Hardwoods Distribution Income Fund Announces 2009 Third Quarter Results
TRADING SYMBOL:
Hardwoods Distribution Income Fund will hold a conference call and
webcast to discuss third quarter and first nine months financial results
on
call can be accessed by dialing: 1-877-974-0451 or 416-644-3430. A replay
will be available until
416-640-1917 (Passcode 4179460 followed by the number sign).
LANGLEY, BC,
Third Quarter Overview (For the three months ended September 30, 2009) - Third quarter revenue declined 25.2% to $46.4 million year-over-year - Gross profit percentage increased to 18.5% from 17.7% in Q3 2008 - Selling and administrative (S&A) expenses decreased by 19.3% or $2.0 million to $8.0 million, from $10.0 million in Q3 2008 - Third quarter EBITDA, net earnings and distributable cash were lower year-over-year - The Fund reduced bank indebtedness (net of cash) by $2.6 million in the third quarter, and by $10.6 million year-to-date, ending the quarter with just $6.9 million of bank indebtedness (net of cash)
"We increased our gross profit margin, protected our market share and strengthened our balance sheet during the third quarter of 2009, as we entered what we believe is the final phase of market downturn that began three years ago," said
"Over the past ten quarters, demand and prices for our products have suffered as US residential construction has fallen from a peak of about 2.3 million housing starts at the beginning of 2006, to the current depressed rate of less than 0.6 million annual starts. A weakened North American economy has further impacted our business by reducing demand for other products that use hardwood. While we are now seeing signs that housing starts are finally starting to stabilize, our own results typically lag the construction market by nine-to-twelve months because hardwood products are used in the finishing stages of construction. Accordingly, our customers continue to be affected by the declining curve in the residential construction market and third quarter sales revenue and product prices remained well below last year's levels," added
"Despite these challenges, the third quarter brought several successes. Our efforts to align our branch network and cost structure with softer market conditions resulted in significantly lower S&A expense. We also continued to protect our market share by introducing innovative new products and attracting new customers to help mitigate the impact of losing customers that have gone out of business."
"On the finance front, we continued to strengthen our balance sheet. As at
"As a result of these efforts, we fully expect to emerge from this downturn in sound financial condition. We are currently operating just above EBITDA breakeven despite the loss of nearly half of our sales since the market peak in 2006, and our balance sheet is significantly strengthened with low bank indebtedness backed by significant working capital assets."
"It is important to note that we anticipate one, and possibly two, more quarters of declining results as we work through the final phase of the downturn and enter our seasonally slowest quarters. However, our longer-term outlook anticipates a gradual market improvement through 2010, with more significant growth in 2011. In the near term, we will continue to emphasize tight management of our business, but aggressive cost cutting will become less of a focus. Our emphasis will instead shift to stabilizing the business as we prepare for the eventual market recovery," said
Summary of Results Selected Unaudited Consolidated Financial Information (in thousands of Canadian dollars except where noted) 3 months 3 months 9 months 9 months ended ended ended ended September September September September 30, 2009 30, 2008 30, 2009 30, 2008 -------- -------- -------- -------- Total sales $ 46,435 $ 62,115 $ 149,346 $ 199,651 Sales in the US (US$) 25,419 38,352 78,225 127,128 Sales in Canada 18,596 22,055 57,839 70,158 Gross profit 8,587 11,013 26,846 36,611 Gross profit % 18.5% 17.7% 18.0% 18.3% Selling and administrative expenses (8,044) (9,967) (25,579) (30,510) Realized gain on foreign currency contracts - 298 - 1,247 ------------------------------------------------------------------------- Earnings before interest, taxes, depreciation and amortization and non- controlling interest ("EBITDA") 543 1,344 1,267 7,348 Add (deduct): Amortization (206) (298) (672) (1,145) Interest (165) (237) (434) (935) Non-cash foreign currency gains (losses) (1,049) (522) (1,382) (1,831) Intangibles impairment - - - (5,468) Goodwill impairment - - - (64,606) Non-controlling interest 391 560 1,757 15,150 Income tax recovery (expense) (10,586) 38 (10,232) 28,185 ------------------------------------------------------------------------- Net earnings (loss) for the period $ (11,072) $ 885 $ (9,696) $ (23,302) ------------------------------------------------------------------------- Basic and fully diluted earnings (loss) per Class A Unit $ (0.768) $ 0.061 $ (0.673) $ (1.617) Average Canadian dollar exchange rate for one US dollar 1.098 1.0411 1.1698 1.0186 ------------------------------------------------------------------------- Distributable Cash and Cash Distributions Selected Unaudited Consolidated Financial Information (in thousands of dollars except per unit amounts) 3 months 3 months 9 months 9 months ended ended ended ended September September September September 30, 2009 30, 2008 30, 2009 30, 2008 -------- -------- -------- -------- Net cash provided by operating activities $ 1,955 $ 3,941 $ 8,867 $ 14,201 Increase (decrease) in non-cash operating working capital (1,680) (2,893) (8,406) (7,157) ----------- ----------- ----------- ----------- Cash flow from operations before changes in non-cash operating working capital 275 1,048 461 7,044 Capital expenditures (45) (48) (95) (346) ----------- ----------- ----------- ----------- Distributable Cash $ 230 $ 1,000 $ 366 $ 6,698 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Distributions relating to the period: Class A Units - $ 1,081(1) $ - $ 7,565(2) Class B Units(3) - - - - ----------- ----------- ----------- ----------- Total Units $ - $ 1,081 $ - $ 7,565 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------------------------------------------------------------------- Outstanding units and per unit amounts: Class A Units outstanding 14,410,000 14,410,000 14,410,000 14,410,000 Class B Units outstanding 3,602,500 3,602,500 3,602,500 3,602,500 ----------- ----------- ----------- ----------- Total Units outstanding 18,012,500 18,012,500 18,012,500 18,012,500 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Distributable Cash per Total Units $ 0.013 $ 0.056 $ 0.020 $ 0.372 Distributions relating to the period: Class A Units $ - $ 0.075(1) $ - $ 0.525(2) Class B Units(3) $ - $ - $ - $ - Total Units $ - $ 0.060 $ - $ 0.420 Payout ratio(4) 0.0% 108.2% 0.0% 113.0% ------------------------------------------------------------------------- March 23, 2004 to September 30, 2009 ---- Cumulative since inception: Distributable Cash 75,983 Distributions relating to the period 66,754 Payout ratio(4) 87.9% ------------------------------------------------------------------------- (1) Includes the cash distributions of $0.025 per Class A Unit per month which relate to the operations of the Fund for July, August and September 2008. (2) Includes the cash distributions of $0.075 per Class A Unit per month which relate to the operations of the Fund for January through June 2008, and cash distributions of $0.025 per Class A Unit per month which relate to the operations of the Fund for July through September 2008. (3) 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 September 30, 2009 balance sheet. (4) 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
For the three months ended
Third quarter 2009 sales were
Third quarter gross profit was
Selling and administrative expenses decreased by
The Fund reported third quarter EBITDA of
Results from Operations - Nine months ended
For the nine months ended
Sales for the first nine months of 2009 declined by 25.2% to
Nine month gross profit was
Hardwoods was successful in decreasing selling and administrative expenses to
Year-to-date EBITDA was
The Fund reported a net loss of
Outlook
Hardwoods anticipates that market conditions will remain challenging through the fourth quarter of 2009 and into the first quarter of 2010 as business enters the seasonally slowest period of the year. The risk of bad debt also remains elevated with many customers feeling the effects of the prolonged downturn. If the Canadian dollar continues to strengthen, this could also have a negative impact on our results.
Despite these near-term challenges, the longer-term outlook is improving. In the US, the pace of housing sales has improved, the inventory of unsold homes has started to decline and housing prices are beginning to firm up. Hardwoods expects to see a corresponding trend in its own business beginning in 2010, as cabinet and furniture orders related to this new construction are placed and help to stabilize hardwood demand and prices.
While these developments are encouraging, management believes that the transition period preceding any significant recovery will be lengthy. Accordingly, Hardwoods will continue to pursue strategies that help protect its business. Cash conservation will remain a priority with a strict focus on accounts receivable and credit control. The company will also continue to actively introduce and promote new import and green products that help to protect and build market share. While cost efficiency will continue to be emphasized, further significant cost cuts are not planned as Hardwoods' distribution network is now closely aligned with market opportunities and will be increasingly engaged in responding to the eventual resumption of demand.
Overall, Hardwoods believes it is well positioned to ride out the remainder of the market downturn and participate fully in the eventual recovery.
Non-GAAP Measures - EBITDA and Distributable Cash
References to "EBITDA" are to earnings before interest, income taxes, depreciation and amortization, 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 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 2009 Third 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 2009 Third 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, the securities of Hardwoods Specialty Products LP and Hardwoods Specialty Products USLP (collectively, "Hardwoods"). The Fund was launched on
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 organized into eight geographic regions throughout
Forward-Looking Information
Certain statements in this press release contain forward-looking information within the meaning of applicable securities laws in
The forward-looking information in this press release includes, but is not limited to: we entered what we believe is the final phase of market downturn that began three years ago; our own results typically lag the construction market by nine-to-twelve months because hardwood products are used in the finishing stages of construction; we fully expect to emerge from this downturn in sound financial condition; we anticipate one, and possibly two, more quarters of declining results as we work through the final phase of the downturn and enter our seasonally slowest quarters; our longer-term outlook anticipates a gradual market improvement through 2010, with more significant growth in 2011; Hardwoods anticipates that market conditions will remain challenging through the fourth quarter of 2009 and into the first quarter of 2010 as business enters the seasonally slowest period of the year; the risk of bad debt also remains elevated with many customers feeling the effects of the prolonged downturn; if the Canadian dollar continues to strengthen, this could also have a negative impact on our results; despite these near-term challenges, the longer-term outlook is improving; Hardwoods expects to see a corresponding trend in its own business beginning in 2010, as cabinet and furniture orders related to this new construction are placed and help to stabilize hardwood demand and prices; management believes that the transition period preceding any significant recovery will be lengthy; Hardwoods will continue to pursue strategies that help protect its business; cash conservation will remain a priority with a strict focus on accounts receivable and credit control; the company will also continue to actively introduce and promote new import and green products that help to protect and build market share; while cost efficiency will continue to be emphasized, further significant cost cuts are not planned as Hardwoods' distribution network is now closely aligned with market opportunities and will be increasingly engaged in responding to the eventual resumption of demand; and overall, Hardwoods believes it is well positioned to ride out the remainder of the market downturn and participate fully in the eventual recovery.
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 the amount of cash the Fund has available to distribute to unitholders in Canadian dollars; the Fund does 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 the business; the Fund does not incur material losses related to credit provided to customers; there is no significant rise in interest rates that increases Hardwoods cost of borrowing under its credit agreements and leads to reduced profitability; Hardwoods' products are not subjected to negative trade outcomes; the company is able to sustain its level of sales and EBITDA margins; Hardwoods' is able to grow its business and to manage its growth; there is no new competition in Hardwoods' markets that leads to reduced revenues and profitability; the Fund does 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
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 the amount of cash the Fund has available to distribute to unitholders in Canadian dollars; Hardwoods' depends on key personnel, the loss of which could harm its business; decreases in the supply of, demand for, or market values of hardwood lumber or sheet goods could harm the business; Hardwoods' may incur losses related to credit provided to customers; a significant rise in interest rates could increase Hardwoods' cost of borrowing under its credit agreements and lead to reduced profitability; Hardwoods' products may be subject to negative trade outcomes; the company may not be able to sustain its level of sales or EBITDA margins; Hardwoods may be unable to grow its business or to manage any growth; competition in the company's markets may lead to reduced revenues and profitability; the Fund may become subject to more stringent regulations; importation of products manufactured with hardwood lumber or sheet goods may increase, and replace products manufactured in
All forward-looking information in this press release is qualified in its entirety by this cautionary statement and, except as may be required by law, the Fund undertakes 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) ------------------------------------------------------------------------- September December 30, 2009 31, 2008 ------------------------------------------------------------------------- (unaudited) Assets Current assets: Cash and cash equivalents $ 1,263 $ 85 Accounts receivable (note 6) 31,123 32,218 Income tax recoverable 347 2,316 Inventory (note 5) 23,478 30,868 Prepaid expenses 1,053 1,039 ----------------------------------------------------------------------- 57,264 66,526 Long-term receivables (note 6) 2,241 3,639 Property, plant and equipment 1,488 2,168 Deferred financing costs 415 235 Future income taxes 17,936 30,782 ------------------------------------------------------------------------- $ 79,344 $ 103,350 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Unitholders' Equity Current liabilities: Bank indebtedness (note 7) $ 8,124 $ 17,561 Accounts payable and accrued liabilities 5,368 3,365 ----------------------------------------------------------------------- 13,492 20,926 Deferred gain on sale-leaseback of land and building 443 572 Non-controlling interests (note 8) 9,535 13,080 Unitholders' equity: Fund units 133,454 133,454 Deficit (59,654) (49,958) Accumulated other comprehensive loss (17,926) (14,724) ----------------------------------------------------------------------- 55,874 68,772 Continuance of operations (note 1) Contingencies (note 15) ------------------------------------------------------------------------- $ 79,344 $ 103,350 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. HARDWOODS DISTRIBUTION INCOME FUND Consolidated Statement of Earnings (Loss) and Deficit (Unaudited) (Expressed in thousands of Canadian dollars) ------------------------------------------------------------------------- Three Three Nine Nine months months months months ended ended ended ended September September September September 30, 2009 30, 2008 30, 2009 30, 2008 ------------------------------------------------------------------------- Sales $ 46,435 $ 62,115 $ 149,346 $ 199,651 Cost of sales 37,848 51,102 122,500 163,040 ------------------------------------------------------------------------- Gross profit 8,587 11,013 26,846 36,611 Expenses: Selling and administrative 8,044 9,967 25,579 30,510 Amortization: Plant and equipment 189 229 620 703 Deferred financing costs 37 8 117 14 Other intangible assets - 80 - 484 Deferred gain on sale - leaseback of land and building (20) (19) (65) (56) Interest 165 237 434 935 Unrealized foreign currency losses 1,049 224 1,382 584 Intangibles impairment - - - 5,468 Goodwill impairment - - - 64,606 ----------------------------------------------------------------------- 9,464 10,726 28,067 103,248 ------------------------------------------------------------------------- Earnings (loss) before non-controlling interests and income taxes (877) 287 (1,221) (66,637) Non-controlling interests (note 8) (391) (560) (1,757) (15,150) ------------------------------------------------------------------------- Earnings (loss) before income taxes (486) 847 536 (51,487) Income tax expense (recovery) (note 13): Current 86 114 193 (638) Future 10,500 (152) 10,039 (27,547) ----------------------------------------------------------------------- 10,586 (38) 10,232 (28,185) ------------------------------------------------------------------------- Net earnings (loss) for the period (11,072) 885 (9,696) (23,302) Deficit, beginning of period (48,582) (36,821) (49,958) (6,150) Distributions declared to Unitholders - (1,081) - (7,565) ------------------------------------------------------------------------- Deficit, end of period $ (59,654) $ (37,017) $ (59,654) $ (37,017) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted earnings (loss) per Unit $ (0.77) $ 0.06 $ (0.67) $ (1.62) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of Units outstanding 14,410,000 14,410,000 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 Three Nine Nine months months months months ended ended ended ended September September September September 30, 2009 30, 2008 30, 2009 30, 2008 ------------------------------------------------------------------------- Net earnings (loss) for the period $ (11,072) $ 885 $ (9,696) $ (23,302) Other comprehensive income (loss): Unrealized gain (loss) on translation of self-sustaining foreign operations (1,977) 1,335 (3,202) 2,993 ----------------------------------------------------------------------- Other comprehensive income (loss) (1,977) 1,335 (3,202) 2,993 ------------------------------------------------------------------------- Comprehensive income (loss) $ (13,049) $ 2,220 $ (12,898) $ (20,309) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statement of Accumulated Other Comprehensive Loss (Unaudited) (Expressed in thousands of Canadian dollars) ------------------------------------------------------------------------- Three Three Nine Nine months months months months ended ended ended ended September September September September 30, 2009 30, 2008 30, 2009 30, 2008 ------------------------------------------------------------------------- Accumulated other comprehensive loss, beginning of period $ (15,949) $ (19,907) $ (14,724) $ (21,565) Other comprehensive income (loss) (1,977) 1,335 (3,202) 2,993 ------------------------------------------------------------------------- Accumulated other comprehensive loss, end of period $ (17,926) $ (18,572) $ (17,926) $ (18,572) ------------------------------------------------------------------------- ------------------------------------------------------------------------- HARDWOODS DISTRIBUTION INCOME FUND Consolidated Statements of Cash Flows (Unaudited) (Expressed in thousands of Canadian dollars) ------------------------------------------------------------------------- Three Three Nine Nine months months months months ended ended ended ended September September September September 30, 2009 30, 2008 30, 2009 30, 2008 ------------------------------------------------------------------------- Cash flows provided by (used in) operating activities: Net earnings (loss) for the period $ (11,072) $ 885 $ (9,696) $ (23,302) Items not involving cash: Amortization 206 298 672 1,145 Imputed interest income in employee loans (11) (17) (148) (48) Gain on sale of property, plant and equipment (6) 1 (31) 1 Unrealized foreign exchange losses 1,049 522 1,382 1,831 Non-controlling interests (391) (560) (1,757) (15,150) Future income taxes 10,500 (81) 10,039 (27,507) Intangibles impairment - - - 5,468 Goodwill impairment - - - 64,606 ----------------------------------------------------------------------- 275 1,048 461 7,044 Change in non-cash operating working capital (note 9) 1,680 2,893 8,406 7,157 ----------------------------------------------------------------------- Net cash provided by operating activities 1,955 3,941 8,867 14,201 Cash flows provided by (used in) investing activities: Additions to property, plant and equipment (45) (48) (95) (346) Proceeds on disposal of property, plant and equipment 13 - 42 - Decrease in long-term receivables, net 179 302 802 186 ----------------------------------------------------------------------- Net cash provided by (used in) investing activities 147 254 749 (160) Cash flows provided by (used in) financing activities: Decrease in bank indebtedness (790) (2,287) (8,118) (4,709) Increase in deferred bank fees (239) (204) (320) (204) Distributions paid to Unitholders - (1,801) - (8,286) ----------------------------------------------------------------------- Net cash used in financing activities (1,029) (4,292) (8,438) (13,199) ------------------------------------------------------------------------- Increase (decrease) in cash 1,073 (97) 1,178 842 Cash, beginning of period 190 1,234 85 295 ------------------------------------------------------------------------- Cash, end of period $ 1,263 $ 1,137 $ 1,263 $ 1,137 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary information (cash amounts): Interest paid $ 165 $ 237 $ 434 $ 935 Income taxes paid 90 19 193 771 Income taxes received - - 1,975 - Transfer of accounts receivable to long-term customer notes receivable, net of write offs, being a non-cash transaction - - 958 2,364 ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 1. Nature and continuance of operations: Hardwoods Distribution Income Fund (the "Fund") is an unincorporated, open ended, limited purpose trust established under the laws of the Province of British Columbia on January 30, 2004 by a Declaration of Trust. The Fund commenced operations on March 23, 2004 when it completed an initial public offering 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. In accordance with the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1400, General Standards of Financial Statement Presentation, the Fund is required to assess and disclose its ability to continue as a going concern. The Fund has forecast its financial results and cash flows for the next 12 months (the "Forecast Period"). The forecasts are based on management's best estimates of operating conditions in the context of the current economic climate, today's capital market conditions and the depressed state of the housing and renovation markets in both Canada and the United States. In the second quarter of 2009, the Fund's U.S. subsidiary and its lender amended their credit agreement with changes to be effective to the June 30, 2009 reporting period. The amendment removed the U.S. subsidiary's previous fixed charge coverage ratio financial covenant, and replaced it with a minimum trailing EBITDA covenant. Under the amendment, the minimum trailing EBITDA covenant is only applicable in the event the U.S. subsidiary's unused credit availability falls below US$4.0 million. At September 30, 2009, the U.S. subsidiary's unused credit availability was in excess of US$4.0 million, and accordingly the U.S. subsidiary was not subject to any financial covenant and was compliant with its credit facility. If the U.S. subsidiary had been subject to its financial covenant at September 30, 2009, it would have met its minimum trailing EBITDA covenant. Due to the difficulty in predicting the continued severity and duration of the current economic and financial crisis, management is uncertain whether its U.S. subsidiary will remain in compliance with its financial covenant during the Forecast Period. Further weakening of the housing and renovation market, or incurring significant customer or credit losses, could cause the U.S. subsidiary to violate its financial covenant. This could cause the Fund's U.S. subsidiary bank indebtedness to become immediately due and payable, and the Fund and its U.S. subsidiary may not be able to access funds under its revolving credit facility. In the event of such a circumstance, the Fund could draw on its Canadian credit facility, or if that does not suffice, it would need to raise additional capital in the form of equity or debt to supplement or replace its existing credit facilities in order to have sufficient liquidity to meet its obligations in the Forecast Period. The accompanying consolidated financial statements have been prepared assuming the Fund will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts should the Fund be unable to continue as a going concern. 2. 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, 2008. 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, 2008. Certain comparative figures have been restated to conform to the current period's financial statement presentation. 3. Adoption of changes in accounting standards: Effective January 1, 2009, the Fund adopted new CICA Handbook Section 3064, Goodwill and Intangible Assets. This section replaces CICA Handbook Section 3062, Goodwill and Intangible Assets, and establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. As the Fund did not have any goodwill or intangible assets at December 31, 2008, the adoption of this new standard did not impact the amounts presented in the financial statements. 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: --------------------------------------------------------------------- September December 30, 2009 31, 2008 --------------------------------------------------------------------- Cash and cash equivalents $ (1,263) $ (85) Bank indebtedness 8,124 17,561 --------------------------------------------------------------------- Net debt 6,861 17,476 Unitholders' equity 55,874 68,772 --------------------------------------------------------------------- Total capitalization $ 62,735 $ 86,248 --------------------------------------------------------------------- --------------------------------------------------------------------- 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 did not meet the foregoing earnings and cash flow tests as well as certain additional credit ratios. The Fund's operating subsidiaries were compliant with all required credit ratios under the US and Canadian credit facilities as at September 30, 2009, 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 September 30, 2009. 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: --------------------------------------------------------------------- September December 30, 2009 31, 2008 --------------------------------------------------------------------- Lumber $ 8,308 $ 12,077 Sheet goods 11,653 14,990 Specialty 2,132 2,356 Goods in-transit 1,385 1,445 --------------------------------------------------------------------- $ 23,478 $ 30,868 --------------------------------------------------------------------- --------------------------------------------------------------------- During the three months ended September 30, 2009 inventory write- downs totaling $0.4 million (nine months ended September 30, 2009 - $1.2 million) were recorded to reduce certain inventory items to their net realizable value. Cost of sales for the three months ended September 30, 2009 were $37.8 million (nine months ended September 30, 2009 - $122.5 million), which included $36.6 million (nine months ended September 30, 2009 - $118.8 million) of costs associated with inventory. The other $1.2 million (nine months ended September 30, 2009 - $3.7 million) related principally to freight and other related selling 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: --------------------------------------------------------------------- September December Accounts receivable 30, 2009 31, 2008 --------------------------------------------------------------------- Trade accounts receivable - Canada $ 11,456 $ 8,404 Trade accounts receivable - United States 20,312 23,423 Sundry receivable 158 495 Current portion of long-term receivables 3,198 2,243 --------------------------------------------------------------------- 35,124 34,565 Less: allowance for doubtful accounts 4,001 2,347 --------------------------------------------------------------------- $ 31,123 $ 32,218 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- September December Long-term receivables 30, 2009 31, 2008 --------------------------------------------------------------------- Employee housing loans $ 1,117 $ 1,507 Customer notes 3,787 3,772 Security deposits 535 603 --------------------------------------------------------------------- 5,439 5,882 Less: current portion, included in accounts receivable 3,198 2,243 --------------------------------------------------------------------- $ 2,241 $ 3,639 --------------------------------------------------------------------- --------------------------------------------------------------------- The aging of trade receivables was: --------------------------------------------------------------------- September December 30, 2009 31, 2008 --------------------------------------------------------------------- Current $ 18,151 $ 17,037 Past due 31-60 days 5,144 6,696 Past due 61-90 days 2,192 3,706 Past due 90+ days 6,201 4,388 --------------------------------------------------------------------- $ 31,688 $ 31,827 --------------------------------------------------------------------- --------------------------------------------------------------------- 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 September 30, 2009 was $4.0 million (December 31, 2008 - $2.3 million). The amount of the allowance is considered sufficient based on the past experience of the business, the security the Fund has in place for past due accounts and management's regular review and assessment of customer accounts and credit risk. Bad debt expense for the three months ended September 30, 2009 was $1.0 million which equates to 2.2% of sales (three month period ended September 30, 2008 - $0.9 million, being 1.4% of sales). Historically bad debt as a percentage of sales has averaged approximately 0.7%. 7. Bank indebtedness: --------------------------------------------------------------------- September December 30, 2009 31, 2008 --------------------------------------------------------------------- Checks issued in excess of funds on deposit $ 239 $ 1,087 Credit facility, Hardwoods LP 1,261 265 Credit facility, Hardwoods USLP (September 30, 2009 - US$6,187; December 31, 2008 - US$13,308) 6,624 16,209 --------------------------------------------------------------------- $ 8,124 $ 17,561 --------------------------------------------------------------------- --------------------------------------------------------------------- In the US, a subsidiary of the Fund has a revolving credit facility of up to $26.8 million (US$25.0 million) and the credit facility matures September 30, 2011. During the quarter ended September 30, 2009 Hardwoods LP negotiated a new three year credit facility that provides financing of up to $15.0 million. The new credit facility can be drawn down to meet short-term financing requirements, or to make capital contributions to the Fund's U.S. operating subsidiary. The new Canadian facility matures on August 7, 2012. These credit facilities can be drawn down to meet short-term financing requirements, including fluctuations in non-cash working capital. The amount made available under these credit facilities is limited to the extent of the value of certain accounts receivable and inventories held by subsidiaries of the Fund in Canada and the US respectively. At September 30, 2009 the Canadian and US credit facilities have $10.1 million and $6.3 million (US$5.9 million), respectively, of additional borrowing capacity, subject to the subsidiaries being able to continue to meet their respective financial covenants as described in note 4. 8. Non-controlling interests: --------------------------------------------------------------------- Balance, January 1, 2009 $ 13,080 Interest in earnings: Interest in earnings before taxes (244) Adjustment to non-controlling interest from subordination of Class B Unit Holders (1,513) --------------------------------------------------------------------- 11,323 Foreign currency translation adjustment of non-controlling interest in Hardwoods USLP (1,788) --------------------------------------------------------------------- Balance, end of period $ 9,535 --------------------------------------------------------------------- --------------------------------------------------------------------- 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 September 30, 2009. 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 September 30, 2009, the amount of such deficiency was $14.4 million; - Third, to the holders of Class B LP Units and Class B USLP Units in a combined amount for one Class B LP Unit and one Class B USLP Unit equal, on a pro-rated basis, to the combined amount advanced or distributed on one Class A LP Unit and one Class A USLP Unit during such fiscal quarter or, if there is insufficient available cash to make advances or distributions in such amount, such lesser amount as is available; - Fourth, to the holders of Class B LP Units and Class B USLP Units, to the extent only that combined advances or distributions in respect of any fiscal quarter(s) during the 12 month period then ended (and not, for greater certainty, in any previous 12 month period) on one Class B LP Unit and one Class B USLP Unit were not made, or were made in amounts less, on a pro-rated basis, that the combined amount advanced or distributed on one Class A LP Unit and one Class A USLP Unit during such 12 month period, the amount of such deficiency. As of September 30, 2009, the amount of such deficiency was $90,063. - Fifth, to the extent of any excess, to the holders of the Class A LP Units and Class B LP Units and Class A USLP Units and Class B USLP Units, respectively, so that the combined advances or distributions on one Class A LP Unit and one Class A USLP Unit are the same as the combined advances or distribution on one Class B LP Unit and one Class B USLP Unit in respect of the 12 month period then ended (and not, for greater certainty, any previous 12 month period). After the Subordination End Date, the holders of the Class B LP Units and Class B USLP Units will generally be entitled to effectively exchange all or a portion of their Class B LP Units and Class B USLP Units together for up to 3,602,500 Units of the Fund, representing 20% of the issued and outstanding Units of the Fund on a fully diluted basis. In the event the Fund enters into an agreement in respect of an acquisition or a take-over bid of the Fund, the holders of the Class B LP Units and Class B USLP Units will be entitled to exchange such units for Units of the Fund. The cumulative deficiency prior to September 30, 2009, which is no longer recoverable by the Class B LP Unitholders and the Class B USLP Unitholders, has been recorded as an adjustment to the non- controlling interest's share of earnings in the amount of $0.2 million for the three-month period ended September 30, 2009 ($1.5 million for the nine-month period ended September 30, 2009). 9. Changes in non-cash operating working capital and additional cash flow disclosures: --------------------------------------------------------------------- Three Three Nine Nine months months months months ended ended ended ended September September September September 30, 2009 30, 2008 30, 2009 30, 2008 --------------------------------------------------------------------- Accounts receivable $ (21) $ 2,527 $ (1,931) $ (50) Income taxes recoverable/payable (13) (3) 1,902 (861) Inventory 71 188 5,221 8,826 Prepaid expenses 139 190 (100) (137) Accounts payable and accrued liabilities 1,504 (9) 3,314 (621) --------------------------------------------------------------------- $ 1,680 $ 2,893 $ 8,406 $ 7,157 --------------------------------------------------------------------- --------------------------------------------------------------------- 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 period ended September 30, 2009 no discretionary cash distributions were paid to Unitholders (2008 - $1.8 million). During the nine month period ended September 30, 2009 no discretionary cash distributions were paid to Unitholders (2008 - $8.3 million). 10. Segment disclosure: Information about geographic areas is as follows: --------------------------------------------------------------------- Three Three Nine Nine months months months months ended ended ended ended September September September September 30, 2009 30, 2008 30, 2009 30, 2008 --------------------------------------------------------------------- Revenue from external customers: Canada $ 18,596 $ 22,055 $ 57,839 $ 70,158 United States 27,839 40,060 91,507 129,493 --------------------------------------------------------------------- $ 46,435 $ 62,115 $ 149,346 $ 199,651 --------------------------------------------------------------------- --------------------------------------------------------------------- September December 30, 2009 31, 2008 --------------------------------------------------------------------- Property, plant and equipment: Canada $ 533 $ 752 United States 955 1,416 --------------------------------------------------------------------- $ 1,488 $ 2,168 --------------------------------------------------------------------- --------------------------------------------------------------------- 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 September 30, 2009, Hardwoods USLP contributed and expensed $56,545 (US$51,498) (three months ended September 30, 2008 - $78,777 (US$77,436)) in relation to the USLP Plan. During the nine months ended September 30, 2009, Hardwoods USLP contributed and expensed $185,224 (US$158,338 (nine months ended September 30, 2008 - $294,933 (US$292,766)) 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 September 30, 2009, Hardwoods LP contributed and expensed $49,744 (three months ended September 30, 2008 - $56,667) in relation to the LP Plan. During the nine months ended September 30, 2009, Hardwoods LP contributed and expensed $149,906 (nine months ended September 30, 2008 - $233,636) in relation to the LP Plan. 12. Related party transactions: For the three months ended September 30, 2009, sales of $86,226 (three months ended September 30, 2008 - $84,435) were made to affiliates of SIL, and the Fund made purchases of $14,684 (three months ended September 30, 2008 - $10,275) from affiliates of SIL. For the nine months ended September 30, 2009, sales of $354,734 (nine months ended September 30, 2008 - $319,658) were made to affiliates of SIL, and the Fund made purchases of $46,844 (nine months ended September 30, 2008 - $51,052) from affiliates of SIL. All these sales and purchases took place at prevailing market prices. 13. Income taxes: During the quarter ended September 30, 2009, the Fund recorded a provision against its net future income tax asset of $11.2 million as a result of the continued downturn in financial results in the Fund's US operating subsidiary. Effective March 31, 2008 the Fund completed an internal reorganization that involved the refinancing of inter-corporate debt in the form of notes issued and held by subsidiaries of the Fund. The reorganization did not have any effect upon the management or business activities of the Fund's operating subsidiaries. As a result of the internal re-organization, income tax losses which are available to reduce US taxable income of approximately US$10.3 million arose. Based on statutory income tax rates in effect for the Fund's US subsidiary, this amounts to an estimated $3.6 million tax benefit available to subsidiaries of the Fund. This $3.6 million benefit was recorded at March 31, 2008 and is comprised of an estimated $0.8 million current income tax recovery and $2.8 million future income tax recovery. During the quarter ended March 31, 2008, tax pools consisting principally of Canadian tax losses carried forward, of approximately $16.0 million were recorded by a subsidiary of the Fund as a result of the Fund's re-organization plan. The tax losses carried forward will result in a reduction of tax otherwise payable under the Canadian federal government's tax on publicly traded income trusts. Based on tax rates expected to apply at the date such tax pools will be utilized, an additional $4.2 million of future income tax benefit was recorded by the Fund at March 31, 2008. During the quarter ended June 30, 2008, the Fund recorded a future tax asset of approximately $20.1 million as a result of the write- down of the goodwill and intangible assets. Goodwill and intangible assets remain deductible for Canadian and U.S. tax purposes. 14. 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. 15. Contingencies: The Fund and its subsidiaries are subject to legal proceedings that arise in the ordinary course of its business. Management is of the opinion, based upon information presently available, that it is unlikely that any liability, to the extent not provided for through insurance or otherwise, would be material in relation to the Fund's consolidated financial statements.
%SEDAR: 00020372E
For further information: For further information: Rob Brown, Chief Financial Officer, Phone: (604) 881-1990, Fax: (604) 881-1995, Email: [email protected]
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