Note: Financial references in US dollars unless otherwise indicated
Q3 2008 HIGHLIGHTS
- Achieved breakeven EBITDA at North American OSB operations for a
second consecutive quarter
- Completed US MACT air emissions compliance projects
- Improved safety rate 22% year-to-dateTORONTO, Oct. 24, 2008 /CNW/ - Norbord Inc. (TSX:NBD) today reported a
loss of $18 million or $0.12 per share in the third quarter of 2008. In the
prior quarter, Norbord reported a loss of $37 million or $0.25 per share,
which included an antitrust litigation settlement charge. Norbord recorded a
loss of $1 million or $0.00 per share in the third quarter of 2007.
Norbord recorded negative EBITDA of $9 million in Q3 2008 compared to
positive EBITDA of $1 million in the prior quarter and positive $30 million in
Q3 2007.
"North American OSB prices were better than anticipated during the
quarter and our North American OSB operations broke even again this quarter as
a result," said Barrie Shineton, Norbord's President and CEO. "However,
world-wide economic conditions continue to deteriorate and are now impacting
results from our European operations. Near-term, we don't expect to see
improvements in the economy or the housing start numbers in North America or
Europe. In this environment, we continue to focus on containing costs,
servicing our excellent customer base and optimizing the performance of our
mills so that we are well positioned when markets recover."
Market Conditions
North American North Central benchmark OSB prices averaged $201, an
improvement of $22 and $24 from the second quarter of 2008 and the third
quarter of 2007, respectively. In the South East region, where approximately
55% of Norbord's North American capacity is located, prices averaged $158 in
the third quarter versus $155 last quarter and $149 in the same period last
year. Third quarter benchmark prices reflected continuing wide-spread industry
curtailments, the seasonal increase in construction activity, low supply chain
inventory levels and production constraints due to weather-related log
shortages.
The lack of available credit in the US has resulted in severely limited
mortgage approvals and a further decline in housing starts. These same
financial restrictions are forcing many of Norbord's customers to modify
operating plans and aggressively reduce their own working capital levels. The
combination of these factors is expected to exaggerate the seasonal slowdown
in demand going into the fourth quarter.
The credit crisis that began in the US has expanded into global financial
markets. Consumer confidence and housing-related spending across Europe have
been significantly impacted as a result. In the UK, where the majority of
Norbord's European assets are located, 2008 housing starts have fallen 40%
year-to-date as mortgage lenders tightened credit terms and limited mortgage
approvals. Norbord's European panelboard prices declined 7% on average
compared to the second quarter of 2008.
Developments
Norbord concluded an additional $35 million commitment under its accounts
receivable securitization program during the third quarter. At quarter end,
Norbord had $181 million of liquidity consisting of cash and cash equivalents,
unutilized bank lines and unutilized term debt facilities. The Company
continues to consider alternatives to further strengthen its liquidity
position and conserve cash.
Performance
In the quarter, Norbord's North American per unit OSB cash production
costs increased 5% over the prior quarter and 9% over the same period last
year. This increase is largely due to higher resin and wax costs. Production
costs have also been impacted, to a lesser extent, by higher fibre and energy
prices and lower production volumes.
In North America, Norbord curtailed approximately 10% of its OSB
production during the third quarter, compared to 10% in Q2 2008. Norbord
curtailed 20% of its European capacity during the quarter, versus 10% in the
prior quarter.
Norbord will continue its practice of monitoring the financial
performance of each mill and will suspend operations on a temporary or
indefinite basis should cash losses exceed shutdown costs. As Norbord does not
consider temporary or indefinite curtailments material in the current market
environment, these shutdowns will be summarized at the end of each quarter
rather than disclosed as they happen.
Capital investments totaled $22 million year-to-date; $7 million in the
third quarter. These capital investments included approximately $12 million to
complete the last of Norbord's US MACT air emissions compliance projects.
Norbord expects to limit 2009 capital investments to less than $25 million. At
quarter end, Norbord's net debt was 37% of capitalization on a market basis
and 62% on a book basis.
Quarterly Dividend
The Board of Directors declared a quarterly dividend of CAD $0.10 per
common share, payable on December 21, 2008 to shareholders of record on
December 1, 2008.
Conference Call
Norbord will hold a conference call for investors on Friday, October 24,
2008 at 11:00 a.m. ET. The call will be broadcast live over the Internet via
www.norbord.com and www.newswire.ca. A replay number will be available
approximately one hour after completion of the call and accessible until
Friday, November 28, 2008, by dialing 647.436.0148 or 888.203.1112. The
passcode is 8684342. Audio playback will be available on the Norbord website.
Norbord Profile
Norbord Inc. is an international producer of wood-based panels with
assets of $1.3 billion, employing approximately 2,700 people at 15 plant
locations in the United States, Europe and Canada. Norbord is one of the
world's largest producers of oriented strand board (OSB). In addition to OSB,
Norbord manufactures particleboard, medium density fibreboard (MDF), hardwood
plywood and related value-added products. Norbord is a publicly traded company
listed on the Toronto Stock Exchange under the symbol NBD.
This news release and attached Shareholders Letter contain
forward-looking statements, as defined in applicable legislation. Often, but
not always, words such as "believe," "will," "expects," "should," "may," and
other expressions which are predictions of or indicate future events, trends
or prospects and which do not relate to historical matters identify
forward-looking statements. Forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Norbord to be materially different
from any future results, performance or achievements expressed or implied by
the forward-looking statements.
Although Norbord believes it has a reasonable basis for making these
forward-looking statements, readers are cautioned not to place undue reliance
on such forward-looking information. By its nature, forward-looking
information involves numerous assumptions, inherent risks and uncertainties,
both general and specific, which contribute to the possibility that the
predictions, forecasts and other forward-looking statements will not occur.
Factors that could cause actual results to differ materially from those
contemplated or implied by forward-looking statements include: general
economic conditions; risks inherent with product concentration; effects of
competition and product pricing pressures; risks inherent with customer
dependence; effects of variations in the price and availability of
manufacturing inputs; risks inherent with a capital intensive industry; and
other risks and factors described from time to time in filings with Canadian
securities regulatory authorities.
Except as required by applicable laws, Norbord does not undertake to
update any forward-looking statements, whether as a result of new information,
future events or otherwise, or to publicly update or revise the above list of
factors affecting this information. See the "Caution Regarding Forward-Looking
Information" statement in the March 1, 2008 Annual Information Form and the
cautionary statement contained in the "Forward-Looking Statements" section of
the 2007 Management's Discussion and Analysis dated January 31, 2008.
October 24, 2008
Dear Norbord Shareholder,
Norbord's third quarter results reflected ongoing weakness in North
American new home sales, downward momentum in UK housing-related activity and
the overall impact of the global credit crisis. Against this backdrop, Norbord
recorded negative EBITDA of $9 million.
Oriented strand board (OSB) prices in North America were better than
anticipated during the third quarter, although they are still at unsustainably
low levels and are expected to soften during the fourth quarter. In addition
to a seasonal drop in construction activity, buyers are aggressively managing
working capital levels to meet their own financial covenant targets at
year-end; a key priority for every business given today's tight credit
markets. We also faced significant input cost pressures during the third
quarter, however, we believe wood, resin and wax prices have peaked and will
ease going forward. US housing starts will end the year at less than 1.0
million and remain at this level in 2009 - this is an important indicator for
our business as more than 65% of the OSB produced in North America goes into
new home construction. For these reasons, we believe that OSB prices will
remain constrained in the near-term.
I've stated over the past few quarters that there are several market
adjustments that must occur before we see a meaningful improvement in housing
starts and stronger OSB prices: high inventory of new and used homes needs to
be absorbed; housing affordability must return to pre-bubble norms; and
mortgage lenders have to put first time buyers back into the housing market.
We continue to believe that all these things will happen, although the
recovery will likely take some time.
The recent expansion of the US credit crisis into global financial
markets means that challenges facing our European operations now mirror those
in North America. In the UK, where most of our European operations are
located, housing starts have fallen 40% year-to-date as mortgage lenders
tightened credit terms and limited mortgage approvals. We believe the market
dynamics needed to see improved housing starts and stronger panel board prices
in Europe are now very similar to North America. It is important to note,
however, that the UK market is not handicapped in the same manner as North
America by high inventories of new or used unsold homes. There is also a
systemic lack of available housing in the UK and this pent-up demand continues
to grow. Combined, these factors suggest that there may be a faster recovery
in housing starts and panel board demand once credit conditions correct and
financial markets stabilize.
We took additional steps this quarter to strengthen Norbord's balance
sheet. To ensure we have sufficient liquidity to manage through this prolonged
downturn, we increased our accounts receivable securitization program by $35
million. At the end of the quarter, Norbord had $181 million of liquidity
consisting of cash, unutilized bank lines and unutilized term debt facilities.
Our current liquidity position supported another dividend payment this
quarter. However, we are in unusually challenging markets and we expect demand
and pricing challenges will last for some time. Prudent management of our
liquidity and cash position remains a key priority for our Company and we will
keep you apprised of further developments.
In our view, the next two years will be difficult for the building
material industries in North America and Europe. Norbord has the right
strategy, good management and the necessary support from Brookfield Asset
Management, our major shareholder. We fully expect to emerge from this cycle a
stronger company.
Thank you for your continuing support.(signed)
J. Barrie Shineton
President & Chief Executive Officer
Management's Discussion and Analysis
THIRD QUARTER 2008
October 23, 2008
INTRODUCTIONThe Management's Discussion and Analysis (MD&A) provides a review of the
significant developments that impacted Norbord's performance during the
period. The information in this section should be read in conjunction with the
financial statements, which follow this MD&A. Norbord's significant accounting
policies and other financial disclosures are contained in the audited annual
financial statements and accompanying notes. Additional information on
Norbord, including documents publicly filed by the Company, is available on
the Company's website at www.norbord.com or the System for Electronic Document
Analysis and Retrieval (SEDAR) at www.sedar.com. All financial references in
the MD&A are stated in US dollars unless otherwise noted.
Some of the statements included or incorporated by reference in this MD&A
constitute forward-looking statements within the meaning of applicable
securities legislation. Forward-looking statements are based on various
assumptions and are subject to various risks. See the cautionary statement
contained in the Forward-Looking Statements section.
EBITDA, operating working capital, total working capital, capital
employed, ROCE, ROE, net debt, tangible net worth, net debt to capitalization,
book basis and net debt to capitalization, market basis are non-GAAP financial
measures described in the Non-GAAP Financial Measures section. Non-GAAP
financial measures do not have any standardized meaning prescribed by Canadian
Generally Accepted Accounting Principles (GAAP) and are therefore unlikely to
be comparable to similar measures presented by other companies. Where
appropriate, a quantitative reconciliation of the non-GAAP financial measure
to the most directly comparable GAAP measure is also provided.
BUSINESS OVERVIEW AND STRATEGY
Norbord is an international producer of wood-based panels with 15 plant
locations in the US, the UK, Canada and Belgium. It is one of the world's
largest producers of oriented strand board (OSB) with annual capacity of
5.0 billion square feet (3/8-inch basis). The core of Norbord's OSB business
is located in the South East region of the US. In addition, the Company is a
significant producer of wood-based panels in Europe. The geographical
breakdown of Norbord's panel production capacity is 73% North America and 27%
Europe.
Norbord's business strategy is focused entirely on the wood panels sector
- in particular OSB - in North America and Europe.
Norbord's financial goal is to achieve top quartile return on equity
(ROE) and cash return on capital employed (ROCE) among North American forest
products companies. As Norbord operates in a cyclical commodity business,
Norbord interprets its financial goal over the cycle.
Protecting the balance sheet is an important element of Norbord's
financing strategy. Norbord believes that its record of superior operational
performance and prudent balance sheet management should enable it to access
public and private capital markets, subject to financial market conditions. At
the end of the quarter, the Company had a net debt to capitalization of 37% on
a market basis and 62% on a book basis. The Company continues to consider
alternatives to further strengthen its liquidity position and conserve cash.
SUMMARY
Results of operations are most affected by the volatility in North
American OSB prices. North America experienced a modest rise in OSB pricing in
the quarter, however, management expects prices to moderate through the
remainder of the year. North American markets remain under pressure
principally due to the continuing sharp decline in US housing starts and the
effects of the unprecedented economic slowdown. The economic challenges in
North America are now having a global impact. European panel markets weakened
in the quarter as market demand and pricing fell and key input prices rose.
The European market decline experienced in the quarter contrasts the
exceptionally robust levels experienced in 2007.
Management expects demand and pricing for North American OSB to remain
weak in the near term, but believes that the long term fundamentals supporting
North American housing and OSB demand are strong. Management continues to
believe that OSB will remain one of the best growth products in the forest
products industry. Norbord's European business is exposed to different market
dynamics relative to the North American business. Management believes that
this provides meaningful market and geographic diversification over the cycle,
while capitalizing on Norbord's strength as a panel producer.
Norbord recorded EBITDA of negative $9 million in the third quarter,
versus positive $1 million in the previous quarter and positive $30 million in
the third quarter of 2007. Norbord's North American OSB mills ran well in the
quarter and achieved break-even EBITDA results for the past two consecutive
quarters. Despite the improvement in North American benchmark OSB prices
quarter over quarter, key input prices continue to rise. European markets
continue to decline in 2008 and rising resin and global energy prices continue
to impact the business because Norbord's European products are more resin and
energy intensive.
The Company recorded a loss of $18 million ($0.12 per share) in the third
quarter of 2008 compared to a loss of $37 million ($0.25 per share) and
$1 million ($0.00 per share) in the second quarter of 2008 and third quarter
of 2007, respectively. Norbord's results in the second quarter of 2008 include
a $32 million pre-tax antitrust litigation settlement charge ($0.15 earnings
per share) to limit the risks and costs associated with a prolonged trial.
Norbord vehemently denies that it violated US antitrust or any other laws.RESULTS OF OPERATIONS
(US$ millions, except
per share information, 3rd Qtr 2nd Qtr 3rd Qtr 9 mos 9 mos
unless otherwise noted) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Return on capital
employed (ROCE) (4)% 0% 11% (4)% 7%
Return on equity (ROE) (28)% (50)% (1)% (39)% (10)%
Earnings per share
- diluted $ (0.12) $ (0.25) $ 0.00 $ (0.58) $ (0.22)
-------------------------------------------------------------------------
Net sales $ 256 $ 262 $ 292 $ 752 $ 841
EBITDA (9) 1 30 (32) 51
Depreciation 18 18 19 55 70
Investment in property,
plant and equipment 7 10 8 22 29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shipments (MMsf 3/8")
OSB 1,124 1,114 1,060 3,197 3,333
Particleboard(1) 86 102 162 319 503
MDF 112 117 124 340 381
Hardwood plywood 10 15 19 40 58
-------------------------------------------------------------------------
Indicative OSB Prices
Average OSB price
- North Central
($/Msf 7/16") 201 179 177 172 159
Average OSB price
- South East
($/Msf 7/16") 158 155 149 145 146
Average OSB price
- Europe
((euro)/m(3)) 196 210 246 208 242
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes particleboard consumed internally (22 MMsf, 30 MMsf,
33 MMsf, 87 MMsf, 103 MMsf for each period, respectively).Net sales in the quarter were $256 million, compared to $262 million and
$292 million in the second quarter of 2008 and the third quarter of 2007,
respectively. Year-to-date net sales were $752 million versus $841 million in
the same prior year period. OSB shipment volume and changes in North American
OSB benchmark prices and European panel prices principally drives the
fluctuation in net sales.
Markets
North American OSB comprises 66% of Norbord's panel shipments by volume,
therefore, results from operations are most affected by volatility in
North American OSB prices. European panel markets comprise 30% of shipments
and also affect Norbord's results, although to a lesser degree.
In the quarter, North American North Central benchmark OSB prices
averaged $201, an improvement of $22 and $24 from the second quarter of 2008
and the third quarter of 2007 respectively. Regional pricing variations,
particularly in the US South, make the North Central benchmark price a useful,
albeit imperfect, proxy for overall North American OSB pricing. Approximately
55% of Norbord's North American capacity is located in the South East region
making the South East benchmark pricing significant to Norbord. South East
benchmark prices averaged $158 in the third quarter versus $155 last quarter
and $149 in the same period last year. Third quarter benchmark prices
reflected continued wide-spread production curtailments taken across the
industry, the seasonal increase in housing activity, low supply chain
inventory levels and production constraints due to weather-related log
shortages.
New home construction is the principal end use for OSB, accounting for
about 65% of demand in 2007. US housing starts fell to a 17-year low in August
and are forecast to be approximately 0.9 million in 2008. Most experts
forecast housing starts will remain at or below this level again in 2009.
The US economy experienced unprecedented turmoil during the quarter
attributed to the unforeseen instability in the financial markets. The lack of
available credit in the US has resulted in severely limited mortgage approvals
and a further decline in housing starts. In addition, financial restrictions
have forced many customers to modify operating plans and aggressively reduce
their own working capital levels. The combination of these factors has
exaggerated the seasonal slowdown in demand going into the fourth quarter.
The economic downturn that began in the US has now expanded globally.
Consumer confidence and housing-related spending across Europe has dropped
significantly as a result. In the UK, where the majority of Norbord's European
assets are located, 2008 housing starts have fallen 40% year-to-date as
mortgage lenders tighten credit terms and limit mortgage approvals. In this
environment of reduced demand, approximately 20% of Norbord's European
capacity was curtailed during the quarter. European panel prices were down 7%
on average compared to the second quarter of 2008. Management expects that
market conditions in Europe will likely mirror those in North America for the
foreseeable future.
Operating Results
In total, Norbord generated EBITDA of negative $9 million in the quarter
and negative $32 million year-to-date versus positive $30 million and positive
$51 million in the comparable prior year periods, respectively. Quarter over
quarter, Norbord generated EBITDA of negative $9 million in the third quarter
versus positive $1 million in the second quarter.
Norbord's North American operations generated an EBITDA loss of
$2 million in the third quarter, and $32 million year-to-date versus positive
$3 million and negative $7 million in the comparable prior year periods,
respectively. Quarter over quarter, the North American operations generated an
EBITDA loss of $2 million in the third quarter versus negative $1 million in
the second quarter.
North American OSB operations achieved break-even EBITDA for the second
consecutive quarter driven by a modest rise in North American benchmark OSB
prices offset by a rise in key input prices and the impact of lower production
volumes. Norbord expects OSB prices to moderate during the fourth quarter.
Norbord's North American OSB mills operated at approximately 90% of capacity
in the second and third quarters of 2008 and approximately 95% of capacity in
the third quarter of 2007. Year-to-date, Norbord's North American OSB mills
operated at approximately 85% of capacity versus 100% in 2007.
The third quarter break-even result from North America OSB operations is
a positive achievement in light of the continued pressure from rising resin,
fibre and global energy prices. In the quarter, Norbord's North American per
unit OSB cash production costs increased 5% over the second quarter of 2008
and increased 9% over the third quarter of 2007. The increase in cash costs
versus the comparable periods is principally due to higher resin prices and to
a lesser extent, higher fibre and energy prices as well as the impact of lower
production volumes.
Norbord's European operations generated an EBITDA loss of $5 million in
the third quarter and positive $8 million year-to-date versus $29 million and
$73 million in the comparable prior year periods, respectively.
Quarter-over-quarter, the European operations generated an EBITDA loss of $5
million in the third quarter versus positive $6 million in the second quarter.
European pricing and markets have retreated in 2008 from the exceptional
levels of 2007, which has led to production curtailments and lower production
volumes. European results in the quarter reflect sharply slower market
conditions and continued key input price pressure. Norbord's European mills
operated at approximately 80% of capacity in the quarter, compared to
approximately 90% in the second quarter of 2008 and 100% in the third quarter
of 2007. Year-to-date, Norbord's European mills operated at 90% of capacity
versus 100% in 2007.
The European business is also disproportionately impacted by rising resin
and global energy prices because Norbord's European products are more resin
and energy intensive. A number of initiatives have been undertaken to address
these cost pressures including the permanent closure of a particleboard line
at the Genk site during the first quarter and the installation of biomass heat
energy systems at Genk OSB and Cowie, Scotland MDF in 2007. The conversion to
biomass heat energy systems at these mills provides an annualized cost savings
of approximately $5 million versus current prices.
Throughout the cycle, Norbord took steps to prepare itself for this
cyclical downturn by focusing on cost containment and a higher margin product
mix. The Margin Improvement Program (MIP) has helped Norbord to improve its
competitive position, generating over $165 million of savings in the past five
years. These gains have helped to offset the impact of industry-wide rising
input costs and management believes its relative competitive position has
improved over this time. MIP gains from prior years have been maintained and
MIP gains resulting from key input usage improvements and from marketing and
sales initiatives were successful in offsetting the impact of the production
curtailments year-to-date.The major components of the change in EBITDA versus comparative periods
are summarized in the following variance table.
3rd Qtr 2008 3rd Qtr 2008 9 mos 2008
EBITDA Variance vs. vs. vs.
(US$ millions) 2nd Qtr 2008 3rd Qtr 2007 9 mos 2007
-------------------------------------------------------------------------
EBITDA - current period $ (9) $ (9) $ (32)
EBITDA - comparative period 1 30 51
-------------------------------------------------------------------------
Variance $ (10) $ (39) $ (83)
-------------------------------------------------------------------------
Mill nets(1) $ 4 $ (1) $ 14
Volume(2) (9) (15) (35)
Key input prices(3) (10) (26) (61)
Key input usage(3) 2 2 8
Other(4) 3 1 (9)
-------------------------------------------------------------------------
$ (10) $ (39) $ (83)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The mill net variance represents the change in realized pricing
across all products. Mill net is calculated as net sales divided by
shipment volume.
(2) The volume variance represents the impact of shipment volume changes
across all products.
(3) Key inputs include fibre, resin and energy.
(4) Other category covers all remaining variances including, supplies and
maintenance, labour and benefits, and the impact of foreign exchange.
INTEREST, DEPRECIATION AND INCOME TAX
3rd Qtr 2nd Qtr 3rd Qtr 9 mos 9 mos
(US$ millions) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Interest and other income $ - $ 2 $ - $ 3 $ 4
Interest expense (11) (11) (13) (37) (36)
Depreciation (18) (18) (19) (55) (70)
Income tax recovery 20 21 1 71 19
-------------------------------------------------------------------------
-------------------------------------------------------------------------Interest and other income and interest expense were relatively consistent
with prior periods.
Depreciation in 2008 was lower relative to 2007 as management's estimate
of the useful life for its OSB assets was changed from 15 years to 25 years
effective July 1, 2007. The impact of this change in estimate on depreciation
was a reduction of $9 million per quarter.
A tax recovery of $20 million was recorded in the quarter on a pre-tax
loss of $38 million. Year-to-date, a tax recovery of $71 million was recorded
on a pre-tax loss of $157 million. The effective tax rate differs from the
statutory rate principally due to rate differences on foreign activities and
fluctuations in relative currency values.
In 2005 and 2006, Norbord paid $163 million in income and income-related
taxes, principally in North America. Losses incurred in 2007 were carried back
for a cash refund of approximately $90 million in 2008 of which $85 million
was received in the second quarter.LIQUIDITY AND CAPITAL RESOURCES
(US$ millions, except
per share information, 3rd Qtr 2nd Qtr 3rd Qtr 9 mos 9 mos
unless otherwise noted) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by (used for)
operating activities $ (8) $ 88 $ (18) $ (1) $ (57)
Cash provided by (used for)
operating activities per
share (0.06) 0.60 (0.12) (0.01) (0.39)
-------------------------------------------------------------------------
Operating working capital (10) 13 127 (10) 127
Total working capital 19 112 175 19 175
Investment in property,
plant and equipment 7 10 8 22 29
Net debt to capitalization,
market basis 37% 33% 32% 37% 32%
Net debt to capitalization,
book basis 62% 59% 61% 62% 61%
-------------------------------------------------------------------------
-------------------------------------------------------------------------The Company continues to consider alternatives to further strengthen its
liquidity position and conserve cash.
During the third quarter, Norbord concluded an additional $35 million on
its accounts receivable securitization facility increasing the program limit
from $50 million to $85 million.
In the first quarter, the Company concluded a $100 million unsecured term
debt facility with its major shareholder at an interest rate equal to the
greater of 8% and US base rate plus 1/2%. The facility matures in 2010 and is
subordinated to the Company's committed unsecured revolving bank lines. Any
drawings under the facility are treated as equity and included in the
determination of tangible net worth for bank line covenant purposes. At
September 27, 2008, $25 million was unutilized under this facility with
$75 million drawn.
In addition to the term debt facility, the Company has cash and cash
equivalents of $9 million, and $235 million of committed unsecured revolving
bank lines to support short-term liquidity requirements. At September 27,
2008, $147 million of the revolving bank lines was unutilized and $88 million
was utilized - $84 million drawn as cash and $4 million utilized for letters
of credit. These committed bank lines mature in 2010, bear interest at money
market rates plus a margin that varies with the Company's credit rating, and
contain the following financial covenants which the Company must comply with
on a quarterly basis: minimum tangible net worth of $300 million; and maximum
net debt to total capitalization, book basis of 65%. At quarter-end, the
Company's tangible net worth was $317 million and net debt to total
capitalization, book basis was 62%.
Operating activities consumed $8 million of cash in the quarter as a
result of negative EBITDA and interest paid offset by a decreased investment
in operating working capital. Operating working capital decreased as a result
of additional proceeds received from the accounts receivable securitization
facility offset by a payment related to the antitrust litigation settlement.
In the prior quarter, operating activities generated $88 million of cash, the
majority of which related to the receipt of $85 million of income tax refunds.
Year-to-date operating activities consumed $1 million of cash compared to
$57 million in the same period of 2007. The increase in operating cash flows
period-over-period was principally due to a strategic decrease in the
investment in operating working capital, the receipt of income tax refunds and
proceeds received on account of the accounts receivable securitization
facility, offset by both decreased earnings and a payment related to the
antitrust litigation settlement.
Operating working capital, consisting of accounts receivable and
inventory less accounts payable and accrued liabilities was negative
$10 million at period end compared to positive $13 million at June 28, 2008
and $127 million at the end of the third quarter of 2007. At period end,
accounts receivable was $56 million which represents a decrease of $45 million
over the second quarter and a decrease of $139 million over the third quarter
in 2007 primarily due to accounts receivable sold under the securitization
program. Proceeds of $50 million were received in fourth quarter of 2007 and
an additional $35 million in the third quarter of 2008. Despite the current
economic environment, Norbord's accounts receivable metrics remain in line
with prior periods. Partially offsetting the decrease in accounts receivable,
is a reduction in accounts payable and accrued liabilities following a payment
of $17 million for the antitrust litigation settlement in the third quarter.
Total working capital at September 27, 2008 was $19 million which
included $9 million in cash and cash equivalents and $20 million of tax
receivable. Total working capital was $112 million in the second quarter of
2008 and $175 million in the third quarter of 2007. The decrease in total
working capital relative to the comparable prior periods was due primarily to
the decrease in operating working capital, the receipt of income tax refunds
and the decrease in cash and cash equivalents used to pay down debt
facilities.
Dividends of $14 million were declared in the quarter of which $9 million
was paid in cash and $5 million was distributed under the Company's Dividend
Reinvestment Program (DRIP). The DRIP permits Canadian shareholders to elect
to receive their dividends in the form of common shares.
The Company realized a gain of $20 million in the third quarter and
$5 million year to date on its matured net investment hedges. The realized
gain was offset by an unrealized loss on the net investments being hedged.
Norbord's net debt stood at $515 million at period end, representing 37%
of capitalization on a market basis and 62% of capitalization on a book basis.
Norbord believes its record of superior operational performance and prudent
balance sheet management should enable it to retain access to public and
private capital markets, subject to financial market conditions.
INVESTMENTS AND DIVESTITURES
Investment in Property, Plant and Equipment
Investment in property, plant and equipment was $22 million year-to-date
(third quarter - $7 million). Approximately $12 million of the $22 million
invested related to capital investments for advanced air emission controls in
compliance with US Environmental Protection Agency MACT (Maximum Achievable
Control Technology) standards. Norbord's 2008 investment in property, plant
and equipment has been limited to $30 million to reflect market conditions. In
2009, the Company expects to limit capital investments to $25 million. Capital
investments are funded with cash on hand, cash generated from operations, and
if necessary, drawings under the Company's committed bank lines.
Provision for Non-Core Operation
In the first quarter of 2008, the Company recorded a $4 million provision
relating to severance arising on the permanent closure of a particleboard line
at the Genk site. The majority of the provision has been paid. Operations at
the Genk OSB line were not impacted. The particleboard line comprises older
technology and was considered non-core at the time the site was acquired in
2004. The Genk mill was acquired to expand Norbord's OSB presence in Europe
and accordingly the majority of the purchase price was allocated to the OSB
line.
CAPITALIZATION
Common Shares
At October 23, 2008, there were 150.6 million common shares outstanding.
In addition, 3.3 million stock options were outstanding, of which
approximately 34% were fully vested.
Long-Term Debt Repurchase
In March 2008, the 8 1/8% debentures with a principal value of
$197 million were repurchased. The repurchase was pre-funded by the February
2007 issuance of $200 million of senior notes due in 2017 which was completed
one year early to mitigate potential refinancing risk.
Credit Ratings
As at October 23, 2008, ratings on Norbord's senior unsecured debentures
were:-------------------------------------------------------------------------
Dominion Bond Standard & Poor's Moody's
Rating Service Ratings Services Investors Service
-------------------------------------------------------------------------
Rating BB(high) BB Ba2
Outlook Negative Negative Negative
-------------------------------------------------------------------------LITIGATION SETTLEMENT
Norbord and eight other North American OSB producers have been named as
defendants in several lawsuits filed in the US District Court for the Eastern
District of Pennsylvania. The lawsuits allege that these nine North American
OSB producers violated US and various state antitrust and other laws by
allegedly agreeing to fix prices and reduce the supply of OSB from June 1,
2002 through the present.
The Court has certified the following classes: A nationwide class of
persons and entities that purchased OSB in the US directly from any of the
defendant North American OSB producers between June 1, 2002 and February 24,
2006; a nationwide class of persons who, as end users, indirectly purchased in
the US for their own use, and not for resale, new OSB manufactured and sold by
one or more of the defendant North American OSB producers between June 1, 2002
and February 24, 2006 (other than persons who purchased OSB only as part of a
house or other structure); and a multi-state class of residents of seventeen
States who, as end users, indirectly purchased in the US for their own use,
and not for resale, new OSB manufactured and sold by one or more of the
defendant North American OSB producers between June 1, 2002 and February 24,
2006 (other than persons who purchased OSB only as part of a house or other
structure). All three classes seek damages or injunctive or other relief under
applicable laws.
Norbord has entered into settlement agreements with the certified classes
of direct and indirect purchasers of OSB to limit the risks and costs
associated with a prolonged trial. Norbord has vigorously contested the
plaintiffs' allegations and continues to deny that it violated US antitrust or
any other laws. Under the terms of the settlement agreements, which are
subject to Court approval, Norbord will pay $30 million into an escrow account
for the benefit of members of the direct purchaser class. A first payment of
$15 million was made on July 25, 2008 and the remainder is due on or before
October 24, 2008. Norbord also has paid $2 million into an escrow account for
the benefit of members of the indirect purchaser classes.
As allowed by Court order, a small number of class members have chosen to
opt out of the direct-purchaser class. Norbord estimates that the purchases by
these entities represents between 10% and 15% of defendants' sales to direct
purchasers of OSB during the class period. Each of these entities is entitled
to pursue its own individual "opt-out" claims against Norbord and the other
defendants. If any of them do so, Norbord will be entitled to a partial refund
of the $30 million settlement amount paid to the direct purchaser class. The
Court has set a deadline of November 3, 2008 by which members of the certified
classes of indirect purchasers of OSB must exercise, if they choose to do so,
their right to opt out of the classes.SELECTED QUARTERLY INFORMATION
2008 2007 2006
(US$ millions, ------------------------------------------------------
except per share
information,
unless otherwise 3rd 2nd 1st 4th 3rd 2nd 1st 4th
noted) Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
-------------------------------------------------------------------------
Cash provided by
(used for)
operating
activities (8) 88 (81) 72 (18) 11 (50) 54
Cash provided by
(used for)
operating
activities per
share (0.06) 0.60 (0.55) 0.49 (0.12) 0.07 (0.34) 0.37
Return on capital
employed (ROCE) (4)% 0% (9)% (3)% 11% 6% 2% 8%
Return on equity
(ROE) (28)% (50)% (37)% (14)% (1)% (15)% (15)% (1)%
-------------------------------------------------------------------------
Net Sales 256 262 234 263 292 288 261 259
EBITDA (9) 1 (24) (9) 30 17 4 22
Earnings (18) (37) (31) (13) (1) (15) (16) (1)
Earnings per share
Basic (0.12) (0.25) (0.21) (0.09) 0.00 (0.11) (0.11) 0.00
Diluted (0.12) (0.25) (0.21) (0.09) 0.00 (0.11) (0.11) (0.01)
-------------------------------------------------------------------------
OSB shipments
(MMsf 3/8") 1,124 1,114 959 1,130 1,060 1,161 1,112 1,083
Average OSB price
- North Central
($/Msf 7/16") 201 179 137 165 177 156 145 166
Average OSB price
- South East
($/Msf 7/16") 158 155 121 132 149 153 138 141
Average OSB price
- Europe
((euro)/m(3)) 196 210 220 234 246 249 234 219
-------------------------------------------------------------------------
-------------------------------------------------------------------------The price of OSB is the primary variable affecting the comparability of
Norbord's results over the past eight quarters. Fluctuations in earnings
during that time mirror fluctuations in the price of OSB in North America. The
Company estimates the annualized impact of a $10 per Msf (7/16-inch basis)
change in the North American OSB price on EBITDA based on Norbord's North
American capacity is approximately $36 million or approximately $0.15 per
share. Regional pricing variations, particularly in the US South, make the
North Central benchmark price a useful, albeit imperfect, proxy for overall
North American OSB pricing. Further, premiums obtained on value added
products, the pricing lag effect of maintaining an order file, and volume and
trade discounts cause realized prices to differ from the benchmark.
Norbord has a relatively low exposure to the Canadian dollar due to a
comparatively small manufacturing base in Canada, comprising 12% of panel
production capacity. The Company estimates the unfavourable impact of a US one
cent increase in the Canadian dollar to negatively impact annual EBITDA by
approximately $1 million.
Quarterly results are also impacted by seasonal factors such as weather
and building activity. Market demand varies seasonally, as home building
activity and repair and renovation work, the principal end use for Norbord's
products, are generally stronger in the spring and summer months. Adverse
weather can also limit access to logging areas, which can affect the supply of
fibre to Norbord's operations. Shipment volumes and commodity prices are
affected by these factors as well as by global supply and demand conditions.
Items not related to ongoing business operations that had a significant
impact on quarterly results include the $32 million pre-tax expense ($0.15
earnings per share) related to the litigation settlement in the second quarter
of 2008, and, in the first quarter of 2008, the $4 million pre-tax expense
($0.02 earnings per share) related to the severance for the permanent closure
of a particleboard line at the Genk site. In addition, the rate of
depreciation has not been constant over the past eight quarters as management
changed its estimate of the useful life of its OSB assets from 15 years to
25 years effective in the third quarter of 2007. The impact of this change in
estimate on depreciation expense was approximately a $9 million reduction per
quarter.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2008, the Company adopted new accounting
recommendations from the Canadian Institute of Chartered Accountants (CICA),
Handbook Section 1535, Capital Disclosures, Section 3031, Inventories, Section
3862, Financial Instruments - Disclosure, and Section 3863, Financial
Instruments - Presentation.
Section 1535 specifies the requirements for the disclosure of both
qualitative and quantitative information that enable users of financial
statements to evaluate the Company's objectives, policies and processes for
managing capital. This disclosure is contained in note 12 to the interim
consolidated financial statements.
Section 3031 relates to the accounting for inventories and revises and
enhances the requirements for assigning costs to inventories. The impact of
adopting this new standard was a $1 million adjustment to opening retained
earnings and a $3 million reclassification of certain capital spare parts from
operating and maintenance supplies inventory to property, plant and equipment.
The opening retained earnings adjustment arises due to prior years'
depreciation on the reclassified capital spare parts and a lower opening
carrying value of certain finished goods and raw material inventory.
Inventories of raw materials and operating maintenance supplies are valued at
the lower of cost and net realizable value, with cost determined on an average
cost basis. Previously, the Company valued these inventories at the lower of
cost and replacement cost. The capital spare parts reclassified to property,
plant and equipment from operating and maintenance supplies inventory are
recorded as production equipment at cost and are depreciated on a straight
line basis. The rates of depreciation are intended to fully depreciate the
assets over two to five years, which approximate their useful lives.
Section 3862 and Section 3863 replace Section 3861, Financial Instruments
- Disclosure and Presentation, and revise and enhance the disclosure
requirements and carry forward the presentation requirements. This disclosure
is contained in note 13 to the interim consolidated financial statements.
In February 2008, the CICA issued a new accounting standard, Section
3064, Goodwill and Intangible Assets, which establishes standards for the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. The Company will adopt this new standard in the first
quarter 2009 and is currently assessing the impact of adoption on its
consolidated financial statements.
In February 2008, the CICA's Accounting Standard Board (AcSB) announced
that Canadian public companies will adopt International Financial Reporting
Standards (IFRS) as issued by the International Accounting Standards Board
(IASB) effective January 1, 2011. Early adoption is permissible. The Company
is currently assessing the impact and date of adoption on its consolidated
financial statements.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Internal controls over financial reporting are designed to provide
reasonable assurance regarding the reliability of financial reporting and
compliance with Canadian GAAP. There have been no changes in Norbord's
internal controls over financial reporting during the interim period ended
September 27, 2008 that have materially affected or are reasonably likely to
materially affect its internal controls over financial reporting.
NON-GAAP FINANCIAL MEASURES
The following non-GAAP financial measures have been used in this MD&A.
Non-GAAP financial measures do not have any standardized meaning prescribed by
GAAP and are therefore unlikely to be comparable to similar measures presented
by other companies. Each non-GAAP financial measure is defined below. Where
appropriate, a quantitative reconciliation of the non-GAAP financial measure
to the most directly comparable GAAP measure is provided.
EBITDA is calculated as earnings determined in accordance with GAAP
before interest, income tax, depreciation and amortization, provision for
non-core operation and litigation settlement. As Norbord operates in a
cyclical commodity business, Norbord interprets EBITDA over the cycle as a
useful indicator of the Company's ability to incur and service debt and meet
capital expenditure requirements. In addition, Norbord views EBITDA as a
measure of gross profit and interprets EBITDA trends as an indicator of
relative operating performance. The following table reconciles EBITDA to the
most directly comparable GAAP measure:-------------------------------------------------------------------------
3rd Qtr 2nd Qtr 3rd Qtr 9 mos 9 mos
(US$ millions) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Earnings $ (18) $ (37) $ (1) $ (86) $ (32)
Add: Provision for non-core
operation - - - 4 -
Add: Litigation settlement - 32 - 32 -
Add: Interest expense 11 11 13 37 36
Less: Interest and other
income - (2) - (3) (4)
Add: Income tax (20) (21) (1) (71) (19)
Add: Depreciation 18 18 19 55 70
-------------------------------------------------------------------------
EBITDA $ (9) $ 1 $ 30 $ (32) $ 51
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating working capital is accounts receivable plus inventory less
accounts payable and accrued liabilities. Operating working capital is a
measure of the investment in accounts receivable, inventory and accounts
payable required to support operations. The Company aims to minimize its
investment in operating working capital, however, the amount will vary with
seasonality, and sales expansions and contractions.
Sep 27 Jun 28 Dec 31 Sep 29
(US$ millions) 2008 2008 2007 2007
-------------------------------------------------------------------------
Accounts receivable $ 56 $ 101 $ 83 $ 195
Inventory 111 133 131 125
Accounts payable and accrued
liabilities (177) (221) (191) (193)
-------------------------------------------------------------------------
Operating working capital (10) $ 13 $ 23 $ 127
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total working capital is operating working capital plus cash and cash
equivalents and tax receivable.
Sep 27 Jun 28 Dec 31 Sep 29
(US$ millions) 2008 2008 2007 2007
-------------------------------------------------------------------------
Operating working capital $ (10) $ 13 $ 23 $ 127
Cash and cash equivalents 9 83 128 48
Tax receivable 20 16 89 -
-------------------------------------------------------------------------
Total working capital 19 $ 112 $ 240 $ 175
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital employed is the sum of property, plant and equipment, operating
working capital, tax receivable, and other assets less any unrealized net
investment hedge loss included in other liabilities. Capital employed is a
measure of the total investment in a business in terms of property, plant,
equipment, operating working capital and other assets. The following table
details the composition of capital employed:
-------------------------------------------------------------------------
Sep 27 Jun 28 Dec 31
(US$ millions) 2008 2008 2007
-------------------------------------------------------------------------
Property, plant and equipment $ 924 $ 956 $ 968
Accounts receivable 56 101 83
Tax receivable 20 16 89
Inventory 111 133 131
Accounts payable and accrued liabilities (177) (221) (191)
Other assets 7 5 5
Unrealized net investment hedge loss(1) (2) (9) (8)
-------------------------------------------------------------------------
Capital employed $ 939 $ 981 $1,077
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Included in other liabilitiesROCE (return on capital employed) is EBITDA divided by average capital
employed. ROCE is a measurement of financial performance, focusing on cash
generation and the efficient use of capital. As Norbord operates in a cyclical
commodity business, Norbord interprets ROCE over the cycle as a useful means
of comparing businesses in terms of efficiency of management and viability of
products. Norbord targets top quartile ROCE among North American forest
products companies over the cycle.
ROE (return on common equity) is earnings available to common
shareholders (earnings less preferred share dividends) divided by common
shareholders' equity. ROE is a measure for common shareholders to determine
how effectively their invested capital is being employed. As Norbord operates
in a cyclical commodity business, Norbord looks at ROE over the cycle and
targets top quartile performance among North American forest products
companies.
Net debt consists of the principal value of long-term debt including the
current portion and bank advances less cash and cash equivalents and drawings
under the term debt facility. Consistent with the treatment under the
Company's bank line financial covenants, drawings under the term debt facility
are excluded from net debt and treated as a component of tangible net worth.
Net debt is a useful indicator of a company's debt position. Net debt
comprises:-------------------------------------------------------------------------
Sep 27 Jun 28 Dec 31
(US$ millions) 2008 2008 2007
-------------------------------------------------------------------------
Long-term debt, principal value $ 599 $ 667 $ 478
Less: Drawings under term debt facility(1) (75) (75) -
Current portion of long-term debt - - 197
Cash and cash equivalents (9) (83) (128)
-------------------------------------------------------------------------
Net debt $ 515 $ 509 $ 547
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Drawings under the Company's term debt facility are treated as equity
for bank line financial covenant purposes.
Tangible net worth consists of shareholders' equity and drawings under the
term debt facility. A minimum tangible net worth of $300 million is one of the
two financial covenants contained in the Company's committed bank lines. At
period end, the Company's tangible net worth was $317 million.
(US$ millions) Sep 27 Dec 31
2008 2007
-------------------------------------------------------------------------
Shareholders equity $ 242 $ 360
Plus: Drawings under term debt facility(1) 75 -
-------------------------------------------------------------------------
Tangible net worth $ 317 $ 360
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Drawings under the Company's term debt facility are treated as equity
for bank line financial covenant purposes.Net debt to capitalization, book basis is net debt divided by the sum of
net debt and tangible net worth. Net debt to capitalization, book basis is a
measure of a company's relative debt position. Norbord interprets this measure
as an indicator of the relative strength and flexibility of its balance sheet.
In addition, a maximum net debt to capitalization, book basis of 65% is one of
the two financial covenants contained in the Company's committed bank lines.
At period end net debt to capitalization, book basis was 62%.
Net debt to capitalization, market basis is net debt divided by the sum
of net debt and market capitalization. Market capitalization is the number of
common shares outstanding at period end multiplied by the trailing 12-month
average per share market price. Market basis capitalization is intended to
correct for the low historical book value of Norbord's asset base relative to
its fair value. Net debt to capitalization, market basis is a key measure of a
company's relative debt position and Norbord interprets this measure as an
indicator of the relative strength and flexibility of its balance sheet. While
the Company considers both book and market basis metrics, the Company believes
the market basis to be superior to the book basis in measuring the true
strength and flexibility of its balance sheet.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, as defined in
applicable legislation. The words "goal," "believes," "believe," "should,"
"expect," "expects," "expected," "forecast," "estimate," "estimates,"
"estimated," "likely", "may," and other expressions which are predictions of
or indicate future events, trends or prospects and which do not relate to
historical matters identify forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Norbord to
be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements.
Examples of such statements include, but are not limited to, comments
with respect to: (1) outlook for the markets for products; (2) expectations
regarding future product pricing: (3) the outlook for operations; (4)
expectations regarding mill capacity and production volumes; (5) objectives;
(6) strategies to achieve those objectives; (7) access to public and private
capital markets (8) sensitivity to changes in product prices, such as the
price of OSB; (9) sensitivity to changes in foreign exchange rates; (10)
margin improvement program targets; (11) expectations regarding contingent
liabilities, lawsuits and guarantees, including the outcome of pending
litigation; (12) expectations regarding the amount, timing and benefits of
capital investments; and (13) expectations regarding the amount and timing of
tax refunds.
Although Norbord believes it has a reasonable basis for making these
forward-looking statements, readers are cautioned not to place undue reliance
on such forward-looking information. By its nature, forward-looking
information involves numerous assumptions, inherent risks and uncertainties,
both general and specific, which contribute to the possibility that the
predictions, forecasts and other forward-looking statements will not occur.
Factors that could cause actual results to differ materially from those
contemplated or implied by forward-looking statements include: general
economic conditions; risks inherent with product concentration; effects of
competition and product pricing pressures; risks inherent with customer
dependence; effects of variations in the price and availability of
manufacturing inputs; risks inherent with a capital intensive industry; and
other risks and factors described from time to time in filings with Canadian
securities regulatory authorities.
Except as required by applicable laws, Norbord does not undertake to
update any forward-looking statements, whether as a result of new information,
future events or otherwise, or to publicly update or revise the above list of
factors affecting this information. See the "Caution Regarding Forward-Looking
Information" statement in the March 1, 2008 Annual Information Form and the
cautionary statement contained in the "Forward-Looking Statements" section of
the 2007 Management's Discussion and Analysis dated January 31, 2008.NORBORD INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(US $ millions, except 3rd Qtr 3rd Qtr 9 mos 9 mos
per share information) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net sales $ 256 $ 292 $ 752 $ 841
-------------------------------------------------------------------------
Earnings before interest,
income tax, depreciation, provision
for non-core operation and
litigation settlement (9) 30 (32) 51
Litigation settlement (note 14) - - (32) -
Provision for non-core operation
(note 9) - - (4) -
Interest and other income - - 3 4
Interest expense (11) (13) (37) (36)
-------------------------------------------------------------------------
Earnings before income tax and
depreciation (20) 17 (102) 19
Depreciation (18) (19) (55) (70)
Income tax 20 1 71 19
-------------------------------------------------------------------------
Earnings $ (18) $ (1) $ (86) $ (32)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share (note 8)
- Basic $ (0.12) $ 0.00 $ (0.58) $ (0.22)
- Diluted $ (0.12) $ 0.00 $ (0.58) $ (0.22)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
NORBORD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
3rd Qtr 3rd Qtr 9 mos 9 mos
(US $ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR):
Operating Activities
Earnings $ (18) $ (1) $ (86) $ (32)
Items not affecting cash:
Depreciation 18 19 55 70
Future income taxes (16) 3 (59) (16)
Other items (5) (2) (6) -
-------------------------------------------------------------------------
(21) 19 (96) 22
Net change in non-cash working
capital balances 13 (37) 95 (79)
-------------------------------------------------------------------------
(8) (18) (1) (57)
-------------------------------------------------------------------------
Investing Activities
Investment in property,
plant and equipment (7) (8) (22) (29)
Other (note 10) 18 (1) 5 (20)
-------------------------------------------------------------------------
11 (9) (17) (49)
-------------------------------------------------------------------------
Financing Activities
Repurchase of 8 1/8% debentures
(note 5) - - (197) -
Drawings under term debt facility
(note 5) - - 75 -
Issue of senior notes (note 5) - - - 198
Other debt incurred/(repaid) (note 5) (68) - 46 (40)
Dividends (9) (8) (25) (24)
-------------------------------------------------------------------------
(77) (8) (101) 134
-------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (74) (35) (119) 28
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period $ 83 $ 83 $ 128 $ 20
Cash and cash equivalents,
end of period (note 10) $ 9 $ 48 $ 9 $ 48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
NORBORD INC.
CONSOLIDATED BALANCE SHEETS
Sep 27 Dec 31
(US $ millions) 2008 2007
-------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9 $ 128
Accounts receivable (note 3) 56 83
Tax receivable 20 89
Inventory (note 4) 111 131
-------------------------------------------------------------------------
196 431
Property, plant and equipment (net) 924 968
Other assets 7 5
-------------------------------------------------------------------------
$ 1,127 $ 1,404
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 14) $ 177 $ 191
Current portion of long-term debt (note 5) - 199
-------------------------------------------------------------------------
177 390
Long-term debt (note 5) 602 480
Other liabilities (note 6) 14 18
Future income taxes 92 156
Shareholders' equity (note 7) 242 360
-------------------------------------------------------------------------
$ 1,127 $ 1,404
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
NORBORD INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(unaudited)
3rd Qtr 3rd Qtr 9 mos 9 mos
(US $ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Share Capital
Balance at beginning of period $ 163 $ 137 $ 150 $ 127
Dividend reinvestment plan (note 7) 5 6 18 16
-------------------------------------------------------------------------
Balance at end of period $ 168 $ 143 $ 168 $ 143
-------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of period $ 2 $ 1 $ 1 $ -
Stock-based compensation - 1 1 2
-------------------------------------------------------------------------
Balance at end of period $ 2 $ 2 $ 2 $ 2
-------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period $ 107 $ 248 $ 205 $ 305
Adoption of new accounting
recommendations (note 2) - - (1) -
-------------------------------------------------------------------------
Adjusted balance at beginning
of period 107 248 204 305
Earnings (18) (1) (86) (32)
Common share dividends (14) (14) (43) (40)
-------------------------------------------------------------------------
Balance at end of period $ 75 $ 233 $ 75 $ 233
-------------------------------------------------------------------------
Accumulated Other Comprehensive
Income (Loss)
Balance at beginning of period $ 2 $ 3 $ 4 $ 2
Other comprehensive income (loss) (5) 4 (7) 5
-------------------------------------------------------------------------
Balance at end of period $ (3) $ 7 $ (3) $ 7
-------------------------------------------------------------------------
Shareholders' equity $ 242 $ 385 $ 242 $ 385
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Earnings $ (18) $ (1) $ (86) $ (32)
Other comprehensive income (loss)
Net change in unrealized
cumulative translation gains (5) 4 (7) 5
-------------------------------------------------------------------------
Other comprehensive income (loss) $ (5) $ 4 $ (7) $ 5
-------------------------------------------------------------------------
Comprehensive income (loss) $ (23) $ 3 $ (93) $ (27)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
NORBORD INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(In US$, unless otherwise noted)
Note 1 - Basis of Presentation
------------------------------
The interim financial statements are unaudited and follow the accounting
policies summarized in the notes to the annual consolidated financial
statements, except as noted in note 2, below.
The interim financial statements do not conform in all respects to the
disclosure requirements of Canadian generally accepted accounting
principles for annual financial statements and should, therefore, be read
in conjunction with the annual consolidated financial statements of
Norbord Inc. which includes information necessary or useful to
understanding the Company's business and financial statement
presentation. In particular, the Company's significant accounting
policies and practices are presented as Note 1 to the annual consolidated
financial statements. Certain prior period amounts have been reclassified
to conform to the current period's presentation.
Note 2 - Changes in Accounting Policies
---------------------------------------
Effective January 1, 2008, the Company adopted new accounting
recommendations from the Canadian Institute of Chartered Accountants
(CICA), Handbook Section 1535, Capital Disclosures, Section 3031,
Inventories, Section 3862, Financial Instruments - Disclosure, and
Section 3863, Financial Instruments - Presentation.
Section 1535 specifies the requirements for the disclosure of both
qualitative and quantitative information that enable users of financial
statements to evaluate the Company's objectives, policies and processes
for managing capital (note 12).
Section 3031 relates to the accounting for inventories and revises and
enhances the requirements for assigning costs to inventories. The impact
of adopting this new standard was a $1 million adjustment to opening
retained earnings and a $3 million reclassification of certain capital
spare parts from operating and maintenance supplies inventory to
property, plant and equipment. The opening retained earnings adjustment
arises due to prior years' depreciation on the reclassified capital spare
parts and a lower opening carrying value of certain finished goods and
raw material inventory. Inventories of raw materials and operating
maintenance supplies are valued at the lower of cost and net realizable
value, with cost determined on an average cost basis. Previously, the
Company valued these inventories at the lower of cost and replacement
cost. The capital spare parts reclassified to property, plant and
equipment from operating and maintenance supplies inventory are recorded
as production equipment at cost and are depreciated on a straight line
basis. The rates of depreciation are intended to fully depreciate the
assets over two to five years, which approximate their useful lives.
Section 3862 and Section 3863 replace Section 3861, Financial Instruments
- Disclosure and Presentation, and revise and enhance the disclosure
requirements and carry forward the presentation requirements (note 13).
The CICA issued a new accounting standard, Section 3064, Goodwill and
Intangible Assets, which establishes standards for the recognition,
measurement, presentation and disclosure of goodwill and intangible
assets. The Company will adopt this new standard in the first quarter
2009 and is currently assessing the impact of adoption on its
consolidated financial statements.
In February 2008, the CICA's Accounting Standard Board (AcSB) announced
that Canadian public companies will adopt International Financial
Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB) effective January 1, 2011. Early adoption is
permissible. The Company is currently assessing the impact and date of
adoption on its consolidated financial statements.
Note 3 - Accounts Receivable
----------------------------
In the third quarter of 2008, the accounts receivable securitization
program limit was increased by $35 million to $85 million through the
addition of a second highly-rated financial institution. At period end,
Norbord recorded cash proceeds of $81 million and a deferred purchase
price of $35 million under this program.
The securitization program is subject to the following financial
covenants that the Company must comply with on a quarterly basis: minimum
tangible net worth of $300 million; and maximum net debt to total
capitalization, book basis, of 65%. At period end, the Company's tangible
net worth was $317 million and net debt to total capitalization, book
basis, was 62%. In addition, the program contains trade accounts
receivable portfolio performance covenants and standard reporting
requirements. The program is not subject to any credit-rating
requirements.
Note 4 - Inventory
------------------
Inventory is comprised of:
Sep 27 Dec 31
(US$ millions) 2008 2007
-------------------------------------------------------------------------
Raw materials $ 24 $ 40
Finished goods 56 59
Operating and maintenance supplies 31 32
-------------------------------------------------------------------------
$ 111 $ 131
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The amount of inventory recognized as an expense during the quarter was
$269 million (nine month period - $795 million) which includes
$17 million (nine month period - $54 million) of depreciation expense on
property, plant & equipment. The provision to reflect inventories at the
lower of cost and net realizable value was $1 million at period end.
Note 5 - Long-Term Debt
-----------------------
(US$ millions) Book Value
-------------------------------------------------------------------------
Fair Value
Principal Adjust- Sep 27 Dec 31
Value ments 2008 2007
-------------------------------------------------------------------------
8 1/8% debentures due 2008 $ - $ - $ - $ 197
7 1/4% debentures due 2012 240 6 246 247
Senior notes due 2017 200 (3) 197 197
Term debt facility 75 - 75 -
Other debt 84 - 84 38
-------------------------------------------------------------------------
599 3 602 679
Less current portion of
long-term debt - - - (199)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 599 $ 3 $ 602 $ 480
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In January 2008, the Company concluded a $100 million unsecured term debt
facility with a related company at an interest rate equal to the greater
of 8% and US base rate plus 1/2%. The facility matures in 2010 and is
subordinated to the Company's committed unsecured revolving bank lines.
Any drawings under the facility are treated as tangible net worth for
bank line covenant purposes. At period end, $75 million was drawn as
cash.
In the first quarter, the 8 1/8% debentures with a principal value of
$197 million were repurchased and a corresponding amount of interest rate
swaps matured.
The Company has committed unsecured revolving bank lines of $235 million
which mature in 2010, bear interest at money market rates plus a margin
that varies with the Company's credit rating, and contain financial
covenants (note 12). At period end, $147 million of these lines were
unutilized, with $84 million drawn as cash and $4 million utilized for
letters of credit.
In the first quarter of 2007, the Company issued $200 million of senior
notes due in 2017 with an interest rate that varies with the Company's
credit ratings. As at September 27, 2008, the rate was 7.45%.
The Company had $115 million (December 31, 2007 - $362 million) of
interest rate swaps outstanding at period end. The terms of these swaps
correspond to the terms of the underlying hedged debt.
Note 6 - Other Liabilities
--------------------------
Sep 27 Dec 31
(US$ millions) 2008 2007
-------------------------------------------------------------------------
Unrealized net investment hedge losses (note 13) $ 2 $ 8
Accrued pension and post-retirement benefits 4 3
Unrealized interest rate swap losses (note 13) 2 3
Other liabilities 6 4
-------------------------------------------------------------------------
$ 14 $ 18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The unrealized net investment hedge and interest rate swap losses are
offset by unrealized gains on the underlying exposures being hedged.
Note 7 - Shareholders' Equity
-----------------------------
In the first quarter, 1.0 million options were granted under the stock
option plan. For the nine months ended September 27, 2008, $1 million
related to stock-based compensation was expensed.
For the nine months ended September 27, 2008, 0.1 million common shares
were issued as a result of options exercised under the stock option plan
for proceeds of less than $1 million.
During the quarter, 1.1 million common shares (nine month period -
3.7 million) were issued in lieu of cash dividends of $5 million (nine
month period - $18 million) under the Company's dividend reinvestment
plan.
Note 8 - Earnings per Common Share
----------------------------------
Earnings per common share are calculated as follows:
(US$ millions, except
per share information, 3rd Qtr 3rd Qtr 9 mos 9 mos
unless otherwise noted) 2008 2007 2008 2007
-------------------------------------------------------------------------
Earnings available to common
shareholders $ (18) $ (1) $ (86) $ (32)
-------------------------------------------
-------------------------------------------
Common shares (millions):
Weighted average number of
common shares outstanding 149.5 145.2 148.3 144.5
Stock options - - - -
-------------------------------------------
Diluted number of common
shares 149.5 145.2 148.3 144.5
-------------------------------------------
-------------------------------------------
Earnings per common share:
Basic $ (0.12) $ 0.00 $ (0.58) $ (0.22)
Diluted $ (0.12) $ 0.00 $ (0.58) $ (0.22)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options issued under the Company's stock option plan were excluded
in the calculation of diluted number of common shares. If dilutive in the
future, stock options would be included to the extent the exercise price
of those options was less than the average market price of the Company's
common shares during the period.
Note 9 - Provision For Non-Core Operation
-----------------------------------------
In the first quarter, the Company recorded a $4 million provision
relating to severance arising on the permanent closure of a particleboard
line at the Genk, Belgium site. The majority of the provision has been
paid.
Note 10 - Supplemental Cash Flow Information
--------------------------------------------
Other investing activities comprises:
3rd Qtr 3rd Qtr 9 mos 9 mos
(US$ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by (used for):
Recouponing payment, net $ - $ - $ - $ (17)
Realized net investment
hedge gains (losses)
(note 13) 20 (1) 5 (2)
Other (2) - - (1)
-------------------------------------------------------------------------
$ 18 $ (1) $ 5 $ (20)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents comprises:
Sep 27 Sep 29
(US$ millions) 2008 2007
-------------------------------------------------------------------------
Cash $ 6 $ 18
Cash equivalents 3 30
-------------------------------------------------------------------------
$ 9 $ 48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 11 - Related Party Transactions
------------------------------------
The Company's major shareholder has various interests over which it has
control or otherwise has significant influence (a "related company" or
collectively "related companies").
During the quarter, the Company provided certain administrative services
to a related company which were charged on a cost recovery basis. In
addition, the Company periodically engages the services of related
companies for various financial, real estate and other business advisory
services. The total fees for the above noted services were less than
$1 million in the quarter, and were charged at market rates.
In January 2008, the Company concluded a $100 million unsecured term debt
facility with its major shareholder (note 5).
Note 12 - Capital Management
----------------------------
Norbord's capital management objective is to achieve top-quartile return
on equity (ROE) and cash return on capital employed (ROCE) over the
business cycle among North American forest products companies to enable
it to retain access to public and private capital markets, subject to
financial market conditions. This objective is unchanged from the prior
year.
Norbord monitors its capital structure using two key measures of its
relative debt position. While the Company considers both book and market
basis metrics, the Company believes the market basis to be superior to
the book basis in measuring the true strength and flexibility of its
balance sheet:
Net debt to capitalization, book basis, is net debt divided by the sum of
net debt and tangible net worth. Net debt consists of the principal value
of long-term debt including the current portion and bank advances less
cash and cash equivalents and drawings under the term debt facility.
Consistent with the treatment under the Company's bank line financial
covenants, drawings under the term debt facility are excluded from net
debt and treated as a component of tangible net worth. Tangible net worth
consists of shareholders' equity and drawings under the term debt
facility.
Net debt to capitalization, market basis, is net debt divided by the sum
of net debt and market capitalization. Net debt is calculated as outlined
above under net debt to capitalization, book basis. Market capitalization
is the number of common shares outstanding at period end multiplied by
the trailing 12-month average per share market price. Market basis
capitalization is intended to correct for the low historical book value
of Norbord's asset base relative to its fair value.
Norbord's capital structure at period end consisted of the following:
Sep 27 Dec 31
(US$ millions) 2008 2007
-------------------------------------------------------------------------
Long-term debt, principal value $ 599 $ 478
Add: Current portion of long-term debt - 197
Less: Drawings under term debt facility(1) (75) -
Cash and cash equivalents (9) (128)
-------------------------------------------------------------------------
Net debt 515 547
-------------------------------------------------------------------------
Shareholders equity 242 360
Plus: Drawings under term debt facility(1) 75 -
-------------------------------------------------------------------------
Tangible net worth 317 360
-------------------------------------------------------------------------
Total capitalization 832 907
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net debt to capitalization, book basis 62% 60%
Net debt to capitalization, market basis 37% 30%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Drawings under the Company's term debt facility are treated as equity
for bank line financial covenant purposes.
The Company's $235 million of committed unsecured revolving bank lines
contain the following financial covenants related to capital management
that the Company must comply with on a quarterly basis: minimum tangible
net worth of $300 million, and maximum net debt to total capitalization,
book basis, of 65%. Drawings under the Company's term debt facility are
treated as equity for bank line financial covenant purposes. At period
end, the Company's tangible net worth was $317 million and net debt to
total capitalization, book basis was 62%.
Note 13 - Financial Instruments
-------------------------------
Norbord has exposure to market, counterparty credit, and liquidity risk.
Norbord's primary risk management objective is to protect the Company's
balance sheet, earnings and cash flow in support of achieving top-
quartile return on equity (ROE) and cash return on capital employed
(ROCE) among North American forest products companies.
Norbord's financial risk management activities are governed by Board-
approved financial policies that cover risk identification, tolerance,
measurement, hedging limits, hedging products, authorization levels, and
reporting. Derivative contracts that are deemed to be highly effective in
offsetting changes in the fair value, net investment or cash flows of
hedged items are designated as hedges of specific exposures. Gains and
losses on these instruments are recognized in the same manner as the item
being hedged. Hedge ineffectiveness, if any, is measured and included in
current period earnings.
Market Risk
-----------
Norbord purchases commodity inputs, issues debt at fixed and floating
interest rates, invests surplus cash, sells product and purchases inputs
in foreign currencies, and invests in foreign operations. These
activities expose the Company to market risk from changes in commodity
prices, interest rates and foreign exchange rates, which affect the
Company's balance sheet, earnings and cash flows. The Company uses
derivatives as part of its overall financial risk management policy to
manage certain exposures to market risk that result from these
activities.
Commodity Price Risk
Norbord is exposed to commodity price risk on most of its manufacturing
inputs, principally wood fibre, resin and energy. These manufacturing
inputs are purchased primarily on the open market in competition with
other users of such resources and prices are influenced by factors beyond
Norbord's control.
Norbord monitors market developments in all commodity prices to which it
is materially exposed. No liquid futures markets exist for the majority
of Norbord's commodity inputs but, where possible, Norbord will hedge a
portion of its commodity price exposure up to Board-approved limits in
order to reduce the potential negative impact of rising commodity input
prices. Should Norbord decide to hedge any of this exposure, it will lock
in prices directly with its suppliers and, if unfeasible, purchase
financial hedges where liquid markets exist.
At October 23, 2008, Norbord has hedged approximately 80% of its 2008
expected natural gas consumption by locking in the price directly with
its suppliers. Approximately 65% of Norbord's electricity is purchased in
regulated markets and Norbord has hedged approximately 55% of its 2008
deregulated electricity consumption. While these contracts are
derivatives, they are exempt from being accounted for as financial
instruments as they were normal purchases for the purpose of receipt.
Interest Rate Risk
Norbord's financing strategy is to access public and private capital
markets to raise long-term core financing and utilize the banking market
to provide committed standby credit facilities to support its short-term
cash flow needs. The Company has fixed-rate debt, which subjects it to
interest rate price risk, and has floating-rate debt, which subjects it
to interest rate cash flow risk. In addition, the Company invests surplus
cash in bank deposits and short-term money market securities.
The Company enters into interest rate swaps to convert a portion of its
debt from fixed to floating rates. At period end, $115 million of
interest rate swaps were outstanding. The terms of these swaps correspond
to the terms of the underlying hedged debt.
From time to time the Company can recoupon its portfolio of interest rate
swaps to more efficiently manage cash flow and credit exposure. Any gains
or losses realized are deferred and amortized over the remaining term of
the debt against which the swaps were designated as hedges. At period
end, $8 million of gains were deferred and included in the carrying value
of long-term debt in the consolidated balance sheet. Amortization of
$1 million (nine month period - $3 million) was included in interest
expense during the quarter.
Currency Risk
Norbord's foreign exchange exposure arises from the following sources:
- Net investments in self-sustaining foreign operations, limited to
Norbord's investment in its European operations
- Net Canadian dollar-denominated monetary assets and liabilities
- Committed or anticipated foreign currency denominated transactions,
primarily Canadian dollar costs in Norbord's Canadian operations and
Euro revenues in Norbord's UK operations
The Company's policy is to hedge all significant balance sheet foreign
exchange exposures using cross-currency swaps and forward foreign
exchange contracts. The Company may hedge a portion of future foreign
currency denominated cash flows using forward foreign exchange contracts
or options for periods up to three years in order to reduce the potential
negative effect of a strengthening Canadian dollar versus the US dollar
or a weakening Euro versus the Pound Sterling.
Each US one cent change in the value of the Canadian dollar impacts
annualized pre-tax earnings by approximately $1 million in 2008. Each
Pound Sterling one-pence change in the value of the Euro impacts pre-tax
earnings by approximately (pnds stlg)1 million in 2008.
Counterparty Credit Risk
------------------------
Norbord invests surplus cash in bank deposits and short-term money market
securities, sells its product to customers on standard market credit
terms, and uses derivatives to manage its market risk exposures. These
activities expose the Company to counterparty credit risk that would
result if the counterparty failed to meet its obligations in accordance
with the terms and conditions of its contracts with the Company.
Norbord operates in a cyclical commodity business. Accounts receivable
credit risk is mitigated through established credit management
techniques, including conducting financial and other assessments to
establish and monitor a customer's creditworthiness, setting customer
limits, monitoring exposures against these limits, and in some instances,
purchasing credit insurance or obtaining trade letters of credit. At
period end, the key performance metrics on the Company's accounts
receivable are in line with prior periods.
Under an accounts receivable securitization program, Norbord has
transferred substantially all of its present and future trade accounts
receivable to a highly rated financial institution, on a fully serviced
basis, for proceeds consisting of cash and deferred purchase price. At
period end, Norbord recorded cash proceeds of $81 million and a deferred
purchase price of $35 million under this program. The fair value of the
deferred purchase price approximates its carrying value as a result of
the short accounts receivable collection cycle and negligible historical
credit losses.
Surplus cash is only invested with counterparties meeting minimum credit
quality requirements and issuer and concentration limits. Derivative
transactions are executed only with approved high quality counterparties
under master netting agreements. The Company monitors and manages its
concentration of counterparty credit risk on an ongoing basis.
The Company's maximum counterparty credit exposure at period end consists
of the carrying amount of cash and cash equivalents and accounts
receivable, which approximates fair value, and the fair value of
derivative financial assets.
Liquidity Risk
--------------
Norbord strives to maintain sufficient financial liquidity at all times
in order to participate in investment opportunities as they arise, as
well as to withstand sudden adverse changes in economic circumstances.
Management forecasts cash flows for its current and subsequent fiscal
years to identify financing requirements. These requirements are then
addressed through a combination of committed credit facilities and access
to capital markets.
At period end, Norbord had $9 million of cash and cash equivalents,
$147 million of unutilized committed unsecured revolving bank lines and
$25 million unutilized under an unsecured term debt facility.
The following table summarizes the aggregate amount of contractual future
cash outflows for the Company's financial liabilities:
Payments Due by Period
----------------------------------------------------
Less than One-Three Four-Five After Five
(US$ millions) Total One Year Years Years Years
-------------------------------------------------------------------------
Long-term debt,
including interest 813 43 231 287 252
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fair Values
The carrying and fair values of non-derivative financial instruments as
at period end were as follows:
Carrying Fair
(US$ millions) Value Value
-------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 9 $ 9
Accounts receivable 56 56
Tax receivable 20 20
-------------------------------------------------------------------------
$ 85 $ 85
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial Liabilities:
Accounts payable and accrued liabilities $ 177 $ 177
Long-term debt 602 485
-------------------------------------------------------------------------
$ 779 $ 662
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Information about derivative financial instruments at period end was as
follows:
(In millions and Unrealized Realized
in US$ unless Notional gain/(loss) at gain/(loss) Sensitivity
otherwise noted) Value period end(1) year-to-date to 1% change
-------------------------------------------------------------------------
Currency hedges:
Net investment
UK (pnds stlg)97 1 3 1
Belgium (euro)82 (4) 2 1
Monetary
liabilities CAD $26 1 - -
Interest rate hedges:
Interest rate swaps $115 (2) - 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The carrying values of the derivative financial instruments are
equivalent to the unrealized gain/(loss) at period end.
Realized and unrealized gains and losses on derivative financial
instruments are offset by realized and unrealized losses and gains on the
underlying exposures being hedged.
Note 14 - Commitments and Contingencies
---------------------------------------
Litigation Settlement
Norbord and eight other North American OSB producers have been named as
defendants in several lawsuits filed in the US District Court for the
Eastern District of Pennsylvania. The lawsuits allege that these nine
North American OSB producers violated US and various state antitrust and
other laws by allegedly agreeing to fix prices and reduce the supply of
OSB from June 1, 2002 through the present.
The Court has certified the following classes: A nationwide class of
persons and entities that purchased OSB in the US directly from any of
the defendant North American OSB producers between June 1, 2002 and
February 24, 2006; a nationwide class of persons who, as end users,
indirectly purchased in the US for their own use, and not for resale, new
OSB manufactured and sold by one or more of the defendant North American
OSB producers between June 1, 2002 and February 24, 2006 (other than
persons who purchased OSB only as part of a house or other structure);
and a multi-state class of residents of seventeen States who, as end
users, indirectly purchased in the US for their own use, and not for
resale, new OSB manufactured and sold by one or more of the defendant
North American OSB producers between June 1, 2002 and February 24, 2006
(other than persons who purchased OSB only as part of a house or other
structure). All three classes seek damages or injunctive or other relief
under applicable laws.
Norbord has entered into settlement agreements with the certified classes
of direct and indirect purchasers of OSB to limit the risks and costs
associated with a prolonged trial. Norbord has vigorously contested the
plaintiffs' allegations and continues to deny that it violated US
antitrust or any other laws. Under the terms of the settlement
agreements, which are subject to Court approval, Norbord will pay
$30 million into an escrow account for the benefit of members of the
direct purchaser class. A first payment of $15 million was made on
July 25, 2008 and the remainder is due on or before October 24, 2008.
Norbord also has paid $2 million into an escrow account for the benefit
of members of the indirect purchaser classes.
As allowed by Court order, a small number of class members have chosen to
opt out of the direct-purchaser class. Norbord estimates that the
purchases by these entities represents between 10% and 15% of
defendants' sales to direct purchasers of OSB during the class period.
Each of these entities is entitled to pursue its own individual "opt-
out" claims against Norbord and the other defendants. If any of them do
so, Norbord will be entitled to a partial refund of the $30 million
settlement amount paid to the direct purchaser class. The Court has set a
deadline of November 3, 2008 by which members of the certified classes of
indirect purchasers of OSB must exercise, if they choose to do so, their
right to opt out of the classes.
Note 15 - Geographic Segments
-----------------------------
The Company has a single reportable business segment. The Company
operates principally in North America and Europe. Net sales by geographic
segment are determined based on the origin of shipment and therefore
include export sales.
(US$ millions)
-------------------------------------------------------------------------
North Unal-
3rd Qtr 2008 America Europe located Total
-------------------------------------------------------------------------
Net sales $ 158 $ 98 $ - $ 256
EBITDA(1) (2) (5) (2) (9)
Depreciation 11 6 1 18
Property, plant and equipment 686 235 3 924
Investment in property, plant
and equipment 5 2 - 7
3rd Qtr 2007
-------------------------------------------------------------------------
Net sales $ 154 $ 138 $ - $ 292
EBITDA(1) 3 29 (2) 30
Depreciation 9 9 1 19
Property, plant and equipment 701 276 4 981
Investment in property, plant
and equipment 3 5 - 8
9 mos 2008
-------------------------------------------------------------------------
Net sales $ 424 $ 328 $ - $ 752
EBITDA(1) (32) 8 (8) (32)
Depreciation 33 21 1 55
Property, plant and equipment 686 235 3 924
Investment in property, plant
and equipment 20 2 - 22
9 mos 2007
-------------------------------------------------------------------------
Net sales $ 444 $ 397 $ - $ 841
EBITDA(1) (7) 73 (15) 51
Depreciation 42 27 1 70
Property, plant and equipment 701 276 4 981
Investment in property, plant
and equipment 18 11 - 29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA is calculated as earnings determined in accordance with GAAP
before interest, income tax, depreciation and amortization, provision
for non-core operation and litigation settlement. Norbord views
EBITDA as a measure of gross profit and interprets EBITDA trends as
an indicator of relative operating performance.
For further information: Anita Veel, Director, Corporate & Regulatory
Affairs, (416) 643-8838, anita.veel@norbord.com
