is reflected in the December 31,
2008 balance sheet.
(3) Payout ratio measures the ratio of distributions by the Fund relating
to the period to Distributable Cash for the period.
Results from Operations - Three Months Ended December 31, 2008
For the three months ended December 31, 2008 the Fund and its
subsidiaries generated negative distributable cash of $(1.7) million, or
$(0.096) per unit. No distributions were paid to either the public unitholders
(Class A Units) or to the Class B Units, resulting in a payout ratio of 0% for
the fourth quarter. By comparison, the Fund generated total distributable cash
of $3.2 million or $0.178 per unit in the same period of 2007. Distributions
of $3.2 million, or $0.225 per unit were declared to the Class A Units and no
distributions were paid to the Class B Units, for a payout ratio of 101.2% in
the fourth quarter of 2007.
Total fourth quarter sales declined by 17.6% to $56.7 million, from the
$68.8 million reported in 2007. The change in sales revenue reflects a 30.0%
decrease in underlying sales activity, partially offset by a 12.4% increase in
sales due to the positive effect of a weaker Canadian dollar. Sales in the
United States, as measured in US dollars, decreased by 37.2% to $29.3 million.
Sales in Canada, as measured in Canadian dollars, declined by 17.9%.
Fourth quarter gross profit declined to $9.5 million, from $12.5 million
in Q4 2007 as a result of the lower sales revenue and a lower gross profit
margin. Gross profit as a percentage of sales declined to 16.7% from 18.2% in
Q4 2007. The lower gross profit percentage reflects extremely competitive
conditions amidst a contracting market, a continued downward trend in hardwood
product prices, and a write-down in the fourth quarter to the carrying value
of some specialized inventory held for a significant customer that went out of
business.
Selling and administrative (S&A) expenses were $10.9 million in the
fourth quarter, compared to $10.0 million in the same period of 2007. The
increase in S&A reflects a $1.4 million negative foreign exchange impact of a
weaker Canadian dollar on the conversion of S&A expenses at Hardwoods' US
operations. Had exchange rates remained consistent with the fourth quarter of
2007, S&A expenses would have been $9.4 million. Fourth quarter 2008 S&A
includes $0.5 million of non-recurring costs associated with closing branches
and restructuring the Fund's California operations. Cost savings achieved by
cancelling year-end incentive plan payments for management and staff were
offset by increased bad debt expense in the fourth quarter of 2008, compared
to the same period in the prior year.
EBITDA for the period was a loss of $(1.4) million, compared to a profit
$3.1 million in Q4 2007. The change in EBITDA reflects the lower gross profit,
lower realized gains on foreign currency contracts, and the higher S&A
expenses.
The Fund recorded a fourth quarter net loss of $12.9 million, compared to
net earnings of $2.1 million in the same period in 2007. The decrease in net
earnings reflects the $4.5 million decrease in EBITDA and a $20.6 million
increase in goodwill and intangible impairment. This was partially offset by a
$2.1 million increase in non-cash foreign currency gains, a $4.6 million
increase in recovery from non-controlling interest, a $3.0 million increase in
income tax recovery, a $0.2 decrease in interest expense and a $0.1 million
decrease in amortization expense.
Results from Operations - 12 months ended December 31, 2008
For the 12 months ended December 31, 2008, the Fund and its subsidiaries
generated total distributable cash of $5.0 million, or $0.276 per unit.
Distributions of $7.6 million, or $0.525 per unit, were declared to the public
unitholders (Class A Units) and no distributions were paid to the Class B
Units, resulting in a year-to-date payout ratio of 152.3%. By comparison, the
Fund generated total distributable cash of $17.3 million or $0.959 per unit in
2007. Distributions of $12.4 million, or $0.857 per unit were declared to the
Class A Units and no distributions were paid to the Class B Units, for a 2007
payout ratio of 71.5%.
Total sales declined by 22.7% to $256.3 million, from $331.8 million in
2007 as a result of significantly reduced demand and lower product prices.
Sales at Hardwoods' US operations, as measured in US dollars, decreased by
25.8%, with the most significant impact felt in the company's California
divisions. Sales in Canada, as measured in Canadian dollars, were down by
14.8% year-over-year, reflecting the weakening domestic economy and continued
slowing of the Canadian housing market.
Gross profit for the year ended December 31, 2008 was $46.6 million,
compared to $62.7 million in 2007. The reduction in gross profit primarily
reflects lower sales, as well as a decline in gross margin percentage to
18.0%, from 18.9% in 2007.
Selling and administrative expenses were $41.4 million in 2008, down by
$2.0 million compared to $39.8 million in 2007. Recognizing the more
challenging sales environment facing our business, cost-savings measures were
implemented to control expenses and achieve $5.3 million in cost reductions in
2008, principally in the area of people costs. These cost reductions were
partially offset by $1.5 million of non-recurring costs incurred from closing
branches and making corporate structure changes made in 2008, and by $1.8
million in additional bad debt expense incurred as economic conditions
deteriorated during the year.
EBITDA for 2008 was $5.9 million, down from $21.3 million in 2007. The
change in EBITDA reflects lower gross profit and a $0.7 decrease in realized
gains on foreign currency contracts, partially offset by lower S&A expenses.
The Fund recorded a net loss of $36.2 million for 2009, compared to net
earnings of $15.6 million in 2007. The change in net earnings primarily
reflects the $90.7 million increase in impairment in goodwill and other
intangible assets, a $1.0 million decrease in non-cash foreign currency gains
and the $15.4 million decrease in EBITDA. These were partially offset by a
$33.4 million decrease in income tax expense, a $20.1 million increase in
recovery from non-controlling interest, a $1.2 million decrease in interest
expense and a $0.4 million reduction in amortization.
Outlook
Hardwoods anticipates that extremely challenging business conditions will
prevail through 2009 and possibly into 2010. A depressed housing market and
the global recession are expected to continue reducing demand for furniture,
cabinets, recreational vehicles and other products that utilize hardwood
lumber and sheet goods. Prices for hardwood lumber are also expected to remain
at low levels, despite production curtailments by many lumber mills.
The current economic environment has also elevated Hardwoods' business
risk, particularly in the following areas:
1. Financing risk related to the ability of Hardwoods to debt-finance
its operations has increased in the current tight credit environment.
Hardwoods obtained an amendment to its US banking agreement in order
to meet its financial covenant for the fourth quarter of 2008, but it
is uncertain if Hardwoods US results will prove strong enough to
remain in compliance with its bank agreement throughout 2009;
2. The risk of bad debts has increased, as Hardwoods' customers face
reduced demand and similar pressures on credit availability in their
own businesses;
3. The possibility that key suppliers could fail has increased, which
could potentially disrupt Hardwoods supply chain; and,
4. Demand for Hardwoods' products could weaken still further, given that
US housing starts fell to historic lows in the fourth quarter of
2008, and the impact on Hardwoods sales often lags changes in the
residential construction cycle by six to twelve months. The lag
exists because kitchen cabinets and furniture, which are a key end
use for hardwood products, are purchased late in the building
process.
With the expectation of a prolonged economic downturn and an enhanced
level of risk, Hardwoods' focus will remain on continued cost reduction as it
works to align expenditures as closely as possible to sales levels. Inventory
levels and working capital will also be tightly managed and management will
continue to work to minimize customer credit risk, which is expected to remain
elevated until business conditions improve. These initiatives, together with a
continued focus on debt reduction will help provide support to Hardwoods'
balance sheet as it works through this downturn.
Simultaneously, Hardwoods will aggressively pursue market opportunities
for its growing lines of "green" building products, while also continuing to
support its successful import program. The Fund's goal is to maintain a strong
market position through the downturn and to emerge positioned to participate
fully in the eventual recovery.
Non-GAAP Measures - EBITDA and Distributable Cash
References to "EBITDA" are to earnings before interest, income taxes,
depreciation and amortization, unrealized foreign currency gains and losses,
goodwill and other intangible assets impairments, and the non-controlling
interest in earnings. In addition to net income or loss, EBITDA is a useful
supplemental measure of performance and cash available for distribution prior
to debt service, changes in working capital, capital expenditures and income
taxes.
References to "Distributable Cash" is to net cash provided by operating
activities, before changes in non-cash operating working capital, less capital
expenditures and contributions to any reserves that the Boards of Directors of
our operating entities determine to be reasonable and necessary for the
operation of the businesses owned by these entities.
We believe that, in addition to net income or loss, EBITDA and
Distributable Cash are each a useful supplemental measures of operating
performance that may assist investors in assessing their investment in units
of the Fund. Neither EBITDA nor Distributable Cash are earnings measure
recognized by GAAP and they do not have a standardized meaning prescribed by
GAAP. Investors are cautioned that EBITDA should not replace net income or
loss (as determined in accordance with GAAP) as an indicator of our
performance, nor should Distributable Cash replace cash flows from operating,
investing and financing activities or as a measure of liquidity and cash
flows. The Fund's method of calculating EBITDA and Distributable Cash may
differ from the methods used by other issuers. Therefore, the Fund's EBITDA
and Distributable Cash may not be comparable to similar measures presented by
other issuers. For reconciliation between EBITDA and net income or loss as
determined in accordance with GAAP, and for reconciliation between
Distributable Cash and net cash provided by operating activities as determined
in accordance with GAAP, please refer to the Management Discussion and
Analysis ("MD&A") included in the Fund's 2008 Annual Report to Unitholders,
which will be filed at www.sedar.com.
Additional guidance regarding disclosure of distributable cash and cash
distributions was issued in 2007 in an interpretative release by the Canadian
Institute of Chartered Accountants (the "CICA") in respect of "Standardized
Distributable Cash in Income Trusts and other Flow Through Entities" and
National Policy 41-201 of the Canadian Securities Administrators "Income
Trusts and other Indirect Offerings" (collectively, the "Interpretative
Guidance"). For disclosure and discussion of the Fund's Standardized
Distributable Cash in accordance with the Interpretive Guidance, please refer
to the MD&A included in the Fund's 2008 Annual Report to Unitholders, which
will be filed at www.sedar.com.
About the Fund
Hardwoods Distribution Income Fund is an unincorporated, open-ended,
limited purpose trust established to hold, indirectly, the securities of
Hardwoods Specialty Products LP and Hardwoods Specialty Products USLP
(collectively, "Hardwoods"). The Fund was launched on March 23, 2004, with the
completion of an initial public offering of 14,410,000 units.
About Hardwoods
Hardwoods is North America's largest distributor of high-grade hardwood
lumber and sheet goods to the cabinet, moulding, millwork, furniture and
specialty wood products industries. The company currently operates a network
of 29 distribution centres comprising 1.1 million square feet of warehouse and
distribution space in the U.S. and Canada.
Forward Looking Statements
Certain statements in this press release contain forward-looking
information within the meaning of applicable securities laws in Canada
("forward-looking information"). The words "anticipates", "believes",
"budgets", "could", "estimates", "expects", "forecasts", "intends", "may",
"might", "plans", "projects", "schedule", "should", "will", "would" and
similar expressions are often intended to identify forward-looking
information, although not all forward-looking information contains these
identifying words.
The forward-looking information in this press release includes, but is
not limited to: we believe we have taken the right steps to align our business
with the new economic realties; we will continue to rationalize our costs in
line with the slower sales pace and to manage the increased risk of bad debt
that comes with the current economic environment; Hardwoods' focus will remain
on continued cost reduction as it works to align expenditures as closely as
possible to sales levels; inventory levels and working capital will be tightly
managed and management will continue to work to minimize customer credit risk,
which is expected to remain elevated until business conditions improve; the
aforementioned initiatives, together with a continued focus on debt reduction
will help provide support to Hardwoods' balance sheet as it works through this
downturn; Hardwoods will aggressively pursue market opportunities for its
growing lines of "green" building products, while also continuing to support
its successful import program; the Fund's goal is to maintain a strong market
position through the downturn and to emerge positioned to participate fully in
the eventual recovery; the current economic environment has elevated
Hardwoods' business risk, particularly (1) financing risk related to the
ability of Hardwoods to debt-finance its operations has increased in the
current tight credit environment, (2) bad debt risk has increased, as
Hardwoods customers face reduced demand, and pressure on credit availability
in their own businesses, (3) the possibility that key suppliers could fail has
increased, which could potentially disrupt Hardwoods supply chain, and (4)
demand for Hardwoods' products could weaken still further, given that US
housing starts fell to historic lows in the fourth quarter of 2008, and the
impact on Hardwoods sales often lags changes in the residential construction
cycle by six to twelve months.
The forecasts and projections that make up the forward-looking
information are based on assumptions which include, but are not limited to:
there are no material exchange rate fluctuations between the Canadian and US
dollar that affect our performance; the general state of the economy does not
worsen; we do not lose any key personnel; there are no decreases in the supply
of, demand for, or market values of hardwood lumber or sheet goods that harm
our business; we do not incur material losses related to credit provided to
our customers; our products are not subjected to negative trade outcomes; we
are able to sustain our level of sales and EBITDA margins; we are able to grow
our business long term and to manage our growth; there is no new competition
in our markets that leads to reduced revenues and profitability; we do not
become subject to more stringent regulations; importation of products
manufactured with hardwood lumber or sheet goods does not increase and replace
products manufactured in North America; our management information systems
upon which we are dependent are not impaired; our insurance is sufficient to
cover losses that may occur as a result of our operations; and, the financial
condition and results of operations of our business upon which we are
dependent is not impaired.
The forward-looking information is subject to risks, uncertainties and
other factors that could cause actual results to differ materially from
historical results or results anticipated by the forward-looking information.
The factors which could cause results to differ from current expectations
include, but are not limited to: exchange rate fluctuations between the
Canadian and US dollar could affect our performance; our results are dependent
upon the general state of the economy; we depend on key personnel, the loss of
which could harm our business; decreases in the supply of, demand for, or
market values of hardwood lumber or sheet goods could harm our business; we
may incur losses related to credit provided to our customers; our products may
be subject to negative trade outcomes; we may not be able to sustain our level
of sales or EBITDA margins; we may be unable to grow our business long term to
manage any growth; competition in our markets may lead to reduced revenues and
profitability; we may become subject to more stringent regulations;
importation of products manufactured with hardwood lumber or sheet goods may
increase, and replace products manufactured in North America; we are dependent
upon our management information systems; our insurance may be insufficient to
cover losses that may occur as a result of our operations; we are dependent
upon the financial condition and results of operations of our business; our
credit facilities affect our liquidity, contain restrictions on our ability to
borrow funds, and impose restrictions on distributions that can be made by
Hardwoods Specialty Products LP and Hardwoods Specialty Products USLP; there
are tax risks associated with an investment in our Units; our future growth
may be restricted by the payout of substantially all of our operating cash
flow; and, other risks described in our Annual Information Form and other
continuous disclosure documents.
All forward-looking information in this press release is qualified in its
entirety by this cautionary statement and, except as may be required by law,
we undertake no obligation to revise or update any forward-looking information
as a result of new information, future events or otherwise after the date
hereof.
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Balance Sheets
(Expressed in thousands of Canadian dollars)
December 31, 2008 and 2007
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 85 $ 295
Accounts receivable (note 6(c)) 32,218 36,474
Income taxes recoverable 2,316 1,041
Inventory (note 5) 30,868 38,400
Prepaid expenses 1,039 1,060
Foreign currency contracts (note 8) - 1,533
-----------------------------------------------------------------------
66,526 78,803
Long-term receivables (note 6(c)) 3,639 2,191
Property, plant and equipment (note 7) 2,168 2,413
Deferred financing costs 235 21
Future income taxes (note 13) 30,782 -
Foreign currency contracts (note 8) - 528
Intangible assets (note 9) - 9,013
Goodwill (note 9) - 80,758
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$ 103,350 $ 173,727
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current liabilities:
Bank indebtedness (note 10) $ 17,561 $ 25,515
Accounts payable and accrued liabilities 3,365 6,950
Distributions payable to Unitholders - 1,081
-----------------------------------------------------------------------
20,926 33,546
Deferred gain on sale-leaseback of land
and building 572 538
Foreign currency contracts (note 8) - 47
Future income taxes (note 13) - 3,534
Non-controlling interests (note 11) 13,080 30,068
Unitholders' equity:
Fund Units (note 12) 133,454 133,454
Deficit (49,958) (5,895)
Accumulated other comprehensive loss (14,724) (21,565)
-----------------------------------------------------------------------
68,772 105,994
Continuance of operations (note 1)
Commitments (note 15)
Contingencies (note 19)
Subsequent events (notes 1, 6(c)(ii) and 10)
-------------------------------------------------------------------------
$ 103,350 $ 173,727
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Statements of Earnings (Loss) and Deficit
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2008 and 2007
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Sales $ 256,301 $ 331,765
Cost of sales 210,205 269,028
-------------------------------------------------------------------------
Gross profit 46,096 62,737
Expenses (income):
Selling and administrative 41,425 43,360
Amortization:
Plant and equipment 941 1,091
Deferred financing costs 36 11
Other intangible assets 573 843
Deferred gain on sale-leaseback of
land and building (79) (79)
Interest 1,219 2,402
Foreign exchange gains (914) (2,524)
Intangibles impairment (note 9) 8,612 -
Goodwill impairment (note 9) 82,083 -
-----------------------------------------------------------------------
133,896 45,104
-------------------------------------------------------------------------
Earnings (loss) before non-controlling
interests and income taxes (87,800) 17,633
Non-controlling interests (note 11) 20,031 (109)
-------------------------------------------------------------------------
Earnings (loss) before income taxes (67,769) 17,524
Income tax expense (recovery) (note 13):
Current (734) 441
Future (30,792) 1,464
-----------------------------------------------------------------------
(31,526) 1,905
-------------------------------------------------------------------------
Net earnings (loss) for the year (36,243) 15,619
Deficit, beginning of year (note 3) (6,150) (9,159)
Distributions declared to Unitholders (7,565) (12,355)
-------------------------------------------------------------------------
Deficit, end of year $ (49,958) $ (5,895)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings (loss) per Unit $ (2.52) $ 1.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number of Units outstanding 14,410,000 14,410,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Statement of Comprehensive Income (Loss)
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2008 and 2007
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Net earnings (loss) for the year $ (36,243) $ 15,619
Other comprehensive income (loss):
Unrealized gains (losses) on translation
of self-sustaining foreign operations 6,841 (10,385)
-------------------------------------------------------------------------
Comprehensive income (loss) $ (29,402) $ 5,234
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Accumulated Other Comprehensive Loss
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2008 and 2007
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Accumulated other comprehensive loss,
beginning of year $ (21,565) $ (11,180)
Other comprehensive income (loss) 6,841 (10,385)
-------------------------------------------------------------------------
Accumulated other comprehensive loss,
end of year $ (14,724) $ (21,565)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2008 and 2007
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Cash flows provided by (used in)
operating activities:
Net earnings (loss) for the year $ (36,243) $ 15,619
Items not involving cash:
Amortization 1,471 1,866
Imputed interest income on employee loans (67) (60)
Loss (gain) on sale of property, plant
and equipment (14) (21)
Unrealized foreign exchange losses (gains) 333 (641)
Intangibles impairment 8,612 -
Goodwill impairment 82,083 -
Non-controlling interests (20,031) 109
Future income taxes (30,751) 980
-----------------------------------------------------------------------
5,393 17,852
Change in non-cash operating working
capital (note 14) 14,836 2,777
-----------------------------------------------------------------------
Net cash provided by operating activities 20,229 20,629
Cash flows used in financing activities:
Decrease in bank indebtedness (11,575) (9,769)
Increase in deferred financing fees (221) -
Distributions paid to Unitholders (8,646) (12,254)
-----------------------------------------------------------------------
Net cash used in financing activities (20,442) (22,023)
Cash flows provided by (used in) investing
activities:
Additions to property, plant and equipment (425) (571)
Proceeds on disposal of property, plant
and equipment 25 26
Decrease in long-term receivables, net 403 1,640
-----------------------------------------------------------------------
Net cash provided by investing activities 3 1,095
-------------------------------------------------------------------------
Decrease in cash (210) (299)
Cash, beginning of year 295 594
-------------------------------------------------------------------------
Cash, end of year $ 85 $ 295
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental information:
Interest paid $ 1,219 $ 2,402
Income taxes paid 75 936
Transfer of accounts receivable to
long-term customer notes receivable,
net of write offs, being a non-cash
transaction 2,508 667
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2008 and 2007
-------------------------------------------------------------------------
1. Nature and continuance of operations:
Hardwoods Distribution Income Fund (the "Fund") is an unincorporated,
open ended, limited purpose trust established under the laws of the
Province of British Columbia on January 30, 2004 by a Declaration of
Trust. The Fund commenced operations on March 23, 2004 when it
completed an initial public offering (the "Offering") of Units and
acquired an 80% interest in a hardwood lumber and sheet goods
distribution business in North America (the "Business") from
affiliates of Sauder Industries Limited ("SIL"). The Fund holds,
indirectly, 80% of the outstanding limited partnership units of
Hardwoods Specialty Products LP ("Hardwoods LP") and Hardwoods
Specialty Products US LP ("Hardwoods USLP"), limited partnerships
established under the laws of the Province of Manitoba and the state
of Delaware, respectively.
Effective for the year ended December 31, 2008, the Fund has adopted
Canadian Institute of Chartered Accountants ("CICA") Handbook Section
1400, General Standards of Financial Statement Presentation. Section
1400 was amended to require management to assess and disclose an
entity's ability to continue as a going concern. The Fund has
forecast its financial results and cash flows for 2009. The forecasts
are based on management's best estimates of operating conditions in
the context of the current economic climate, today's capital market
conditions and the depressed state of the housing and renovation
markets in both Canada and the United States.
At December 31, 2008, preliminary financial results for a U.S.
subsidiary of the Fund indicated that it would breach its fixed
charge coverage ratio, the only financial covenant which it is
subject to under its U.S. credit agreement. Subsequent to year end,
the Fund's U.S. subsidiary and its lender amended their credit
agreement with changes to be retroactively effective to the
December 31, 2008 reporting period. Under the amendment, the Fund's
U.S. subsidiary was compliant with its financial covenant at
December 31, 2008. Currently management does not anticipate being in
default of the fixed charge covenant ratio under its U.S. lending
agreement in the first quarter of 2009. However, due to the
difficulty in predicting the continued severity and duration of the
current economic and financial crisis, management is uncertain
whether its U.S. subsidiary will remain in compliance with its
financial covenant during the remainder of 2009. Further weakening of
the housing and renovation market, or incurring significant customer
or credit losses, could cause the U.S. subsidiary to violate its
fixed charge coverage ratio in 2009. This could cause the Fund's U.S.
subsidiary bank indebtedness to become immediately due and payable,
and the Fund and its U.S. subsidiary may not be able to access funds
under its revolving credit facility. In the event of such as
circumstance, the Fund anticipates it would need to raise additional
capital in the form of equity or debt to supplement or replace its
existing credit facilities in order to have sufficient liquidity to
meet its obligations in 2009.
The accompanying consolidated financial statements have been prepared
assuming the Fund will continue as a going concern which contemplates
the realization of assets and the satisfaction of liabilities in the
normal course of business. The consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts should the Fund be unable to
continue as a going concern.
2. Significant accounting policies:
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles.
(a) Basis of presentation:
These consolidated financial statements include the accounts of
the Fund and its 80% owned subsidiaries Hardwoods LP and
Hardwoods USLP and other wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated on consolidation.
(b) Cash and cash equivalents:
The Fund considers deposits in banks, certificates of deposit and
short-term investments with original maturities of three months
or less when acquired as cash and cash equivalents.
(c) Accounts receivable:
Accounts receivable includes trade accounts receivable net of
allowances for doubtful accounts plus the current portion of
housing loans receivable from employees related to their
relocation and customer notes receivable.
(d) Inventory:
Inventory is valued at lower of cost and net realizable value.
Cost is determined using the weighted average cost method and
includes invoice cost, duties, freight, and other directly
attributable costs of acquiring the inventory.
Volume rebates and other supplier discounts are included in
income when earned. Volume discounts and supplier trade discounts
are accounted for as a reduction of the cost of the related
inventory and are earned when inventory is sold.
(e) Property, plant and equipment:
Property, plant and equipment are stated at cost. Amortization is
provided at straight-line rates sufficient to amortize the cost
of the assets over their estimated useful lives as follows:
-----------------------------------------------------------------
Assets Estimated useful life
-----------------------------------------------------------------
Machinery and equipment 3 to 10 years
Mobile equipment 7 years
Leasehold improvements Over the term of the lease
-----------------------------------------------------------------
-----------------------------------------------------------------
(f) Deferred financing costs:
Financing costs incurred to obtain credit facilities are deferred
and amortized on a straight-line basis over the term of the
related debt facility.
(g) Intangible assets:
Intangible assets represent customer relationships acquired at
the time the Business was purchased from SIL (note 1) and are
recorded at cost less accumulated amortization and any write-
downs. Amortization is provided for on a straight-line basis over
15 years. During the year ended December 31, 2008, management
performed impairment tests at June 30, 2008 and at December 31,
2008 and recorded aggregate intangibles impairments of
$8.6 million (2007 - nil). See also note 9 to these consolidated
financial statements.
(h) Goodwill:
Goodwill is recorded at cost less any write-downs and is not
amortized. Management reviews the carrying value of goodwill for
impairment annually, or more frequently if events or changes in
circumstances indicate that the asset may be impaired. Any excess
of carrying value over fair value is charged to earnings in the
period in which the impairment is determined. During the year
ended December 31, 2008, management performed impairment tests at
June 30, 2008 and at December 31, 2008 and recorded aggregate
goodwill impairments of $82.1 million (2007 - nil). See also note
9 to these consolidated financial statements.
(i) Impairment of long-lived assets:
Long-lived assets, including property, plant and equipment and
other intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount for the asset
exceeds its estimated future cash flows, an impairment charge is
recognized by the amount that the carrying amount of the asset
exceeds its fair value.
(j) Sales-leaseback of land and building:
During the year ended December 31, 2005, a subsidiary of the Fund
sold a building and related land and leased back the facilities.
The gain on the sale has been deferred and is amortized in
proportion to the rental payments over the lease term.
(k) Income taxes:
Incorporated subsidiaries of the Fund use the asset and liability
method of accounting for income taxes. Under the asset and
liability method, future income tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Future tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on future tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the substantive enactment
date. The amount of future income tax assets recognized is
limited to the amount that is more likely than not to be
realized.
As the Fund allocates all of its net earnings to Unitholders and
deducts these amounts in computing its taxable income,
Unitholders, rather than the Fund, will generally be liable for
any income tax obligations until January 1, 2011. Accordingly, no
provision for current income taxes has been made in respect of
the Fund itself.
On June 12, 2007, the Canadian federal government's legislation
to tax publicly traded income trusts passed third reading in the
House of Commons and thus the associated income tax became
substantively enacted for accounting purposes. The legislation
imposes a tax on distributions from Canadian public income
trusts. The new tax is not expected to apply to the Fund until
January 1, 2011 as a transition period applies to publicly traded
trusts that existed prior to November 1, 2006. As a result of the
substantive enactment of the new tax legislation, the Fund has
recognized future income tax assets and liabilities that are
expected to reverse subsequent to January 1, 2011.
(l) Revenue recognition:
Revenue from the sale of hardwood lumber and sheet goods is
recognized at the time of delivery, which is when title and the
risks and rewards of ownership transfer to the customer.
(m) Translation of foreign currencies:
The accounts of the Fund's self-sustaining foreign operations are
translated into Canadian dollars using the current rate method.
Assets and liabilities are translated at the exchange rate in
effect at the balance sheet date and revenue and expenses are
translated at average exchange rates for the period. Gains or
losses arising from the translation of the financial statements
of the self-sustaining foreign operations are deferred in the
accumulated other comprehensive loss account in Unitholders'
equity.
Foreign monetary assets and liabilities of the Canadian
operations have been translated into Canadian dollars using the
rate of exchange in effect at the balance sheet date. Revenue and
expenses of the Canadian operations denominated in foreign
currencies are translated at the average exchange rates for the
period. Exchange gains or losses arising from translation of
these foreign monetary balances and transactions are reflected in
earnings.
(n) Foreign currency contracts:
The Fund has used currency derivatives to manage its exposure to
fluctuations in exchange rates between the Canadian and the
United States dollar. The foreign currency contracts were
recognized in the balance sheet and measured at fair value, with
changes in fair value recognized currently in the statement of
earnings.
(o) Earnings (loss) per Unit:
Basic earnings (loss) per Unit is calculated by dividing net
earnings (loss) by the weighted average number of Units
outstanding during the reporting period. Diluted earnings (loss)
per Unit is calculated by application of the if-converted method
for convertible securities (being exchangeable Units held by the
non-controlling interest). As the conversion of convertible
securities would not have a dilutive effect on earnings (loss)
per Unit, diluted and basic earnings (loss) per Unit are the same
amount.
(p) Use of estimates:
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Areas requiring significant management estimates include
the assessment of the Fund's ability to continue as a going
concern, the valuation and impairment analysis of goodwill and
other intangible assets, the determination of the allowance for
doubtful accounts, future income taxes and amounts of accrued
liabilities. Actual amounts may differ from the estimates applied
in the preparation of these financial statements.
(q) Future changes in accounting standards:
(i) International Financial Reporting Standards:
The CICA will transition Canadian generally accepted
accounting principles ("GAAP") for publicly accountable
entities to International Financial Reporting Standards
("IFRS"). The Fund's consolidated financial statements are
to be prepared in accordance with IFRS for the fiscal year
commencing January 1, 2011. The impact of the transition to
IFRS on the Fund's consolidated financial statements has
not been determined.
(ii) Goodwill and intangible assets:
Effective January 1, 2009, the Fund will adopt new CICA
Handbook Section 3064, Goodwill and Intangible Assets. This
section replaces CICA Handbook Section 3062, Goodwill and
Intangible Assets, and establishes revised standards for
the recognition, measurement, presentation and disclosure
of goodwill and intangible assets. As the Fund does not
have any goodwill or intangible assets at December 31,
2008, the adoption of this new standard will not impact the
amounts presented in the financial statements.
3. Adoption of new accounting standards:
Effective January 1, 2008, the Fund adopted four new accounting
standards: (a) Handbook Section 1535, Capital Disclosures; (b)
Handbook Section 3031, Inventories; (c) Handbook Section 3862,
Financial Instruments - Disclosures; and Handbook Section 3863,
Financial Instruments - Presentation. The main requirements of these
new standards and the resulting financial statement impact are
described below.
(a) Capital Disclosures (Section 1535):
CICA Section 1535 requires disclosure of: (i) an entity's
objectives, policies and process for managing capital; (ii)
quantitative data about what the entity considers as capital;
(iii) whether the entity has complied with any capital
requirements and, if it has not complied, the consequences of
such non-compliance. Refer to note 4 for additional disclosures.
(b) Inventories (Section 3031):
CICA Section 3031 provides significantly more guidance on the
measurement of inventories, with an expanded definition of cost
and the requirement that inventory must be measured at the lower
of cost and net realizable value. In addition the section has
additional disclosure requirements, including accounting
policies, carrying values, and the amount of any inventory
write-downs. Refer to note 5 for additional disclosures.
Consistent with the transitional rules for Section 3031, the Fund
has not restated any prior period amounts as a result of adopting
the accounting changes. As allowed under the transition rules,
the opening deficit has been adjusted to reflect the cumulative
impact of adopting the changes in accounting policy related to
inventory. The adoption of this new standard reflects trade
discounts from suppliers for inventory purchases that previously
had been recognized in earnings when received.
The effect of the adoption of Section 3031 is summarized in the
following table:
-----------------------------------------------------------------
Adjustment
As at on adoption As at
December 31, of new January 1,
2007 standards 2008
-----------------------------------------------------------------
Inventory $ 38,400 $ (317) $ 38,083
Non-controlling interests 30,068 (62) 30,006
Unitholders equity:
Deficit $ (5,895) $ (255) $ (6,150)
-----------------------------------------------------------------
-----------------------------------------------------------------
(c) Financial Instruments - Disclosures (Section 3862) and Financial
Instruments - Presentation (Section 3863):
CICA Section 3032 and 3063 replaces CICA Handbook Section 3861,
Financial Instruments - Disclosures and Presentation, revising
and enhancing disclosure requirements to provide additional
information on the nature and extent of risks arising from
financial instruments to which the entity is exposed and how it
manages those risks. Refer to note 6 for additional disclosures.
4. Capital disclosures:
The Fund's policy is to maintain a strong capital base so as to
maintain investor, creditor and market confidence and to sustain
future development of the business. The Fund considers its capital to
be bank indebtedness (net of cash) plus Unitholders' equity. The
Fund's capitalization is as follows:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Cash and cash equivalents $ (85) $ (295)
Bank indebtedness 17,561 25,515
---------------------------------------------------------------------
Net debt 17,476 25,220
Unitholders' equity 68,772 105,994
---------------------------------------------------------------------
Total capitalization $ 86,248 $ 131,214
---------------------------------------------------------------------
---------------------------------------------------------------------
The Fund monitors on a monthly basis the ratio of net debt to
earnings before interest, income taxes, depreciation and amortization
("EBITDA"). Net debt to EBITDA serves as an indicator of the Fund's
financial leverage. The maximum ratio of net debt to EBITDA allowed
under the Canadian credit facility is 2.50 times, and the minimum
ratio of EBITDA to interest is 3.0 times. Under the U.S. credit
facility, as amended on March 17, 2009, a Fixed Charge Coverage Ratio
((EBITDA less capital expenditures less cash taxes)/(interest plus
distributions)) is not permitted to be less than 0.75 for the periods
ended September 30, 2008 and December 31, 2008, not less than 0.50
for the period ended March 31, 2009, not less than 0.75 for the
period ended June 30, 2009, and not less than 1.0 thereafter. Refer
to note 10 for additional disclosures.
The terms of the agreements with the Fund's lenders provide that
distributions cannot be made to its unitholders in the event that its
subsidiaries did not meet the foregoing leverage as well as certain
additional credit ratios. Following the amendment to the USLP credit
facility on March 17, 2009 (notes 1 and 10), the operating
subsidiaries were fully compliant with all required credit ratios as
at December 31, 2008, and accordingly there were no restrictions on
distributions arising from compliance with financial covenants.
Distributions are one of the ways the Fund manages its capital.
Distributions of the Fund's available cash are made to the maximum
extent possible, subject to reasonable reserves established by the
Trustees of the Fund. Distributions are made by the Fund having given
consideration to a variety of factors including the outlook for the
business, financial leverage, and the ratio of distributions to
available cash of the Fund. There were no changes in the Fund's
approach to capital management during the year ended December 31,
2008. On November 3, 2008 the Trustees of the Fund suspended further
monthly distributions until such time as market conditions and the
Fund's generation of cash has improved.
5. Inventory:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Lumber $ 12,077 $ 15,077
Sheet goods 14,990 17,884
Specialty 2,356 3,067
Goods in-transit 1,445 2,372
---------------------------------------------------------------------
$ 30,868 $ 38,400
---------------------------------------------------------------------
---------------------------------------------------------------------
During the year ended December 31, 2008 inventory write-downs
totaling $3.1 million (2007 - $2.4 million) were recorded to reduce
certain inventory items to their net realizable value. The write-down
for the year ended December 31, 2008 included $0.6 million for
inventory stocked specifically for a large customer which declared
bankruptcy subsequent to year end.
Cost of sales for the year ended December 31, 2008 were
$210.2 million (2007 - $269.0 million), which included $201.8 million
(2007 - $259.8 million) of costs associated with inventory. The other
$8.4 million (2007 - $9.2 million) related principally to freight and
other related selling expenses.
6. Financial instruments:
Financial instrument assets include cash and cash equivalents, which
are designated as held-for-trading and measured at fair value, and
current and long-term receivables which are designated as loans and
receivables and measured at amortized cost. Financial instrument
liabilities include bank indebtedness, accounts payable, accrued
liabilities and distributions payable. All financial liabilities are
designated as other liabilities and are measured at amortized cost.
There are no financial instruments classified as available-for-sale
or held-to-maturity. Financial instruments of the Fund also included
foreign currency contracts which are derivative financial instruments
(note 6(b)) and measured at fair value prior to settlement in August
2008.
(a) Fair values of financial instruments:
The carrying values of cash and cash equivalents, accounts
receivable, income tax recoverable, accounts payable and accrued
liabilities and distributions payable approximate their fair
values due to the relatively short period to maturity of the
instruments. The fair value of long-term receivables is not
expected to differ materially from the carrying value. The
carrying values of the credit facilities approximate their fair
values due to the existence of floating market based interest
rates. The foreign currency contracts were carried at market
values as disclosed in note 8 prior to their settlement.
(b) Derivative financial instruments:
Until August 2008 the Fund used foreign currency contracts to
assist in forward planning for the business relating to managing
its exposure to fluctuations in exchange rates between the
Canadian dollar and the U.S. dollar. The foreign currency
contracts were recognized in the balance sheet and measured at
their fair value, with changes in fair value recognized currently
in the statement of earnings.
All of the outstanding foreign currency contracts were settled
with the counterparty during the year ended December 31, 2008.
Refer to note 8 for additional disclosure.
(c) Financial risk management:
Trustees of the Fund and the Board of Directors of the Fund's
subsidiaries have the overall responsibility for the
establishment and oversight of the Fund's risk management
framework. The Fund's risk management policies are established to
identify and analyze the risks faced by the Fund, to set
appropriate risk limits and controls, and to monitor risks and
adherence to limits. Risk management policies and systems are
reviewed regularly to reflect changes in market conditions and in
response to the Fund's activities. Through its standards and
procedures management has developed a disciplined and
constructive control environment in which all employees
understand their roles and obligations. Management regularly
monitors compliance with the Fund's risk management policies and
procedures and reviews the adequacy of the risk management
framework in relation to the risks faced by the Fund.
The Fund has exposure to credit, liquidity and market risks from
its use of financial instruments.
(i) Credit risk:
Credit risk is the risk of financial loss to the Fund if a
customer or counterparty to a financial instrument fails to
meet its contractual obligations, and arises principally
from the Fund's receivables from customers. Employee
housing loans, customer notes and security deposits also
present credit risk to the Fund.
The following is a breakdown of the Fund's current and
long-term receivables and represents the Fund's exposure to
credit risk related to its financial assets:
-----------------------------------------------------------
2008 2007
-----------------------------------------------------------
Trade accounts receivable
- Canada $ 8,404 $ 11,086
Trade accounts receivable
- United States 23,423 25,131
Sundry receivable 495 645
Current portion of long-term
receivables 2,243 658
-----------------------------------------------------------
34,565 37,520
Less: allowance for doubtful
accounts 2,347 1,046
-----------------------------------------------------------
$ 32,218 $ 36,474
-----------------------------------------------------------
-----------------------------------------------------------
Long-term receivables:
Employee housing loans $ 1,507 $ 1,130
Customer notes 3,772 1,166
Security deposits 603 553
---------------------------------------------------------
5,882 2,849
Less: current portion, included
in accounts receivable 2,243 658
-----------------------------------------------------------
$ 3,639 $ 2,191
-----------------------------------------------------------
-----------------------------------------------------------
Trade accounts receivable:
The Fund's exposure to credit risk is influenced mainly by
individual characteristics of each customer. The Fund is
exposed to credit risk in the event it is unable to collect
in full amounts receivable from its customers. The Fund
employs established credit approval practices and engages
credit attorneys when appropriate to mitigate the credit
risk. It is the Fund's policy to secure credit advanced to
customers whenever possible by registering security
interests in the assets of the customer and by obtaining
personal guarantees. Credit limits are established for each
customer and are regularly reviewed. In some instances the
Fund may choose to transact with a customer on a cash-on-
delivery basis. Our largest individual customer balance
amounted to 8.2% of trade accounts receivable and customer
notes receivable at December 31, 2008.
The aging of trade receivables was:
-----------------------------------------------------------
2008 2007
-----------------------------------------------------------
Current $ 17,037 $ 20,245
Past due 31-60 days 6,696 8,345
Past due 61-90 days 3,706 3,453
Past due 90+ days 4,388 4,174
-----------------------------------------------------------
$ 31,827 $ 36,217
-----------------------------------------------------------
-----------------------------------------------------------
The Fund determines its allowance for doubtful accounts
based on its best estimate of the net recoverable amount by
customer. Accounts that are considered uncollectable are
written off. The total allowance at December 31, 2008 was
$2.3 million (2007 - $1.0 million). The amount of the
allowance is considered sufficient based on the past
experience of the business, the security the Fund has in
place for past due accounts and management's regular review
and assessment of customer accounts and credit risk.
Bad debt expense for the year ended December 31, 2008 was
$3.9 million which equates to 1.5% of sales. For the year
ended December 31, 2007 bad debt expense was $2.1 million
which equates to 0.6% of sales. Historically bad debt
expense has averaged approximately 0.6% of sales.
Employee housing loans:
Employee loans are non-interest bearing and are granted to
employees who are relocated. Employee loans are secured by
a deed of trust or mortgage depending upon the
jurisdiction. Employees are required to make an annual
payment from their profit share. These loans are measured
at their fair market value upon granting the loan and
subsequently measured at amortized cost.
Customer notes:
Customer notes are issued to certain customers to provide
fixed repayment schedules for amounts owing that have been
agreed will be repaid over longer periods of time. The
terms of each note are negotiated with the customer. For
notes issued the Fund requires a fixed payment amount,
personal guarantees, general security agreements, and in
some cases security over specific property or assets.
Customer notes bear market interest rates ranging from 8%-
18%.
Security deposits:
Security deposits are recoverable on leased premises at the
end of the related lease term. The Fund does not believe
there is any material credit risk associated with its
security deposits.
(ii) Liquidity risk:
Liquidity risk is the risk that the Fund will not be able
to meet its financial obligations as they fall due. The
Fund's approach to managing liquidity is to ensure that it
will have sufficient cash available to meet its liabilities
when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to
the Fund's reputation. At December 31, 2008, in Canada, a
subsidiary of the Fund had a revolving credit facility of
up to $22.0 million. In the US, a subsidiary of the Fund
has a revolving credit facility of up to $36.5 million (US
$30.0 million). These credit facilities can be drawn down
to meet short-term financing requirements, including
fluctuations in non-cash working capital. The amount made
available under the revolving credit facilities from time
to time is limited to the extent of the value of certain
accounts receivable and inventories held by subsidiaries of
the Fund, as well as by continued compliance with credit
ratios and certain other terms under the credit facilities.
At December 31, 2008 the Canadian and U.S. credit
facilities have $11.5 million and $7.2 million (US$5.9
million), respectively of additional borrowing capacity.
Subsequent to December 31, 2008, the Fund reduced the size
of its Canadian credit facility to $12.0 million from a
previous maximum of $22.0 million. The reduction in
facility size was initiated in order to save approximately
$20,000 in standby fees for unused borrowing capacity
during 2009. The revised facility maximum of $12.0 million
is considered adequate to the working capital financing
needs of the Canadian operation, which at December 31, 2008
had borrowings under the facility of $0.3 million.
(iii) Market risk:
Market risk is the risk that changes in market prices, such
as interest rates, foreign exchange rates, and commodity
prices will affect the Fund's net earnings or value of its
holdings of financial instruments.
Interest rate risk:
The Fund is exposed to interest rate risk on its credit
facilities which bear interest at floating market rates.
Based upon December 31, 2008 bank indebtedness balance of
$17.6 million, a 1% increase or decrease in the interest
rates charged will result in decrease or increase to annual
net earnings by $0.1 million.
Currency risk:
As the Fund conducts business in both Canada and the United
States it is exposed to currency risk. Most of the hardwood
lumber sold by the Fund in Canada is purchased in U.S.
dollars from suppliers in the United States. Although the
Fund reports its financial results in Canadian dollars,
approximately two-thirds of its sales are generated in the
United States. Changes in the currency exchange rates of
the Canadian dollar against the U.S .dollar will affect the
results presented in the Fund's financial statements and
cause its earnings to fluctuate. In addition, changes in
the costs of hardwood lumber purchased by the Fund in the
United States as a result of the changing value of the
Canadian dollar against the U.S. dollar are usually
absorbed by the Canadian market. When the hardwood lumber
is resold in Canada it is generally sold at a Canadian
dollar equivalent selling price, and accordingly revenues
in Canada are effectively increased by decreases in value
of the Canadian dollar and vice versa. Fluctuations in the
value of the Canadian dollar against the U.S. dollar will
affect the amount of cash available to the Fund for
distribution to its Unitholders.
The Fund no longer maintains foreign currency contracts to
mitigate the potential impact of foreign exchange on U.S.
dollar distributions made by its U.S. operations. These
contracts did not eliminate the Fund's exposure to
fluctuations in the exchange rate between the Canadian
dollar and the U.S. dollar.
The foreign currency contracts allowed the Fund to
determine in advance, for the period and amount covered by
the contracts, the rates of exchange that would be realized
when translating into Canadian dollars that portion of
distributable cash contributed by the United States
operation. Currently no distributions are being made from
the Fund's U.S. subsidiary.
At December 31, 2008 the Fund's Canadian subsidiaries
exposure to foreign denominated working capital financial
instruments was in relation to accounts receivable from
U.S. customers (US$0.1 million), income taxes recoverable
(US$1.3 million), and accounts payable to U.S. suppliers
($0.1 million).
Based on the Fund's exposure to foreign denominated
financial instruments, the Fund estimates a $0.05 weakening
in the Canadian dollar as compared to the U.S. dollar would
have reduced the net loss for the year ended December 31,
2008 by approximately $0.1 million. A $0.05 strengthening
of the Canadian dollar as compared to the U.S. dollar would
have had the equal but opposite effect.
This foreign currency sensitivity is focused solely on the
currency risk associated with the Fund's Canadian
subsidiaries exposure to foreign denominated financial
instruments as at December 31, 2008 and does not take into
account the effect of a change in currency rates will have
on the translation of the balance sheet and operations of
the Fund's U.S. subsidiaries nor is it intended to estimate
the potential impact changes in currency rates would have
on the Fund's sales and purchases.
Commodity price risk:
The Fund does not enter in to any commodity contracts.
Inventory purchases are transacted at current market rates
based on expected usage and sale requirements and increases
or decreases in prices are reflected the Fund's selling
prices to customers.
7. Property, plant and equipment:
---------------------------------------------------------------------
Accumulated Net book
December 31, 2008 Cost amortization value
---------------------------------------------------------------------
Machinery and equipment $ 2,308 $ 1,610 $ 698
Mobile equipment 3,776 2,458 1,318
Leasehold improvements 840 688 152
---------------------------------------------------------------------
$ 6,924 $ 4,756 $ 2,168
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated Net book
December 31, 2007 Cost amortization value
---------------------------------------------------------------------
Machinery and equipment $ 2,345 $ 1,534 $ 811
Mobile equipment 3,195 1,853 1,342
Leasehold improvements 792 532 260
---------------------------------------------------------------------
$ 6,332 $ 3,919 $ 2,413
---------------------------------------------------------------------
---------------------------------------------------------------------
8. Foreign currency contracts:
In August 2008, a subsidiary of the Fund agreed to settle all of its
remaining foreign currency contracts with the counter-party. The
amount received by the Fund's subsidiary in settling the remaining
twenty-two outstanding contracts was $0.2 million.
For the year ended December 31, 2008, the Fund's subsidiary has
realized cash of $1.2 million (2007 - $1.9 million) from the
settlement of foreign currency contracts. For the year ended December
31, 2008, a loss of $0.8 million (2007 - $0.6 million gain) is
recorded in the statement of earnings as the cash realized was less
than the $2.0 million fair value of the contracts recorded at
December 31, 2007 due to the strengthening of the U.S. dollar during
that period.
9. Intangible assets and goodwill:
During the year ended December 31, 2008, management reviewed for
impairment the carrying value of intangible assets and the carrying
value of goodwill. Results of testing indicated impairment in the
carrying value of intangible assets in the Fund's U.S. reporting unit
of $5.5 million (US$5.4 million), and in the Fund's Canadian
reporting unit of $3.1 million. Testing also indicated impairment in
the carrying value of goodwill in the Fund's U.S. reporting unit of
$47.6 million (US$46.7 million), and in the Fund's Canadian reporting
unit of $34.5 million. This impairment reduces all intangible asset
and goodwill balances to zero, and is attributable primarily to the
significant decline in sales in both the U.S. and in Canada. Sales
declined due to reduced residential housing starts and remodeling
sales, branch shutdowns in the recreational vehicle industry, and a
decline in consumer confidence and overall economic activity.
10. Bank indebtedness:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Checks issued in excess of funds on deposit $ 1,087 $ 1,034
Credit facility, Hardwoods LP 265 5,538
Credit facility, Hardwoods USLP
(December 31, 2008 - US$13,308;
December 31, 2007 - US$19,109) 16,209 18,943
---------------------------------------------------------------------
$ 17,561 $ 25,515
---------------------------------------------------------------------
---------------------------------------------------------------------
Bank indebtedness consists of checks issued in excess of funds on
deposit and advances under operating lines of credit available to
Hardwoods LP and Hardwoods USLP. At December 31, 2008, Hardwoods LP
had a revolving credit facility of up to an aggregate amount of $22.0
million. On January 30, 2009, the maximum aggregate amount of the
Hardwoods LP revolving credit facility was reduced to $12.0 million.
Hardwoods USLP has a revolving credit facility of up to an aggregate
amount of $36.5 million (US$30.0 million). As described in note 6(c)
(ii), the amount made available under these credit facilities is
limited to the extent of the value of certain accounts receivable and
inventories held by subsidiaries of the Fund.
The Hardwoods LP credit facility expires November 30, 2009, and is
secured by a first security interest in all of the present and after
acquired property of Hardwoods LP and its operating subsidiaries, and
by the Hardwoods LP Units held indirectly by the Fund. The Hardwoods
USLP credit facility was renegotiated in September 2008 and now
expires September 30, 2011. Subsequent to year end, on March 17, 2009
Hardwoods USLP and the lender agreed to amend certain financial
covenants in the Hardwoods USLP credit facility (note 1). Costs paid
to the lender with respect to entering into the new facility of US
$207,000 are being amortized over the three year term of the credit
facility. The Hardwoods USLP facility is secured by a first security
interest in all of the present and after acquired property of
Hardwoods USLP and by the Hardwoods USLP Units held indirectly by the
Fund.
The credit facilities are repayable without any prepayment penalties
and bear interest at a floating rate based on the Canadian dollar or
U.S. dollar prime rate (as the case may be), LIBOR or bankers
acceptance rates plus, in each case, an applicable margin. Letters of
credit are also available under the credit facilities.
Hardwoods LP's interest rates vary with the ratio of total debt for
borrowed money, capital leases and letters of credit (as adjusted for
certain items) to earnings before interest, taxes, depreciation and
amortization ("Debt to EBITDA ratio"), as defined by the credit
agreement. The Debt to EBITDA ratio as calculated under the Hardwoods
LP credit agreement is not permitted to exceed 2.5 times. In
addition, the ratio of Hardwoods LP's earnings before interest,
taxes, depreciation and amortization to interest is not permitted to
be less than 3.0 times, all as defined by the Hardwoods LP credit
agreement.
Hardwoods USLP's rates vary with its Fixed Charge Coverage Ratio
("FCCR"), the ratio of earnings before interest, taxes, depreciation,
and amortization less cash taxes and capital expenditures (as
adjusted for certain items), to the sum of interest expense plus
distributions, all as defined by the credit agreement. Hardwoods
USLP's applicable margin is dependent upon the FCCR and ranges from
0.25% to 0.75% for prime rate loans and from 1.75% to 2.25% on LIBOR
revolving loans. The FCCR as calculated under the Hardwoods USLP
credit agreement is not permitted to be less than 0.5 until March 31,
2009, not less than 0.75 from April 1to June 30, 2009, and not less
than 1.00 thereafter. Distributions by Hardwoods USLP are permitted
to be made to the extent that after giving effect to the
distribution, the FCCR does not fall below its minimum required
level, and at least $4.0 million of unused borrowing capacity is
available in Hardwoods USLP.
The average annual interest rates paid for the year ended December
31, 2008 were 6.26% and 5.18% (2007 - 6.7% and 7.2%) for the
Hardwoods LP and Hardwoods USLP credit facilities, respectively.
11. Non-controlling interests:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Balance, beginning of year (note 3(b)) $ 30,006 $ 33,788
Interest in earnings:
Interest in earnings before taxes (17,560) 3,527
Adjustment to non-controlling interest
from subordination of Class B Unit Holders (2,471) (3,418)
-------------------------------------------------------------------
Increase (decrease) (20,031) 109
Foreign currency translation adjustment
of non-controlling interest
in Hardwoods USLP 3,105 (3,829)
---------------------------------------------------------------------
Balance, end of year $ 13,080 $ 30,068
---------------------------------------------------------------------
---------------------------------------------------------------------
The previous owners of the Business (note 1) have retained a 20%
interest in Hardwoods LP and Hardwoods USLP through ownership of
Class B Hardwoods LP units ("Class B LP Units") and Class B Hardwoods
USLP units ("Class B USLP Units"), respectively. The Fund owns an
indirect 80% interest in Hardwoods LP and Hardwoods USLP through
ownership of all Class A Hardwoods LP units ("Class A LP Units") and
Class A Hardwoods USLP units ("Class A USLP Units"), respectively.
The Class A LP Units and Class B LP Units and the Class A USLP Units
and Class B USLP Units, respectively, have economic and voting rights
that are equivalent in all material respects except distributions on
the Class B LP Units and Class B USLP Units are subject to the
subordination arrangements described below until the date (the
"Subordination End Date") on which
- the consolidated Adjusted EBITDA, as defined in the Subordination
Agreement dated March 23, 2004, of the Fund for the 12 month
period ending on the last day of the month immediately preceding
such date is at least $21,300,000; and
- cash distributions of at least $29,540,000 ($2.05 per Unit) have
been paid on the Units and a combined amount of cash advances or
distributions of at least $7,385,000 has been paid on the Class B
LP Units and Class B USLP Units, being $2.05 per combined Class B
LP and Class B USLP Units (as adjusted for issuances, redemptions
and repurchases of Units, LP Units and USLP Units subsequently and
by converting the cash distributions or advances by Hardwoods USLP
on the USLP Units at the rate of exchange used by the Fund to
convert funds received by it in U.S. dollars into Canadian
dollars) for the 24 month period ending on the last day of the
month immediately preceding such date.
The Subordinated End Date had not occurred at December 31, 2008.
Prior to the Subordination End Date, advances and distributions on
the LP Units and the USLP Units will be made in the following order
of priority:
- At the end of each month, cash advances or distributions will be
made to the holders of Class A LP Units and Class A USLP Units in
a combined amount that is sufficient to provide available cash to
the Fund to enable the Fund to make cash distributions upon the
Units for such month at least equal to $0.08542 per Unit or, if
there is insufficient available cash to make distributions or
advances in such amount, such lesser amount as is available as
determined by the board of directors of the general partners;
- At the end of each fiscal quarter of Hardwoods LP and Hardwoods
USLP, including the fiscal quarter ending on the fiscal year end,
available cash of Hardwoods LP and Hardwoods USLP will be advanced
or distributed in the following order of priority:
- First, in payment of the monthly cash advance or distribution
to the holders of Class A LP Units and Class A USLP Units as
described above, for the month then ended;
- Second, to the holders of Class A LP Units and Class A USLP
Units, to the extent that the combined monthly cash advances or
distributions in respect of the 12 month period then ended (and
not, for greater certainty, in any previous 12 month period) on
Class A LP Units and Class A USLP Units were not made or were
made in amounts less than a combined amount at least equal to
$1.025 per Unit, the amount of any such deficiency. As of
December 31, 2008, the amount of such deficiency was $7.2
million;
- Third, to the holders of Class B LP Units and Class B USLP
Units in a combined amount for one Class B LP Unit and one
Class B USLP Unit equal, on a pro-rated basis, to the combined
amount advanced or distributed on one Class A LP Unit and one
Class A USLP Unit during such fiscal quarter or, if there is
insufficient available cash to make advances or distributions
in such amount, such lesser amount as is available;
- Fourth, to the holders of Class B LP Units and Class B USLP
Units, to the extent only that combined advances or
distributions in respect of any fiscal quarter(s) during the 12
month period then ended (and not, for greater certainty, in any
previous 12 month period) on one Class B LP Unit and one Class
B USLP Unit were not made, or were made in amounts less, on a
pro-rated basis, that the combined amount advanced or
distributed on one Class A LP Unit and one Class A USLP Unit
during such 12 month period, the amount of such deficiency. As
of December 31, 2008, the amount of such deficiency was $1.9
million.
- Fifth, to the extent of any excess, to the holders of the Class
A LP Units and Class B LP Units and Class A USLP Units and
Class B USLP Units, respectively, so that the combined advances
or distributions on one Class A LP Unit and one Class A USLP
Unit are the same as the combined advances or distribution on
one Class B LP Unit and one Class B USLP Unit in respect of the
12 month period then ended (and not, for greater certainty, any
previous 12 month period).
After the Subordination End Date, the holders of the Class B LP Units
and Class B USLP Units will generally be entitled to effectively
exchange all or a portion of their Class B LP Units and Class B USLP
Units together for up to 3,602,500 Units of the Fund, representing
20% of the issued and outstanding Units of the Fund on a fully
diluted basis. In the event the Fund enters into an agreement in
respect of an acquisition or a take-over bid of the Fund, the holders
of the Class B LP Units and Class B USLP Units will be entitled to
exchange such units for Units of the Fund.
The cumulative deficiency prior to December 31, 2007, which is no
longer recoverable by the Class B LP Unitholders and the Class B USLP
Unitholders, has been recorded as an adjustment to the non-
controlling interest's share of earnings in the amount of $2.5
million for the year ended December 31, 2008 and $3.4 million for the
year ended December 31, 2007.
12. Fund Units:
(a) An unlimited number of Units and Special Voting Units may be
created and issued pursuant to the Declaration of Trust. Each
Unit is transferable and represents an equal undivided beneficial
interest in any distributions from the Fund, whether of net
income, net realized capital gains or other amounts and in the
net assets of the Fund in the event of a termination or winding
up of the Fund. The Special Voting Units are not entitled to any
beneficial interest in any distribution from the Fund or in the
net assets of the Fund in the event of a termination or winding
up of the Fund. Each Unit, or Special Voting Unit, entitles the
holder thereof to one vote at all meetings of voting Unitholders.
On March 23, 2004, the Fund issued 14,410,000 Units at a price of
$10 per Unit pursuant to the Offering. Net proceeds from the
Offering were $133,454,000 after deducting expenses of the
Offering of $10,646,000. The holders of the Class B Units of
Hardwoods LP and Hardwoods USLP were issued 3,602,500 Special
Voting Units of the Fund, the value of which is included in non-
controlling interests (note 11). Such Special Voting Units are to
be cancelled on the exchange of Class B Units of Hardwoods LP and
Hardwoods USLP for Units of the Fund.
(b) The Trustees of the Fund approved the adoption of a Unitholders'
Rights Plan (the "Rights Plan") dated December 12, 2006, that is
intended to ensure fair treatment for all Unitholders in the
event of a take-over bid or any other attempt to acquire a
controlling interest in the Fund. The Rights Plan has been
accepted by the Toronto Stock Exchange and was approved at the
meeting of Unitholders on May 14, 2007. The Rights Plan will
continue in effect until the annual general meeting of
Unitholders in 2010. Provisions of the Rights Plan include the
limitation on Unitholder ownership at 20% of outstanding units in
the absence of a take-over bid for all outstanding units and a
requirement for a take-over bid to be open for a minimum of 60
days. At the effective date of the Rights Plan, beneficial owners
of 20% or more of the units of the Fund (including holders of
securities exchangeable for units of the Fund) were deemed to be
"Grandfathered Persons" and are exempt from the definition of an
"Acquiring Person" under the Rights Plan provided their
beneficial interest in the outstanding units does not increase by
more than 1.0% following December 12, 2006. The rights become
exercisable only when a person or party acquires 20% or more of
the Units, or in the case of a Grandfathered Person increases
their beneficial interest in Units by more than 1.0%, each
without complying with certain provisions of the Rights Plan.
Each right would entitle each holder of Units (other than the
acquiring person or party) to purchase additional Units of the
Fund at a 50 percent discount to the market price at the time.
13. Income taxes:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Current $ (734) $ 441
Future (30,792) 1,464
---------------------------------------------------------------------
$ (31,526) $ 1,905
---------------------------------------------------------------------
---------------------------------------------------------------------
Effective March 31, 2008 the Fund completed an internal
reorganization that involved the refinancing of inter-corporate debt
in the form of notes issued and held by subsidiaries of the Fund. The
reorganization does not have any effect upon the management or
business activities of the Fund's operating subsidiaries. As a result
of the internal re-organization, income tax losses arose of
approximately US$10.3 million which are available to reduce U.S.
taxable income. Based on statutory income tax rates in effect for the
Fund's U.S. subsidiary, this amounts to an estimated $3.6 million tax
benefit available to subsidiaries of the Fund. This $3.6 million
benefit was recorded at March 31, 2008 and is comprised of an
estimated $0.8 million current income tax recovery and $2.8 million
future income tax recovery.
In addition, during the quarter ending March 31, 2008, tax pools
consisting principally of Canadian tax loss carry forward, of
approximately $16.0 million were recorded by a subsidiary of the Fund
as a result of the Fund's re-organization plan. The tax loss carry
forwards will result in a reduction of tax otherwise payable under
the Canadian federal government's tax on publicly traded income
trusts. Based on tax rates expected to apply at the date such tax
pools will be utilized, an additional $4.2 million of future income
tax benefit was recorded by the Fund at March 31, 2008.
During the year ended December 31, 2008, the Company recorded a
future tax recovery of approximately $22.3 million as a result of the
write-down of the goodwill and intangible assets. Goodwill and
intangible assets remain deductible for Canadian and U.S. tax
purposes.
Under current income tax regulations subsidiaries of the Fund are
only subject to U.S. tax, thus income tax expense differs from that
calculated by applying U.S. federal and state statutory income tax
rates in effect in that jurisdiction in which the U.S. subsidiary is
subject to tax of 39.4% (2007 - 39.4%) to earnings before income
taxes for the following reasons:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Earnings before income tax $ (67,769) $ 17,524
---------------------------------------------------------------------
---------------------------------------------------------------------
Computed tax expenses at statutory rate $ (26,701) $ 6,904
Income of Fund distributed
directly to Unitholders (2,382) (4,317)
Income and deductions not subject to tax (422) (812)
Taxes paid as a result of
Subordination Agreement 92 712
Adjustment to non-controlling
interest not subject to tax (698) (930)
State and branch profits tax 50 75
Reconciling items related to
goodwill and intangible impairment 5,611 -
Restructuring (7,802) -
Other 726 273
---------------------------------------------------------------------
$ (31,526) $ 1,905
---------------------------------------------------------------------
---------------------------------------------------------------------
Taxes paid as a result of Subordination Agreement represent
additional taxes incurred by subsidiaries of the Fund due to
distributions having not been made to the non-controlling interests
on a proportional basis.
The tax effect of temporary differences that give rise to significant
portions of the future income tax assets and liabilities at December
31, 2008 is as follows:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Future income tax assets:
Accounts receivable $ 380 $ 154
Inventory 351 383
Employee housing loans 77 73
Property, plant and equipment 309 249
Goodwill 19,307 -
Tax loss carry forwards and
future interest deductions 10,318 -
Deferred gain on sale-leaseback
of land and building 180 170
-------------------------------------------------------------------
30,922 1,029
Future income tax liabilities:
Prepaid expenses (88) (84)
Property, plant and equipment (52) (111)
Goodwill - (4,368)
-------------------------------------------------------------------
(140) (4,563)
---------------------------------------------------------------------
Net future income tax asset (liability) $ 30,782 $ (3,534)
---------------------------------------------------------------------
---------------------------------------------------------------------
At December 31, 2008, subsidiaries of the Fund have operating loss
carry forwards for income tax purposes of approximately $16.6 million
in Canada and US$10.0 million in the United States that may be
utilized to offset future taxable income. These losses, if not
utilized expire between 2014 and 2028.
14. Changes in non-cash operating working capital and additional cash
flow disclosures:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Source (use) of funds
Accounts receivable $ 7,858 $ 1,470
Income taxes recoverable/payable (805) (445)
Inventory 11,820 1,627
Prepaid expenses 155 (70)
Accounts payable and accrued liabilities (4,192) 195
---------------------------------------------------------------------
Decrease in non-cash
operating working capital $ 14,836 $ 2,777
---------------------------------------------------------------------
---------------------------------------------------------------------
CICA 1540, Cash Flow Statements, require entities to disclose total
cash distributions on financial instruments classified as equity in
accordance with a contractual agreement and the extent to which total
cash distributions are non-discretionary. The Fund has no contractual
requirement to pay cash distributions to Unitholders' of the Fund.
During the year ended December 31, 2008, $8.6 million (2007 - $12.3
million) in discretionary cash distributions were paid to
Unitholders.
15. Commitments:
(a) The Fund's subsidiaries are obligated under various building and
automobile operating leases that require minimum rental payments
in each of the next five years as follows:
-----------------------------------------------------------------
2009 $ 7,389
2010 5,742
2011 2,703
2012 1,726
2013 1,026
-----------------------------------------------------------------
18,586
Thereafter 658
-----------------------------------------------------------------
$ 19,244
-----------------------------------------------------------------
-----------------------------------------------------------------
(b) At December 31, 2008, the Fund's subsidiaries had no commitments
(2007 - $22,304 (US$22,500)) under letters of credit.
16. Segment disclosure:
Information about geographic areas is as follows:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Revenue from external customers:
Canada $ 89,581 $ 105,171
United States 166,720 226,594
---------------------------------------------------------------------
$ 256,301 $ 331,765
---------------------------------------------------------------------
---------------------------------------------------------------------
Property, plant and equipment:
Canada $ 752 $ 1,003
United States 1,416 1,410
---------------------------------------------------------------------
$ 2,168 $ 2,413
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill
Canada $ - $ 34,477
United States - 46,281
---------------------------------------------------------------------
$ - $ 80,758
---------------------------------------------------------------------
---------------------------------------------------------------------
17. Pensions:
Hardwoods USLP maintains a defined contribution 401 (k) retirement
savings plan (the "USLP Plan"). The assets of the USLP Plan are held
and related investment transactions are executed by the Plan's
Trustee, ING National Trust, and, accordingly, are not reflected in
these consolidated financial statements. During the year ended
December 31, 2008, Hardwoods USLP contributed and expensed $377,750
(US$354,362) (2007- $403,817 (US$375,643)) in relation to the USLP
Plan.
Hardwoods LP does not maintain a pension plan. Hardwoods LP does,
however, administer a group registered retirement savings plan ("LP
Plan") that has a matching component whereby Hardwoods LP makes
contributions to the LP Plan which match contributions made by
employees up to a certain level. The assets of the LP Plan are held
and related investment transactions are executed by LP Plan's
Trustee, Sun Life Financial Trust Inc., and, accordingly, are not
reflected in these consolidated financial statements. During the year
ended December 31, 2008, Hardwoods LP contributed and expensed
$256,469 (2007 - $246,475) in relation to the LP Plan
18. Related party transactions:
For the year ended December 31, 2008, sales of $427,795 (2007 -
$736,573) were made to affiliates of SIL, and the Fund made purchases
of $98,005 (2007 - $184,732) from affiliates of SIL. All these sales
and purchases took place at prevailing market prices.
During year ended December 31, 2008, the Fund paid $108,000 (2007 -
$108,000) to affiliates of SIL under the terms of an agreement to
provide services for management information systems. This cost is
included in the selling and administrative expense in the statement
of earnings.
19. Contingencies:
The Fund and its subsidiaries are subject to legal proceedings that
arise in the ordinary course of its business. Management is of the
opinion, based upon information presently available, that it is
unlikely that any liability, to the extent not provided for through
insurance or otherwise, would be material in relation to the Fund's
consolidated financial statements.
%SEDAR: 00020372E
For further information: Rob Brown, Chief Financial Officer, Phone:
(604) 881-1990, Fax: (604) 881-1995, Email: robbrown@hardwoods-inc.com;
www.hardwoods-inc.com
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