Nov. 15, 2010 (Canada NewsWire Group) --
TRADING SYMBOL: Toronto Stock Exchange - HWD.UN
Hardwoods Distribution Income Fund will hold a conference call and webcast to discuss third quarter and nine-month financial results on November 16, 2010 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by dialling: 1-888-231-8191 or 647-427-7450. A replay will be available until November 30, 2010 at: 1-800-642-1687 or 1-416-849-0833 (Passcode 22377125).
LANGLEY, BC, Nov. 15 /CNW/ - Hardwoods Distribution Income Fund (the "Fund") today reported financial results for the third quarter and first nine months of 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 a network of 27 distribution centres in the US and Canada.
Third Quarter Overview
(For the three months ended September 30, 2010)
<<
- Third quarter revenue increased 8.9% to $50.6 million year-over-year
- Gross profit increased to $8.7 million, from $8.6 million in Q3 2009
- Selling and administrative expenses were reduced by 8.9% to
$7.3 million, from $8.0 million in Q3 2009
- Third quarter EBITDA increased 156% to $1.4 million, from
$0.5 million in Q3 2009
- The Fund increased net earnings to $0.3 million, from a net loss of
$11.1 million last year
- Distributable Cash was $1.3 million, or $0.070 cents per unit, from
$0.2 million, or $0.013 per unit in Q3 2009
>>
"Our financial results continued to strengthen in the third quarter and first nine months of 2010," said Lance Blanco, Hardwoods' President and CEO. "Sales, EBITDA and net income were all up compared to the same periods last year. We also generated positive Distributable Cash for the third consecutive quarter and have now generated a total of $4.3 million of Distributable Cash in the first nine months of 2010. This is a significant turnaround from the $0.4 million of Distributable Cash earned in the same period last year."
"On the revenue front, we grew total sales by 8.9% during the quarter, and excluding the negative impact of foreign exchange underlying sales were up an even stronger 12.6%. These gains are significant in light of the relatively modest increases in market demand and ongoing competitive pressures experienced during the quarter. Our improved sales results primarily reflect stronger average prices for hardwood lumber, as well as our successful efforts to maintain and build our customer base. Hardwoods' strategy through this phase of the business cycle has been to vigorously defend market share, selectively increase our sales capability in certain markets, and continue sourcing new products that provide customers with innovative solutions in a highly competitive market," added Mr. Blanco.
"While these initiatives are generating results, intense competitive pressure had a negative impact on third quarter gross profit margins. At 17.2%, our gross profit margin was below our targeted range of 18% to 19% and is expected to continue trending below normal levels over the coming quarters. We are now nearing the end of the fourth year of a prolonged market downturn and price competition for the products we sell has intensified as some competitors struggle to stay in business."
"Despite this margin pressure, we were able to achieve significant improvements in our bottom line results by continuing to reduce operating costs. We successfully lowered selling and administrative expenses by $0.7 million during the third quarter and by $3.9 million in the first nine months of 2010. This, together with growing sales and a slight increase in gross profit dollars, contributed to our improved EBITDA, net income and Distributable Cash results."
"At the close of the third quarter, I'm pleased to note that we continue to maintain a strong financial position. As at September 30, 2010, we had just $11.6 million of bank indebtedness (net of cash) financing $58.8 million of net working capital assets, and $21.0 million of unused credit facility available to us," said Mr. Blanco.
"Overall, we are encouraged by our strengthening results and solid financial position, but we remain cautious in our outlook. Coming into the seasonally slower fourth quarter, housing starts in the US remain near historical lows and the momentum in hardwood lumber prices has cooled. We continue to anticipate a slow economic recovery with significant competitive pressures. Accordingly, we will remain focused on disciplined management of our business with tight control of expenses and cash, a close eye on accounts receivable collection, and continued efforts to protect and build market share. We will also continue to evaluate our branch network to determine if we can adjust capacity, either upwards or downwards, to better align our business with market opportunities. We have been successful in keeping the business strong and stable through this prolonged downturn and this will remain a priority going forward," said Mr. Blanco.
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, 2010 30, 2009 30, 2010 30, 2009
-------- -------- -------- --------
Total sales $ 50,559 $ 46,435 $ 151,263 $ 149,346
Sales in the US (US$) 29,246 25,419 87,302 78,225
Sales in Canada 20,164 18,596 60,827 57,839
Gross profit 8,716 8,587 26,668 26,846
Gross profit % 17.2% 18.5% 17.6% 18.0%
Selling and
administrative expenses (7,325) (8,044) (21,734) (25,579)
-------------------------------------------------------------------------
Earnings before interest,
taxes, depreciation and
amortization and
non-controlling
interest ("EBITDA") 1,391 543 4,934 1,267
Add (deduct):
Amortization (99) (206) (442) (672)
Interest (211) (165) (542) (434)
Non-cash foreign
currency gains
(losses) (88) (1,049) (44) (1,382)
Non-controlling
interest (198) 391 (781) 1,757
Income tax recovery
(expense) (532) (10,586) (1,626) (10,232)
-------------------------------------------------------------------------
Net earnings (loss) for
the period $ 263 $ (11,072) $ 1,499 $ (9,696)
-------------------------------------------------------------------------
Basic and fully diluted
earnings (loss) per
Class A Unit $ 0.02 $ (0.77) $ 0.10 $ (0.67)
Average Canadian dollar
exchange rate for one
US dollar 1.040 1.098 1.036 1.170
-------------------------------------------------------------------------
>>
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, 2010 30, 2009 30, 2010 30, 2009
-------- -------- -------- --------
Net cash provided by (used
in) operating activities $ (626) $ 1,955 $ (7,854) $ 8,867
Increase (decrease) in
non-cash operating
working capital 1,893 (1,680) 12,167 (8,406)
----------- ----------- ----------- -----------
Cash flow from operations
before changes in
non-cash operating
working capital 1,267 275 4,313 461
Capital expenditures (8) (45) (37) (95)
----------- ----------- ----------- -----------
Distributable Cash $ 1,259 $ 230 $ 4,276 $ 366
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Distributions relating
to the period:
Class A Units $ - $ - $ - $ -
Class B Units(1) - - - -
----------- ----------- ----------- -----------
Total Units $ - $ - $ - $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
-------------------------------------------------------------------------
Outstanding units and
per unit amounts:
outstanding
Class A Units 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 $ 0.070 $ 0.013 $ 0.237 $ 0.020
Distributions relating
to the period:
Class A Units $ - $ - $ - $ -
Class B Units(1) $ - $ - $ - $ -
Total Units $ - $ - $ - $ -
Payout ratio(2) 0.0% 0.0% 0.0% 0.0%
-------------------------------------------------------------------------
March 23, 2004
to September 30,
2010
----
Cumulative since
inception:
Distributable Cash 79,754
Distributions relating
to the period 66,754
Payout ratio(2) 83.7%
-------------------------------------------------------------------------
(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 September 30,
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 September 30, 2010
For the three months ended September 30, 2010, the Fund and its subsidiaries generated Distributable Cash of $1.3 million or $0.070 per unit. No distributions were paid to either the public unitholders (Class A Units) or to the Class B Units. By comparison, the Fund generated Distributable Cash of $0.2 million or $0.013 per unit during the same period in 2009 with no distributions paid.
Third quarter 2010 sales increased 8.9% to $50.6 million, from $46.4 million during the same period in 2009. The improvement in sales reflects a 12.6% increase in underlying sales activity, partially offset by a 3.7% decrease resulting from the negative impact of a stronger Canadian dollar when translating sales for financial reporting purposes. Sales in the United States, as measured in US dollars, increased 15.1% to $29.3 million, from $25.4 million during the third quarter of 2009. This increase reflects stronger average prices for hardwood lumber compared to a year ago, improved demand for hardwoods in some regions, growing demand from the US recreational vehicle manufacturing sector, and targeted efforts to build business in selected markets. Sales in Canada, as measured in Canadian dollars, increased 8.4% as compared to the same period in the prior year, primarily driven by stronger average prices for hardwood lumber and increased residential construction activity.
Third quarter gross profit increased to $8.7 million, from $8.6 million in Q3 2009. The improvement in gross profit reflects higher sales, partially offset by a decrease in gross profit percentage to 17.2%, from 18.5% a year ago. Hardwoods' target range for gross profit percentage is traditionally 18% to 19%, with some quarter-to-quarter variation. In the current market environment, competition for business is intense and has resulted in margins trending below the target range through much of this stage of the business cycle.
Selling and administrative ("S&A") expenses decreased by 8.9% to $7.3 million, from $8.0 million in Q3 2009. This improvement primarily reflects a $0.4 million reduction in bad debt expense and a $0.3 million reduction in other expenses, including interest income earned on legal recovery from a bankrupt customer and the absence of restructuring costs related to prior-year facilities closure.
Third quarter EBITDA increased 154% to $1.4 million, from $0.5 million in Q3 2009. The EBITDA gain primarily reflects lower S&A expenses and the increase in gross profit.
The Fund also generated net earnings of $0.3 million, compared to a net loss of $11.1 million in the comparable quarter in 2009. The $11.4 million increase to net earnings primarily reflects higher EBITDA, a $0.9 million decrease in non-cash foreign currency losses and a $10.1 million reduction in income tax expense. This was partially offset by a $0.6 million decrease in recovery from the non-controlling interest.
Results from Operations - Nine months ended September 30, 2010
For the nine months ended September 30, 2010, the Fund and its subsidiaries generated total Distributable Cash of $4.3 million, or $0.237 per unit. No distributions were paid to either the public unitholders (Class A Units) or to the Class B Units. By comparison, the Fund generated total Distributable Cash of $0.4 million or $0.020 per unit in the first nine months of 2009 and declared no distributions.
Sales for the first nine months increased 1.3% to $151.3 million, from $149.3 million in 2009. The increase in total sales reflects a 9.1% increase in underlying sales activity, partially offset by a 7.8% decrease in sales due to the negative impact of a stronger Canadian dollar. Had exchange rates remained consistent with prior-year levels, nine-month sales would have been $11.7 million higher at $163.0 million.
Year-to-date sales activity at Hardwoods' US operations, as measured in US dollars, increased by 11.6% year-over-year, while sales in Canada, as measured in Canadian dollars, were up by 5.2% year-over-year.
Gross profit for the first nine months was $26.7 million, down slightly from $26.8 million during the same period in 2009. The reduction in gross profit reflects a lower gross profit margin. As a percentage of sales, gross profit was 17.6% in the first nine months of 2009, compared to 18.0% during the same period last year, reflecting the more intensive competitive environment.
Hardwoods was successful in decreasing selling and administrative expenses by $3.9 million or 15.0% to $21.7 million in the first nine months of 2010, from $25.6 million last year. The improvement in S&A expense reflects the positive impact of the stronger Canadian dollar on the conversion of S&A expenses at the US operations, lower bad debt expense, lower premises expense, and lower other expenses, including $0.4 million in one-time expense recoveries related to proceeds from legal settlements.
Year-to-date EBITDA increased 289% to $4.9 million, from $1.3 million in the same period in 2009. The higher EBITDA reflects the improvement in S&A costs, partially offset by the $0.1 million reduction in gross profit.
For the nine months ended September 30, 2010, the Fund increased net earnings to $1.5 million, from a net loss of $9.7 million during the same period in 2009. The improvement in net earnings primarily reflects the $3.6 million increase in EBITDA, a $1.4 million decrease in non-cash foreign currency losses, a $8.6 million decrease in income tax expense, and a $0.2 million reduction in amortization expense. These gains were partially offset by a $2.5 million decrease related to changes in the non-controlling interest and a $0.1 million increase in interest expense.
Outlook
The Fund's outlook remains cautious despite the year-over-year improvement in financial results. In the US housing market, a large inventory of foreclosed or about-to-be foreclosed homes continues to create oversupply, while high unemployment and lack of jobs growth is suppressing demand for new homes. While the Canadian market is faring better, the introduction of the Harmonized Sales Tax (HST) in Ontario and British Columbia has made home buying more expensive in those provinces and could have a negative impact on Canadian construction activity. Hardwood lumber prices, which increased in the first nine months of the year, have also shown signs of softening moving into the fourth quarter. In addition, gross profit margins are expected to continue trending below normally targeted levels as Hardwoods responds to competitive pressures. Overall, management anticipates a continuation of very challenging market conditions through the balance of the year.
With this expectation, Hardwoods' focus will remain on tight control of costs, inventories and working capital. Continuing to minimize customer credit risk will also remain a priority going forward. On the marketing front, Hardwoods will remain proactive in defending market share and working to attract new customers in specific segments. Five experienced, industry-proven new sales professionals were recently added to help expand sales capability in selected markets. The company will also continue to invest in its specialty import and Greenbelt lines of products, which provide customers with innovative solutions in a highly competitive market environment.
Hardwoods' goal through the balance of 2010 will be to protect its business, balance sheet and strong market position. Decisions about reinstating cash distributions will be evaluated, but given continued market weakness, the Fund does not anticipate a change in direction until Trustees see signs of a more sustainable market recovery, a more predictable level of cash generation performance, and any cash needs for the Fund to invest in additional working capital necessary to support sales growth have been satisfied.
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, impairment of goodwill and other intangible assets, 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 measure 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 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 2010 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, 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: that the Fund's outlook remains cautious, despite the year-over-year improvement in financial results, particularly in light of the US housing market's large inventory of foreclosed or about-to-be foreclosed homes which continues to create oversupply, while high unemployment and lack of jobs growth is suppressing demand for new homes; our belief that the introduction of the Harmonized Sales Tax (HST) in Ontario and British Columbia has made home buying more expensive in those provinces and could have a negative impact on Canadian construction activity; our perspective that hardwood lumber prices, which increased in the first nine months of the year, have shown signs of softening moving into the fourth quarter; our expectation that gross profit margins are expected to continue trending below normally targeted levels as Hardwoods responds to competitive pressures; our anticipation of a continuation of very challenging market conditions through the balance of the year; our intent that focus will remain on tight control of costs, inventories and working capital, and that continuing to minimize customer credit risk will also remain a priority going forward; that Hardwoods will remain proactive in defending market share and working to attract new customers in specific segments; our intention to continue to invest in its specialty import and Greenbelt lines of products, which provide customers with innovative solutions in a highly competitive market environment; our goal through the balance of 2010 will be to protect our business, balance sheet and strong market position; our expectation that with respect to decisions about reinstating cash distributions, given continued market weakness, the Fund does not anticipate a change in direction until Trustees see signs of a more sustainable market recovery, a more predictable level of cash generation performance, and any cash needs for the Fund to invest in additional working capital necessary to support sales growth have been satisfied.
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)
-------------------------------------------------------------------------
September 30, December 31,
2010 2009
-------------------------------------------------------------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 203 $ 463
Accounts receivable (note 6) 30,736 25,585
Income tax recoverable 1,863 2,286
Inventory (note 5) 30,473 23,901
Prepaid expenses 908 878
-----------------------------------------------------------------------
64,183 53,113
Long-term receivables (note 6) 1,692 1,883
Property, plant and equipment 942 1,291
Deferred financing costs 260 396
Future income taxes 15,915 17,587
-------------------------------------------------------------------------
$ 82,992 $ 74,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current liabilities:
Bank indebtedness (note 7) $ 11,762 $ 4,960
Accounts payable and accrued liabilities 5,352 4,988
-----------------------------------------------------------------------
17,114 9,948
Deferred gain on sale-leaseback of land and
building 350 416
Non-controlling interests (note 8) 9,277 8,748
Unitholders' equity:
Fund units 133,454 133,454
Contributed surplus (note 16) 109 -
Deficit (58,699) (60,198)
Accumulated other comprehensive loss (18,613) (18,098)
-----------------------------------------------------------------------
56,251 55,158
Contingencies (note 14)
-------------------------------------------------------------------------
$ 82,992 $ 74,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Sales $ 50,559 $ 46,435 $ 151,263 $ 149,346
Cost of sales 41,843 37,848 124,595 122,500
-------------------------------------------------------------------------
Gross profit 8,716 8,587 26,668 26,846
Expenses:
Selling and
administrative 7,325 8,044 21,734 25,579
Amortization:
Plant and equipment 74 189 366 620
Deferred financing
costs 44 37 133 117
Deferred gain on
sale - leaseback of
land and building (19) (20) (57) (65)
Interest 211 165 542 434
Unrealized foreign
currency losses 88 1,049 44 1,382
-----------------------------------------------------------------------
7,723 9,464 22,762 28,067
-------------------------------------------------------------------------
Earnings (loss) before
non-controlling
interests and income
taxes 993 (877) 3,906 (1,221)
Non-controlling
interests (note 8) 198 (391) 781 (1,757)
-------------------------------------------------------------------------
Earnings (loss) before
income taxes 795 (486) 3,125 536
Income tax expense
Current 10 86 144 193
Future 522 10,500 1,482 10,039
-------------------------------------------------------------------------
532 10,586 1,626 10,232
-------------------------------------------------------------------------
Net earnings (loss) for
the period 263 (11,072) 1,499 (9,696)
Deficit, beginning of
period (58,962) (48,582) (60,198) (49,958)
-------------------------------------------------------------------------
Deficit, end of
period $ (58,699) $ (59,654) $ (58,699) $ (59,654)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
Unit $ 0.02 $ (0.77) $ 0.10 $ (0.67)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
Consolidated Statement of Comprehensive Income (Loss)
(Unaudited)
(Expressed in thousands of Canadian dollars)
-------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Net earnings (loss)
for the period $ 263 $ (11,072) $ 1,499 $ (9,696)
Other comprehensive
income (loss):
Unrealized loss on
translation of
self-sustaining
foreign operations (823) (1,977) (515) (3,202)
-----------------------------------------------------------------------
Other comprehensive
loss (823) (1,977) (515) (3,202)
-------------------------------------------------------------------------
Comprehensive income
(loss) $ (560) $ (13,049) $ 984 $ (12,898)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Accumulated Other Comprehensive Loss
(Unaudited)
(Expressed in thousands of Canadian dollars)
-------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Accumulated other
comprehensive loss,
beginning of period $ (17,790) $ (15,949) $ (18,098) $ (14,724)
Other comprehensive
loss (823) (1,977) (515) (3,202)
-------------------------------------------------------------------------
Accumulated other
comprehensive loss,
end of period $ (18,613) $ (17,926) $ (18,613) $ (17,926)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in thousands of Canadian dollars)
-------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Cash flows provided by
(used in) operating
activities:
Net earnings (loss)
for the period $ 263 $ (11,072) $ 1,499 $ (9,696)
Items not involving
cash:
Amortization 118 227 499 737
Imputed interest
income in employee
loans (2) (11) (14) (148)
Non-cash employee
incentive program
(note 16) 109 - 109 -
Deferred gain on
sale-leaseback of
land and building (19) (21) (57) (65)
Gain on sale of
property, plant and
equipment (10) (6) (30) (31)
Unrealized foreign
exchange losses 88 1,049 44 1,382
Non-controlling
interests 198 (391) 781 (1,757)
Future income taxes 522 10,500 1,482 10,039
-----------------------------------------------------------------------
1,267 275 4,313 461
Change in non-cash
operating working
capital (note 9) (1,893) 1,680 (12,167) 8,406
-----------------------------------------------------------------------
Net cash provided by
(used in) operating
activities (626) 1,955 (7,854) 8,867
Cash flows provided by
(used in) investing
activities:
Additions to property,
plant and equipment (8) (45) (37) (95)
Proceeds on disposal
of property, plant
and equipment 11 13 34 42
Decrease in long-term
receivables, net 267 179 700 802
-----------------------------------------------------------------------
Net cash provided by
investing activities 270 147 697 749
Cash flows provided by
(used in) financing
activities:
Increase (decrease) in
bank indebtedness 443 (790) 6,897 (8,118)
Increase in deferred
bank fees - (239) - (320)
-----------------------------------------------------------------------
Net cash provided by
(used in) financing
activities 443 (1,029) 6,897 (8,438)
-------------------------------------------------------------------------
Increase (decrease) in
cash 87 1,073 (260) 1,178
Cash, beginning of
period 116 190 463 85
-------------------------------------------------------------------------
Cash, end of period $ 203 $ 1,263 $ 203 $ 1,263
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary
information (cash
amounts):
Interest paid $ 254 $ 165 $ 585 $ 434
Income taxes paid 8 90 75 193
Income taxes received 22 - 317 1,975
Transfer of accounts
receivable to long-
term customer notes
receivable, net of
write offs, being a
non-cash transaction - - - 958
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Notes to the Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of Canadian dollars)
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.
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:
- the deferred gain on sale-leaseback of land and building on the
balance sheet will be transferred proportionately to the non-
controlling interest and to Unitholders' deficit at January 1,
2011. The anticipated effect is a decrease to liabilities,
decrease to deficit, and increase to non-controlling interest;
- at the IFRS balance sheet transition date, the Fund expects to
elect under IFRS 1 to reduce to nil cumulative translation
differences that exist related to translation of self sustaining
foreign subsidiaries. The anticipated effect is to decrease to nil
the balance of accumulated other comprehensive loss, and make a
corresponding increase to deficit;
- subsidiaries of the Fund lease vehicles for employee use. Under
IFRS it is anticipated such leases will be determined to be
capital leases, rather than operating leases as is currently the
case. The anticipated effect is to increase property, plant and
equipment, and to record a lease obligation liability.
Amortization on the property, plant and equipment and finance
costs associated with the lease obligation will be recorded in
earnings as compared to an operating lease expense;
- under IFRS, it is anticipated that the Fund units will be
determined to meet the definition of a liability. The anticipated
effect is to reduce Unitholders' equity, and increase Fund unit
liability.
- corresponding future income tax impacts of the above noted
adjustments will also be required.
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:
---------------------------------------------------------------------
September 30, December 31,
2010 2009
---------------------------------------------------------------------
Cash and cash equivalents $ (203) $ (463)
Bank indebtedness 11,762 4,960
---------------------------------------------------------------------
Net debt 11,559 4,497
Unitholders' equity 56,251 55,158
---------------------------------------------------------------------
Total capitalization $ 67,810 $ 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 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, 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 three and nine month periods ended September 30, 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:
---------------------------------------------------------------------
September 30, December 31,
2010 2009
---------------------------------------------------------------------
Lumber $ 10,578 $ 8,224
Sheet goods 16,250 12,171
Specialty 1,820 2,099
Goods in-transit 1,825 1,407
---------------------------------------------------------------------
$ 30,473 $ 23,901
---------------------------------------------------------------------
---------------------------------------------------------------------
During the three months ended September 30, 2010 inventory write-
downs totaling $0.2 million (nine months ended September 30, 2010 -
$0.6 million) were recorded to reduce certain inventory items to
their net realizable value (three months ended September 30, 2009 -
$0.4 million, nine months ended September 30, 2009 - $1.2 million).
Cost of sales for the three months ended September 30, 2010 were
$41.8 million (nine months ended September 30, 2010 -
$124.6 million), which included $40.0 million (nine months ended
September 30, 2010 - $119.6 million) of costs associated with
inventory. The other $1.8 million (nine months ended September 30,
2010 - $5.0 million) related principally to freight and other related
selling expenses (nine months ended September 30, 2009 - $118.8
inventory and $3.7 million other related expenses).
6. Receivables:
The following is a breakdown of the Fund's current and long-term
receivables and represents the Fund's principal exposure to credit
risk related to its financial assets:
---------------------------------------------------------------------
September 30, December 31,
Accounts receivable 2010 2009
---------------------------------------------------------------------
Trade accounts receivable - Canada $ 12,181 $ 9,756
Trade accounts receivable - United States 21,146 16,117
Sundry receivable 226 203
Current portion of long-term receivables 353 919
---------------------------------------------------------------------
33,906 26,995
Less: allowance for doubtful accounts 3,170 1,410
---------------------------------------------------------------------
$ 30,736 $ 25,585
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
September 30, December 31,
Long-term receivables 2010 2009
---------------------------------------------------------------------
Employee housing loans $ 392 $ 450
Customer notes 1,173 1,834
Security deposits 480 518
---------------------------------------------------------------------
2,045 2,802
Less: current portion, included in
accounts receivable 353 919
---------------------------------------------------------------------
$ 1,692 $ 1,883
---------------------------------------------------------------------
---------------------------------------------------------------------
The aging of trade receivables was:
---------------------------------------------------------------------
September 30, December 31,
2010 2009
---------------------------------------------------------------------
Current $ 20,526 $ 14,557
Past due 31-60 days 6,090 5,283
Past due 61-90 days 2,004 2,181
Past due 90+ days 4,707 3,852
---------------------------------------------------------------------
$ 33,327 $ 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 September 30, 2010 was $3.2 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.
Bad debt expense, net of recoveries, for the three months ended
September 30, 2010 was $0.6 million which equates to 1.2% of sales
(three month period ended September 30, 2009 - $1.0 million, being
2.2% of sales). For the nine months ended September 30, 2010 bad debt
expense, net of recoveries, was $1.4 million (nine months ended
September 30, 2009 - $2.9 million). Historically bad debt as a
percentage of sales has averaged approximately 0.8%.
7. Bank indebtedness:
---------------------------------------------------------------------
September 30, December 31,
2010 2009
---------------------------------------------------------------------
Checks issued in excess of funds on deposit $ 331 $ 1,077
Credit facility, Hardwoods LP 2,638 1,945
Credit facility, Hardwoods USLP
(September 30, 2010 - US$8,546;
December 31, 2009 - US$1,844) 8,793 1,938
---------------------------------------------------------------------
$ 11,762 $ 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 repaid in the second 12 months of the credit
facility term, and $75,000 thereafter if repaid 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 September 30, 2010 the Hardwoods LP credit facility had
$11.1 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 September 30, 2010
the Hardwoods USLP credit facility had unused availability of
$9.9 million (US$9.6 million).
8. Non-controlling interests:
---------------------------------------------------------------------
Balance, January 1, 2010 $ 8,748
Interest in earnings:
Interest in earnings before taxes 781
-------------------------------------------------------------------
9,529
Foreign currency translation adjustment of
non-controlling interest in Hardwoods USLP (252)
---------------------------------------------------------------------
Balance, end of period $ 9,277
---------------------------------------------------------------------
---------------------------------------------------------------------
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, 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
September 30, 2010, the amount of such deficiency was
$14.8 million (2009 - $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.
- 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 Nine months Nine months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
---------------------------------------------------------------------
Accounts
receivable $ 193 $ (21) $ (6,034) $ (1,931)
Income taxes
recoverable/payable 7 (13) 377 1,902
Inventory (1,620) 71 (6,906) 5,221
Prepaid expenses (30) 139 (41) (100)
Accounts payable
and accrued
liabilities (443) 1,504 437 3,314
---------------------------------------------------------------------
$ (1,893) $ 1,680 $ (12,167) $ 8,406
---------------------------------------------------------------------
---------------------------------------------------------------------
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 and nine month periods ended September 30,
2010 and September 30, 2009 no discretionary cash distributions were
paid to Unitholders.
10. Segment disclosure:
Information about geographic areas is as follows:
---------------------------------------------------------------------
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
---------------------------------------------------------------------
Revenue from
external
customers:
Canada $ 20,164 $ 18,596 $ 60,827 $ 57,839
United States 30,395 27,839 90,436 91,507
---------------------------------------------------------------------
$ 50,559 $ 46,435 $ 151,263 $ 149,346
---------------------------------------------------------------------
---------------------------------------------------------------------
September December
30, 31,
2010 2009
---------------------------------------------------------------------
Property, plant and equipment:
Canada $ 316 $ 450
United States 626 841
---------------------------------------------------------------------
$ 942 $ 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 September 30, 2010, Hardwoods USLP contributed and expensed
$53,814 (US$51,769) (three months ended September 30, 2009 - $56,545
(US$51,498)) in relation to the USLP Plan. During the nine months
ended September 30, 2010, Hardwoods USLP contributed and expensed
$165,835 (US$160,088 (nine months ended September 30, 2009 - $185,224
(US$158,338)) 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, 2010, Hardwoods LP contributed and
expensed $52,284 (three months ended September 30, 2009 - $49,744) in
relation to the LP Plan. During the nine months ended September 30,
2010, Hardwoods LP contributed and expensed $169,377 (nine months
ended September 30, 2009 - $149,906) in relation to the LP Plan.
12. Related party transactions:
For the three months ended September 30, 2010, sales of $103,589
(three months ended September 30, 2009 - $86,226) were made to
affiliates of SIL, and the Fund made purchases of $40,384 (three
months ended September 30, 2009 - $14,684) from affiliates of SIL.
For the nine months ended September 30, 2010, sales of $370,198 (nine
months ended September 30, 2009 - $354,734) were made to affiliates
of SIL, and the Fund made purchases of $84,694 (nine months ended
September 30, 2009 - $46,844) 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.
15. Unitholders' Rights Plan:
The Fund had a Unitholders' Rights Plan (the "Rights Plan"), as
described in note 12(b) in the annual consolidated financial
statements, until the Annual General Meeting of Unitholders on May
20, 2010. At the Annual General Meeting, the Unitholders voted
against renewing the Rights Plan and, as such, at September 30, 2010
the Rights Plan is no longer in place.
16. Long Term Incentive Plan:
At the Annual General Meeting held on May 20, 2010, the Unitholders
approved a long term incentive plan ("LTIP") which authorized the
issuance of a maximum of 850,000 Units to qualified trustees,
directors, officers, employees and consultants to align the interests
of such persons with the interests of Unitholders.
The LTIP is comprised of Restricted Units and Performance Units. Each
Restricted Unit will entitle the holder to be issued the number of
units of the Fund ("Units") designated in the grant agreement for
that restricted unit. Units issuable pursuant to Restricted Units
will vest and be issued on the date or dates determined by the Fund's
Compensation Committee and set out in the grant agreement, provided
such date or dates are not later than December 31st following the
third anniversary of the date the Restricted Unit was granted. Each
Performance Unit will entitle the holder to be issued the number of
Units designated in the grant agreement for the Performance Unit
multiplied by a payout multiplier which may range from a minimum of
zero to a maximum of two depending on the achievement of the defined
performance criteria. Units issuable pursuant to Performance Units
will be issued on the date set out in the grant agreement if the
performance criteria are satisfied, provided such date is not later
than December 31st following the third anniversary of the date the
Performance Unit was granted.
The Units to which a grantee is entitled under a Restricted Unit or
Performance Unit may, at the discretion of the Board of Directors, be
settled by the Fund in Units issued from treasury, Units purchased by
the Fund in the secondary market, in an amount of cash equal to the
fair market value of such Units, or any combination of the foregoing.
If any Restricted Units or Performance Units granted under LTIP
expire, terminate or are cancelled for any reason without the Units
issuable under the Restricted Unit or Performance Unit having been
issued in full, those Units will become available for the purposes of
granting further Restricted Units or Performance Units under the
LTIP. To the extent any Units issuable pursuant to Restricted Units
or Performance Units are settled in cash or with Units purchased in
the market, those Units will become available for the purposes of
granting further Restricted Units or Performance Units.
The LTIP provides for cumulative adjustments to the number of Units
to be issued pursuant to Restricted Units or Performance Units on
each date that distributions are paid on the Units by an amount equal
to a fraction having as its numerator the amount of the distribution
per Unit and having as its denominator the fair market value of the
Units on the trading day immediately preceding the distribution
payment date. Fair market value is the weighted average price that
the Units trade on the Toronto Stock Exchange for the five trading
days on which the Units traded immediately preceding that date.
The LTIP provides that the number of Units issued to insiders
pursuant to the plan and other Unit compensation arrangements of the
Fund within a one year period, or at any one time, may not exceed 10%
of the issued and outstanding Units.
The Fund is accounting for the Restricted Units and Performance Units
as employee equity settled awards whereby the compensation cost is
determined at the grant date and recognized over the service period
using graded vesting amortization. The amount of compensation cost
recognized each period during the requisite service period is based
on the estimated number of awards that are expected to vest and in
the case of Performance Units, based on the estimated number of Units
to be issued provided that the performance conditions are considered
probable of achievement.
During the three months ended September 30, 2010 341,572 Restricted
Units and 120,339 Performance Units were granted under the terms of
the LTIP with an average fair value of $1.75 per Restricted or
Performance Unit. The Restricted and Performance Units vest over a
three year period from the grant dates and as of September 30, 2010
none of the awards were fully vested. A non-cash compensation expense
and associated contributed surplus amount of $109,041 was recorded
for the three month period ended September 30, 2010.
>>
Rob Brown, Chief Financial Officer, Phone: (604) 881-1990, Fax: (604) 881-1995, Email: robbrown@hardwoods-inc.com