Hardwoods Distribution Income Fund Announces 2010 First Quarter Results

TRADING SYMBOL: Toronto Stock Exchange - HWD.UN

Hardwoods Distribution Income Fund will hold a conference call to discuss first quarter financial results on May 10, 2010 at 8:00 a.m. Pacific Time (11:00 am Eastern). The call can be accessed by dialing: (888) 231 - 8191 or (647) 427 - 7450. A replay will be available until May 24, 2010 at: 800-642- 1687 or 416-849-0833 (Passcode 71777571).

LANGLEY, BC, May 7 /CNW/ - Hardwoods Distribution Income Fund (the "Fund") today reported financial results for the three months ended March 31, 2010. The Fund's results are based on the performance of Hardwoods Specialty Products LP and Hardwoods Specialty Products USLP (collectively "Hardwoods") - one of North America's largest wholesale distributors of hardwood lumber and related sheet good products. Hardwoods operates 27 distribution centres in the US and Canada.

    
    First Quarter Overview
    (For the three months ended March 31, 2010)

    -   The Fund generated Distributable Cash of $1.0 million or $0.053 per
        unit, an increase of 36.5% from $0.7 million or $0.039 per unit
        generated in Q1 2009

    -   Excluding the impact of foreign exchange rates, underlying sales
        increased by 1.4% in the first quarter compared to the same period in
        the prior year. After reflecting the negative impact of a stronger
        Canadian dollar, reported sales were 9.2% lower than in Q1 2009

    -   Gross profit percentage of 17.8% declined from 18.0% in Q1 2009

    -   Selling and administrative expenses decreased by 14.3% to $7.5
        million, from $8.7 million in Q1 2009

    -   First quarter EBITDA increased to $1.2 million from $0.9 million in
        Q1 2009

    -   Net earnings of $0.4 million compared to net earnings of $1.9 million
        in Q1 2009
    

"The first quarter of 2010 brought encouraging developments with signs of stabilization in demand, stronger hardwood lumber prices and improving EBITDA and Distributable Cash results for the Fund," said Maurice Paquette, Hardwoods' President and CEO.

"Our underlying sales increased by 1.4% compared to the first quarter a year ago, and our total sales were 16.6% higher than the sales we reported in the fourth quarter of 2009. This was the first sequential quarter-over-quarter sales gain we've seen in our business in two years and it suggests that hardwood demand is starting to catch up with the stabilizing trend that emerged in the residential construction market midway through 2009. Demand for hardwood products typically lags the residential construction cycle by between six and twelve months because our products are used in the final stages of house construction," added Mr. Paquette.

"Our sales also benefited from an increase in hardwood lumber pricing, which rose 8.7% compared to the same period in 2009. This increase was largely driven by mill supply shortages, as most manufacturers are operating with minimal inventories."

"While strengthening our underlying sales, we continued to reduce our costs in the first quarter. Sales and administrative expense fell by 14.3%, reflecting a positive foreign exchange impact on costs at our US operations and the benefits of last year's branch rationalizations. This, together, with the stronger underlying sales, helped us increase EBITDA by 27.6% and Distributable Cash by 36.5% compared to the first quarter of 2009."

"While these were positive developments, the overall business environment remained challenging in the first quarter. Our Canadian sales were lower year- over-year, and our total sales declined as a result of the impact of a stronger Canadian dollar on translation of our US sales results. Competition also remained intense for available business, putting pressure on our gross profit margins. As we said at the outset of the year, we expect that any market recovery this year will be slow and uneven, and we fully anticipate continuing challenges. We will continue to manage the business carefully as we prepare for a more significant recovery in 2011 and beyond," said Mr. Paquette.

    
    Summary of Results

    Selected Unaudited Consolidated Financial Information
    (in thousands of Canadian dollars)
                                                  Three months  Three months
                                                         Ended         Ended
                                                      March 31,     March 31,
                                                          2010          2009
    -------------------------------------------------------------------------
    Total sales                                    $    48,498   $    53,422
      Sales in the US (US$)                             27,703        26,503
      Sales in Canada                                   19,685        20,437
    Gross profit                                         8,629         9,616
      Gross profit %                                     17.8%         18.0%
    Selling and administrative expenses                 (7,460)       (8,700)
    -------------------------------------------------------------------------
    Earnings before interest, taxes, depreciation
     and amortization and non-controlling
     interest ("EBITDA")                           $     1,169   $       916
      Add (deduct):
        Amortization                                      (182)         (225)
        Interest                                          (145)         (152)
        Non-cash foreign currency gains (losses)           (57)          332
        Non-controlling interest                          (157)          474
        Income tax recovery (expense)                     (214)          522
    -------------------------------------------------------------------------
    Net earnings for the period                    $       414   $     1,867
    -------------------------------------------------------------------------
    Basic and fully diluted earnings
     per Class A Unit                              $     0.029   $     0.130
    Average Canadian dollar exchange
     rate for one US dollar                             1.0401        1.2446
    -------------------------------------------------------------------------



    Distributable Cash and Cash Distributions

    Selected Unaudited Consolidated Financial Information
    (in thousands of dollars except per unit amounts)

                                                  Three months  Three months
                                                         Ended         Ended
                                                      March 31,     March 31,
                                                          2010          2009
                                                          ----          ----

    Net cash provided by operating activities      $    (3,785)  $     5,414
    Increase (decrease) in non-cash
     operating working capital                           4,763        (4,704)
                                                  ------------- -------------
    Cash flow from operations before changes
     in non-cash operating working capital                 978           710
    Capital expenditures                                   (16)           (5)
                                                  ------------- -------------
    Distributable Cash                             $       962  $        705
                                                  ------------- -------------
                                                  ------------- -------------
    Distributions relating to the period:
      Class A Units                                $         -   $         -
      Class B Units(1)                                       -             -
                                                  ------------- -------------
      Total Units                                  $         -   $         -
                                                  ------------- -------------
                                                  ------------- -------------

    -------------------------------------------------------------------------

    Outstanding units and per unit amounts:
      Class A Units outstanding                     14,410,000    14,410,000
      Class B Units outstanding                      3,602,500     3,602,500
                                                  ------------- -------------
      Total Units outstanding                       18,012,500    18,012,500
                                                  ------------- -------------
                                                  ------------- -------------

    Distributable Cash per Total Units             $     0.053   $     0.039

    Distributions relating to the period:
      Class A Units                                $         -   $         -
      Class B Units(1)                             $         -   $         -
      Total Units                                  $         -   $         -

    Payout ratio(2)                                       0.0%          0.0%
    -------------------------------------------------------------------------

                                                March 23, 2004
                                                   to March 31,
                                                          2010
                                                          ----
    Cumulative since inception:
      Distributable Cash                                76,440
      Distributions relating to the period              66,754
      Payout ratio(2)                                    87.3%
    -------------------------------------------------------------------------

    (1) On January 10, 2006, Hardwoods Specialty Products LP and Hardwoods
        Specialty Products US LP, limited partnerships in each of which the
        Fund owns an 80% interest, announced that quarterly distributions
        were suspended on the Class B LP and Class B US LP units. The Class B
        LP units and Class B US LP units represent a 20% interest in
        Hardwoods Specialty Products LP and Hardwoods Specialty Products US
        LP, respectively. No distributions are to be paid on the Class B LP
        units and Class B US LP units unless distributions in stipulated
        minimum amounts are paid on the units in the limited partnerships
        held by the Fund, and in certain other circumstances. Accordingly, no
        distributions have been declared since the third quarter of 2005 to
        the non-controlling interests. No liability for distributions payable
        to the non-controlling interests is reflected in the March 31, 2010
        balance sheet.
    (2) Payout ratio measures the ratio of distributions by the Fund relating
        to the period to Distributable Cash for the period.
    

Results from Operations - Three Months Ended March 31, 2010

For the three months ended March 31, 2010, the Fund and its subsidiaries generated total Distributable Cash available to Class A and Class B Unitholders of $1.0 million, or $0.053 per unit. By comparison, the Fund generated total Distributable Cash of $0.7 million or $0.039 per unit in the same period of 2009. No distributions were paid to the public unitholders (Class A Units) or to the Class B Units in either period.

First quarter 2010 sales were $48.5 million, down 9.2% compared to $53.4 million during the same period in 2009. The decline in total sales reflects a 10.6% decrease due to the negative effect of a stronger Canadian dollar, partially offset by a 1.4% increase in underlying sales activity. First quarter sales in the United States, as measured in US dollars, increased 4.5%, while sales in Canada, as measured in Canadian dollars, decreased by 3.7%.

First quarter gross profit was $8.6 million, compared to $9.6 million in Q1 2009. The change in gross profit reflects lower sales, as well as a decrease in gross profit percentage to 17.8% from 18.0% a year ago. The lower gross margin reflects the impact of intense competition in an environment of reduced overall market demand.

Selling and administrative ("S&A") expenses decreased by $1.2 million, or 14.3%, to $7.5 million, from $8.7 million in Q1 2009. This improvement reflects the $0.8 million positive foreign exchange impact of a stronger Canadian dollar on the conversion of S&A expenses at Hardwoods' US operations, and a one-time $0.3 million credit against S&A expenses related to proceeds from a lawsuit settlement received in the first quarter. As a percentage of sales, first quarter 2010 S&A expenses were 15.4% of sales, compared to $16.3% in 2009.

First quarter EBITDA increased to $1.2 million, from $0.9 million in 2009. The $0.3 million increase reflects the $1.2 million reduction in S&A expenses, partially offset by the $1.0 million decrease in gross profit.

The Fund reported net earnings of $0.4 million for the first three months of 2010, compared to net earnings of $1.9 million during the same period in 2009. The change in net earnings primarily reflects the $0.3 million increase in EBITDA, offset by a $0.4 million decrease in non-cash foreign currency gains, a $0.7 million decrease in recovery from the non controlling interest and a $0.7 million decrease in income tax recovery.

Outlook

Hardwoods' near-term outlook remains cautious despite recent signs of stabilization in hardwood demand and prices. US economic conditions are fragile, unemployment is high and the inventory of unsold new and used housing is still at historically high levels. In addition, many economists predict that the recent encouraging signs in the residential construction market could be tempered by higher mortgage rates, the recent expiry of the US government's home-buyers tax credit and the shadow inventory of US homes in early stages of mortgage payment delinquency and bank foreclosure. In Canada, mid-year implementation of the Harmonized Sales Tax is expected to make home buying more expensive in Ontario and British Columbia and could have a negative impact on Canadian construction activity. Hardwoods' risk of bad debt also remains elevated with many customers feeling the effects of the prolonged downturn. Overall, management is cautious in its expectations for 2010 and continues to believe that a more sustainable and robust market recovery will not occur prior to 2011.

In light of these expectations, tight management of expenses, cash and working capital will remain a key focus in 2010, with Hardwoods continuing to ensure that its distribution network and expenditures are appropriately aligned with market conditions. The company plans to remain proactive on the marketing front with continued sales force motivation and further investment in strategic product lines.

The Fund continues to prepare for a management transition in 2010, with President and CEO, Maurice Paquette planning to retire following a 36-year career with Hardwoods and its predecessor companies. The Board is currently conducting a search for Mr. Paquette's successor.

Non-GAAP Measures - EBITDA and Distributable Cash

References to "EBITDA" are to earnings before interest, income taxes, depreciation and amortization, mark-to-market adjustments on foreign currency contracts, goodwill and other intangible assets impairments, and the non- controlling interest in earnings. In addition to net income or loss, EBITDA is a useful supplemental measure of performance and cash available for distribution prior to debt service, changes in working capital, capital expenditures and income taxes.

References to "Distributable Cash" is to net cash provided by operating activities, before changes in non-cash operating working capital, less capital expenditures and contributions to any reserves that the Boards of Directors of Hardwoods' operating entities determine to be reasonable and necessary for the operation of the businesses owned by these entities.

Hardwoods believes that, in addition to net income or loss, EBITDA and Distributable Cash are each a useful supplemental measures of operating performance that may assist investors in assessing their investment in units of the Fund. Neither EBITDA nor Distributable Cash are earnings measures recognized by GAAP and they do not have a standardized meaning prescribed by GAAP. Investors are cautioned that EBITDA should not replace net income or loss (as determined in accordance with GAAP) as an indicator of our performance, nor should Distributable Cash replace cash flows from operating, investing and financing activities or as a measure of liquidity and cash flows. The Fund's method of calculating EBITDA and Distributable Cash may differ from the methods used by other issuers. Therefore, the Fund's EBITDA and Distributable Cash may not be comparable to similar measures presented by other issuers. For reconciliation between EBITDA and net income or loss as determined in accordance with GAAP, and for reconciliation between Distributable Cash and net cash provided by operating activities as determined in accordance with GAAP, please refer to the Management Discussion and Analysis ("MD&A") included in the Fund's 2010 First Quarter Report to Unitholders, which will be filed at www.sedar.com.

Additional guidance regarding disclosure of distributable cash and cash distributions was issued in 2007 in an interpretative release by the Canadian Institute of Chartered Accountants (the "CICA") in respect of "Standardized Distributable Cash in Income Trusts and other Flow Through Entities" and National Policy 41-201 of the Canadian Securities Administrators "Income Trusts and other Indirect Offerings" (collectively, the "Interpretative Guidance"). For disclosure and discussion of the Fund's Standardized Distributable Cash in accordance with the Interpretive Guidance, please refer to the MD&A included in the Fund's 2010 First Quarter Report to Unitholders, which will be filed at www.sedar.com.

About the Fund

Hardwoods Distribution Income Fund is an unincorporated, open-ended, limited purpose trust established to hold, indirectly, an 80% ownership interest in Hardwoods Specialty Products LP and Hardwoods Specialty Products USLP (collectively, "Hardwoods"). The Fund was launched on March 23, 2004, with the completion of an initial public offering of 14,410,000 shares.

About Hardwoods

Hardwoods is one of North America's largest distributors of high-grade hardwood lumber and sheet goods to the cabinet, moulding, millwork, furniture and specialty wood products industries. The company currently operates a network of 27 distribution centres in the U.S. and Canada.

Forward-Looking Information

Certain statements in this press release contain forward-looking information within the meaning of applicable securities laws in Canada ("forward-looking information"). The words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "will", "would" and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words.

The forward-looking information in this press release includes, but is not limited to: our belief that hardwood demand is starting to catch up with the stabilizing trend that emerged in the residential construction market midway through 2009; our belief that any market recovery this year will be slow and uneven, and we fully anticipate continuing challenges; our intention to continue to manage the business carefully as we prepare for a more significant recovery in 2011 and beyond; our belief that near-term outlook remains cautious despite recent signs of stabilization in hardwood demand and prices; our belief that US economic conditions are fragile; our belief that the risk of bad debt remains elevated with many customers feeling the effects of the prolonged downturn; our belief that a more sustainable and robust market recovery will not occur prior to 2011; our intention that tight management of expenses, cash and working capital will remain a key focus in 2010; our intention to continue to ensure that our distribution network and expenditures are appropriately aligned with market conditions and to remain proactive on the marketing front with continued sales force motivation and further investment in strategic product lines; and our intention to continue to prepare for a management transition in 2010, with President and CEO, Maurice Paquette planning to retire following a 36-year career with Hardwoods and its predecessor companies.

The forecasts and projections that make up the forward-looking information are based on assumptions which include, but are not limited to: there are no material exchange rate fluctuations between the Canadian and US dollar that affect our performance; the general state of the economy does not worsen; we do not lose any key personnel; there are no decreases in the supply of, demand for, or market values of hardwood lumber or sheet goods that harm our business; we do not incur material losses related to credit provided to our customers; our products are not subjected to negative trade outcomes; we are able to sustain our level of sales and EBITDA margins; we are able to grow our business long term and to manage our growth; there is no new competition in our markets that leads to reduced revenues and profitability; we do not become subject to more stringent regulations; importation of products manufactured with hardwood lumber or sheet goods does not increase and replace products manufactured in North America; our management information systems upon which we are dependent are not impaired; our insurance is sufficient to cover losses that may occur as a result of our operations; and, the financial condition and results of operations of our business upon which we are dependent is not impaired.

The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. The factors which could cause results to differ from current expectations include, but are not limited to: exchange rate fluctuations between the Canadian and US dollar could affect our performance; our results are dependent upon the general state of the economy; we depend on key personnel, the loss of which could harm our business; decreases in the supply of, demand for, or market values of hardwood lumber or sheet goods could harm our business; we may incur losses related to credit provided to our customers; our products may be subject to negative trade outcomes; we may not be able to sustain our level of sales or EBITDA margins; we may be unable to grow our business long term to manage any growth; competition in our markets may lead to reduced revenues and profitability; we may become subject to more stringent regulations; importation of products manufactured with hardwood lumber or sheet goods may increase, and replace products manufactured in North America; we are dependent upon our management information systems; our insurance may be insufficient to cover losses that may occur as a result of our operations; we are dependent upon the financial condition and results of operations of our business; our credit facilities affect our liquidity, contain restrictions on our ability to borrow funds, and impose restrictions on distributions that can be made by our operating limited partnerships; our future growth may be restricted by the payout of substantially all of our operating cash flow; and, other risks described in our Annual Information Form and our first quarter report to unitholders.

All forward-looking information in this news release is qualified in its entirety by this cautionary statement and, except as may be required by law, we undertake no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof.

    
    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Balance Sheets
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                                                      March 31,  December 31,
                                                          2010          2009
    -------------------------------------------------------------------------
                                                    (unaudited)

    Assets

    Current assets:
      Cash and cash equivalents                    $       195   $       463
      Accounts receivable (note 6)                      30,148        25,585
      Income tax recoverable                             2,209         2,286
      Inventory (note 5)                                23,877        23,901
      Prepaid expenses                                     689           878
      -----------------------------------------------------------------------
                                                        57,118        53,113

    Long-term receivables (note 6)                       1,794         1,883

    Property, plant and equipment                        1,122         1,291

    Deferred financing costs                               348           396

    Future income taxes                                 17,087        17,587

    -------------------------------------------------------------------------
                                                   $    77,469   $    74,270
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity

    Current liabilities:
      Bank indebtedness (note 7)                   $     8,130   $     4,960
      Accounts payable and accrued liabilities           5,706         4,988
      -----------------------------------------------------------------------
                                                        13,836         9,948

    Deferred gain on sale-leaseback
     of land and building                                  383           416
    Non-controlling interests (note 8)                   8,502         8,748

    Unitholders' equity:
      Fund units                                       133,454       133,454
      Deficit                                          (59,784)      (60,198)
      Accumulated other comprehensive loss             (18,922)      (18,098)
    -------------------------------------------------------------------------
                                                        54,748        55,158
    Contingencies (note 14)

    -------------------------------------------------------------------------
                                                   $    77,469   $    74,270
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Statement of Operations and Deficit
    (Unaudited)
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                                                  Three months  Three months
                                                         Ended         Ended
                                                      March 31,     March 31,
                                                          2010          2009
    -------------------------------------------------------------------------

    Sales                                          $    48,498   $    53,422
    Cost of sales                                       39,869        43,806
    -------------------------------------------------------------------------
    Gross profit                                         8,629         9,616

    Expenses:
      Selling and administrative                         7,460         8,700
      Amortization:
        Plant and equipment                                156           224
        Deferred financing costs                            45            24
      Deferred gain on sale -
       leaseback of land and building                      (19)          (23)
      Interest                                             145           152
      Foreign exchange losses (gains)                       57          (332)
      -----------------------------------------------------------------------
                                                         7,844         8,745
    -------------------------------------------------------------------------

    Earnings before non-controlling interests
     and income taxes                                      785           871

    Non-controlling interests (note 8)                     157          (474)
    -------------------------------------------------------------------------

    Earnings before income taxes                           628         1,345

    Income expense (recovery):
      Current                                               26             5
      Future                                               188          (527)
      -----------------------------------------------------------------------
                                                           214          (522)
    -------------------------------------------------------------------------

    Net earnings for the period                            414         1,867

    Deficit, beginning of period                       (60,198)      (49,958)

    Distributions declared to Unitholders                    -             -
    -------------------------------------------------------------------------
    Deficit, end of period                           $ (59,784)    $ (48,091)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted earnings per Unit              $    0.03     $    0.13
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average number of Units outstanding    14,410,000    14,410,000
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Statement of Comprehensive Income (Loss)
    (Unaudited)
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                                                  Three months  Three months
                                                         Ended         Ended
                                                      March 31,     March 31,
                                                          2010          2009
    -------------------------------------------------------------------------

    Net earnings for the period                    $       414   $     1,867

    Other comprehensive income (loss):
      Unrealized gain (loss) on translation of
       self-sustaining foreign operations                 (824)        1,050
      -----------------------------------------------------------------------
      Other comprehensive income (loss)                   (824)        1,050

    -------------------------------------------------------------------------
    Comprehensive income (loss)                    $      (410)  $     2,917
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Consolidated Statement of Accumulated Other Comprehensive Loss
    (Unaudited)
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                                                  Three months  Three months
                                                         Ended         Ended
                                                      March 31,     March 31,
                                                          2010          2009
    -------------------------------------------------------------------------

    Accumulated other comprehensive loss,
     beginning of period                           $   (18,098)  $   (14,724)

    Other comprehensive income (loss)                     (824)        1,050

    -------------------------------------------------------------------------

    Accumulated other comprehensive loss,
     end of period                                 $   (18,922)  $   (13,674)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Statements of Cash Flows
    (Unaudited)
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                                                  Three months  Three months
                                                         Ended         Ended
                                                      March 31,     March 31,
                                                          2010          2009
    -------------------------------------------------------------------------

    Cash flows provided by (used in)
     operating activities:
      Net earnings for the period                  $       414   $     1,867
      Items not involving cash:
        Amortization                                       201           248
        Imputed interest income in employee loans           (7)          (39)
        Deferred gain on sale-leaseback of land
         and building                                      (19)          (23)
        Gain on sale of property, plant and
         equipment                                         (13)          (10)
        Unrealized foreign exchange losses (gains)          57          (332)
        Non-controlling interests                          157          (474)
        Future income taxes                                188          (527)
      -----------------------------------------------------------------------
                                                           978           710
      Change in non-cash operating
       working capital (note 9)                         (4,763)        4,704
      -----------------------------------------------------------------------
      Net cash provided by (used in) operating
       activities                                       (3,785)        5,414

    Cash flows provided by (used in) investing
     activities:
      Additions to property, plant and equipment           (16)           (5)
      Proceeds on disposal of property, plant
       and equipment                                        15            10
      Decrease in long-term receivables, net               163           186
      -----------------------------------------------------------------------
      Net cash provided by investing activities            162           191

    Cash flows provided by (used in)
     financing activities:
      Increase (decrease) in bank indebtedness           3,355        (5,103)
      Distributions paid to Unitholders                      -             -
      -----------------------------------------------------------------------
      Net cash provided by (used in) financing
       activities                                        3,355        (5,103)
    -------------------------------------------------------------------------

    Increase (decrease) in cash                           (268)          502

    Cash, beginning of period                              463            85

    -------------------------------------------------------------------------
    Cash, end of period                            $       195   $       587
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary information (cash amounts):
      Interest paid                                $       145   $       152
      Income taxes paid                                     60             -
      Income taxes received                                  -         1,800
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.


    1.  Nature of operations:

        Hardwoods Distribution Income Fund (the "Fund") is an unincorporated,
        open ended, limited purpose trust established under the laws of the
        Province of British Columbia on January 30, 2004 by a Declaration of
        Trust. The Fund commenced operations on March 23, 2004 when it
        completed an initial public offering of Units and acquired an 80%
        interest in a hardwood lumber and sheet goods distribution business
        in North America (the "Business") from affiliates of Sauder
        Industries Limited ("SIL"). The Fund holds, indirectly, 80% of the
        outstanding limited partnership units of Hardwoods Specialty Products
        LP ("Hardwoods LP") and Hardwoods Specialty Products US LP
        ("Hardwoods USLP"), limited partnerships established under the laws
        of the Province of Manitoba and the state of Delaware, respectively.

    2.  Basis of presentation:

        The Fund prepares its consolidated interim financial statements in
        accordance with Canadian generally accepted accounting principles on
        a basis consistent with those used and described in the annual
        consolidated financial statements for the year ended December 31,
        2009. The disclosures contained in these consolidated interim
        financial statements do not include all the requirements of Canadian
        generally accepted accounting principles for annual financial
        statements, and accordingly, these consolidated interim financial
        statements should be read in conjunction with the annual consolidated
        financial statements for the period ended December 31, 2009. Certain
        comparative figures have been restated to conform to the current
        period's financial statement presentation.

    3.  Adoption of new accounting standards:

        The CICA will transition Canadian generally accepted accounting
        principles ("GAAP") for publicly accountable entities to
        International Financial Reporting Standards ("IFRS"). The Fund's
        consolidated financial statements are to be prepared in accordance
        with IFRS for the fiscal year commencing January 1, 2011. While IFRS
        uses a conceptual framework similar to Canadian GAAP, there are
        significant differences on recognition, measurement, and disclosures.
        While the effects of IFRS have not yet been fully determined, the
        Fund has identified a number of key areas which are likely to be
        impacted, including: deferred gain on sale-leaseback of land and
        building; accumulated other comprehensive loss; property plant and
        equipment, leased vehicles, and potentially the classification of
        non-controlling interests and Fund units. In addition, financial
        statement presentation changes and additional disclosure requirements
        are anticipated under IFRS. The adoption of IFRS is not expected to
        have a material impact on the Fund's reported cash flows.

    4.  Capital Disclosures:

        The Fund's policy is to maintain a strong capital base so as to
        maintain investor, creditor and market confidence and to sustain
        future development of the business. The Fund considers its capital to
        be bank indebtedness (net of cash) plus Unitholders' equity. The
        Fund's capitalization is as follows:

        ---------------------------------------------------------------------
                                                      March 31,  December 31,
                                                          2010          2009
        ---------------------------------------------------------------------

        Cash and cash equivalents                  $      (195)  $      (463)
        Bank indebtedness (note 7)                       8,130         4,960
        ---------------------------------------------------------------------
        Net debt                                         7,935         4,497

        Unitholders' equity                             54,748        55,158

        ---------------------------------------------------------------------
        Total capitalization                       $    62,683   $    59,655
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Fund monitors on a monthly basis the ratio of net debt to
        earnings before interest, income taxes, depreciation and amortization
        ("EBITDA"). Net debt to EBITDA serves as an indicator of the Fund's
        financial leverage. The U.S. credit facility is subject to a minimum
        trailing EBITDA covenant that is only applicable in the event the
        U.S. subsidiary's unused credit availability falls below US $4.0
        million. The Canadian credit facility is subject to a Fixed Charge
        Coverage Ratio ("FCCR") calculated as (EBITDA - capital expenditures
        - cash taxes)/(interest expense) which cannot be less than 1.1 for
        Hardwoods LP.

        The terms of the agreements with the Fund's lenders provide that
        distributions cannot be made to its unitholders in the event that its
        subsidiaries do not meet the above covenant requirements as well as
        certain additional credit ratios. The Fund's operating subsidiaries
        were compliant with all required credit ratios as at March 31, 2010,
        and accordingly there were no restrictions on distributions arising
        from compliance with financial covenants.

        Distributions are one of the ways the Fund manages its capital.
        Distributions of the Fund's available cash are made to the maximum
        extent possible, subject to reasonable reserves established by the
        Trustees of the Fund. Distributions are made by the Fund having given
        consideration to a variety of factors including the outlook for the
        business, financial leverage, and the ratio of distributions to
        available cash of the Fund.

        There were no changes in the Fund's approach to capital management
        during the period ended March 31, 2010. On November 3, 2008 the
        Trustees of the Fund suspended further monthly distributions until
        such time as market conditions and the Fund's generation of cash has
        improved.

    5.  Inventory:

        ---------------------------------------------------------------------
                                                      March 31,  December 31,
                                                          2010          2009
        ---------------------------------------------------------------------

        Lumber                                     $     9,346   $     8,224
        Sheet Goods                                     11,354        12,171
        Specialty                                        1,733         2,099
        Goods in-transit                                 1,444         1,407

        ---------------------------------------------------------------------
                                                   $    23,877   $    23,901
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During the three months ended March 31, 2010 inventory write-downs
        totaling $0.3 million (2009 - $0.5 million) were recorded to reduce
        certain inventory items to their net realizable value.

        Cost of sales for the three months ended March 31, 2010 were $39.9
        million, which included $38.3 million of costs associated with
        inventory (2009 - $43.8 million and $42.6 million respectively). The
        other $1.6 million (2009 - $1.2 million) related principally to
        freight and other related expenses.

    6.  Receivables:

        The following is a breakdown of the Fund's current and long-term
        receivables and represents the Fund's exposure to credit risk related
        to its financial assets:

        ---------------------------------------------------------------------
                                                      March 31,  December 31,
        Accounts receivable                               2010          2009
        ---------------------------------------------------------------------

        Trade accounts receivable - Canada         $    11,649   $     9,756
        Trade accounts receivable - United States       19,643        16,117
        Sundry receivable                                  209           203
        Current portion of long-term receivables           744           919
        ---------------------------------------------------------------------
                                                        32,245        26,995

        Less: allowance for doubtful accounts            2,097         1,410

        ---------------------------------------------------------------------
                                                   $    30,148   $    25,585
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------



        ---------------------------------------------------------------------
                                                      March 31,  December 31,
        Long-term receivables                             2010          2009
        ---------------------------------------------------------------------

        Employee housing loans                     $       398   $       450
        Customer notes                                   1,653         1,834
        Security deposits                                  487           518
        ---------------------------------------------------------------------
                                                         2,538         2,802

        Less: current portion, included in
         accounts receivable                               744           919

        ---------------------------------------------------------------------
                                                   $     1,794   $     1,883
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        The aging of trade receivables was:
        ---------------------------------------------------------------------
                                                      March 31,  December 31,
                                                          2010          2009
        ---------------------------------------------------------------------

        Current                                    $    20,225   $    14,557

        Past due 31-60 days                              4,968         5,283
        Past due 61-90 days                              2,119         2,181
        Past due 90+ days                                3,980         3,852

        ---------------------------------------------------------------------
                                                   $    31,292   $    25,873
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Fund determines its allowance for doubtful accounts based on its
        best estimate of the net recoverable amount by customer account.
        Accounts that are considered uncollectable are written off. The total
        allowance at March 31, 2010 was $2.1 million (December 31, 2009 -
        $1.4 million). The amount of the allowance is considered sufficient
        based on the past experience of the business, the security the Fund
        has in place for past due accounts and management's regular review
        and assessment of customer accounts and credit risk.

    7.  Bank indebtedness:

        ---------------------------------------------------------------------
                                                      March 31,  December 31,
                                                          2010          2009
        ---------------------------------------------------------------------

        Checks issued in excess of funds
         on deposit                                $       930   $     1,077
        Credit facility, Hardwoods LP                    1,067         1,945
        Credit facility, Hardwoods USLP
         (March 31, 2010 - US$6,038;
         December 31, 2009 - US$1,844)                   6,133         1,938

        ---------------------------------------------------------------------
                                                   $     8,130   $     4,960
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Bank indebtedness consists of checks issued in excess of funds on
        deposit and advances under operating lines of credit available to
        Hardwoods LP and Hardwoods USLP (the "Credit Facilities").

        Each of the Credit Facilities is separate, is not guaranteed by the
        other partnership, and does not contain cross default provisions to
        the other Credit Facility. The Credit Facility made available to
        Hardwoods LP is secured by a first security interest in all of the
        present and after acquired property of Hardwoods LP and its operating
        subsidiaries, and by the LP Units held by a subsidiary of the Fund
        and SIL. The Credit Facility made available to Hardwoods USLP is
        secured by a first security interest in all of the present and after
        acquired property of Hardwoods USLP and by the USLP Units held by a
        subsidiary of the Fund and by SIL.

        The Hardwoods LP Credit Facility has a three year term, provides
        financing up to $15.0 million and has a maturity date of August 7,
        2012. The Hardwoods USLP Credit Facility has a three year term,
        provides financing of up to US$ 25.0 million and has a maturity date
        of September 30, 2011. Each facility is payable in full at maturity.
        The Hardwoods LP Credit Facility is a revolving credit facility which
        Hardwoods LP may terminate subject to prepayment penalties of
        $225,000 if terminated in the first 12 months of the credit facility
        term, $150,000 if terminated in the second 12 months of the credit
        facility term, and $75,000 thereafter if terminated prior to the
        maturity date of the credit facility. The Hardwoods USLP Credit
        Facility may be terminated by Hardwoods USLP without prepayment
        penalties. The Credit Facilities bear interest at a floating rate
        based on the Canadian or US prime rate (as the case may be), LIBOR or
        bankers acceptance rates plus, in each case, an applicable margin.
        Letters of credit are also available under the Credit Facilities on
        customary terms for facilities of this nature. The Credit
        Facilities' rates vary with the ratio of EBITDA minus capital
        expenditures and cash taxes, divided by interest. Commitment fees and
        standby charges usual for borrowings of this nature were and are
        payable.

        The amount made available under the Credit Facility to Hardwoods LP
        from time to time is limited to the extent of 85% of the book value
        of accounts receivable and the lesser of 60% of the book value or 85%
        of appraised value of inventories with the amount based on
        inventories not to exceed 60% of the total amount to be available.
        Certain identified accounts receivable and inventories are excluded
        from the calculation of the amount available under the Credit
        Facility. Hardwoods LP is required to maintain a fixed charge
        coverage ratio (calculated as the ratio of EBITDA less cash taxes
        less capital expenditures, divided by interest) of not less than 1.1
        to 1. At March 31, 2010 the Hardwoods LP credit facility had $10.6
        million of additional borrowing capacity.

        The amount to be made available under the Credit Facility to
        Hardwoods USLP from time to time is limited to the extent of 85% of
        the book value of certain accounts receivable and 50% of the book
        value of inventories (with certain accounts receivable and inventory
        being excluded). Hardwoods USLP is required to maintain a minimum
        trailing EBITDA covenant until December 31, 2010, and a fixed charge
        coverage ratio (calculated as EBITDA less cash taxes less capital
        expenditures, divided by interest plus distributions) of 1.0 to 1
        thereafter. These covenants of the Hardwoods USLP Credit Facility do
        not need to be met however when the unused availability under the
        credit facility is in excess of US$4.0 million. At March 31, 2010 the
        Hardwoods USLP credit facility had unused availability of $8.8
        million (US$8.7 million).

    8.  Non-controlling interests:

        ---------------------------------------------------------------------

        Balance, January 1, 2010                                 $     8,748

        Interest in earnings:
          Interest in earnings before taxes                              157

          -------------------------------------------------------------------
                                                                       8,905

        Foreign currency translation adjustment
         of non-controlling interest in Hardwoods
         USLP                                                           (403)

        ---------------------------------------------------------------------
        Balance, end of period                                   $     8,502
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The previous owners of the Business (note 1) have retained a 20%
        interest in Hardwoods LP and Hardwoods USLP through ownership of
        Class B Hardwoods LP units ("Class B LP Units") and Class B Hardwoods
        USLP units ("Class B USLP Units"), respectively. The Fund owns an
        indirect 80% interest in Hardwoods LP and Hardwoods USLP through
        ownership of all Class A Hardwoods LP units ("Class A LP Units") and
        Class A Hardwoods USLP units ("Class A USLP Units"), respectively.

        The Class A LP Units and Class B LP Units and the Class A USLP Units
        and Class B USLP Units, respectively, have economic and voting rights
        that are equivalent in all material respects except distributions on
        the Class B LP Units and Class B USLP Units are subject to the
        subordination arrangements described below until the date (the
        "Subordination End Date") on which:

        -  the consolidated Adjusted EBITDA, as defined in the Subordination
           Agreement dated March 23, 2004, of the Fund for the 12 month
           period ending on the last day of the month immediately preceding
           such date is at least $21,300,000; and

        -  cash distributions of at least $29,540,000 ($2.05 per Unit) have
           been paid on the Units and a combined amount of cash advances or
           distributions of at least $7,385,000 has been paid on the Class B
           LP Units and Class B USLP Units, being $2.05 per combined Class B
           LP and Class B USLP Units (as adjusted for issuances, redemptions
           and repurchases of Units, LP Units and USLP Units subsequently
           and by converting the cash distributions or advances by Hardwoods
           USLP on the USLP Units at the rate of exchange used by the Fund
           to convert funds received by it in US dollars into Canadian
           dollars) for the 24 month period ending on the last day of the
           month immediately preceding such date.

        The Subordinated End Date had not occurred at March 31, 2010.

        Prior to the Subordination End Date, advances and distributions on
        the LP Units and the USLP Units will be made in the following order
        of priority:

        -  At the end of each month, cash advances or distributions will be
           made to the holders of Class A LP Units and Class A USLP Units in
           a combined amount that is sufficient to provide available cash to
           the Fund to enable the Fund to make cash distributions upon the
           Units for such month at least equal to $0.08542 per Unit or, if
           there is insufficient available cash to make distributions or
           advances in such amount, such lesser amount as is available as
           determined by the board of directors of the general partners;

        -  At the end of each fiscal quarter of Hardwoods LP and Hardwoods
           USLP, including the fiscal quarter ending on the fiscal year end,
           available cash of Hardwoods LP and Hardwoods USLP will be advanced
           or distributed in the following order of priority:

           -  First, in payment of the monthly cash advance or distribution
              to the holders of Class A LP Units and Class A USLP Units as
              described above, for the month then ended;

           -  Second, to the holders of Class A LP Units and Class A USLP
              Units, to the extent that the combined monthly cash advances or
              distributions in respect of the 12 month period then ended (and
              not, for greater certainty, in any previous 12 month period) on
              Class A LP Units and Class A USLP Units were not made or were
              made in amounts less than a combined amount at least equal to
              $1.025 per Unit, the amount of any such deficiency. As of March
              31, 2010, the amount of such deficiency was $14.8 million (2009
              $10.5 million);

           -  Third, to the holders of Class B LP Units and Class B USLP
              Units in a combined amount for one Class B LP Unit and one
              Class B USLP Unit equal, on a pro-rated basis, to the combined
              amount advanced or distributed on one Class A LP Unit and one
              Class A USLP Unit during such fiscal quarter or, if there is
              insufficient available cash to make advances or distributions
              in such amount, such lesser amount as is available;

           -  Fourth, to the holders of Class B LP Units and Class B USLP
              Units, to the extent only that combined advances or
              distributions in respect of any fiscal quarter(s) during the 12
              month period then ended (and not, for greater certainty, in any
              previous 12 month period) on one Class B LP Unit and one Class
              B USLP Unit were not made, or were made in amounts less, on a
              pro-rated basis, that the combined amount advanced or
              distributed on one Class A LP Unit and one Class A USLP Unit
              during such 12 month period, the amount of such deficiency and

           -  Fifth, to the extent of any excess, to the holders of the Class
              A LP Units and Class B LP Units and Class A USLP Units and
              Class B USLP Units, respectively, so that the combined advances
              or distributions on one Class A LP Unit and one Class A USLP
              Unit are the same as the combined advances or distribution on
              one Class B LP Unit and one Class B USLP Unit in respect of the
              12 month period then ended (and not, for greater certainty, any
              previous 12 month period).

        After the Subordination End Date, the holders of the Class B LP Units
        and Class B USLP Units will generally be entitled to effectively
        exchange all or a portion of their Class B LP Units and Class B USLP
        Units together for up to 3,602,500 Units of the Fund, representing
        20% of the issued and outstanding Units of the Fund on a fully
        diluted basis. In the event the Fund enters into an agreement in
        respect of an acquisition or a take-over bid of the Fund, the holders
        of the Class B LP Units and Class B USLP Units will be entitled to
        exchange such units for Units of the Fund.

    9.  Changes in non-cash operating working capital and additional cash
        flow disclosures:

        ---------------------------------------------------------------------
                                                  Three months  Three months
                                                         ended         ended
                                                      March 31,     March 31,
                                                          2010          2009
        ---------------------------------------------------------------------

        Accounts receivable                        $    (5,296)  $    (3,910)
        Income taxes recoverable/payable                     -         1,731
        Inventory                                         (487)        3,362
        Prepaid expenses                                   175           199
        Accounts payable and accrued liabilities           845         3,322

        ---------------------------------------------------------------------
                                                   $    (4,763)  $     4,704
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        CICA 1540, Cash Flow Statements, require entities to disclose total
        cash distributions on financial instruments classified as equity in
        accordance with a contractual agreement and the extent to which total
        cash distributions are non-discretionary. The Fund has no contractual
        requirement to pay cash distributions to Unitholders' of the Fund.
        During the three month periods ended March 31, 2010 and March 31,
        2009 no discretionary cash distributions were paid to Unitholders.

    10. Segment disclosure:

        Information about geographic areas is as follows:

        ---------------------------------------------------------------------
                                                  Three months  Three months
                                                         ended         ended
                                                      March 31,     March 31,
                                                          2010          2009
        ---------------------------------------------------------------------

        Revenue from external customers:
          Canada                                   $    19,685   $    20,437
          United States                                 28,813        32,985

        ---------------------------------------------------------------------
                                                   $    48,498   $    53,422
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        ---------------------------------------------------------------------
                                                      March 31,  December 31,
                                                          2010          2009
        ---------------------------------------------------------------------
        Property, plant and equipment:
          Canada                                   $       396   $       450
          United States                                    726           841

        ---------------------------------------------------------------------
                                                   $     1,122   $     1,291
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    11. Pensions:

        Hardwoods USLP maintains a defined contribution 401 (k) retirement
        savings plan (the "USLP Plan"). The assets of the USLP Plan are held
        and related investment transactions are executed by the Plan's
        Trustee, ING National Trust, and, accordingly, are not reflected in
        these consolidated financial statements. During the three months
        ended March 31, 2010, Hardwoods USLP contributed and expensed $59,618
        (US$57,320) (three months ended March 31, 2009 - $68,837 (US$55,309))
        in relation to the USLP Plan.

        Hardwoods LP does not maintain a pension plan. Hardwoods LP does,
        however, administer a group registered retirement savings plan ("LP
        Plan") that has a matching component whereby Hardwoods LP makes
        contributions to the LP Plan which match contributions made by
        employees up to a certain level. The assets of the LP Plan are held
        and related investment transactions are executed by LP Plan's
        Trustee, Sun Life Financial Trust Inc., and, accordingly, are not
        reflected in these consolidated financial statements. During the
        three months ended March 31, 2010, Hardwoods LP contributed and
        expensed $64,168 (three months ended March 31, 2009 - $49,852) in
        relation to the LP Plan.

    12. Related party transactions:

        For the three months ended March 31, 2010, sales of $127,702 (three
        months ended March 31, 2009 - $125,734) were made to affiliates of
        SIL, and the Fund made purchases of $27,542 (three months ended March
        31, 2009 - $7,111) from affiliates of SIL. All these sales and
        purchases took place at prevailing market prices.

    13. Seasonality:

        The Fund is subject to seasonal influences. Historically the first
        and fourth quarters are seasonally slower periods for construction
        activity and therefore demand for hardwood products.

    14. Contingencies:

        The Fund and its subsidiaries are subject to legal proceedings that
        arise in the ordinary course of its business. Management is of the
        opinion, based upon information presently available, that it is
        unlikely that any liability, to the extent not provided for through
        insurance or otherwise, would be material in relation to the Fund's
        consolidated financial statements.
    

%SEDAR: 00020372E

SOURCE HARDWOODS DISTRIBUTION INCOME FUND

For further information: For further information: Rob Brown, Chief Financial Officer, Phone: (604) 881-1990, Fax: (604) 881-1995, Email: robbrown@hardwoods-inc.com

Organization Profile

HARDWOODS DISTRIBUTION INCOME FUND

More on this organization


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890