Note: Financial references in US dollars unless otherwise indicated
HIGHLIGHTS
- Completed recapitalization initiatives, including CAD $240 million
Rights Offering
- Reached an agreement with lenders to amend revolving bank lines to
widen financial covenants and extend term to 2011
- Reduced investment in operating working capital by $76 million
year-over-year
- Completed US MACT environmental compliance projects
- Improved safety recordable rate 15%
- Generated margin improvements of $14 millionTORONTO, Jan. 30, 2009 /CNW/ - Norbord Inc. (TSX:NBD.WT) today reported a
2008 loss of $116 million or $0.77 per share compared to a loss of $45 million
or $0.31 per share in 2007. The Company recorded a loss of $30 million in the
fourth quarter of 2008 or $0.19 per share compared to a loss of $13 million or
$0.09 per share in the fourth quarter last year.
For the full year, Norbord generated negative EBITDA of $60 million
compared to positive EBITDA of $42 million in the prior year. Higher input
prices, especially resin and energy, accounted for $81 million of the
year-over-year decline. In the fourth quarter, Norbord recorded EBITDA of
negative $28 million versus negative $9 million in the fourth quarter of 2007.
The quarter-over-quarter change in EBITDA was due to the impact of lower
production volumes and higher input costs.
"The past year has been the most difficult in Norbord's history," said
Barrie Shineton, President and CEO. "The issues have been well documented:
poor demand for our core products; high input costs; and a breakdown in the
financial markets resulted in a lack of available credit for both individuals
and corporations.
We took a number of difficult decisions during the fourth quarter to
improve liquidity and strengthen our balance sheet. We raised CAD $240 million
through our Rights Offering, suspended the quarterly dividend and negotiated
bank line amendments with our lenders. We also reduced production to limit our
exposure to housing-related OSB and lowered our investment in operating
working capital. We have taken more costs out of our already lean overhead by
eliminating bonuses, reducing headcount and cutting consulting and travel
expenses. We believe we're well positioned for another difficult year in 2009
as a result of these actions."
Recapitalization Initiatives
Norbord raised CAD $240 million under its previously announced Rights
Offering ("Offering") to shareholders. A total of approximately 432 million
common shares and 136 million warrants of Norbord are now issued and
outstanding.
During the fourth quarter, approximately 110 million units comprising
approximately 110 million common shares and approximately 55 million warrants
were issued to shareholders that elected to exercise rights under the
Offering, including exercise of the basic subscription right by Brookfield
Asset Management Inc. (TSX and NYSE:BAM, Euronext:BAMA) or its affiliates
(collectively, "Brookfield"), Norbord Inc.'s largest shareholder. Gross
proceeds from the initial subscriptions totaled approximately CAD $96 million.
On January 6, 2009, the Standby Purchase Agreement between Norbord and
Brookfield was settled. Brookfield purchased approximately 163 million
additional common shares and approximately 81 million warrants for gross
proceeds of approximately CAD $144 million. Brookfield now holds approximately
325 million common shares or approximately 75% of the total number of
Norbord's common shares issued and outstanding and approximately 131 million
warrants.
In response to the unprecedented financial market turmoil and uncertainty
regarding the near-term recovery of US housing starts, the Board of Directors
suspended the CAD $0.10 per share quarterly dividend during the fourth
quarter. The CAD $0.10 dividend paid on December 21, 2008 to shareholders of
record on December 1, 2008 was the last payment to be made until further
notice.
In November 2008, the Company reached agreement to amend the terms of its
revolving bank lines with six of its seven lenders. The amendments are subject
to customary conditions, including completion of definitive documentation
which Norbord expects to complete during the first quarter of 2009. At that
time, Norbord's aggregate revolving bank line commitment will be reduced from
$235 million to $205 million, the term will be extended to May 2011 and the
financial covenants will be amended to the following: minimum tangible net
worth of $250 million and maximum net debt to total capitalization, book basis
of 70%. In addition, a $50 million term debt facility with Brookfield will
remain available to the Company.
At year end, Norbord's net debt was 32% of capitalization on a market
basis and 61% on a book basis. Upon completion of these recapitalization
initiatives, Norbord will have access to approximately $300 million of
liquidity, tangible net worth of $384 million and net debt to capitalization
of 51% (book basis) on a pro forma basis.
Market Conditions
US housing starts in 2008 were approximately 0.9 million, down from 1.35
million in 2007 and 1.8 million in 2006.
For the full year, North Central OSB prices averaged $172 per Msf
(7/16-inch basis) compared to $161 per Msf in 2007. In the South East region,
where 55% of Norbord's North American capacity is located, OSB prices averaged
$143 per Msf in both 2008 and 2007.
The North Central OSB benchmark price averaged $170 in the fourth quarter
of 2008, down $31 from the third quarter. South East benchmark prices averaged
$137 in the fourth quarter of 2008, down $21 from the prior quarter. Lower OSB
prices during the quarter were due to the combination of the seasonal slowdown
in order files and an extremely cautious customer buying pattern as credit and
working capital concerns spread.
The economic downturn that began in the US has expanded globally.
Consumer confidence and housing-related spending dropped sharply across Europe
as a result. In the UK, where the majority of Norbord's European assets are
located, housing starts fell 35% and housing prices declined 16% in 2008. Both
indicators are expected to weaken further in 2009. As a result, European OSB
prices declined 15% versus 2007 and UK particleboard prices were down 3% and
MDF prices were unchanged. Year-over-year, average annual particleboard and
MDF prices remained relatively unchanged, however, prices did trend sharply
down in the second half of 2008.
Performance
Norbord's North American OSB mills operated at approximately 60% of
capacity in the fourth quarter versus 90% of capacity in the third quarter of
2008. For the full year, Norbord's North American mills operated at
approximately 80% of capacity. Industry-wide, OSB mills in North America
operated at approximately 55% of capacity in the fourth quarter and 70% of
capacity for the full year.
Norbord curtailed 30% of its European capacity in the fourth quarter and
15% for the full year 2008.
Subsequent to year end, Norbord announced that indefinite curtailments
would be taken at its OSB mills in Huguley, Alabama and Jefferson, Texas to
contain costs and manage operating working capital. Combined, these mills
represent 915 MMsf (3/8-inch basis) of annual production capacity.
Approximately 215 people have been impacted as a result of these decisions.
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 thresholds. 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.
Norbord's North American per unit OSB production costs increased 7% in
the fourth quarter versus the third quarter of 2008 due primarily to the
impact of production curtailments and energy usages. For the full year, per
unit OSB production costs increased 9% over 2007 due to increased key input
prices in addition to the negative impact of lower production volumes.
Capital investments totalled $27 million in 2008; $5 million in the
fourth 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.
Developments
Norbord Inc. and Kruger Inc. have reached an agreement in principle to
form a joint venture to combine their respective Hardwood Plywood Operations.
The transaction is subject to necessary approvals and is expected to close in
the first quarter of 2009. The new company, True North Hardwood Plywood Inc.,
will operate out of Norbord's mill in Cochrane, Ontario.
Conference Call
Norbord will hold a conference call for analysts and institutional
investors on Friday, January 30, 2009 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 March 1, 2009, by dialing 647-436-0148 or
888-203-1112. The passcode is 1674650. Audio playback and a written transcript
will be available on the Norbord website.
Norbord Profile
Norbord Inc. is an international producer of wood-based panels with
assets of $1.0 billion, employing approximately 2,500 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 symbols NBD and NBD.WT.
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," "expect," "expects," "expected,"
"forecast," "estimate", "estimates," "estimated," "likely," "may," "agreed
to," "would," 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 2008 Management's Discussion and Analysis dated January 29, 2009.
January 30, 2009
To Our Shareholders,
The past year has been the most difficult in Norbord's history.
Our negative earnings of $116 million in 2008 reflected ongoing weakness
in US housing starts, a collapse in UK housing activity and the overall
economic impact of the breakdown in global financial markets. Our results were
also affected by a $140/barrel peak oil price that resulted in a significant
increase in our manufacturing input costs, especially those associated with
energy and resin.
The economic drivers behind the prolonged US housing downturn have been
well documented by both mainstream and financial media. The Market and Outlook
sections of our annual Management's Discussion and Analysis contain a more
comprehensive review of current market conditions and the adjustments we
believe are required for meaningful improvements in US and UK housing and I
encourage you to read this material.
Throughout 2007 and early 2008, we took proactive measures to strengthen
our balance sheet and secure enough liquidity to manage through what we then
believed would be a typical housing downturn. During that time, we completed
the early refinance of $200 million in long-term debt, added $135 million in
bank lines and concluded an $85 million accounts receivable securitization
program. It was our view that these actions would provide adequate liquidity
to get us through the downturn.
Cyclical US Housing Downturn Expands into Global Financial Crisis
The world changed in September 2008 when the US credit crisis expanded
into a global financial meltdown. The challenges facing our European
operations mirrored those in North America and it became clear that a housing
recovery in North America and the UK would be delayed. It was also apparent
that traditional financing options were no longer available.
Norbord acted quickly to stabilize its balance sheet and prepare for a
"worst case" scenario. In November, we announced a plan to recapitalize the
business. We made the difficult decision to suspend our quarterly dividend. We
also raised CAD $240 million through a Rights Offering supported by Brookfield
Asset Management Inc. - our principal shareholder. And, we negotiated bank
line amendments to widen financial covenants and extend terms until 2011,
which we expect will take effect by the end of the first quarter.
Our operations also took decisive action to reduce costs and further
improve our competitive position. Specifically, we:- Reduced production by approximately 20% in both North America and
Europe in 2008 to conserve cash and manage our operating working
capital risk. I'm pleased to report that our efforts in this area
resulted in a $76 million reduction in operating working capital.
- Lowered our already lean overhead costs by eliminating bonus
payments, reducing headcount and cutting most consulting and travel
expenses.
The success of these financial and operational initiatives allows us to
head into the first quarter with our house in order and positions us well to
manage through another difficult year in 2009.
Strategy Remains Unchanged
We continue to believe that oriented strand board (OSB) is the industry's
best long-term growth opportunity. We also believe that the effective
execution of our strategy will provide real value for our shareholders over
the cycle. As we look to 2009 and 2010, we will continue to stay the course as
we:
Develop a world class safety culture - Our 2008 OSHA rate of 2.00 was a
best ever result and we will work to achieve further gains in 2009.
Pursue growth in OSB - We will prudently undertake a limited number of
high-return projects to increase productivity at existing mills so we are
in optimal operating condition when markets improve. We will also
continue to evaluate acquisition opportunities if, and when, they arise.
Own high-quality assets with low cost positions - We will use
curtailments during the year to complete maintenance projects, conserve
cash and manage operating working capital.
Maintain a margin-focused operating culture - Reduced operating rates
limit the visibility of our margin improvement efforts. However, we will
continue to progress the margin improvement gains realized over the past
five years.
Focus on growth customers - We will continue our work to minimize
exposure to housing-related OSB and grow our sales with big box retailers
and industrial customers.
Allocate capital with discipline - Our 2009 capital program will be
limited to $25 million, appropriately reflecting market conditions.Looking Ahead
We don't expect any recovery in the housing markets in North America or
Europe during 2009.
We agree with the industry experts' opinion that the decline in US
housing was an early indicator of the current global financial crisis and that
the stabilization of US housing will be the main driver of an eventual
recovery. However, in our view, several market adjustments must occur before
there is a meaningful improvement, including:- Government stimulus packages must filter through to the housing
sector,
- Falling house prices need to stabilize before buyers will re-enter
the market,
- Mortgage lenders must support the return of qualified and first-time
buyers to the housing market, and
- The high inventory of new and existing homes for sale must return to
normal levels.We continue to believe that the underlying demographics will support
strong demand for new homes. We expect to see signs of a US housing recovery
in 2010 or early 2011, with recovery in the UK pacing slightly behind.
Norbord has the right plan in place to manage through the remainder of
the downturn. Our recent recapitalization initiatives have significantly
improved our ability to access liquidity. We are comfortable with our cost
position in North America and the depreciation of the Pound Sterling further
improves our competitive position in Europe. And, we have the continued
support of our major shareholder. We are well positioned for success when the
markets do recover.
On behalf of everyone at Norbord, I thank you for your continued support
during this challenging point in our history. I look forward to updating you
on our progress throughout the year.(signed)
J. Barrie ShinetonThis letter includes forward-looking statements, as defined by applicable
securities legislation. Often, but not always, forward-looking statements can
be identified by the use of words such as "would," "expect," "positions,"
"when," "if," "must," "believe," "view," "when," or variations of such words
and phrases or statements that certain actions "may," "could," "must,"
"would," "might," or "will" be undertaken, occur or be achieved.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of Norbord to be materially different from any future results, performance or
achievement expressed or implied by the forward-looking statements. See the
cautionary language in the Forward-Looking Statements section of the
Management's Discussion and Analysis.
JANUARY 29, 2009
Management's Discussion and Analysis
INTRODUCTION
This Management's Discussion and Analysis (MD&A) provides a review of the
significant developments that impacted Norbord's performance during 2008
relative to 2007. The information in this section should be read in
conjunction with the audited financial statements, which follow this MD&A.
In this MD&A, "Norbord" means Norbord Inc. and all of its consolidated
subsidiaries and affiliates, and "Company" means Norbord Inc. as a separate
corporation, unless the context implies otherwise. "Brookfield" means
Brookfield Asset Management Inc. or any of its consolidated subsidiaries and
affiliates, a related party, by virtue of a controlling equity interest in the
Company.
In 2007, Norbord ceased voluntarily filing certain reports with the US
Securities and Exchange Commission. Additional information on Norbord,
including documents publicly filed by the Company, is available on the
Company's web site at www.norbord.com or the System for Electronic Document
Analysis and Retrieval (SEDAR) at www.sedar.com.
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.
To enhance shareholders' understanding, certain five-year historical
financial and statistical information is presented. Norbord's significant
accounting policies and other financial disclosures are contained in the
audited financial statements and accompanying notes, which follow this MD&A.
All financial references in the MD&A are stated in US dollars unless otherwise
noted.
Certain historical financial and statistical information for the years
2004 and 2003 include information for the paper and timberlands business
(Fraser Papers Inc.), which was distributed to Norbord's common shareholders
on June 30, 2004, and thus may not be comparable with the information for the
years 2008, 2007, 2006 and 2005.
EBITDA, EBITDA margin, operating working capital, total working capital,
capital employed, ROCE, ROE, net debt, 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
Norbord is an international producer of wood-based panels with 15 plant
locations in the United States, Europe and Canada.
Norbord is one of the world's largest producers of oriented strand board
(OSB) with annual capacity of 5 billion square feet (Bsf) (3/8-inch basis).
The core assets of Norbord's OSB business are located in the South East region
of the United States. The Company is also a significant producer of wood-based
panels in Europe. Norbord does not own any timberlands. It purchases wood
fibre from third parties that include private landowners and government-owned
and -managed timberlands. Norbord employed approximately 2,500 people at
December 31, 2008.
Operations include 11 OSB mills, 2 particleboard mills, 2 medium density
fibreboard (MDF) mills, 1 hardwood plywood mill and a furniture plant. The
Company reports all operations as a single operating segment.
STRATEGY
Norbord's business strategy is focused entirely on the wood panels sector
- in particular OSB - in North America and Europe. The table below summarizes
the six key components of our strategy and our performance in each strategic
area during 2008. The Company is of the view that successful execution of this
strategy will provide real value for our shareholders over the cycle.-------------------------------------------------------------------------
Strategic Priority 2008 Performance
-------------------------------------------------------------------------
1. Develop world class - Improved Occupational Safety and Health
safety culture. Administration (OSHA) recordable rate by
15% to 2.00.
- Completed Safety Leadership Training for
all operational management and supervisors.
- Increased the number of employees directly
involved in safety activities by 25% to a
total participation rate of 76%.
-------------------------------------------------------------------------
2. Pursue growth in OSB. - Rebuilt OSB press at Guntown, Mississippi.
- Completed significant maintenance on OSB
press at Joanna, South Carolina.
-------------------------------------------------------------------------
3. Own high-quality - Conserved cash and managed operating
assets with working capital by curtailing 20% of North
low-cost positions. American panel capacity and 15% of European
panel capacity.
-------------------------------------------------------------------------
4. Maintain a - Generated margin improvements of
margin-focused $144 million over the past five years;
operating culture. $14 million in 2008.
-------------------------------------------------------------------------
5. Focus on growth - Limited exposure to housing-related OSB by
customers. increasing sales volume to strategic big
box retailers and industrial customers.
- Increased sales volume to top 10 customers.
-------------------------------------------------------------------------
6. Allocate capital - Constrained capital program to $27 million.
with discipline. - Directed approximately 45% of 2008 capital
program to US Environmental Protection
Agency's Maximum Achievable Control
Technology (MACT) compliance projects.
-------------------------------------------------------------------------
In addition to the highlights listed above, Norbord also accomplished the
following in 2008:
- Executed recapitalization initiatives, including a $200 million
Rights Offering (CAD $240 million)
- Reached agreement with lenders to amend revolving bank lines - extend
term to 2011 and widen financial covenants, subject to conditions,
including completion of definitive documentation
- Reduced investment in operating working capital by $76 million year
over year
- Increased accounts receivable securitization facility by $35 million
- Completed final US Environmental Protection Agency's Maximum
Achievable Control Technology (MACT) compliance projects before the
October 2008 deadline.Protecting the balance sheet is an important element of Norbord's
financial strategy. Management 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 year, the Company had unutilized liquidity of
$259 million, net debt to capitalization, book basis of 61%, and tangible net
worth of $301 million. On a pro forma basis, Norbord will have access to
approximately $300 million of liquidity, net debt to capitalization, book
basis of 51% and tangible net worth of $384 million upon completion of the
recapitalization initiatives subsequent to year-end.Summary
(US $ millions, except
per share information,
unless otherwise noted) 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Return on capital
employed (ROCE) (6)% 4% 25% 53% 73%
Return on equity (ROE) (37)% (11)% 20% 46% 47%
Cash provided by (used
for) operating activities (13) 15 191 314 562
Cash provided by (used
for) operating
activities per share $(0.09) $0.10 $1.33 $2.14 $3.75
-------------------------------------------------------------------------
Net sales 943 1,104 1,252 1,462 1,486
EBITDA (60) 42 247 495 631
Earnings from continuing
operations (116) (45) 97 248 332
Earnings (116) (45) 97 248 326
Earnings from continuing
operations per share
(diluted) (0.77) (0.31) 0.67 1.61 2.19
Earnings per share (diluted) (0.77) (0.31) 0.67 1.61 2.14
Common dividends per share 0.38 0.38 1.25 1.13 1.10
-------------------------------------------------------------------------
Total assets 1,041 1,404 1,299 1,328 1,391
Long-term debt 542 480 480 440 450
Net debt 477 547 460 285 236
Net debt to capitalization,
market basis 32% 30% 27% 17% 13%
Net debt to capitalization,
book basis 61% 60% 51% 35% 30%
-------------------------------------------------------------------------
Shipments (MMsf-3/8")
OSB 4,088 4,463 4,289 4,136 3,731
Particleboard(1) 398 631 643 583 438
MDF 435 494 525 545 593
Hardwood plywood 51 71 78 77 79
Indicative OSB pricing
Average OSB price - North
Central ($/Msf 7/16") 172 161 217 320 369
Average OSB price -
South East ($/Msf 7/16") 143 143 219 338 370
Average OSB price -
Europe (euro/m3) 203 240 208 199 222
-------------------------------------------------------------------------
(1) Excludes particleboard consumed internally (114 MMsf, 138 MMsf,
178 MMsf, 183 MMsf, 209 MMsf for each period respectively).Norbord was challenged by unprecedented economic and financial market
turmoil which began in North America and then evolved into a global economic
crisis during 2008. Norbord's fundamental strategy of geographic
diversification was less evident in its 2008 results as markets for Norbord's
North American and European products started to move in the same direction in
response to the global economic contraction. European markets which were
exceptionally robust in 2007, began a sharp decline in the second half of
2008. The Company's ability to minimize losses, conserve cash and
strategically manage operating working capital continues to be instrumental in
ensuring that Norbord is well positioned for another difficult year in 2009.
North American OSB prices remained at cyclical lows throughout the year
reflecting the continued decline in US housing starts. Fluctuation in North
American OSB price and demand is the most significant variable affecting
Norbord's results. North American benchmark prices averaged $172 per thousand
square feet (Msf) (North Central 7/16-inch basis) in 2008, well below the
historical five-year average of $248 per Msf. Rising global commodity prices
had a significant negative impact on the industry for most of 2008. Norbord
successfully managed production curtailments in both North America and Europe
in response to the declining market conditions and reduced demand. Demand and
pricing for North American OSB are expected to remain weak in the near term
with some improvement expected in 2010. Long term, the underlying demographics
continue to support demand for new homes. Further, management believes
Norbord's North American and European operations provide meaningful market and
geographic diversification over the cycle, while capitalizing on Norbord's
strength as a panel producer.
Throughout the cycle, Norbord took steps to prepare itself for a housing
market downturn by containing costs and focusing its sales mix on
higher-margin products. The Margin Improvement Program (MIP) has helped
Norbord to improve its competitive position, generating over $144 million of
savings in the past five years. MIP measures margin improvement relative to
the previous year at constant prices and exchange rates. These gains have
helped offset the impact of industry-wide rising input costs and management
believes its relative competitive position has improved over time.
EBITDA in 2008 was negative $60 million versus positive $42 million in
2007. EBITDA margins for 2008 were negative 6%, compared to positive 4% for
the prior year. A loss of $116 million or $0.77 per share was generated in
2008 versus a loss of $45 million or $0.31 per share in 2007. Pre-tax ROCE
averaged negative 6% for 2008 compared to positive 4% in 2007. 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. Over the past five years, Norbord has achieved an average annual
ROCE of 30%.
Norbord's North American OSB operations achieved break-even EBITDA
results in the second and third quarters, which is a positive and notable
achievement in light of the weak housing markets and continued pressure from
rising global energy and resin prices. Norbord's European operations generated
positive EBITDA of $4 million in 2008 comprised of positive EBITDA of $13
million during the first half of 2008 offset by negative EBITDA of $9 million
in the second half of the year due to the precipitous decline in UK
housing-related activity. In this environment of reduced demand and prices,
Norbord's North American OSB mills operated at 80% of capacity and European
mills operated at 85% of capacity during 2008. As a result, 2008 production
volumes retreated by 15% from the record annual OSB production volumes
achieved in 2007.
Over the past five years, $1.1 billion in cash has been generated from
operating activities. This cash has been used to reshape the Company from its
historic role as a diversified Canadian forest products company to an
internationally recognized leader in the structural panel market. During this
time, Norbord achieved the following:- Invested $375 million in growing the business
- Reduced net debt by $140 million
- Paid out $560 million in cash dividends including three special CAD
$1.00 dividends
- Invested $100 million to repurchase 10.2 million common shares
- Distributed Fraser Papers Inc. to shareholdersDuring 2008, the Company undertook several key initiatives to ensure it
comes out of this unprecedented cyclical downturn with sufficient capital
resources to solidify its position as an industry leader. During the year, the
Company successfully executed a Rights Offering to existing shareholders to
raise approximately $200 million of equity capital and reached an agreement
with its lenders to widen financial covenants and extend the term of its
revolving bank lines. The bank amendments are subject to customary conditions,
including the execution of definitive documentation, which the Company expects
to complete during the first quarter of 2009.
Outlook for 2009
No near-term relief is expected from housing market pressures in North
America or Europe in 2009. Most experts agree that the decline in US housing
was an early indicator of what has become a global financial meltdown and
believe that the recovery of US housing may also be the main driver in
eventually stabilizing financial markets and the economy.
The National Bureau of Economic Research has declared that the US economy
has been in recession since December 2007. In its view, recessions have
averaged about 10 months in duration and it is forecasting this to be a longer
and deeper recession that is not expected to end before late 2009.
In the short term, Norbord concurs with expert views that the US economy
will deteriorate further across most industries and regions. Restricted credit
availability and the resulting financial crisis have had an adverse effect on
consumer and business confidence and will likely lead to higher unemployment
and weak consumer spending in 2009. Home prices declined 12% in 2008 and are
expected to continue their decline in 2009.
The underlying demographics continue to support long-term demand for new
homes. However, Norbord believes that several market adjustments must occur
before there is a sustainable improvement in housing starts, including:- Government stimulus packages must filter through to the housing
sector
- Falling house prices need to stabilize
- Mortgage lenders must support the return of qualified and first-time
buyers back to the housing market
- The high inventory of new and used homes for sale must be absorbedIndustry experts forecast annualized US housing starts will drop below
0.8 million in 2009, with the first half of the year at an even lower
annualized pace. Industry research also predicts that housing starts will
begin a moderate recovery in 2010 and the trend line should accelerate upwards
over the ensuing years.
In Europe, the sharp decline in housing and financial markets is more
recent. However, in some markets, especially the UK, it has been faster and
more pronounced than the North American downturn. Markets for all products in
the UK and Europe are expected to soften in 2009.
The economic recovery in the UK and the US will depend on financial
markets stabilization and credit availability for home builders. The Company
believes the UK market is not handicapped in the same manner as North America
by high inventories of new and used unsold homes. There is also a systemic
lack of available housing in the UK and thus pent up demand continues to grow.
Combined, these factors suggest that there may be a faster recovery in
housing and panel demand once credit conditions improve and financial markets
achieve stability.
Norbord benefited from the weakening of the Pound Sterling relative to
the Euro and US dollar in 2008 as most of our mills in Europe are located in
the UK. The currency shift makes it more difficult for competing panel
products to be imported into the UK and may provide an opportunity for Norbord
to increase exports of panel products from its UK mills into Continental
Europe.
The dramatic escalation of energy and resin input prices through most of
2008 significantly impacted Norbord's production input costs. Management
believes energy and resin prices peaked in the fourth quarter and are now in
decline.
Norbord intends to constrain capital expenditures to less than $25
million in 2009 which will be comprised of strictly essential maintenance and
limited productivity improvement and environmental projects.
The relative difference in cost position among North American OSB
producers has moderated during 2008 as production curtailments taken across
the industry have reduced higher cost capacity. Norbord continues to be
comfortable with its cost position in this environment.
The Company is confident that its long-term strategy, recent
recapitalization initiatives, and high-quality customer base in both North
America and Europe, combined with the active support of its major shareholder,
position the Company well to maintain its leadership position in the industry.Results of Operations
-------------------------------------------------------------------------
(US $ millions) 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Net sales $ 943 $ 1,104 $ 1,252 $ 1,462 $ 1,486
EBITDA (60) 42 247 495 631
EBITDA margin (6)% 4% 20% 34% 42%
Depreciation 70 88 94 89 82
Investment in property,
plant and equipment 27 36 160 115 67
-------------------------------------------------------------------------
OSB shipments (MMsf 3/8") 4,088 4,463 4,289 4,136 3,731
Average OSB price -
North Central
($/Msf 7/16") 172 161 217 320 369
Average OSB price -
South East ($/Msf 7/16") 143 143 219 338 370
Average OSB price -
Europe (euro/m(3)) 203 240 208 199 222
-------------------------------------------------------------------------
Markets
North America is the principal market destination for Norbord's products.
North American OSB comprises 70% of Norbord's panel shipments by volume.
Therefore results of operations are most affected by volatility in North
American OSB prices. European panels comprise 27% of shipments by volume and
also affect Norbord's results, although to a lesser degree.
-------------------------------------------------------------------------
Shipments by market destination North 2008 2007
(MMsf-3/8") America Europe Total Total
-------------------------------------------------------------------------
OSB 3,458 630 4,088 4,463
Particleboard(1) - 398 398 631
MDF 115 320 435 494
Hardwood Plywood 51 - 51 71
-------------------------------------------------------------------------
(1) Excludes particleboard consumed internally (2008 - 114 MMsf 3/8";
2007 - 138 MMsf 3/8")North America
The US economy experienced unprecedented turmoil in 2008 due to the
unforeseen instability in the financial markets. Many experts believe that
this accelerated downturn in the US economy was largely rooted in the housing
market decline.
The lack of available credit in the US, combined with a dramatic increase
in foreclosure rates and the high inventory of new and existing homes for
sale, led to an unprecedented erosion in housing starts. New home construction
is the primary end use for OSB in North America, accounting for approximately
60% of OSB demand in 2008. The US housing downturn that began in 2006 has
accelerated throughout 2007 and 2008. US housing starts in 2008 were
approximately 0.9 million, down from 1.35 million in 2007 and 1.8 million in
2006. To put the decline into context, 100,000 housing starts represent
approximately 1 Bsf (3/8-inch basis) of OSB demand.
According to APA - The Engineered Wood Association, the North American
structural panel industry produced approximately 31 Bsf (3/8-inch basis) of
panels in 2008, or 70% of total panel capacity. Specifically, OSB production
was approximately 19 Bsf, or 68% of total OSB capacity. OSB now represents
approximately 60% of total North American structural panel production. In
2008, Norbord's North American OSB mills operated at approximately 80% of
capacity compared to 100% in 2007.
In addition to lower demand from housing, financial restrictions forced
many builders to modify operating plans and aggressively reduce their own
working capital levels. The combination of these factors has amplified the
slowdown in demand and created a challenging operating environment for
building material producers.
The North American North Central OSB benchmark price averaged $172 per
Msf (7/16-inch basis) in 2008 compared to an average price of $161 per Msf in
2007 representing a modest 7% increase of $11 per Msf (7/16-inch basis). In
the South East region, where approximately 55% of Norbord's North American OSB
capacity is located, prices averaged $143 per Msf in both 2008 and 2007.
Benchmark prices reflected wide spread curtailments taken across the industry.
Modest price improvements did occur in some regions during 2008, however, key
input costs, primarily resin and wax, continued to rise. Some relief surfaced
at the end of the year as global commodity prices began to fall, a trend which
is expected to continue into 2009.
Europe
The economic downturn that began in the US has expanded globally.
Consumer confidence and housing-related spending across Europe have dropped
sharply as a result. In the UK, where the majority of Norbord's European
assets are located, housing starts fell 35% and housing prices declined 16% in
2008. Both indicators are expected to weaken further in 2009. As a result,
European OSB prices declined 15% in 2008 versus 2007 and in the UK,
particleboard prices were down 3% and MDF prices were unchanged. Year over
year, average annual particleboard and MDF prices were relatively unchanged.
However, prices for these products did trend down sharply in the second half
of 2008.
European mills operated at 85% of capacity throughout the second half of
the year to contain costs and lower operating working capital. Throughout most
of 2008, Norbord's European business was disproportionately impacted by high
resin and global energy prices because Norbord's European products are more
resin and energy intensive to produce. Key input prices for energy and resin
did ease at the end of the fourth quarter. However, these cost reductions were
largely offset by downward pressure on panel pricing.-------------------------------------------------------------------------
Net Sales Shipments Average Mill Nets
(US $ millions) (MMsf-3/8")(US $ per Msf-3/8")
2008 2007 2008 2007 2008 2007
-------------------------------------------------------------------------
OSB(1) $ 618 $ 673 4,088 4,463 $ 151 $ 151
Particleboard(2) 81 134 398 631 204 212
MDF 110 127 435 494 253 257
Hardwood plywood 34 47 51 71 667 662
Other(3) 100 123
-------------------------------------------------------------------------
Total $ 943 $ 1,104
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes European net sales of $142 million (2007 - $161 million).
(2) Excludes particleboard consumed internally (2008 - 114 million square
feet (MMsf) 3/8"; 2007 - 138 MMsf 3/8").
(3) Other sales include I-joist, laminated products, furniture components
and ready-to-assemble furniture units.
Production
-------------------------------------------------------------------------
(MMsf-3/8") 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
OSB 4,028 4,614 4,335 4,172 3,821
Particleboard 475 795 794 777 616
MDF 437 492 517 555 598
Hardwood plywood 51 71 79 78 79
-------------------------------------------------------------------------During 2008, in a market environment of reduced demand, production
volumes were significantly curtailed company wide. North American OSB
production decreased by approximately 20% versus 2007 excluding the impact of
the production ramp-up of the new OSB line at Cordele which was completed in
2007. North American OSB mills operated at 80% of capacity compared to 100%
capacity in the prior year. Similarly, European panel production decreased by
20% in 2008 versus 2007 (excluding the impact of the Genk particleboard line
closure described below) as the European mills operated at 85% of capacity.
The particleboard line at Genk was permanently closed in the first
quarter of 2008. Operations at the Genk OSB line were not impacted. The
particleboard line comprised 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.
On December 1, 2008, Norbord and Kruger Inc. announced an agreement in
principle to form a 50/50 joint venture to combine their respective hardwood
plywood businesses. As of December 31, 2008, a Memorandum of Understanding has
been signed and the transaction is expected to close in the first quarter of
2009.
Norbord will continue its practice of taking production curtailments in
2009 to minimize losses, conserve cash and manage operating working capital.
In January 2009, Norbord informed employees of its intention to suspend
production indefinitely at the Jefferson, Texas and Huguley, Alabama mills due
to the decline in OSB prices and demand.
Operating Results
In 2008, EBITDA was negative $60 million compared to positive $42 million
in 2007. Higher key input prices accounted for $81 million of the change in
EBITDA year over year. The modest 7% increase in North American OSB prices
from 2007 partially offset the negative impact of lower production volumes.
North American benchmark OSB prices averaged $172 in 2008, or approximately
30% below the historical five-year average. EBITDA margin was negative 6%
compared to positive 4% for the prior year. The components of the EBITDA
change are summarized in the variance table below.-------------------------------------------------------------------------
EBITDA Variance 2008 vs. 2007
(US $ millions)
-------------------------------------------------------------------------
EBITDA - current period $ (60)
EBITDA - comparative period 42
-------------------------------------------------------------------------
Variance $ (102)
-------------------------------------------------------------------------
North American mill nets(1) $ 28
European mill nets(1) (19)
Volume(2) (38)
Key input prices(3) (81)
Key input usage(3) 6
Other(4) 2
-------------------------------------------------------------------------
$ (102)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 labour and
benefits, supplies and maintenance and the impact of foreign
exchange.North American OSB generated EBITDA of negative $46 million (2007 -
negative $19 million). Norbord's European panel operations generated EBITDA of
positive $4 million (2007 - positive $81 million). Other products generated
EBITDA of negative $5 million (2007 - negative $3 million). These figures
exclude unallocated corporate overhead relating to all product lines totalling
$13 million (2007 - $17 million).
North American OSB achieved break-even EBITDA results in the second and
third quarters of 2008 which was a positive and notable achievement in light
of continued pressure on input costs from rising resin, fibre and global
energy prices and the impact of production curtailments during the year.
European operations achieved positive EBITDA of $13 million during the first
half of 2008 followed by negative EBITDA of $9 million during the second half
of the year. European OSB prices averaged 10% lower in the second half of 2008
versus the first half and 15% lower than 2007.
Significantly higher input prices had a dramatic impact on the global
forest products industry in 2008. The upward pricing pressure was an economic
reality for the majority of the year although global commodity prices softened
towards the end of 2008. Global commodity input prices are expected to
moderate further in 2009. The price of energy, resin and fibre which account
for 70% of Norbord's production costs, have increased sharply over the past
five years. MIP gains of $14 million in 2008, measured relative to 2007 at
constant prices and exchange rates, limited the impact these higher input
prices had on earnings. Contributions to MIP in 2008 included key input usage
reduction initiatives, operating supplies, maintenance consumption initiatives
and general reduction in overhead. MIP gains were limited as weaker market
conditions resulted in a decline in production volumes and sales of certain
value-added products. Reduced operating rates will limit the visibility of
margin improvement efforts in 2009.
Norbord's North American per unit OSB production costs in 2008 increased
9% over the prior year due to increased resin and wax, electricity, fibre and
gas prices in addition to the negative impact of reduced production volumes.
This was partially offset by the benefit of increased productivity and
improved key input usages.
The direct impact on operating costs of rising energy prices for most of
2008 has been limited since all of Norbord's heat energy for OSB operations is
provided by burning bark and other biomass. Natural gas and electricity
satisfy the remainder of Norbord's energy requirements. Norbord continues to
look for ways to improve its level of energy self-sufficiency.
Norbord's European operations are 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 of 2008 and the
installation of biomass heat energy systems at Genk OSB and Cowie MDF in 2007.
Net sales for the year were $943 million, compared to $1.1 billion in
2007, which is an overall reduction of 15%. European net sales decreased by
20% and were primarily driven by lower pricing and shipment volumes. North
American net sales decreased by 9% due to lower shipment volumes offset by a
modest increase in North American OSB prices in the second and third quarters
of 2008.Interest, Depreciation and Income Tax
-------------------------------------------------------------------------
(US $ millions) 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Interest and other income $ 3 $ 5 $ 3 $ 5 $ 6
Interest expense (49) (49) (29) (30) (31)
Depreciation (70) (88) (94) (89) (82)
Income tax recovery (expense) 96 45 (17) (133) (183)
-------------------------------------------------------------------------Interest
In 2008, interest and other income was down over the prior year due to
higher average cash balances in 2007 principally arising from the $200 million
issue of senior notes completed in February 2007 to pre-fund the March 2008
debenture maturity. Interest expense of $49 million was relatively consistent
with the prior year. Interest of $3 million was capitalized to production
equipment in 2007 relating to the Cordele expansion.
The effective interest rate on Norbord's debt-related obligations,
including the impact of interest rate swaps, was 6.2% at December 31, 2008,
compared to 7.1% at year-end 2007. Approximately 40% of Norbord's net debt was
subject to floating interest rates during the year. The decreased average rate
was the result of lower US money market rates in 2008 as the US Federal
Reserve continued cutting interest rates throughout the year, partially offset
by the coupon step-up applicable to the Company's 2017 senior notes.
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. As at December 31, 2008, $8
million of gains were deferred and included in the carrying value of long-term
debt in the consolidated balance sheet. Amortization of $3 million in 2008 and
$8 million in 2007 was included in interest expense.
Depreciation
In accordance with the Company's policy, depreciation rates for property,
plant and equipment are assessed from time to time to ensure they continue to
approximate their useful life. Effective July 1, 2007, management's estimate
of the useful life of its OSB assets was changed from 15 years to 25 years.
This change in estimate was accounted for prospectively. The impact of this
change in estimate of depreciation was a reduction of approximately $18
million in 2007 and $36 million in 2008.
Income tax
A tax recovery of $96 million was recorded in 2008 on a pre-tax loss of
$212 million. The effective tax rate of 45% is higher than the statutory rate,
principally due to rate differences on foreign activities and fluctuations in
relative currency values.
From 2004 to 2006, Norbord paid $234 million in income and income-related
taxes, principally in North America. In 2007 and 2008, the Company received
tax refunds of $33 million and $85 million respectively, related to over
installments and losses carried back. The economic stimulus package currently
being negotiated in the US Congress contains a proposal to extend the loss
carry back period from two to five years. Pending enactment of this stimulus
package as currently proposed, the Company would be entitled to approximately
$64 million in cash tax refunds.
At December 31, 2008, the Company had tax operating loss carryforwards of
approximately pnds stlg 39 million from European operations. These losses can
be carried forward indefinitely. The Company has operating losses and capital
losses in Canada of CAD $22 million and CAD $13 million respectively. The
operating losses expire in 2028 and the capital losses can be carried forward
indefinitely. The Company also has approximately CAD $37 million of Investment
Tax Credits (ITCs) available to reduce future Canadian tax liabilities. The
ITCs expire between 2008 and 2017. The loss carryforwards and the credits may
be utilized over the next several years to eliminate cash taxes otherwise
payable, and will enhance future cash flows. The future tax benefits of these
temporary differences have been included in future income taxes in the
consolidated financial statements.
Upon completion of their basic subscription privilege under the Rights
Offering on December 24, 2008, Brookfield's ownership interest in the Company
increased to approximately 60%. For Canadian tax purposes, the increased
ownership resulted in Brookfield acquiring control of the Company on December
24, 2008.
As a result of the acquisition of control of the Company by Brookfield on
December 24, 2008, $8 million in future tax benefits was charged to retained
earnings in 2008 relating to capital loss carryforwards not available for
future use. Current Canadian tax legislation prohibits capital losses from
being used to shelter capital gains realized in fiscal periods subsequent to
the acquisition of control date. Certain draft Canadian legislation was
introduced in 2008 to permit the Company to elect to apply the available
capital losses against unrealized built-in gains on certain eligible assets as
at the acquisition of control date. These tax attributes will be reinstated in
the future when the pending draft income tax legislation is substantively
enacted.Liquidity and Capital Resources
-------------------------------------------------------------------------
(US $ millions, except
per share information,
unless otherwise noted) 2008 2007 2006 2005 2004
Cash provided by (used for)
operating activities $ (13) $ 15 $ 191 $ 314 $ 562
Cash provided by (used for)
operating activities
per share (0.09) 0.10 1.33 2.14 3.75
-------------------------------------------------------------------------
Operating working capital (53) 23 - 19 2
Investment in property,
plant and equipment 27 36 160 115 67
Net debt to capitalization,
market basis 32% 30% 27% 17% 13%
Net debt to capitalization,
book basis 61% 60% 51% 35% 30%
-------------------------------------------------------------------------Rights Offering
On November 17, 2008, the Company filed a final short form prospectus
with securities regulators in Canada pursuant to a Rights Offering (the
Offering) for gross proceeds of approximately $200 million (CAD $240 million)
(see Capitalization). Under the Offering, the Company received gross proceeds
of $79 million (CAD $96 million) in 2008 and $120 million (CAD $144 million)
subsequent to year-end. Related issue costs of approximately $3 million have
been netted against the proceeds. The net proceeds were used to repay the term
debt facility and revolving bank lines.
Term Debt Facility
In the first quarter of 2008, the Company concluded a $100 million term
debt facility with Brookfield 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 revolving bank lines. Any drawings under the
facility are treated as tangible net worth for bank line covenant purposes. At
December 31, 2008, $35 million was drawn as cash. In the fourth quarter of
2008, the Company repaid $40 million of the term debt facility and the
remaining $35 million was repaid subsequent to year-end, in each case using
proceeds from the Company's Offering. In conjunction with the revolving bank
line amendments discussed below, the term debt facility commitment will be
reduced from $100 million to $50 million and the term will be extended to June
2011.
Revolving Bank Lines
At year end, the Company had committed revolving bank lines of $235
million which mature in May 2010, bear interest at money market rates plus a
margin that varies with the Company's credit rating, and contain the following
financial covenants with which the Company must comply on a quarterly basis:
minimum tangible net worth of $300 million; and maximum net debt to total
capitalization, book basis, of 65%. On December 31, 2008, the Company's
tangible net worth was $301 million and net debt to total capitalization, book
basis, was 61%. At December 31, 2008, $57 million of the revolving bank lines
was drawn as cash, $4 million was utilized for letters of credit and $174
million was available to support the Company's liquidity requirements.
In the fourth quarter of 2008, the Company reached an agreement with its
lenders to amend the terms of its revolving bank lines. The aggregate
revolving bank line commitment will be reduced from $235 million to $205
million, the term will be extended to May 2011 and the financial covenants
will be amended to the following: minimum tangible net worth of $250 million
and maximum net debt to total capitalization, book basis, of 70%. These
amendments are subject to customary conditions including the execution of
definitive documentation, which the Company expects to complete during the
first quarter of 2009.
At year end, the Company had unutilized liquidity of $259 million, net
debt to capitalization, book basis of 61%, and tangible net worth of $301
million. On a pro forma basis, Norbord will have access to approximately $300
million of liquidity, net debt to capitalization, book basis, of 51% and
tangible net worth of $384 million upon completion of these recapitalization
initiatives.
Norbord has no investments in, or other direct exposure to, US sub-prime
mortgages, US auction rate securities or Canadian asset-backed commercial
paper.
Senior Notes Due 2017
In February 2007, the Company issued $200 million in senior notes due in
2017 with an interest rate of 6.45%, which are subject to a credit
ratings-based coupon step-up provision. At year-end, the interest rate was
7.95%. The notes were issued to pre-fund the March 2008 debenture maturity.
The Company's outstanding long-term debt has a weighted average term of
4.9 years. Norbord's net debt stood at $477 million at year-end, representing
32% of capitalization on a market basis and 61% of capitalization on a book
basis. Net debt includes long-term debt of $497 million less cash and cash
equivalents of $20 million.
Other Liquidity and Capital Resources
Operating working capital, consisting of accounts receivable and
inventory less accounts payable and accrued liabilities was reduced by $76
million during the year, to negative $53 million at year-end compared to
positive $23 million at December 31, 2007. The 2008 and 2007 accounts
receivable balances are net of $68 million and $50 million, respectively, of
accounts receivable sold under a securitization facility. The facility was
established at $50 million in November 2007 and subsequently increased to $85
million in July 2008. Despite the current economic environment, Norbord's
accounts receivable metrics remain in line with prior periods. The Company
aims to minimize the amount of capital held as operating working capital and
took action to reduce this investment in conjunction with its production
curtailments over the year-end period. Total working capital at December 31,
2008, was negative $20 million which includes $20 million in cash and cash
equivalents and $13 million in tax receivable.
Operating activities consumed $13 million in cash or $0.09 per share in
2008 compared to generating $15 million or $0.10 per share in 2007. The
decrease is principally due to a lower loss in the comparable period of the
prior year and payment of the litigation settlement partially offset by the
reduced investment in operating working capital and receipt of cash tax
refunds in 2008.
In 2008, cash dividends of $33 million were paid (2007 - $32 million) and
$23 million of dividends were paid (2007 - $23 million) under the Company's
Dividend Reinvestment Plan (DRIP). The DRIP permits Canadian shareholders to
elect to receive their dividends in the form of common shares. On November 10,
2008, the Company announced the suspension of quarterly dividend payments on
its common shares. The dividend payment of CAD $0.10 on December 21, 2008 to
shareholders of record on December 1, 2008 was the last payment to be made
until further notice.
The Company realized a gain of $26 million in 2008 on its matured net
investment hedges. Recouponing payments of $21 million (net) were made in 2007
on cross-currency swaps, which are designated as hedges against the Company's
net investments in Europe. The realized gains and recouponing payments were
offset by unrealized losses and gains on the net investments being hedged.
From 2004 to 2006, Norbord paid $234 million in income and income-related
taxes, principally in North America. In 2007 and 2008, the Company received
tax refunds of $33 million and $85 million, respectively, related to over
installments and losses carried back. The economic stimulus package currently
being negotiated in the US Congress contains a proposal to extend the loss
carryback period from two to five years. Pending enactment of this stimulus
package as currently proposed, the Company would be entitled to approximately
$64 million in cash tax refunds.
The following table summarizes the aggregate amount of future cash
outflows for contractual obligations:-------------------------------------------------------------------------
Payments Due by Period
One- Four- After
Contractual Obligations Less than Three Five Five
(US $ millions) Total One Year Years Years Years
-------------------------------------------------------------------------
Long-term debt,
including interest $ 734 $ 35 $ 156 $ 287 $ 256
Purchase obligations 82 33 47 2 -
Operating leases 12 3 5 2 2
-------------------------------------------------------------------------
Total $ 828 $ 71 $ 208 $ 291 $ 258
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note: The above table does not include pension and post-retirement
benefits plan obligations which are discussed in the Significant
Accounting Policies and Estimates - Defined Benefit Pension Plans
section.INVESTMENTS AND DIVESTITURES
Investment in Property, Plant and Equipment
Investment in property, plant and equipment in 2008 was $27 million
representing approximately 40% of depreciation. Approximately $12 million of
the $27 million invested was related to advanced air emission controls in
compliance with US Environmental Protection Agency MACT standards.
Investment in property, plant and equipment was limited in 2008 and 2007
to reflect market conditions. In 2006 and 2005, investment in property, plant
and equipment was higher compared to normalized levels as the Company took
advantage of strong earnings to expand capacity at the Cordele mill, to
accelerate higher-return capital projects, particularly focused on energy
reduction and production enhancement, and to meet MACT requirements.
In 2006, investment in property, plant and equipment included the second
OSB line at Cordele, which was completed in December 2006, on time and on
budget, creating one of the largest and most efficient OSB manufacturing
facilities in the world. The expansion added approximately 550 Msf (3/8-inch
basis) of production capacity at a capital cost of $135 million and increased
Norbord's North American OSB production capacity by 15%. In addition to the
capital cost of $135 million, $11 million of interest and $7 million in
start-up costs were capitalized from the time construction began in 2005.
Norbord's 2009 investment in property, plant and equipment is expected to
be constrained to $25 million for essential capital projects and will be
funded with cash on hand, cash generated from operations and, if necessary,
drawings under the Company's committed revolving bank lines or term debt
facility.
The following table summarizes Norbord's investment in property, plant
and equipment over the past five years:-------------------------------------------------------------------------
(US $ millions) 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Increased productivity $ 3 $ 20 $ 32 $ 34 $ 39
Environmental 13 2 6 28 11
Maintenance of business 11 11 18 14 17
Greenfield and major expansion - - 97 38 -
Capitalized interest - 3 7 1 -
-------------------------------------------------------------------------
Total $ 27 $ 36 $ 160 $ 115 $ 67
-------------------------------------------------------------------------
-------------------------------------------------------------------------CAPITALIZATION
Issue of Common Shares and Warrants
On November 17, 2008, the Company filed a final short form prospectus
with securities regulators in Canada pursuant to the Offering for gross
proceeds of approximately $200 million (CAD $240 million). Under the Offering,
the Company distributed rights to existing eligible shareholders to purchase
272.6 million units at a price of CAD $0.88 per unit. Each unit consisted of
one common share and one-half of a common share purchase warrant. One whole
common share purchase warrant entitles the holder to purchase one common share
at a price of CAD $1.36 at any time prior to December 24, 2013.
On December 24, 2008, pursuant to the basic and additional subscription
privileges, the Company issued 109.6 million common shares and 54.8 million
warrants to shareholders that exercised rights under the Offering and received
gross proceeds of $79 million (CAD $96 million). Net proceeds received were
used to repay the drawings under term debt facility and revolving bank lines.
Under a Standby Purchase Agreement entered into in connection with the
Offering, Brookfield agreed to purchase any units not otherwise subscribed for
by other shareholders of the Company for a standby fee equal to 1% of gross
proceeds from the Offering. Subsequent to year-end, Brookfield purchased 163
million common shares and 81.5 million warrants under the Standby Purchase
Agreement for gross proceeds of $120 million (CAD $144 million). Related share
issue costs of approximately $3 million have been netted against proceeds. Net
proceeds received subsequent to year-end were used to repay the drawings under
the term debt facility and revolving bank lines.
Issue of Senior Notes
In 2007, the Company issued $200 million in senior notes due 2017 with an
interest rate of 6.45%, which are subject to a credit ratings-based coupon
step-up provision. At year-end, the interest rate was 7.95% and during the
year the average interest rate was 7.61%. The notes were issued to pre-fund
the March 2008 debenture maturity and the issue was completed one year early
to mitigate potential refinancing risk.
Repurchase of Long-Term Debt
In 2008, the 8 1/8% debentures due 2008 with a principal value of $197
million were repurchased. The repurchase was pre-funded by the February 2007
issuance of $200 million in senior notes due in 2017 which was completed one
year early to mitigate potential refinancing risk.
In 2007, the Company repurchased $3 million of the 8 1/8% debentures due
2008 and unwound a corresponding amount of interest rate swaps. There was no
gain or loss on the debenture repurchase or unwinding the interest rate swaps.Selected Quarterly Information
(US $ millions,
except per share 2008 2007
information, -------------------------------------------------------
unless otherwise 4th 3rd 2nd 1st 4th 3rd 2nd 1st
noted) Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
-------------------------------------------------------------------------
Key Performance Metrics
Return on equity
(ROE) (45)% (28)% (50)% (37)% (14)% (1)% (15)% (15)%
Return on capital
employed (ROCE) (12)% (4)% 0% (9)% (3)% 11% 6% 2%
Cash provided
by (used for)
operating
activities (12) (8) 88 (81) 72 (18) 11 (50)
Cash provided by
(used for)
operating
activities
per share (0.08) (0.06) 0.60 (0.55) 0.49 (0.12) 0.07 (0.34)
-------------------------------------------------------------------------
Net Sales And Earnings
Net sales 191 256 262 234 263 292 288 261
EBITDA (28) (9) 1 (24) (9) 30 17 4
Earnings (30) (18) (37) (31) (13) (1) (15) (16)
Per Common Share
Earnings
Basic (0.19) (0.12) (0.25) (0.21) (0.09) 0.00 (0.11) (0.11)
Diluted (0.19) (0.12) (0.25) (0.21) (0.09) 0.00 (0.11) (0.11)
-------------------------------------------------------------------------
Key Statistics
OSB shipments
(MMsf 3/8") 891 1,124 1,114 959 1,130 1,060 1,161 1,112
Average OSB price
- North Central
($/Msf 7/16") 170 201 179 137 165 177 156 145
Average OSB price
- South East
($/Msf 7/16") 137 158 155 121 132 149 153 138
Average OSB price
- Europe
(euro/m(3)) 190 196 210 220 234 246 249 234
-------------------------------------------------------------------------Quarterly results are impacted by seasonal factors such as weather and
building activity. Market demand varies seasonally, as homebuilding activity
and repair and renovation work, the principal end use for Norbord's products,
is 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.
The price of OSB in North America is one of the primary variables
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 when
operating at capacity is approximately $36 million or $0.09 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, competition 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.
High global commodity prices caused upward pressure on the prices of key
input costs, primarily resin and wax, energy and fibre for most of 2008.
Downward trends in global energy prices started in the latter part of 2008 and
are expected to continue into 2009 providing some cost pressure relief.
Norbord has relatively low exposure to the Canadian dollar due to a
comparatively small manufacturing base in Canada, comprising 13% of its panel
production capacity. The Company estimates that the unfavourable impact of a
US one cent increase in the Canadian dollar would negatively impact annual
EBITDA by approximately $1 million when Canadian OSB mills operate at
capacity.
Items not related to ongoing business operations that had a significant
impact on quarterly results include the $32 million pre-tax expense ($0.21 per
share) related to the litigation settlement in the second quarter of 2008, and
the $4 million pre-tax expense ($0.03 per share) related to the severance
expenses for the permanent closure of a particleboard line at the Genk site in
the first quarter of 2008. 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 of depreciation
expense was approximately a $9 million reduction per quarter. In the second
quarter of 2007, depreciation expense increased $3 million as depreciation
commenced on the new OSB line at Cordele.
LITIGATION SETTLEMENT
Norbord and eight other North American OSB producers were named as
defendants in several lawsuits filed in the US District Court for the Eastern
District of Pennsylvania. The lawsuits alleged 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 to at least February 2006.
The Court certified: 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 sought damages or injunctive or other relief under applicable
laws.
Although Norbord vigorously contested the plaintiffs' allegations and
continues to deny that it violated US antitrust or any other laws, Norbord
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. Under the terms of the settlement agreements, which have been
approved by the Court, Norbord paid $30 million into an escrow account for the
benefit of members of the direct purchaser class and $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 chose to opt
out of the direct purchaser class; no members of the indirect purchaser
classes chose to opt out. Each entity that opted out of the direct purchaser
class is entitled to pursue its own individual "opt-out" claims against
Norbord and the other defendants. Norbord has entered into a settlement
agreement with one such entity. Norbord has also entered into an agreement
with the remaining entities that opted out of the direct purchaser class. The
terms of these agreements are not material to the Company.
FOURTH QUARTER RESULTS
Both North America and Europe were impacted by declining demand and
prices in the fourth quarter of 2008. Under normal economic conditions, a
seasonal slowdown is expected in the fourth quarter. The seasonal slowdown was
exacerbated during the fourth quarter of 2008 by extremely cautious customer
buying patterns. Overall, sales in the fourth quarter were down by
approximately 30% and shipment volumes were down by approximately 20% as
compared to the fourth quarter of 2007.
In the quarter, North Central benchmark OSB prices averaged $170, down
$31 from the third quarter and up $5 from the fourth quarter of 2007. In the
South East region, where approximately 55% of Norbord's North American OSB
capacity is located, prices averaged $137 in the quarter, down $21 from the
previous quarter. European OSB prices retreated by 2% relative to the third
quarter of 2008 while particleboard and MDF prices decreased by approximately
6%. Production curtailments continued in the quarter in response to weak
demand. As a result, Norbord's North American OSB mills operated at 60% of
capacity and the European mills operated at 70% of capacity.
In the quarter, Norbord recorded EBITDA of negative $28 million versus $9
million in the previous quarter and $9 million in the fourth quarter of 2007.
EBITDA changes are summarized in the variance table below.-------------------------------------------------------------------------
4th Qtr 2008 4th Qtr 2008
EBITDA Variance vs. vs.
(US $ millions) 3rd Qtr 2008 4th Qtr 2007
-------------------------------------------------------------------------
EBITDA - current period $ (28) $ (28)
EBITDA - comparative period (9) (9)
-------------------------------------------------------------------------
Variance $ (19) $ (19)
-------------------------------------------------------------------------
Mill nets(1) $ (5) $ (14)
Volume(2) (5) (5)
Key input prices(3) (19) (5)
Key input usage(3) - (3)
Other(4) 10 8
-------------------------------------------------------------------------
$ (19) $ (19)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 labour and
benefits, supplies and maintenance, and the impact of foreign
exchange.The Company recorded a loss of $30 million in the fourth quarter of 2008
or $0.19 per share compared to a loss of $18 million or $0.12 per share in the
third quarter of 2008. Lower fourth quarter earnings were due to lower EBITDA
offset by a higher tax recovery. EBITDA in the fourth quarter was lower due to
higher key input prices, primarily for resin, wax and lower OSB prices and
shipment volumes in both North America and Europe.
The Company recorded a loss of $30 million in the fourth quarter of 2008
or $0.19 per share compared to $13 million or $0.09 per share in the fourth
quarter of 2007. Lower earnings versus the same quarter last year were due to
sales mix and a reduction in sales volume primarily due to significant
production curtailments in 2008 despite modestly higher OSB prices in North
America, higher key input prices for resin and energy and the impact of
reduced production on energy usages.
Norbord's North American operations generated an EBITDA loss of $19
million in the fourth quarter of 2008 versus $15 million in the fourth quarter
of 2007 and $2 million in third quarter of 2008. North American OSB achieved
break-even EBITDA results in the third quarter of 2008 followed by negative
$18 million in the fourth quarter, primarily due to the effects of decreased
mill nets and production curtailments.
In the fourth quarter, Norbord's North American per unit OSB cash
production costs increased by 7% over the third quarter of 2008 primarily due
to the impact of production curtailments and energy usages. Costs increased
12% over the fourth quarter of 2007 due to higher resin prices and the impact
of lower production volumes and, to a lesser extent, higher fibre and energy
prices. Norbord's North American OSB mills operated at approximately 60% of
capacity in the fourth quarter versus 90% of capacity in the third quarter of
2008 and almost full capacity in the fourth quarter of 2007.
Norbord's European operations generated an EBITDA loss of $5 million and
$4 million in the third and fourth quarters of 2008, respectively, versus
positive $8 million in the fourth quarter of 2007. European pricing and
markets declined in the second half of the year. European results in the
quarter reflect a sharp deterioration of market conditions and continued key
input price pressure particularly for resin and energy. The European business
is disproportionately impacted by rising resin and global energy prices since
Norbord's European products are more resin and energy intensive. Norbord's
European mills operated at approximately 70% of capacity in the quarter,
compared to approximately 80% in the third quarter of 2008 and 100% in the
fourth quarter of 2007.
Net sales in the quarter were $191 million, compared to $256 million and
$263 million in the third quarter of 2008 and fourth quarter of 2007
respectively. North American and European net sales in 2008 were down due to
lower selling prices and shipment volumes.
COMMON SHARES
At January 29, 2009, there were 431.7 million common shares outstanding.
The number of common shares outstanding in the year has increased over the
prior year principally due to issuance under the Offering and activity under
the DRIP. Under the DRIP, 12.2 million common shares were issued in 2008
compared to 2.8 million in 2007.
Under the Rights Offering, the Company issued 109.6 million common shares
and 54.8 million warrants in 2008 to shareholders that exercised rights.
Subsequent to year-end, Brookfield purchased 163 million common shares and
81.5 million warrants pursuant to a Standby Purchase Agreement entered into in
connection with the Offering (see Capitalization).
Shares issued under the Company's stock option plan totalled 0.1 million
in 2008, generating proceeds of less than $1 million. Options on 0.2 million
shares were exercised during 2007. Options on 3.3 million shares were
outstanding at year-end 2008, with approximately 30% vested. The exercise
prices for these options range from CAD $0.01 to CAD $11.13, with expiry at
various dates to 2017.
The following table summarizes common share information for each of the
past five years.-------------------------------------------------------------------------
Common Share Information
as at December 31 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Shares outstanding
(millions) 268.7 146.8 143.7 144.8 149.3
Dividends (US $ millions) $ 56 $ 55 $ 178 $ 166 $ 166
Market price at year-end
(CAD $) $ 0.70 $ 7.96 $ 8.91 $ 12.25 $ 12.40
-------------------------------------------------------------------------The total return on Norbord shares during 2008 was a loss of 86% as the
CAD $0.40 in dividend payments were offset by a decline in share price. The
average daily volume traded during 2008 was 0.7 million shares as compared to
0.6 million shares in 2007.
TRANSACTIONS WITH RELATED PARTIES
In the normal course of operations, the Company enters into various
transactions on market terms with related parties which have been measured at
exchange value and are recognized in the consolidated financial statements.
The following transactions have occurred between the Company and Brookfield
during the normal course of business:
Rights Offering
In connection with the Offering (see Capitalization), the Company entered
into a Standby Purchase Agreement with Brookfield, in which Brookfield agreed
to exercise all of its rights and to purchase any units not otherwise
subscribed for by other shareholders of the Company. For the year ended
December 31, 2008, Brookfield paid $72 million (CAD $87 million) to purchase
99.1 million common shares and 49.6 million warrants through their basic
subscription privilege which increased their ownership interest to
approximately 60% of the Company's issued and outstanding common shares. On
December 24, 2008, as a result of Brookfield's acquisition of control, $8
million in future income tax assets were charged to retained earnings. These
tax attributes will be reinstated in the future when pending Canadian income
tax legislation is substantively enacted. Subsequent to year-end, Brookfield
paid $120 million (CAD $144 million) to acquire 163 million common shares and
81.5 million warrants under the Standby Purchase Agreement, increasing their
ownership interest to approximately 75%. Subsequent to year end, a standby fee
of $2 million was paid to Brookfield and was based on 1% of the gross proceeds
of the Offering.
Term Debt Facility
In 2008, the Company concluded a $100 million term debt facility with
Brookfield. In conjunction with the revolving bank line amendments (see
Liquidity and Capital Resources) the facility commitment will be reduced to
$50 million and the term will be extended to June 2011.
Dividend Reinvestment Plan (DRIP)
In 2008, Brookfield elected to receive all of their dividends totaling
$21 million (2007 - $20 million) as common shares which were distributed under
the Company's DRIP. The DRIP permits Canadian shareholders to elect to receive
their dividends as common shares.
Indemnity Commitment
As at December 31, 2008, total future costs related to a 1999 asset
purchase agreement between the Company and Brookfield for which Norbord
provided an indemnity are estimated at less than $1 million and are included
in other liabilities in the consolidated balance sheet.
Other
In 2008 and 2007, the Company provided certain administrative services to
Brookfield or its affiliates which were charged on a cost recovery basis. In
addition, the Company periodically engages the services of Brookfield or its
affiliates for various financial, real estate and other business advisory
services. In 2008, the fees for these services were less than $1 million and
were charged at market rates.
Guarantee of Certain Obligations of Fraser Papers Inc.
Norbord continues to guarantee certain obligations under operating lease
commitments of Fraser Papers Inc. which was distributed to common shareholders
in 2004. The maximum potential amount of future payments that Norbord could be
required to make under these obligations is estimated to be $1 million. The
leases expire in March 2009. No amounts have been recorded in the consolidated
balance sheet with respect to these guarantees. As security for these ongoing
financial commitments to Fraser Papers Inc., Norbord has the right, at any
time, to require Fraser Papers Inc. to provide a fixed first charge security
interest over certain of Fraser Papers Inc.'s manufacturing facilities. In
2008, the fee for providing these guarantees was less than $1 million (2007 -
less than $1 million).
FINANCIAL POLICIES
Capital Allocation
Norbord considers effective capital allocation to be critical to its
success. Capital is invested only when Norbord expects returns to exceed
pre-determined thresholds, taking into consideration both the degree and
magnitude of the relative risks and rewards and, if appropriate, strategic
considerations in the establishment of new business activities or maintenance
of existing business activities. Post-investment reviews are conducted on
capital investment decisions to assess the results against planned project
returns.
Liquidity
Norbord strives to maintain sufficient financial liquidity at all times
in order to participate in attractive 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 year-end, Norbord had $20 million of cash on hand, $65 million
unutilized under a term debt facility and $174 million of unutilized committed
revolving bank lines with seven international financial institutions available
to support its liquidity requirements. Subsequent to year-end, Norbord
concluded the Offering (see Capitalization) and expects to conclude amendments
to its term debt facility and revolving bank lines during the first quarter of
2009 (see Liquidity and Capital Resources). On a pro forma basis for these
subsequent events, Norbord will have access to approximately $300 million in
liquidity.
Credit Ratings
Maintaining a stable 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 January 29, 2009, ratings on Norbord's senior debt securities were:
-------------------------------------------------------------------------
Dominion Bond Standard & Poor's Moody's
Rating Service Ratings Services Investors Service
-------------------------------------------------------------------------
Rating BB (high) BB- Ba3
Outlook Negative Negative Negative
-------------------------------------------------------------------------During 2008, Moody's, DBRS and S&P downgraded Norbord's credit ratings to
Ba3, BB(high) and BB- respectively, citing the weaker than expected US housing
market.
Credit ratings are intended to provide investors with an independent
measure of the credit quality of any securities issue. The credit ratings
accorded to debt securities by the rating agencies are not recommendations to
purchase, hold or sell the debt securities, as such ratings do not comment as
to market price or suitability for a particular investor. There is no
assurance that any rating will remain in effect for any given period of time
or that any rating will not be revised or withdrawn entirely by a rating
agency in the future if, in its judgement, circumstances so warrant.
Use of Financial Instruments
Norbord uses derivative financial instruments solely for the purpose of
managing its interest rate, foreign exchange and commodity price exposures, as
further detailed in the Risks and Uncertainties section. These activities are
governed by Board-approved financial policies that cover risk identification,
tolerance, measurement and reporting. Derivative transactions are executed
only with approved high-quality counterparties under master netting
agreements. 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 and, accordingly, all
gains and losses on these instruments are recognized in the same manner as the
item being hedged.
CHANGES IN ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES
Capital Disclosures
In December 2006, the Canadian Institute of Chartered Accountants
("CICA") issued Section 1535, Capital Disclosures which requires the
disclosure of: (i) an entity's objectives, policies and process for managing
capital; (ii) quantitative data about an entity's managed capital; (iii)
whether or not an entity has complied with capital requirements; and (iv) if
an entity has not complied with such capital requirements, the consequences of
such non-compliance. This new standard became effective for the Company on
January 1, 2008, and the related disclosure is included as Note 15 to the
consolidated financial statements.
Financial Instruments - Disclosure and Presentation
In December 2006, the CICA issued two new accounting standards, Section
3862, Financial Instruments - Disclosures and Section 3863, Financial
Instruments - Presentation. These standards replace Section 3861, Financial
Instruments - Disclosure and Presentation and enhance the disclosure of the
nature and extent of risks arising from financial Instruments and how the
entity manages those risks. These new standards became effective for the
Company on January 1, 2008, and the related disclosure is included as Note 16
to the consolidated financial statements.
Inventories
In June 2007, the CICA issued Section 3031, Inventories, replacing
Section 3030. This standard provides guidance on the determination of the cost
of inventories and the subsequent recognition as an expense, including any
writedown to net realizable value. This new standard became effective for the
Company on January 1, 2008 and the related disclosure is included in Note 4 to
the consolidated financial statements.
The impact of adopting this new standard was a $1 million reduction in
opening retained earnings and a $3 million reclassification of certain capital
spare parts from inventory to property, plant and equipment. The opening
retained earnings adjustment of $1 million arises due to a lower opening
carrying value of certain finished goods and raw material inventory and prior
years' depreciation on the reclassified capital spare parts. Effective January
1, 2008, 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. Prior to adopting the new standard on January 1, 2008,
the Company valued these inventories at the lower of cost and replacement
cost. Capital spare parts of $3 million were reclassified from inventory to
property, plant and equipment at cost and are depreciated on a straight line
basis over two to five years, which approximates their useful lives.
Significant Accounting Estimates
Effective July 1, 2007, management's estimate of the useful life of its
OSB assets was changed from 15 years to 25 years. In accordance with the
Company's policy, depreciation rates for property, plant and equipment are
assessed from time to time to ensure that they continue to approximate their
useful life. This change in estimate was accounted for prospectively. The
impact of the change in estimate on 2007 depreciation was a reduction of
approximately $18 million. The impact on a full year of depreciation is a
reduction of approximately $36 million.
Future Accounting Policy - Goodwill and Intangible Assets
In February 2008, the CICA issued Handbook Section 3064, Goodwill and
Intangible Assets, replacing Handbook Sections 3062, Goodwill and Other
Intangible Assets and 3450, Research and Development Costs. Various changes
have been made to other sections of the CICA Handbook for consistency
purposes. The new section will be applicable to the financial statements
relating to fiscal years beginning January 1, 2009. The new section
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition of intangible
assets by profit-oriented enterprises. The Company is currently evaluating the
impact of Section 3064 on its consolidated financial statements.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Accounting Standards Board (AcSB) confirmed in February 2008 that
International Financial Reporting Standards (IFRS) will replace Canadian GAAP
for publicly accountable enterprises for financial periods beginning on and
after January 1, 2011.
Impact of Adoption of IFRS
IFRS are premised on a conceptual framework similar to Canadian GAAP,
however, significant differences exist in certain matters of recognition,
measurement and disclosure. The following paragraphs outline the significant
accounting policies which are required or are currently expected to be applied
by the Company upon its adoption of IFRS that will be significantly different
than its Canadian GAAP accounting policies. As the Company continues to
evaluate the impact of adoption on its processes and accounting policies it
will provide updated disclosure where appropriate. While the adoption of IFRS
will not have a material impact on the reported cash flows of the Company, it
will have a material impact on the Company's consolidated balance sheet and
statement of income.
Property, Plant and Equipment
Consistent with Canadian GAAP, under IFRS, separable components of
property, plant and equipment are recognized initially at cost. Under
International Accounting Standard (IAS) 16 Property, Plant and Equipment an
entity is required to choose, for each class of property, plant and equipment,
to account for each class using either the cost model or the revaluation
model. The cost model is generally consistent with Canadian GAAP where an item
of property, plant and equipment is carried at its cost less any accumulated
depreciation and any accumulated impairment losses. Under the revaluation
model an item of property, plant and equipment is carried at its revalued
amount, being its fair value at the date of the revaluation less any
accumulated depreciation and accumulated impairment losses.
Impairments
Under Canadian GAAP for assets other than financial assets, a write-down
to estimated fair value is recognized if the estimated undiscounted future
cash flows from an asset or group of assets is less than their carried value.
Under IFRS, IAS 36 Impairment of Assets requires a write-down to be recognized
if the recoverable amount, determined as the higher of the estimated fair
value less costs to sell or value in use, is less than carried value.
Consistent with Canadian GAAP, impairments are measured at the amount by which
carried value exceeds fair value less costs to sell.
Employee Benefits
Under Canadian GAAP, accrued pension benefit obligation in excess of plan
assets for defined benefit pension plans are required to be disclosed within
the notes to the consolidated financial statements. Under IFRS, IAS 19
Employee Benefits requires the obligation in excess of plan assets to be
recorded as a liability on the balance sheet.
Financial Instruments
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.
Under Canadian GAAP, this represents a true sale of accounts receivable. Under
IFRS, IAS 39 Financial Instruments: Recognition and Measurement this transfer
would be recorded on the Company's balance sheet as a financing arrangement.
Share-based Payment
The Company issues stock-based awards in the form of stock options that
vest evenly over a five year period. Under Canadian GAAP Norbord recognizes
the fair value of the award, determined at the time of the grant, on a
straight-line basis over the five year vesting period. Under IFRS the fair
value of each tranche of the award is considered a separate grant based on the
vesting period with the fair value of each tranche determined separately and
recognized as compensation expense over the term of its respective vesting
period. Accordingly, this will result in a higher amount of each grant being
recognized in income at a faster rate than under Canadian GAAP.
First-time Adoption of International Financial Reporting Standards
Norbord's adoption of IFRS will require the application of IFRS 1
First-time Adoption of International Financial Reporting Standards (IFRS 1),
which provides guidance for an entity's initial adoption of IFRS. IFRS 1
generally requires that an entity apply all IFRS effective at the end of its
first IFRS reporting period retrospectively. However, IFRS 1 does require
certain mandatory exceptions and limited optional exemptions in specified
areas of certain standards from this general requirement. The following are
the optional exemptions available under IFRS 1 significant to Norbord that the
Company expects to apply in preparing its first financial statements under
IFRS.
Fair value of revaluation as deemed cost
IFRS 1 allows an entity to initially measure an item of property, plant
and equipment upon transition to IFRS at fair value, as opposed to recreating
depreciated cost under IFRS. The Company will, for items of property, plant
and equipment, use fair value as deemed cost. Norbord expects to use a measure
of deemed cost for a significant portion of its fixed assets, the cumulative
effect of which will generally result in carrying values under IFRS in excess
of those under Canadian GAAP. This increase in carrying value is the result of
the accounting depreciation taken under Canadian GAAP no longer attributed to
the assets at transition, in addition to the value appreciation of such assets
in aggregate since acquisition.
Cumulative translation differences
IAS 21 The Effects of Changes in Foreign Exchange Rates requires a
company to determine the translation differences in accordance with IFRS from
the date on which a subsidiary was formed or acquired. IFRS allows cumulative
translation differences for all foreign operations to be deemed zero at the
date of transition to IFRS, with future gains or losses on subsequent disposal
of any foreign operations to exclude translation differences arising from
prior to the date of transition to IFRS. Norbord expects to reset all
cumulative translation differences to zero on transition to IFRS.
Employee Benefits
On adoption of IFRS, the Company is allowed to record all deferred
actuarial gains and losses through equity. Once recorded, the Company can
continue to record actuarial gains and losses on a systematic and consistent
basis, subject to a minimum required amortization based on a "corridor"
approach. The "corridor" is 10% of the greater of the accrued benefit
obligation at the beginning of the year and the fair value, or market related
value, of plan assets at the beginning of the year. When amortization is
required, the excess over the corridor amount should be amortized over a
period no longer than the employees' average remaining service period.
Share-based payments
On adoption of IFRS, an entity is not required under IFRS 2 Share-based
Payment (IFRS 2) to recognize share-based payments settled before the entity's
IFRS transition date. IFRS 1 encourages, but does not require, application of
its provisions to equity instruments granted on or before November 7, 2002.
Norbord will recognize under IFRS 2 the share-based awards that were
recognized under Canadian GAAP.
IFRS 1 allows for certain other optional exemptions; however, the Company
does not expect such exemptions to be significant to the Company's adoption of
IFRS.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Revenue Recognition
Net sales are recognized when the risks and rewards of ownership pass to
the purchaser. This is generally when goods are shipped. Sales are recorded
net of third-party transportation and discounts.
Sales are governed by contract or by standard industry terms. Revenue is
not recognized prior to the completion of those terms. The majority of product
is shipped via third-party transport on a freight-on-board shipping point
basis. In all cases, product is subject to quality testing by the Company to
ensure it meets applicable standards prior to shipment.
Inventories
Inventories of raw materials and operating and maintenance supplies are
valued at the lower of cost and net realizable value, with cost determined on
an average cost basis.
Inventories of finished goods are valued at the lower of cost and net
realizable value, with cost determined on an average cost basis. Cost includes
direct material, direct labour and an allocation of overhead.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, including capitalized
interest. Government capital grants and investment tax credits received reduce
the cost of related assets. Property, plant and equipment acquired in a
business acquisition are recorded at fair value. Property, plant and equipment
are depreciated on a straight-line basis. The rates of depreciation are
intended to fully depreciate manufacturing and non-manufacturing assets over
the following periods, which approximate their useful lives.Buildings 20 to 40 years
Production equipment 10 to 25 yearsThese periods are assessed from time to time to ensure that they continue
to approximate the useful lives of the related assets. Property, plant and
equipment are tested for recoverability whenever events or changes in
circumstances indicate the carrying amount may not be recoverable. The
recoverability assessment is based on the Company's estimates and assumptions.
If these estimates change in the future, the Company could be required to
reduce the carrying value of property, plant and equipment resulting in an
impairment charge.
Future Income Taxes
Future income tax assets and liabilities are determined based on
temporary differences between the carrying amount and tax basis of assets and
liabilities as well as certain carryforward items. Future income tax assets
are recognized only to the extent that, in the Company's opinion, it is more
likely than not that the future income tax assets will be realized. This
opinion is based on certain estimates and assumptions. If these estimates or
assumptions change in the future, the Company could be required to reduce or
increase the value of the future income tax assets resulting in income tax
expense or recovery. The Company evaluates its future income tax assets
periodically.
Defined Benefit Pension Plans
Norbord's defined benefit pension plans are funded in accordance with all
applicable regulatory requirements. Norbord's obligations under its defined
benefit pension plans are determined periodically through actuarial
valuations, which are the basis for calculating pension expense. The weighted
average assumed return on assets is 7.8% and is based on management's best
estimate of the long-term expected rate of return on plan assets, including
consideration of asset mix, equity risk premium and active investment
management premium. The weighted average discount rate used to value year-end
2008 accrued benefit obligations is 6.4% and is based on the market yield of
high-quality corporate bonds of similar duration to the pension plan
liabilities.
At December 31, 2008, defined benefit pension plan assets were $40
million (2007 - $59 million) while the accrued benefit obligations were $54
million (2007 - $81 million), yielding an unfunded liability of $14 million
(2007 - $22 million). Defined benefit pension expense for the year was $3
million (2007 - $3 million) and defined benefit employer contributions were $4
million (2007 - $4 million). Norbord anticipates 2009 net pension expense and
employer contributions will be in line with 2008 levels.
Significant changes in assumptions, driven by changes in financial
markets, asset performance different from the assumed rate of return,
significant new plan enhancements, acquisitions, divestitures, changes in the
regulatory environment, and the measurement uncertainty incorporated into the
actuarial valuation process could materially affect Norbord's future plan
assets, accrued benefit obligations, pension expense and pension
contributions.
Stock-Based Compensation
The Company accounts for stock options using the fair value method. Under
this method, compensation expense for options is measured at the grant date
using the Black-Scholes option pricing model based on certain estimates and
assumptions and is recognized on a straight-line basis over the vesting
period. In 2008, the Company recognized $2 million in compensation expense
related to stock options (2007 - $1 million). If estimates or assumptions
change in the future, the Company could be required to reduce or increase
contributed surplus, resulting in compensation expense or recovery.
RISKS AND UNCERTAINTIES
Norbord is exposed to a number of risks and uncertainties in the normal
course of its business that could have a material adverse effect on the
Company's business, financial position, operating results and cash flows. A
discussion of some of the major risks and uncertainties follows.
Product Price Sensitivities
OSB accounts for almost 80% of Norbord's panel production capacity. The
price of OSB is one of the most volatile in the wood-based panels industry.
Norbord's concentration in OSB increases its sensitivity to product pricing
and may result in a high degree of sales and earnings volatility.
Norbord's financial performance is principally dependent on the selling
price of its products. Most of Norbord's products are globally traded
commodities for which no liquid futures markets exist. The markets for most of
Norbord's products are highly cyclical and are characterized by periods of
supply and demand imbalance during which its product prices have tended to
fluctuate significantly. In addition, since many of Norbord's products are
used for new home construction, seasonal and annual weather changes can affect
demand and sale volumes. These imbalances, which may affect different areas of
Norbord's business at different times, are influenced by numerous factors that
are beyond Norbord's control and include: changes in global and regional
production capacity for a particular product or group of products; changes in
the end use of those products or the increased use of substitute products; and
the overall level of economic activity in the regions in which Norbord
conducts business. Norbord has been negatively affected in the past by
declines in product pricing and has taken production downtime to manage
working capital and minimize cash losses.
Based on operating at full capacity, the following table shows the
approximate annualized impact of changes in product prices on EBITDA.-------------------------------------------------------------------------
Sensitivity Factor Impact on EBITDA
($ millions)
-------------------------------------------------------------------------
OSB - North America $10 per Msf-7/16" 36
OSB - Europe (euro)10 per m3 7
Other panels $10 per Msf-7/16" 9
-------------------------------------------------------------------------Competition
The wood-based panels industry is a highly competitive business
environment in which companies compete, to a large degree, on the basis of
price. Norbord's principal market is the United States where it competes with
North American and, in some instances, foreign producers. Norbord's European
operations compete primarily with other European producers. Certain
competitors may have lower cost facilities than Norbord. Norbord's ability to
compete in these and other markets is dependent on a variety of factors such
as manufacturing costs, availability of key production inputs, continued free
access to markets, customer service, product quality, financial resources and
currency exchange rates. In addition, competitors could develop new cost-
effective substitutes for Norbord's wood-based panels, or building codes could
be changed to make the use of Norbord's products less attractive for certain
applications.
Customer Dependence
Norbord sells its products primarily to major retail chains, contractor
supply yards, and wholesale distributors and faces strong competition for the
business of significant customers. In 2008, Norbord had one customer whose
purchases represented greater than 10% of total net sales. Norbord generally
does not have contractual assurances as to future sales. As a result, any
significant customer order cancellations could negatively affect Norbord's
sales and earnings. Continued consolidation in the retail industry could
expose Norbord to increased concentration of customer dependence and increase
customers' abilities to exert pricing pressure on Norbord.
Manufacturing Inputs
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 may not be able to hedge the purchase price of manufacturing inputs or
pass increased costs through to its customers.
Fibre Resource
As Norbord does not own any timberlands, it purchases timber, wood chips
and other wood fibre as well as recycled materials on the open market in
competition with other users of such resources where prices are influenced by
factors beyond Norbord's control.
Norbord's wood fibre supply comes from several different sources. In the
US, roundwood logs are primarily sourced from private and industry owned
woodlands. The MDF mill also purchases wood chips and sawdust from local
sawmills. In Europe, wood fibre is purchased from government and private
landowners. Fibre for OSB comes from roundwood logs while the MDF and
particleboard mills source fibre in the form of roundwood logs, wood chips,
sawdust and recycled wood. Norbord's Canadian mills hold forestry licences and
agreements to source poplar and birch from Crown timberlands in Ontario and
Quebec. Most of this volume is harvested and delivered by third parties that
also hold licences to operate in these areas.
The Crown licences require the payment of stumpage fees for the timber
harvested, and compliance with specified rehabilitation and silvicultural
management practices. The licences cover periods ranging from 20 to 25 years
and are renewed or extended every 5 years. They can be revoked or cancelled
for non-performance and contain terms and conditions that could, under certain
circumstances, result in a reduction of annual allowable timber that may be
harvested by Norbord without any compensation.
Labour Relations
Norbord's US employees are non-unionized while its UK, Belgian and most
of its Canadian employees are unionized - representing just under one-half of
the workforce. All of Norbord's UK and Belgian union contracts are evergreen.
Canadian union contracts typically cover a three- to five-year term.
In 2007, a new five-year agreement expiring May 31, 2012, was negotiated
with the Steelworkers Union representing members at the Cochrane, Ontario,
hardwood plywood mill. In 2008, a new five-year agreement expiring December
31, 2012, was negotiated with the Teamsters union representing members at the
Val-d'Or, Quebec, OSB mill. The Communications, Energy and Paperworkers Union
contract covering members at the La Sarre, Quebec OSB mill expires on June 30,
2009. Strikes or work stoppages could result in lost production and sales,
higher costs or supply constraints if Norbord is unable to negotiate
acceptable contracts with its various trade unions.
Environmental Matters
Norbord's operations are subject to a range of general and industry-
specific environmental laws and regulations relating to air emissions,
wastewater discharges, solid and hazardous waste management, plant and
wildlife protection, and site remediation. Failure to comply with applicable
environmental laws and regulations could result in fines, penalties or other
enforcement actions that could impact Norbord's production capacity or
increase Norbord's production costs. Norbord has incurred, and expects to
continue to incur, capital expenditures and operating costs to comply with
applicable environmental laws and regulations. In addition, environmental laws
and regulations could become more stringent in the future.
Product Liability
Norbord produces a variety of wood-based panels that are used in new home
construction, repair and remodeling of existing homes, furniture and fixtures,
and industrial applications. In the normal course of business, the end users
of Norbord's products have in the past, and could in the future, make claims
with respect to the fitness for use of its products or related to product
quality or performance issues. Norbord could face increased costs if any
future claims exceed purchased insurance coverage.
Natural Events
Norbord's business is exposed to numerous natural events such as forest
fires, adverse weather conditions, insect infestation, disease, prolonged
drought, and other natural disasters, which are not insurable events. If such
an event occurs, Norbord may need to curtail production or incur increased
fibre or other costs.
Capital Intensity
The production of wood-based panels is capital intensive. There can be no
assurance that key pieces of equipment will not need to be repaired or
replaced. In certain circumstances, the costs of repairing or replacing
equipment and the associated downtime of the affected production line may not
be an insurable event.
Tax Exposures
Norbord takes various tax filing positions in the normal course of
business and there can be no assurance that tax authorities will not challenge
such filing positions. In addition, Norbord is subject to further
uncertainties concerning the interpretation and application of tax laws in
various operating jurisdictions. Norbord maintains reserves for known
estimated tax exposures in all jurisdictions. These exposures are settled
primarily through the closure of audits with the jurisdictional taxing
authorities. However future settlements could differ materially from the
Company's reserves.
Currency Exposures
Norbord reports its financial results in US dollars. A portion of
Norbord's product prices and costs are influenced by relative currency values
(particularly the Canadian dollar, Pound Sterling and Euro). Significant
fluctuations in relative currency values could negatively affect the cost
competitiveness of Norbord's facilities, the value of its foreign investments,
the results of its operations and its financial position.
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 transactions, primarily
Canadian dollar costs in Norbord's Canadian operations and Euro
revenues in Norbord's UK operations
ASSESSMENT AND CHANGES IN INTERNAL CONTROLS AND DISCLOSURE CONTROLS OVER
FINANCIAL REPORTINGIn accordance with the requirements of National Instrument 52-109
Certification of Disclosure in Issuer's Annual and Interim Filings, the
Company's management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), have evaluated the operating effectiveness of the
Company's internal control over financial reporting. Management of Norbord is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process
designed by, or under the supervision of, the CEO and the CFO and effected by
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Management assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2008. Based on this
assessment, management believes that, as of December 31, 2008, the Company's
internal control over financial reporting is operating effectively. Management
determined that there were no material weaknesses in the Company's internal
control over financial reporting as of December 31, 2008. There have been no
changes in Norbord's internal control over financial reporting during the year
ended December 31, 2008, that have materially affected, or are reasonably
likely to materially affect its internal control over financial reporting.
Disclosure controls and procedures are designed to provide reasonable
assurance that all relevant information is gathered and reported to senior
management, including the CEO and CFO, on a timely basis so that appropriate
decisions can be made regarding annual and interim financial statement
disclosure. An evaluation of the effectiveness of the design and operation of
disclosure controls and procedures was conducted as of December 31, 2008, by
Norbord's management, including the CEO and CFO. Based on this evaluation, the
CEO and CFO have concluded that Norbord's disclosure controls and procedures
as defined in National Instrument 52-109, Certification of Disclosure in
Issuers' Annual and Interim Filings, are effective.
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 earnings determined in accordance with GAAP from continuing
operations before interest, premium on early extinguishment of debt,
litigation settlement, provision for non-core operation, income tax,
depreciation and amortization. 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 indicators of relative operating performance.
The following table reconciles EBITDA to the most directly comparable GAAP
measure:-------------------------------------------------------------------------
(US $ millions) 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Earnings $ (116) $ (45) $ 97 $ 248 $ 326
Less: Earnings from
discontinued operations - - - - 6
Add: Premium on early
extinguishment of debt,
net - - - - 9
Add: Litigation settlement 32
Add: Provision for
non-core operation 4 - 13 - -
Add: Interest expense 49 49 29 30 31
Less: Interest and
other income (3) (5) (3) (5) (6)
Add: Income tax expense
(recovery) (96) (45) 17 133 183
Add: Depreciation 70 88 94 89 82
-------------------------------------------------------------------------
EBITDA $ (60) $ 42 $ 247 $ 495 $ 631
-------------------------------------------------------------------------
-------------------------------------------------------------------------EBITDA margin (%) is EBITDA as a percentage of net sales. When compared
with industry statistics and prior periods, EBITDA margin can be a useful
indicator of operating efficiency and a company's ability to compete
successfully with its peers. Norbord interprets EBITDA margin trends as
indicators of relative operating performance.
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, accounts payable
and accrued liabilities 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.-------------------------------------------------------------------------
(US $ millions) 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Accounts receivable $ 12 $ 83 $ 130 $ 145 $ 150
Inventory 81 131 98 99 90
Accounts payable and
accrued liabilities (146) (191) (228) (225) (238)
-------------------------------------------------------------------------
Operating working
capital $ (53) $ 23 $ - $ 19 $ 2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total working capital is operating working capital plus cash and cash
equivalents and tax receivable (payable).
-------------------------------------------------------------------------
(US $ millions) 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Operating working
capital $ (53) $ 23 $ - $ 19 $ 2
Cash and cash
equivalents 20 128 20 155 215
Tax receivable (payable) 13 89 33 (2) (3)
-------------------------------------------------------------------------
Total working capital $ (20) $ 240 $ 53 $ 172 $ 214
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital employed is the sum of property, plant and equipment, operating
working capital and other assets less any unrealized balance sheet losses
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.
-------------------------------------------------------------------------
(US $ millions) 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Property, plant and
equipment $ 879 $ 968 $ 1,008 $ 921 $ 927
Accounts receivable 12 83 130 145 150
Tax receivable 13 89 33 - -
Inventory 81 131 98 99 90
Accounts payable and
accrued liabilities (146) (191) (228) (225) (238)
Other assets 36 5 7 4 5
Unrealized net investment
hedge losses(1) (8) (8) (25) - (16)
-------------------------------------------------------------------------
Capital employed $ 867 $ 1,077 $ 1,023 $ 944 $ 918
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Included in other liabilities.ROCE (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.
Total shareholder return is a useful measure of the return on an
investment in Norbord common shares including share price appreciation and
dividends. The calculation assumes the reinvestment of all dividends in shares
of Norbord. The 2004 return assumes the shares of Fraser Papers received in
the distribution were disposed on the first day of trading with the
reinvestment of the proceeds in Norbord shares.
Net debt is the principal value of long-term debt including the current
portion and bank advances less drawings under the term debt facility and cash
and cash equivalents. Net debt is a useful indicator of a company's debt
position. Net debt comprises:-------------------------------------------------------------------------
(US $ millions) 2008 2007 2006 2005 2004
-------------------------------------------------------------------------
Long-term debt $ 532 $ 478 $ 480 $ 440 $ 450
Current portion
of long-term debt - 197 - - 1
Drawings under term
debt facility (35) - - - -
Cash and cash equivalents (20) (128) (20) (155) (215)
-------------------------------------------------------------------------
Net debt $ 477 $ 547 $ 460 $ 285 $ 236
-------------------------------------------------------------------------
-------------------------------------------------------------------------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
two financial covenants contained in the Company's committed revolving bank
lines and accounts receivable securitization program.
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 two financial covenants contained in the Company's committed revolving bank
lines.
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 includes forward-looking statements, as defined by
applicable securities legislation. Often, but not always, forward-looking
statements can be identified by the use of words such as "believes,"
"expects," "does not expect," "is expected," "targets," "outlook," "plans,"
"scheduled," "estimates," "forecasts," "intends," "anticipates" or "does not
anticipate" or variations of such words and phrases or statements that certain
actions, events or results "may," "could," "would," "might" or "will" be
taken, occur or be achieved. 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) outlook for operations; (4) expectations
regarding mill capacity and production volumes; (5) objectives; (6) strategies
to achieve those objectives; (7) expected financial results; (8) sensitivity
to changes in product prices, such as the price of OSB; (9) sensitivity to key
input prices, such as the price of natural gas; (10) sensitivity to changes in
foreign exchange rates; (11) Margin Improvement Program targets; (12)
expectations regarding income tax rates; (13) expectations regarding
compliance with environmental regulations; (14) expectations regarding
contingent liabilities and guarantees, including the outcome of pending
litigation; and (15) expectations regarding the amount, timing and benefits of
capital investments.
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.
These factors include, but are not limited to: (1) assumptions in connection
with the economic and financial conditions in the United States, Europe,
Canada and globally; (2) risks inherent with product concentration; (3)
effects of competition and product pricing pressures; (4) outcome of the OSB
class action lawsuits; (5) risks inherent with customer dependence; (6)
effects of variations in the price and availability of manufacturing inputs
including continued access to fibre resources at competitive prices; (7)
various events which could disrupt operations, including natural events and
ongoing relations with employees; (8) impact of changes to or non-compliance
with environmental regulations; (9) impact of any product liability claims in
excess of insurance coverage; (10) risks inherent with a capital intensive
industry; (11) impact of future outcome of certain tax exposures; and (12)
effects of currency exposures and exchange rate fluctuations.
The above list of important factors affecting forward-looking information
is not exhaustive. Additional factors are noted elsewhere and reference should
be made to the other risks discussed in filings with Canadian securities
regulatory authorities. Except as required by applicable law, Norbord does not
undertake to update any forward-looking statements, whether written or oral,
that may be made from time to time by or on behalf of the Company, 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.Management's Responsibility for
the Financial StatementsThe accompanying consolidated financial statements and all information in
this annual report are the responsibility of management and have been approved
by the Board of Directors.
The consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles. Financial
statements are not precise since they include certain amounts based upon
estimates and judgments. When alternative methods exist, management has chosen
those it deems to be the most appropriate in the circumstances in order to
ensure that the consolidated financial statements are presented fairly, in all
material respects, in accordance with Canadian generally accepted accounting
principles.
The Company maintains systems of internal controls, which are designed to
provide reasonable assurance that accounting records are reliable and to
safeguard the Company's assets.
The Board of Directors is responsible for ensuring that management
fulfills its responsibilities for financial reporting and is ultimately
responsible for reviewing and approving the financial statements. The Board
carries out this responsibility principally through its Audit Committee.
The Audit Committee is appointed by the Board and reviews the
consolidated financial statements and management's discussion and analysis;
considers the report of the external auditors; assesses the adequacy of the
internal controls of the Company; approves the services provided by the
external auditors; examines the fees and expenses for audit services; and
recommends to the Board the independent auditors for appointment by the
shareholders. The Committee reports its findings to the Board of Directors for
consideration when approving the consolidated financial statements for
issuance to the shareholders.January 29, 2009
(signed) J. Barrie Shineton (signed) Robin E. Lampard
J. Barrie Shineton Robin E. Lampard
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
Auditors' ReportTo the Shareholders of Norbord Inc.
We have audited the consolidated balance sheets of Norbord Inc. as at
December 31, 2008 and 2007, and the consolidated statements of earnings and
shareholders' equity and comprehensive income and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2008 and 2007, and the results of its operations and its cash flows for
the years then ended in accordance with Canadian generally accepted accounting
principles.January 29, 2009 (signed) KPMG LLP
Toronto, Canada Chartered Accountants, Licensed
Public Accountants
Consolidated Statements of Earnings
-------------------------------------------------------------------------
Years ended December 31
(US $ millions, except per share information) 2008 2007
-------------------------------------------------------------------------
Net sales $ 943 $ 1,104
-------------------------------------------------------------------------
Earnings before interest, income tax, depreciation,
litigation settlement and provision for
non-core operation (60) 42
Litigation settlement (note 19) (32) -
Provision for non-core operation (note 11) (4) -
Interest and other income 3 5
Interest expense (notes 3 and 7) (49) (49)
-------------------------------------------------------------------------
Earnings before income tax and depreciation (142) (2)
Depreciation (note 2) (70) (88)
Income tax recovery (note 12) 96 45
-------------------------------------------------------------------------
Earnings $ (116) $ (45)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share (note 10)
Basic $ (0.77) $ (0.31)
Diluted $ (0.77) $ (0.31)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------
Years ended December 31
(US $ millions) 2008 2007
-------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR):
Operating Activities
Earnings $ (116) $ (45)
Items not affecting cash:
Depreciation (note 2) 70 88
Future income taxes (note 12) (81) (46)
Other items (note 13) (22) (5)
-------------------------------------------------------------------------
(149) (8)
Net change in non-cash working capital balances
(note 13) 136 23
-------------------------------------------------------------------------
(13) 15
-------------------------------------------------------------------------
Investing Activities
Investment in property, plant and equipment (27) (36)
Other (note 13) 29 (32)
-------------------------------------------------------------------------
2 (68)
-------------------------------------------------------------------------
Financing Activities
Repurchase of 8 1/8% debentures (note 7) (197) (3)
Issue of senior notes (note 7) - 198
Drawings from term debt facility (note 7) 35 -
Revolving bank lines drawn (repaid) (note 7) 19 (2)
Issue of common shares, net (note 9) 65 -
Issue of warrants, net (note 9) 14 -
Dividends paid (33) (32)
-------------------------------------------------------------------------
(97) 161
-------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ (108) $ 108
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents, beginning of year $ 128 $ 20
Cash and cash equivalents, end of year (note 13) 20 128
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
Consolidated Balance Sheets
-------------------------------------------------------------------------
As at December 31
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 13) $ 20 $ 128
Accounts receivable (note 3) 12 83
Tax receivable (note 12) 13 89
Inventory (note 4) 81 131
-------------------------------------------------------------------------
126 431
Property, plant and equipment (note 5) 879 968
Other assets (note 6) 36 5
-------------------------------------------------------------------------
$ 1,041 $ 1,404
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 146 $ 191
Current portion of long-term debt (note 7) - 199
-------------------------------------------------------------------------
146 390
Long-term debt (note 7) 542 480
Other liabilities (note 8) 14 18
Future income taxes (note 12) 73 156
Shareholders' equity (note 9) 266 360
-------------------------------------------------------------------------
$ 1,041 $ 1,404
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Subsequent event (note 21)
(See accompanying notes)
On behalf of the Board:
(signed) Robert J. Harding (signed) J. Barrie Shineton
Robert J. Harding J. Barrie Shineton
Chair President and Chief Executive Officer
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income
-------------------------------------------------------------------------
Years ended December 31
(US $ millions) 2008 2007
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
Share Capital
Balance, beginning of year $ 150 $ 127
Dividend reinvestment plan (note 9) 23 23
Issue of common shares, net (note 9) 65 -
-------------------------------------------------------------------------
Balance, end of year $ 238 $ 150
-------------------------------------------------------------------------
Contributed Surplus
Balance, beginning of year $ 1 $ -
Stock-based compensation (note 9) 2 1
Issue of warrants, net (note 9) 14 -
-------------------------------------------------------------------------
Balance, end of year $ 17 $ 1
-------------------------------------------------------------------------
Retained Earnings
Balance, beginning of year $ 205 $ 305
Adoption of new accounting standards (note 2) (1) -
-------------------------------------------------------------------------
Adjusted balance, beginning of year 204 305
Earnings (116) (45)
Common share dividends (56) (55)
Future income taxes - acquisition of control
(notes 12 and 18) (8) -
-------------------------------------------------------------------------
Balance, end of year $ 24 $ 205
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of year $ 4 $ 2
Other comprehensive income (loss) (17) 2
-------------------------------------------------------------------------
Balance, end of year $ (13) $ 4
-------------------------------------------------------------------------
Shareholders' equity $ 266 $ 360
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Earnings $ (116) $ (45)
Other comprehensive income (loss):
Net change in unrealized cumulative translation
gain (loss)(net of $7 tax (2007 - nil)) (17) 2
-------------------------------------------------------------------------
Comprehensive income (loss) $ (133) $ (43)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
Notes to the Consolidated Financial Statements
(in US $, unless otherwise noted)
In these notes "Norbord" means Norbord Inc. and all of its consolidated
subsidiaries and affiliates, and "Company" means Norbord Inc. as a
separate corporation, unless the context implies otherwise. "Brookfield"
means Brookfield Asset Management Inc. or any of its consolidated
subsidiaries and affiliates, a related party, by virtue of a controlling
equity interest in the Company.
Note 1. Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries.
Use of Estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles (GAAP) requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates are required in
assessing net recoverable amounts and net realizable values, tax and
other provisions, hedge effectiveness and fair value.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and investment grade
money market securities and bank term deposits with maturities of 90 days
or less from the date of purchase. Cash and cash equivalents are recorded
at cost, which approximates market value.
Inventories
Inventories of raw materials and operating and maintenance supplies are
valued at the lower of cost and net realizable value, with cost
determined on an average cost basis.
Inventories of finished goods are valued at the lower of cost and net
realizable value, with cost determined on an average cost basis. Cost
includes direct material, direct labour and an allocation of overhead.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated on
a straight-line basis. The rates of depreciation are intended to fully
depreciate the assets over the following periods, which approximate their
useful lives:
Buildings 20 to 40 years
Production equipment 10 to 25 years
Interest is capitalized on major capital projects during construction.
Costs, net of revenues, incurred during the start-up period of major
capital projects are deferred as other assets and amortized over the
early productive life of the project.
Employee Future Benefits
Norbord sponsors various defined benefit and defined contribution pension
plans, which cover substantially all employees and are funded in
accordance with applicable plan and regulatory requirements. The benefits
under Norbord's defined benefit pension plans are generally based on an
employee's length of service and the final five years' average salary,
and the plans do not provide for indexation of benefit payments. Norbord
also provides non-pension post-retirement benefits consisting of health
care benefits to eligible retirees of certain former businesses, which
are funded on a pay-as-you-go basis.
The measurement date for all defined benefit plans is December 31. The
obligations associated with Norbord's defined benefit plans are
actuarially valued using the projected unit credit method pro-rated on
services, management's best estimate assumptions for expected investment
performance, salary escalation and health care cost trend rates, and a
current market discount rate. For the purpose of calculating the expected
return on plan assets, those assets are measured at fair value. Prior
service costs related to plan amendments and transitional assets are
amortized on a straight-line basis over the estimated average remaining
service lives (EARSL) of the employee groups. The net actuarial gains or
losses in excess of 10% of the greater of the accrued benefit obligation
and the fair value of plan assets are amortized on a straight-line basis
over EARSL.
Financial Instruments
The Company utilizes derivative financial instruments solely to manage
its foreign currency, interest rate, and commodity price exposures in the
ordinary course of business. Derivatives are not used for trading or
speculative purposes. All hedging relationships, risk management
objectives, and hedging strategies are formally documented and
periodically assessed to ensure that the changes in the value of these
derivatives are highly effective in offsetting changes in the fair
values, net investments or cash flows of the hedged exposures.
Accordingly, all gains and losses (realized and unrealized, as
applicable) on such derivatives are recognized in the same manner as
gains and losses on the underlying exposure being hedged. Any resulting
carrying amounts are included in other assets if there is an unrealized
gain on the derivative or other liabilities if there is an unrealized
loss on the derivative.
The carrying value of financial instruments approximates fair value,
except where disclosed in these notes. Fair values disclosed are
determined using actual quoted market prices or, if not available,
indicative prices based on similar publicly-traded instruments. The fair
value of derivative financial instruments reflects the estimated amount
that the Company would have paid or received if forced to settle all
outstanding contracts at year-end. This fair value represents a point-in-
time estimate that may not be relevant in predicting the Company's future
earnings or cash flows.
The Company is exposed to credit risk in the event of non-performance by
its derivative counterparties. However, the Company's Board-approved
financial policies require that derivative transactions be executed only
with approved highly rated counterparties under master netting
agreements; therefore, the Company does not anticipate any
non-performance.
Debt Issue Costs
The Company accounts for transaction costs that are directly attributable
to the issuance of long-term debt by deducting such costs from the
carrying value of the long-term debt. The capitalized transaction costs
are amortized to earnings over the term of the related long-term debt.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Accordingly, future tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Future tax assets and liabilities are measured
using enacted or substantively enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. In addition, the effect on future
tax assets and liabilities of a change in tax rates is recognized in
income in the year that includes the enactment or substantive enactment
date.
Stock Options
The Company accounts for stock options using the fair value method. Under
the fair value method, compensation expense for options is measured at
the grant date using the Black-Scholes option pricing model and
recognized in earnings on a straight-line basis over the vesting period.
Warrants
The Company accounts for warrants using the fair value method. Under the
fair value method, the value of warrants is measured at the issue date
using the Black-Scholes option pricing model, reduced by any related
issue costs.
Revenue Recognition
Net sales are recognized when the risks and rewards of ownership pass to
the purchaser. This is generally when goods are shipped. Sales are
recorded net of third party transportation and discounts.
Sales are governed by contract or by standard industry terms. Revenue is
not recognized prior to the completion of those terms. The majority of
product is shipped via third-party transport on a freight-on-board
shipping point basis. In all cases, product is subject to quality testing
by the Company to ensure it meets applicable standards prior to shipment.
Translation of Foreign Currencies
The accounts of subsidiaries having a functional currency other than the
US dollar are translated using the current rate method. Gains or losses
on translation are deferred and included in accumulated other
comprehensive income. Gains or losses on foreign currency-denominated
balances and transactions that are designated as hedges of net
investments in these subsidiaries are reported in the same manner as
translation adjustments.
Monetary assets and liabilities denominated in currencies other than an
entity's functional currency are translated at the rate of exchange
prevailing at year-end. Gains or losses on translation of these items are
included in the consolidated statement of earnings. Gains or losses on
transactions that hedge these items are also included in the consolidated
statement of earnings.
Gains or losses on transactions that serve to hedge future foreign
currency-denominated cash flows are recognized and reported in the same
manner as the cash flows being hedged.
Note 2. Changes in Accounting Policies and Significant Accounting
Estimates
Capital Disclosures
In December 2006, the Canadian Institute of Chartered Accountants (CICA)
issued Section 1535, Capital Disclosures which requires the disclosure
of: (i) an entity's objectives, policies and process for managing
capital; (ii) quantitative data about an entity's managed capital; (iii)
whether an entity has complied with capital requirements; and (iv) if an
entity has not complied with such capital requirements, the consequences
of such non-compliance. This new standard became effective for the
Company on January 1, 2008, and the related disclosure is included as
note 15 to the consolidated financial statements.
Financial Instruments - Disclosure and Presentation
In December 2006, the CICA issued two new accounting standards, Section
3862, Financial Instruments - Disclosures and Section 3863, Financial
Instruments - Presentation. These standards replace Section 3861,
Financial Instruments - Disclosure and Presentation and enhance the
disclosure of the nature and extent of risks arising from financial
Instruments and how the entity manages those risks. These new standards
became effective for the Company on January 1, 2008, and the related
disclosure is included as Note 16 to the consolidated financial
statements.
Inventories
In June 2007, the CICA issued Section 3031, Inventories, replacing
Section 3030. This standard provides guidance on the determination of the
cost of inventories and the subsequent recognition as an expense,
including any write down to net realizable value. This new standard
became effective for the Company on January 1, 2008 and the related
disclosure is included in Note 4 to the consolidated financial
statements.
The impact of adopting this new standard was a $1 million reduction in
opening retained earnings and a $3 million reclassification of certain
capital spare parts from inventory to property, plant and equipment. The
opening retained earnings adjustment of $1 million arises due to a lower
opening carrying value of certain finished goods and raw material
inventory and prior years' depreciation on the reclassified capital spare
parts. Effective January 1, 2008, 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. Prior to
adopting the new standard on January 1, 2008, the Company valued these
inventories at the lower of cost and replacement cost. Capital spare
parts of $3 million were reclassified from inventory to property, plant
and equipment at cost and are depreciated on a prospective basis using
the straight-line method over two to five years, which approximates their
useful lives.
Significant Accounting Estimates
Effective July 1, 2007, management's estimate of the useful life of its
OSB assets was changed from 15 years to 25 years. In accordance with the
Company's policy, depreciation rates for property, plant and equipment
are assessed from time to time to ensure that they continue to
approximate their useful life. This change in estimate was accounted for
prospectively. The impact of the change in estimate on 2007 depreciation
was a reduction of approximately $18 million. The impact on a full year
of depreciation is a reduction of approximately $36 million.
Future Changes in Accounting Policies - International Financial Reporting
Standards (IFRS)
The Accounting Standards Board (AcSB) confirmed in February 2008 that
International Financial Reporting Standards (IFRS) will replace Canadian
GAAP for publicly accountable enterprises for financial periods beginning
on and after January 1, 2011.
Note 3. Accounts Receivable
In November 2007, Norbord entered into a $50 million accounts receivable
securitization program with a highly rated financial institution for an
initial commitment period of 10 months with automatic extensions each
four-month anniversary date thereafter unless terminated by either party
prior to such anniversary date. In July 2008, the program limit was
increased from $50 million to $85 million. At December 31, 2008, Norbord
recorded cash proceeds of $68 million (2007 - $50 million) relating to
this program.
Under the program, Norbord has transferred substantially all of its
present and future trade accounts receivable to the financial
institution, on a fully serviced basis, for proceeds consisting of cash
and deferred purchase price. Norbord can increase or decrease the cash
component of proceeds on each settlement date, subject to the program
limit. The utilization charge, which is based on money market rates plus
a fixed margin, and other program fees are recorded as interest expense.
In 2008, the utilization charge and program fee included in interest
expense was $2 million (2007 - nil).
The securitization program is subject to the following financial
covenants with which the Company must comply on a quarterly basis:
minimum tangible net worth of $300 million; and maximum net debt to total
capitalization, book basis, of 65%. At year-end, the Company's tangible
net worth was $301 million and net debt to total capitalization, book
basis, was 61%. 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
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Raw materials $ 20 $ 40
Finished goods 32 59
Operating and maintenance supplies 29 32
-------------------------------------------------------------------------
$ 81 $ 131
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The amount of inventory recognized as an expense during the year was
$1,018 million which includes $69 million in depreciation expense on
property, plant and equipment. As at December 31, 2008, the provision to
reflect inventories at the lower of cost and net realizable value was $3
million.
Note 5. Property, Plant and Equipment
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Accumu- Accumu-
lated lated
Depre- Net Book Depre- Net Book
Cost ciation Value Cost ciation Value
-------------------------------------------------------------------------
Land $ 12 $ - $ 12 $ 12 $ - $ 12
Buildings 232 105 127 256 110 146
Production
equipment 1,470 730 740 1,606 796 810
-------------------------------------------------------------------------
$1,714 $ 835 $ 879 $1,874 $ 906 $ 968
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2008, production equipment includes construction in
progress of $4 million (2007 - $3 million). In 2008, interest costs
capitalized to property, plant and equipment was nil (2007 - $3 million).
Note 6. Other Assets
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Unrealized net investment hedge gains $ 26 $ -
Unrealized interest rate swap gains 6 -
Other 4 5
-------------------------------------------------------------------------
$ 36 $ 5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The unrealized net investment hedge gains and unrealized interest rate
swap gains are offset by unrealized losses on the underlying exposures
being hedged.
Note 7. Long-Term Debt
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Principal value
7 1/4% debentures due 2012 $ 240 $ 240
Senior notes due 2017 200 200
8 1/8% debentures repaid 2008 - 197
Term debt facility 35 -
Revolving bank lines 57 38
-------------------------------------------------------------------------
532 675
Debt issue costs (4) (4)
Deferred interest rate swap gains 8 11
Unrealized interest rate swap
gains (losses) (notes 6 and 8) 6 (3)
-------------------------------------------------------------------------
542 679
Less current portion of long-term debt - (199)
-------------------------------------------------------------------------
$ 542 $ 480
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Maturities of long-term debt are as follows:
-------------------------------------------------------------------------
2009 2010 2011 2012 Thereafter Total
-------------------------------------------------------------------------
Maturities of
long-term debt $ - $ 92 $ - $ 240 $ 200 $ 532
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Senior Notes Due in 2017
During 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 December 31, 2008, the interest rate was 7.95% (2007 - 6.70%) and
during the year the average interest rate was 7.61% (2007 - 6.64%).
8 1/8% Debentures Repaid in 2008
In the first quarter of 2008, the 8 1/8% debentures with a principal
value of $197 million were repurchased and a corresponding amount of
interest rate swaps matured.
Term Debt Facility
In the first quarter of 2008, the Company concluded a $100 million term
debt facility with Brookfield 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 revolving bank lines. Any
drawings under the facility are treated as tangible net worth for bank
line covenant purposes. At December 31, 2008, $35 million was drawn as
cash.
In the fourth quarter of 2008, the Company repaid $40 million of the
unsecured term debt facility and the remaining $35 million was repaid
subsequent to year end, in each case using proceeds from the Company's
Offering (note 9).
Revolving Bank Lines
The Company has committed revolving bank lines of $235 million that
mature in May 2010 and bear interest at money market rates plus a margin
that varies with the Company's credit rating, and contain the following
financial covenants with which the Company must comply on a quarterly
basis: minimum tangible net worth of $300 million; and maximum net debt
to total capitalization, book basis, of 65%. At year end, the Company's
tangible net worth was $301 million and net debt to total capitalization,
book basis, was 61%. At December 31, 2008, $57 million of the revolving
bank lines was drawn as cash; $4 million was utilized for letters of
credit; and $174 million was available to support short-term liquidity
requirements.
In the fourth quarter of 2008, the Company reached an agreement with its
lenders to amend the terms on its revolving bank lines. The aggregate
revolving bank line commitment will be reduced from $235 million to $205
million, the term will be extended to May 2011 and the financial
covenants will be amended to the following: minimum tangible net worth of
$250 million and maximum net debt to total capitalization, book basis of
70%. These amendments are subject to customary conditions including the
execution of definitive documentation.
Interest Rate Swaps
At period end, the Company had $115 million (2007 - $362 million) in
interest rate swaps outstanding. The terms of these swaps correspond to
the terms of the underlying hedged debt.
As at December 31, 2008, the effective interest rate on the Company's
debt-related obligations including the impact of the interest rate swaps
is 6.2% (2007 - 7.1%). Interest expense on long-term debt for the year,
including the impact of interest rate swaps, was $45 million (2007 - $49
million). Total interest paid during the year was $53 million (2007 - $53
million).
Note 8. Other Liabilities
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Unrealized net investment hedge losses (note 16) $ 8 $ 8
Accrued pension and post-retirement
benefits (note 14) 2 3
Unrealized interest rate swap losses - 3
Other liabilities 4 4
-------------------------------------------------------------------------
$ 14 $ 18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The unrealized net investment hedge losses and unrealized interest rate
swap losses are offset by unrealized gains on the underlying exposures
being hedged.
Note 9. Shareholders' Equity
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Capital stock:
Share capital $ 238 $ 150
Contributed surplus 17 1
-------------------------------------------------------------------------
255 151
Retained earnings 24 205
Accumulated other comprehensive income (loss) (13) 4
-------------------------------------------------------------------------
$ 266 $ 360
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Rights Offering
On November 17, 2008, the Company filed a final short form prospectus
with securities regulators in Canada pursuant to a Rights Offering (the
"Offering") for gross proceeds of $199 million (CAD $240 million). Under
the Offering, the Company distributed rights to existing eligible
shareholders to purchase 272.6 million units at a price of CAD $0.88 per
unit. Each unit consisted of one common share and one-half of a common
share purchase warrant. One whole common share purchase warrant entitles
the holder to purchase one common share at a price of CAD $1.36 at any
time prior to December 24, 2013.
On December 24, 2008, pursuant to the basic and additional subscription
privileges, the Company issued 109.6 million common shares and 54.8
million warrants to shareholders that exercised rights under the Offering
and received gross proceeds of $79 million (CAD $96 million). Net
proceeds received were used to repay drawings under the term debt
facility and revolving bank lines (note 7).
Under a Standby Purchase Agreement entered into in connection with the
Offering, Brookfield agreed to purchase any units not otherwise
subscribed for by other shareholders of the Company for a standby fee
equal to 1% of gross proceeds from the Offering. Subsequent to year-end,
Brookfield purchased 163 million common shares and 81.5 million warrants
under the Standby Purchase Agreement for gross proceeds of $120 million
(CAD $144 million) (notes 18 and 21). Share issue costs, including the
standby fee, were approximately $3 million. Net proceeds received
subsequent to year-end were used to repay drawings under the term debt
facility and revolving bank lines.
Share Capital
As at December 31, 2008, the authorized capital stock of the Company is
as follows: unlimited number of Class A and Class B preferred shares;
unlimited number of non-voting participating shares; and an unlimited
number of common shares. During 2008 and 2007, the number of issued and
outstanding common shares changed as follows:
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Shares Amount Shares Amount
(million) (US$ millions) (million) (US$ millions)
-------------------------------------------------------------------------
Balance, beginning
of year 146.8 $ 150 143.8 $ 127
Dividend
reinvestment plan 12.2 23 2.8 23
Issue of common
shares, net 109.6 65 - -
Issue of common
shares - stock
options 0.1 - 0.2 -
-------------------------------------------------------------------------
Balance, end of year 268.7 $ 238 146.8 $ 150
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed Surplus
Contributed surplus is comprised of transactions on account of warrants
issued under the Offering and stock options issued under the Company's
stock option plan.
Warrants
On December 24, 2008, 54.8 million warrants were issued pursuant to the
basic and additional subscription privileges under the Offering.
Subsequent to year-end, 81.5 million additional warrants were issued to
Brookfield pursuant to the Standby Purchase Agreement entered into in
connection with the Offering (note 21). Each warrant entitles the holder
to purchase one common share at a price of CAD$1.36 at any time prior to
December 24, 2013.
The fair value of the warrants issued has been established using a Black-
Scholes option pricing model using the following weighted average
assumptions: dividend yield of nil; expected volatility 66%, risk-free
interest rate 2.58%; and expected life of five years. The fair value of
the warrants issued on December 24, 2008, was $14 million, net of issue
costs.
-------------------------------------------------------------------------
2008
-------------------------------------------------------------------------
Amount
Warrants (US$
(million) millions)
-------------------------------------------------------------------------
Balance, beginning of year - $ -
Issue of warrants 54.8 14
-------------------------------------------------------------------------
Balance, end of year 54.8 $ 14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock Options
Under the Company's stock option plan, the Board of Directors of the
Company may issue stock options to certain employees of the Company.
These options vest over a five-year period and expire 10 years from the
date of issue. In 2008, stock option expense of $2 million was recorded
against contributed surplus (2007 - $1 million). During 2008 and 2007,
the stock options changed as follows:
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
(millions) Price (CAD$) (millions) Price (CAD$)
-------------------------------------------------------------------------
Balance, beginning
of year 2.4 $ 7.73 1.8 $ 6.31
Options granted 1.0 6.09 0.8 9.16
Options exercised (0.1) 1.41 (0.2) 1.10
-------------------------------------------------------------------------
Balance, end of year 3.3 $ 7.37 2.4 $ 7.73
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable at year end 1.1 $ 6.47 0.7 $ 5.12
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes the weighted average exercise prices and
the weighted average remaining contractual life of the balances of stock
options outstanding at December 31, 2008:
-------------------------------------------------------------------------
Options Outstanding Options Vested
-------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Remaining Exercise Exercise
Prices Options Contractual Price Options Price
(CAD$) (millions) Life (CAD$) (millions) (CAD$)
-------------------------------------------------------------------------
$0.01 0.1 1.84 $ 0.01 0.1 $ 0.01
$0.32 - $0.54 0.1 3.08 0.54 0.1 0.54
$0.84 - $1.17 0.1 3.35 0.92 0.1 0.92
$3.83 0.2 5.08 3.83 0.2 3.83
$6.09 1.0 9.10 6.09 - -
$8.73 - $11.13 1.8 7.25 9.73 0.6 9.82
-------------------------------------------------------------------------
3.3 7.25 $ 7.37 1.1 $ 6.47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 10. Earnings per Common Share
Earnings per common share are calculated as follows:
-------------------------------------------------------------------------
(US $ millions, except per share information,
unless otherwise noted) 2008 2007
-------------------------------------------------------------------------
Earnings available to common shareholders $ (116) $ (45)
-------------------------------------------------------------------------
Common shares (millions):
Weighted average number of common shares
outstanding 151.2 144.9
Stock options 1.1 0.3
Warrants 54.8 -
-------------------------------------------------------------------------
Diluted number of common shares 207.1 145.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share:
Basic $ (0.77) $ (0.31)
Diluted $ (0.77) $ (0.31)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options issued under the Company's stock option plan (note 9) and
warrants issued under the Offering (note 9) were excluded from the
calculation of diluted earnings per common share because the impact would
be anti-dilutive. If dilutive in the future, they would be included to
the extent that the exercise prices were less than the average market
price of the Company's common shares during the year.
Note 11. Provision for Non-Core Operation
In the first quarter of 2008, the Company recorded a $4 million provision
relating to severance arising from the permanent closure of a
particleboard line at the Genk, Belgium site. The majority of the
provision was paid by year-end.
Note 12. Income Tax
Future income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities in the financial
statements and the amounts used for income tax purposes.
Income tax recovery comprises the following:
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Current income tax $ 15 $ 91
Future income tax 81 (46)
-------------------------------------------------------------------------
Income tax recovery $ 96 $ 45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The differences between income taxes computed using statutory tax rates
and income tax as recorded are as follows:
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Earnings before income tax $ (212) $ (90)
-------------------------------------------------------------------------
Income tax recovery at combined statutory rates (66) (28)
Effect of:
Rate differences on foreign activities (19) (32)
Other (11) 15
-------------------------------------------------------------------------
Income tax recovery $ (96) $ (45)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The income tax effects of temporary differences that give rise to future
income taxes are as follows:
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Benefit of tax loss carry forwards $ 100 $ 36
Investment tax credits 20 24
Other future income tax liabilities (12) (24)
Property, plant and equipment (181) (192)
-------------------------------------------------------------------------
Future income taxes, net $ (73) $ (156)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprised of:
Current future income tax asset $ - $ -
Long-term future income tax liability (73) (156)
-------------------------------------------------------------------------
$ (73) $ (156)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income and income-related tax refunds (net) received during the year were
$75 million (2007 - $33 million).
Rights Offering
Upon completion of their basic subscription privilege under the Offering
on December 24, 2008, Brookfield's ownership interest in the Company
increased to approximately 60%. For Canadian tax purposes, the increased
ownership resulted in Brookfield acquiring control of the Company on
December 24, 2008.
As a result of the acquisition of control of the Company by Brookfield on
December 24, 2008, $8 million in future tax benefits was charged to
retained earnings in 2008 relating to capital loss carryforwards not
available for future use. Current Canadian tax legislation prohibits
capital losses from being used to shelter capital gains realized in
fiscal periods subsequent to the acquisition of control date. Certain
drafted Canadian legislation permits the Company to elect to apply the
available capital losses against unrealized built-in gains on certain
eligible assets as at the acquisition of control date. These tax
attributes will be reinstated in the future when this pending income tax
legislation is substantively enacted.
Note 13. Supplemental Cash Flow Information
Other items under operating activities comprise:
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Cash provided by (used for):
Amortization of deferred interest rate swap
gains (note 7) $ (3) $ (8)
Pension funding greater than pension expense
(note 14) (1) (1)
Income and income-related tax payments (note 12) (10) -
Other (8) 4
-------------------------------------------------------------------------
$ (22) $ (5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The net change in non-cash working capital balance comprises:
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Cash provided by (used for):
Accounts receivable $ 36 $ 51
Tax receivable 85 33
Inventory 37 (33)
Accounts payable and accrued liabilities (22) (28)
-------------------------------------------------------------------------
$ 136 $ 23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other under investing activities comprises:
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Cash provided by (used for):
Realized net investment hedge
gains (losses) (note 16) $ 26 $ (8)
Recouponing payment, net (note 16) - (21)
Other 3 (3)
-------------------------------------------------------------------------
$ 29 $ (32)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents comprises:
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Cash $ 17 $ 17
Cash equivalents 3 111
-------------------------------------------------------------------------
$ 20 $ 128
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 14. Employee Benefit Plans
Pension Plans
Norbord has a number of pension plans in which participation is available
to substantially all employees. Norbord's obligations under its defined
benefit pension plans are determined periodically through the preparation
of actuarial valuations, which are generally required every three years.
The most recent actuarial valuation was conducted as of December 31,
2006. The date of the next required valuation is December 31, 2009, and
Norbord may choose to perform an actuarial valuation at an earlier date.
Information about the Company's defined benefit pension plans is as
follows:
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Change in Accrued Benefit Obligation During the Year:
Accrued benefit obligation, beginning of year $ 81 $ 69
Employee contributions 1 1
Current service cost 2 2
Interest on accrued benefit obligation 4 4
Benefits paid (5) (4)
Net actuarial loss (gain) (13) (2)
Foreign currency exchange rate impact (15) 11
Transfer (1) -
-------------------------------------------------------------------------
Accrued benefit obligation, end of year(1) $ 54 $ 81
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Change in Plan Assets During the Year:
Plan assets, beginning of year $ 59 $ 49
Actual return on plan assets (7) 1
Employer contributions 4 4
Employee contributions 1 1
Benefits paid (5) (4)
Foreign currency exchange rate impact (11) 8
Transfer (1) -
-------------------------------------------------------------------------
Plan assets, end of year(1) $ 40 $ 59
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reconciliation of Funded Status:
Accrued benefit obligation $ 54 $ 81
Plan assets 40 59
-------------------------------------------------------------------------
Accrued benefit obligation in excess of plan assets (14) (22)
Unamortized net actuarial loss 18 26
Unamortized prior service costs - 1
Unamortized net transitional asset (4) (6)
-------------------------------------------------------------------------
Net accrued benefit liability - (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Recorded in:
Other liabilities $ - $ (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) All plans have accrued benefit obligations in excess of plan assets.
-------------------------------------------------------------------------
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Components of Net Periodic Pension Expense:
Current service cost $ 2 $ 2
Interest on accrued benefit obligation 4 4
Actual return on plan assets 7 (1)
Net actuarial loss (gain) (13) (1)
Difference between actual and expected return on
plan assets (11) (2)
Difference between actual and recognized net
actuarial gain (loss) 15 2
Amortization of transition asset (1) (1)
-------------------------------------------------------------------------
Net periodic pension expense $ 3 $ 3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Significant Weighted Average Actuarial Assumptions:
Used in calculation of net periodic pension expense
for the year:
Discount rate 5.3% 5.0%
Expected long-term rate of return on plan assets 7.8% 7.8%
Rate of compensation increase 3.7% 3.7%
Used in calculation of accrued benefit obligation,
end of year:
Discount rate 6.4% 5.3%
Rate of compensation increase 3.6% 3.7%
The weighted average asset allocation of Norbord's defined benefit
pension plan assets is as follows:
Asset category:
Equity investments 54% 61%
Fixed income investments 46% 39%
-------------------------------------------------------------------------
Total assets 100% 100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating costs include $5 million (2007 - $7 million) related to
contributions to Norbord's defined contribution pension plans.
Post-Retirement Benefit Plans
Norbord funds health care benefits costs on a pay-as-you go basis.
Norbord's obligations under its post-retirement benefit plan are
determined periodically through actuarial valuations. At December 31,
2008, the accrued benefit obligation related to this plan was $2 million
(2007 - $4 million) and the net accrued liability was $2 million (2007 -
$2 million). In 2008 and 2007 less than $1 million was included in
operating costs related to this plan.
Note 15. 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
drawings under the term debt facility and cash and cash equivalents.
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:
-------------------------------------------------------------------------
Dec 31 Dec 31
(US $ millions) 2008 2007
-------------------------------------------------------------------------
Long-term debt, principal value $ 532 $ 478
Plus: Current portion of long-term debt - 197
Less: Drawings under term debt facility(1) (35) -
Less: Cash and cash equivalents (20) (128)
-------------------------------------------------------------------------
Net debt 477 547
-------------------------------------------------------------------------
Shareholders' equity 266 360
Plus: Drawings under term debt facility(1) 35 -
-------------------------------------------------------------------------
Tangible net worth 301 360
-------------------------------------------------------------------------
Total capitalization $ 778 $ 907
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net debt to capitalization, book basis 61% 60%
Net debt to capitalization, market basis 32% 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 year-end,
the Company's tangible net worth was $301 million and net debt to total
capitalization, book basis was 61%.
In the fourth quarter of 2008, the Company reached an agreement with its
lenders to amend the terms on its revolving bank lines. The aggregate
revolving bank line commitment will be reduced from $235 million to
$205 million, the term will be extended to May 2011 and the financial
covenants will be amended to the following: minimum tangible net worth of
$250 million and maximum net debt to total capitalization, book basis, of
70%. These amendments are subject to customary conditions including the
execution of definitive documentation (note 7).
Pursuant to the Offering (note 9), the Company raised $79 million (CAD
$96 million) of shareholders' equity in the fourth quarter of 2008 and a
further $120 million (CAD $144 million) subsequent to year-end. Related
issue costs were approximately $3 million. The net proceeds were used to
repay drawings under the term debt facility and revolving bank lines.
Note 16. 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 December 31, 2008, Norbord has hedged approximately 20% of its 2009
expected natural gas consumption by locking in the price directly with
its suppliers. Approximately 80% of Norbord's electricity is purchased in
regulated markets and Norbord has hedged approximately 30% of its 2009
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 (note 7). 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 (note 7). In 2008,
amortization of $3 million (2007 - 8 million) was included in interest
expense (note 13).
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.
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. As at December 31, 2008, the
provision for doubtful accounts was less than $1 million (2007 - less
than $1 million). In 2008, Norbord had one customer whose purchases
represented greater than 10% of total net sales.
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
December 31, 2008, Norbord recorded cash proceeds of $68 million (2007 -
$50 million) relating to 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 $20 million of cash and cash equivalents,
$174 million of unutilized committed revolving bank lines and $65 million
unutilized under the term debt facility.
Management believes that, subject to achieving its business plans, the
Company has sufficient liquidity for the foreseeable future.
Financial Liabilities
---------------------
The following table summarizes the aggregate amount of contractual future
cash outflows for the Company's financial liabilities:
-------------------------------------------------------------------------
Payments Due by Period
(US $ millions) 2009 2010 2011 2012 Thereafter Total
-------------------------------------------------------------------------
Principal $ - $ 92 $ - $ 240 $ 200 $ 532
Interest 35 33 31 31 72 202
-------------------------------------------------------------------------
Long-term debt,
including interest $ 35 $ 125 $ 31 $ 271 $ 272 $ 734
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-Derivative Financial Instruments
------------------------------------
The net book values and fair values of non-derivative financial
instruments at year-end were as follows:
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Net Book Fair Net Book Fair
(US $ millions) Value Value Value Value
-------------------------------------------------------------------------
Financial Assets:
Cash and cash
equivalents $ 20 $ 20 $ 128 $ 128
Accounts receivable 12 12 83 83
Tax receivable 13 13 89 89
-------------------------------------------------------------------------
$ 45 $ 45 $ 300 $ 300
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial Liabilities:
Accounts payable and
accrued liabilities $ 146 $ 146 $ 191 $ 191
Long-term debt 542 376 679 633
-------------------------------------------------------------------------
$ 688 $ 522 $ 870 $ 824
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Derivative Financial Instruments
--------------------------------
Information about derivative financial instruments at year-end was as
follows:
-------------------------------------------------------------------------
2008
-------------------------------------------------------------------------
Unrealized
(In millions and gain/(loss) Realized
in US $ unless Notional at period gain/(loss) Sensitivity
otherwise noted) Value end(1) year-to-date to 1% change
-------------------------------------------------------------------------
Currency hedges:
Net investment
UK (pnds stlg)103 26 14 2
Belgium (euro)79 (8) 12 1
Monetary
liabilities CAD $18 - (5) -
Future committed
transaction
(note 9) CAD $144 1 - 1
Interest rate hedges:
Interest rate swaps $115 6 - 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007
-------------------------------------------------------------------------
Unrealized
(In millions and gain/(loss) Realized
in US $ unless Notional at period gain/(loss) Sensitivity
otherwise noted) Value end(1) year-to-date to 1% change
-------------------------------------------------------------------------
Currency hedges:
Net investment
UK (pnds stlg)128 (9) (19) 3
Belgium (euro)84 1 (10) 1
Monetary
liabilities CAD $66 2 4 1
Future Committed
Transaction CAD $24 - - -
Interest rate hedges:
Interest rate swaps $362 (3) - 4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 17. Commitments and Contingencies
Tax Exposures
In the normal course of operations, the Company is subject to various
uncertainties concerning the interpretation and application of tax laws
in the filing of its tax returns in operating jurisdictions that could
materially affect the Company's cash flows. There can be no assurance
that the tax authorities will not challenge the Company's filing
positions.
The Company is engaged in ongoing discussions with tax authorities
regarding the Company's transfer pricing methodology. These tax
authorities could challenge the validity of the Company's policies which
generally involve areas of taxation open to various interpretations and
a significant degree of judgment in applying the tax law to the Company's
circumstances. If the tax authorities are successful in challenging the
Company's transfer pricing methodology, it may have a material adverse
effect on the Company's results of operations or cash flows. Norbord uses
all available information in determining its transfer pricing methodology
and in seeking to manage transfer pricing and other taxation issues to a
satisfactory conclusion. Taking account of external professional advice,
the Company continues to believe that its taxable income has been
reported in accordance with tax law requirements and, has not recorded a
provision related to this matter. The ultimate resolution of this matter
is dependent upon continuing negotiations with the relevant tax
authorities and potentially appeals under the tax law.
Other
The Company has provided certain commitments and indemnifications,
including those related to former businesses. The maximum amounts from
many of these items cannot be reasonably estimated at this time. However,
in certain circumstances, the Company has recourse against other parties
to mitigate the risk of loss.
The Company has entered into various commitments as follows:
-------------------------------------------------------------------------
Payments Due by Period
(US $ millions) 2009 2010 2011 2012 Subsequent Total
-------------------------------------------------------------------------
Purchase obligations $ 33 $ 28 $ 19 $ 2 $ - $ 82
Operating leases 3 3 2 1 3 12
-------------------------------------------------------------------------
$ 36 $ 31 $ 21 $ 3 $ 3 $ 94
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 18. Related Party Transactions
In the normal course of operations, the Company enters into various
transactions on market terms with related parties which have been
measured at exchange value and recognized in the consolidated financial
statements. The following transactions have occurred between the Company
and Brookfield during the normal course of business.
Rights Offering
In connection with the Offering, the Company entered into a Standby
Purchase Agreement with Brookfield, in which Brookfield agreed to
exercise all of its rights and to purchase any units not otherwise
subscribed for by other shareholders of the Company. In 2008, Brookfield
paid $72 million (CAD $87 million) to purchase 99.1 million common shares
and 49.6 million warrants through their basic subscription privilege
which increased their ownership interest to approximately 60% of the
Company's issued and outstanding common shares. On December 24, 2008, as
a result of the acquisition of control of the Company by Brookfield
(note 12), $8 million of future income tax assets were charged to
retained earnings. These tax attributes may be reinstated in the future
when pending Canadian income tax legislation is substantively enacted.
Subsequent to year-end, Brookfield paid $120 million (CAD $144 million)
to acquire 163.0 million common shares and 81.5 million warrants under
the Standby Purchase Agreement, increasing their ownership interest to
approximately 75%. Subsequent to year-end, a standby fee of $2 million
was paid to Brookfield which was based on 1% of the gross proceeds of
the Offering (note 21).
Term Debt Facility
In 2008, the Company concluded a $100 million term debt facility with
Brookfield. Interest expense on the term debt facility was $4 million
for the year (2007 - $ nil).
Dividend Reinvestment Plan (DRIP)
In 2008, Brookfield elected to receive all of their dividends totaling
$21 million (2007 - $20 million) as common shares which were distributed
under the Company's Dividend Reinvestment Program (DRIP). The DRIP
permits Canadian shareholders to elect to receive their dividends as
common shares.
Indemnity Commitment
As at December 31, 2008, total future costs related to a 1999 asset
purchase agreement between the Company and Brookfield for which Norbord
provided an indemnity are estimated at less than $1 million and are
included in other liabilities in the consolidated balance sheet.
Other
In 2008 and 2007, the Company provided certain administrative services
to Brookfield or its affiliates which were charged on a cost recovery
basis. In addition, the Company periodically engages the services of
Brookfield or its affiliates for various financial, real estate and other
business advisory services. In 2008, the fees for these services were
less than $1 million and were charged at market rates.
Guarantee of Certain Obligations of Fraser Papers Inc.
Norbord continues to guarantee certain obligations under operating lease
commitments of Fraser Papers Inc. which was distributed to common
shareholders in 2004. The maximum potential amount of future payments
that Norbord could be required to make under these obligations is
estimated to be $1 million. The leases expire in March 2009. No amounts
have been recorded in the consolidated balance sheet with respect to
these guarantees. As security for these ongoing financial commitments to
Fraser Papers Inc., Norbord has the right, at any time, to require
Fraser Papers Inc. to provide a fixed first charge security interest
over certain of Fraser Papers Inc.'s manufacturing facilities. In 2008,
the fee for providing these guarantees is less than $1 million (2007 -
less than $1 million).
Note 19. Litigation Settlement
Norbord and eight other North American OSB producers were named as
defendants in several lawsuits filed in the US District Court for the
Eastern District of Pennsylvania. The lawsuits alleged 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 to at least February 2006.
The Court certified: 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 sought damages or injunctive or other
relief under applicable laws.
Although Norbord vigorously contested the plaintiffs' allegations and
continues to deny that it violated US antitrust or any other laws,
Norbord 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. Under the terms of the settlement
agreements, which have been approved by the Court, Norbord paid
$30 million into an escrow account for the benefit of members of the
direct purchaser class and $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 chose to opt
out of the direct purchaser class; no members of the indirect purchaser
classes chose to opt out. Each entity that opted out of the direct
purchaser class is entitled to pursue its own individual "opt-out"
claims against Norbord and the other defendants. Norbord has entered
into a settlement agreement with one such entity. Norbord has also
entered into an agreement with the remaining entities that opted out of
the direct purchaser class. The terms of these agreements are not
material to the Company.
Note 20. Geographic Segments
The Company has a single reportable 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.
-------------------------------------------------------------------------
2008
-------------------------------------------------------------------------
North
(US $ millions) America Europe Unallocated Total
-------------------------------------------------------------------------
Net sales $ 538 $ 405 $ - $ 943
EBITDA(1) (51) 4 (13) (60)
Depreciation 43 26 1 70
Property, plant and
equipment 682 194 3 879
Investment in property,
plant and equipment 25 2 - 27
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007
-------------------------------------------------------------------------
North
(US $ millions) America Europe Unallocated Total
-------------------------------------------------------------------------
Net sales $ 593 $ 511 $ - $ 1,104
EBITDA(1) (22) 81 (17) 42
Depreciation 53 34 1 88
Property, plant and
equipment 696 268 4 968
Investment in property,
plant and equipment 24 12 - 36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA is earnings before interest, income tax, depreciation,
litigation settlement and provision for non-core operation.
Note 21. Subsequent Events
Rights Offering
On January 6, 2009, Brookfield completed the standby commitment under
the Offering through which it purchased an additional 163 million common
shares and 81.5 million warrants for gross proceeds of approximately
$120 million (CAD $144 million). The standby fee of $2 million was paid
to Brookfield subsequent to year-end. Upon satisfaction of the standby
commitment, Brookfield holds a total of 325 million common shares or
approximately 75% of the total number of the Company's common shares
issued and outstanding and 131 million warrants. Prior to the completion
of the standby commitment, and after Brookfield had subscribed for shares
under the Offering pursuant to its basic subscription privilege,
Brookfield's interest was approximately 60% (note 9).
Joint Venture Agreement
On December 1, 2008 the Company and Kruger Inc. announced an agreement
in principle to form a 50/50 joint venture to combine their respective
hardwood plywood businesses. As of December 31, 2008, a Memorandum of
Understanding has been signed and the transaction is expected to close in
the first quarter of 2009.
For further information: Anita Veel, Director, Corporate & Regulatory
Affairs, (416) 643-8838, anita.veel@norbord.com
