| TEMBEC INC. CONSOLIDATED BALANCE SHEETS |
(unaudited) (in millions of Canadian dollars)
| Sept. 28, | ||||||
| Mar. 29, | 2013 | |||||
| 2014 | (note 2 | ) | |||
| ||||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 23 | $ | 73 | ||
Restricted cash | 8 | 1 | ||||
Trade and other receivables | 150 | 157 | ||||
Income tax receivable | 3 | - | ||||
Inventories (note 3) | 312 | 237 | ||||
Prepaid expenses | 8 | 6 | ||||
Assets classified as held for sale | 7 | 7 | ||||
| 511 | 481 | ||||
Property, plant and equipment (note 4) | 572 | 496 | ||||
Biological assets | 2 | 5 | ||||
Employee future benefits | 32 | 24 | ||||
Other long-term receivables | 10 | 10 | ||||
Deferred tax assets | 6 | 5 | ||||
| $ | 1,133 | $ | 1,021 | ||
| ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
Current liabilities: | ||||||
Operating bank loans (note 5) | $ | 81 | $ | 57 | ||
Trade, other payables and accrued charges | 232 | 195 | ||||
Interest payable | 11 | 10 | ||||
Income tax payable | - | 8 | ||||
Provisions | 5 | 6 | ||||
Current portion of long-term debt (note 6) | 19 | 16 | ||||
| 348 | 292 | ||||
| ||||||
Long-term debt (note 6) | 430 | 369 | ||||
Provisions | 11 | 12 | ||||
Employee future benefits | 124 | 127 | ||||
Other long-term liabilities | 2 | 2 | ||||
| 915 | 802 | ||||
Shareholders' equity: | ||||||
Share capital | 567 | 567 | ||||
Deficit | (373 | ) | (354 | ) | ||
Accumulated other comprehensive earnings | 24 | 6 | ||||
| 218 | 219 | ||||
| $ | 1,133 | $ | 1,021 |
The accompanying notes are an integral part of these interim consolidated financial statements.
- 1 -
| TEMBEC INC. CONSOLIDATED STATEMENTS OF NET EARNINGS (LOSS) |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars, unless otherwise noted)
| Quarters | Six months | |||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||
| (note 2 | ) | (note 2 | ) | |||||||||
Sales | $ | 362 | $ | 407 | $ | 716 | $ | 783 | ||||
Freight and other deductions | 44 | 54 | 88 | 104 | ||||||||
Lumber export taxes | (1 | ) | - | - | 1 | |||||||
Cost of sales (excluding depreciation and amortization) | 284 | 310 | 562 | 596 | ||||||||
Selling, general and administrative | 18 | 19 | 35 | 38 | ||||||||
Share-based compensation | (1 | ) | - | - | 1 | |||||||
Depreciation and amortization | 9 | 9 | 17 | 20 | ||||||||
Other items (note 8) | 6 | 24 | (8 | ) | 25 | |||||||
Operating earnings (loss) | 3 | (9 | ) | 22 | (2 | ) | ||||||
| ||||||||||||
Interest, foreign exchange and other | 9 | 10 | 18 | 22 | ||||||||
Exchange loss on long-term debt | 11 | 6 | 23 | 10 | ||||||||
Net finance costs (note 9) | 20 | 16 | 41 | 32 | ||||||||
Loss before income taxes | (17 | ) | (25 | ) | (19 | ) | (34 | ) | ||||
| ||||||||||||
Income tax expense (note 10) | 11 | 6 | 7 | 12 | ||||||||
Net loss | $ | (28 | ) | $ | (31 | ) | $ | (26 | ) | $ | (46 | ) |
| ||||||||||||
Basic and diluted net loss in dollars per share (note 7) | $ | (0.28 | ) | $ | (0.31 | ) | $ | (0.26 | ) | $ | (0.46 | ) |
| TEMBEC INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS) |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars)
| Quarters | Six months | |||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||
| (note 2 | ) | (note 2 | ) | ||||||||
Net loss | $ | (28 | ) | $ | (31 | ) | $ | (26 | ) | $ | (46 | ) |
| ||||||||||||
Other comprehensive earnings (loss), net of income taxes: | ||||||||||||
Items that will never be reclassified to earnings (loss): | ||||||||||||
Defined benefit pension plans and other benefit plans (note 11) | (20 | ) | 68 | 9 | 73 | |||||||
Income tax recovery (expense) | 5 | - | (2 | ) | - | |||||||
| (15 | ) | 68 | 7 | 73 | |||||||
Items that may be reclassified to earnings (loss) in future periods: | ||||||||||||
Foreign currency translation differences for foreign operations | 7 | (2 | ) | 18 | 4 | |||||||
Other comprehensive earnings (loss) for the period | (8 | ) | 66 | 25 | 77 | |||||||
Total comprehensive earnings (loss) | $ | (36 | ) | $ | 35 | $ | (1 | ) | $ | 31 | ||
The accompanying notes are an integral part of these interim consolidated financial statements.
- 2 -
| TEMBEC INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY |
Quarters ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars)
| Quarter ended March 29, 2014 | ||||||||||||
| Translation | ||||||||||||
| Share | of foreign | Shareholders' | ||||||||||
| capital | operations | Deficit | equity | |||||||||
Balance - beginning of period, December 28, 2013 | $ | 567 | $ | 17 | $ | (330 | ) | $ | 254 | |||
| ||||||||||||
Net loss for the period | - | - | (28 | ) | (28 | ) | ||||||
Other comprehensive earnings (loss), net of income taxes: | ||||||||||||
Defined benefit pension plans andother benefit plans (note 11) | - | - | (20 | ) | (20 | ) | ||||||
Income tax recovery | - | - | 5 | 5 | ||||||||
Foreign currency translation differencesfor foreign operations | - | 7 | - | 7 | ||||||||
| ||||||||||||
Balance - end of period, March 29, 2014 | $ | 567 | $ | 24 | $ | (373 | ) | $ | 218 | |||
| Quarter ended March 30, 2013 (note 2) | ||||||||||||
| Translation | ||||||||||||
| Share | of foreign | Shareholders' | ||||||||||
| capital | operations | Deficit | equity | ||||||||
Balance - beginning of period, December 29, 2012 | $ | 567 | $ | (3 | ) | $ | (465 | ) | $ | 99 | ||
| ||||||||||||
Net loss for the period | - | - | (31 | ) | (31 | ) | ||||||
Other comprehensive earnings (loss), net of income taxes: | ||||||||||||
Defined benefit pension plans and other benefit plans (note 11) | - | - | 68 | 68 | ||||||||
Foreign currency translation differences for foreign operations | - | (2 | ) | - | (2 | ) | ||||||
Issue of warrants | - | - | - | - | ||||||||
| ||||||||||||
Balance - end of period, March 30, 2013 | $ | 567 | $ | (5 | ) | $ | (428 | ) | $ | 134 | ||
The accompanying notes are an integral part of these interim consolidated financial statements.
- 3 -
| TEMBEC INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY |
Six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars)
| Six months ended March 29, 2014 | ||||||||||||
| Translation | ||||||||||||
| Share | of foreign | Shareholders' | ||||||||||
| capital | operations | Deficit | equity | |||||||||
Balance - beginning of year, September 28, 2013 | $ | 567 | $ | 6 | $ | (354 | ) | $ | 219 | |||
| ||||||||||||
Net loss for the period | - | - | (26 | ) | (26 | ) | ||||||
Other comprehensive earnings (loss), net of income taxes: | ||||||||||||
Defined benefit pension plans andother benefit plans (note 11) | - | - | 9 | 9 | ||||||||
Income tax expense | - | - | (2 | ) | (2 | ) | ||||||
Foreign currency translation differencesfor foreign operations | - | 18 | - | 18 | ||||||||
| ||||||||||||
Balance - end of period, March 29, 2014 | $ | 567 | $ | 24 | $ | (373 | ) | $ | 218 | |||
| Six months ended March 30, 2013 (note 2) | ||||||||||||
| Translation | ||||||||||||
| Share | of foreign | Shareholders' | ||||||||||
| capital | operations | Deficit | equity | ||||||||
Balance - beginning of year, September 29, 2012 | $ | 564 | $ | (9 | ) | $ | (455 | ) | $ | 100 | ||
| ||||||||||||
Net loss for the period | - | - | (46 | ) | (46 | ) | ||||||
Other comprehensive earnings (loss), net of income taxes: | ||||||||||||
Defined benefit pension plans and other benefit plans (note 11) | - | - | 73 | 73 | ||||||||
Foreign currency translation differences for foreign operations | - | 4 | - | 4 | ||||||||
Issue of warrants | 3 | - | - | 3 | ||||||||
| ||||||||||||
Balance - end of period, March 30, 2013 | $ | 567 | $ | (5 | ) | $ | (428 | ) | $ | 134 | ||
The accompanying notes are an integral part of these interim consolidated financial statements.
- 4 -
| TEMBEC INC. CONSOLIDATED STATEMENTS OF CASH FLOWS |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars)
| Quarters | Six months | |||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||
| (note 2 | ) | (note 2 | ) | ||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (28 | ) | $ | (31 | ) | $ | (26 | ) | $ | (46 | ) |
Adjustments for: | ||||||||||||
Depreciation and amortization | 9 | 9 | 17 | 20 | ||||||||
Net finance costs (note 9) | 20 | 16 | 41 | 32 | ||||||||
Income tax expense (note 10) | 11 | 6 | 7 | 12 | ||||||||
Income tax paid | (17 | ) | (6 | ) | (20 | ) | (8 | ) | ||||
Excess cash contributions over employee future benefits expense | (5 | ) | (6 | ) | (13 | ) | (17 | ) | ||||
Impairment loss (note 8) | - | 22 | - | 22 | ||||||||
Gain on sale of assets (note 8) | (1 | ) | - | (21 | ) | (2 | ) | |||||
Settlement loss on pension plan (note 8) | 7 | - | 7 | - | ||||||||
Other | (1 | ) | 1 | 4 | (3 | ) | ||||||
| (5 | ) | 11 | (4 | ) | 10 | ||||||
Changes in non-cash working capital: | ||||||||||||
Trade and other receivables | 25 | (20 | ) | 8 | 4 | |||||||
Inventories | (65 | ) | (33 | ) | (74 | ) | (31 | ) | ||||
Prepaid expenses | (3 | ) | (7 | ) | (2 | ) | (5 | ) | ||||
Trade, other payables and accrued charges | 33 | 33 | 35 | 2 | ||||||||
| (10 | ) | (27 | ) | (33 | ) | (30 | ) | ||||
| (15 | ) | (16 | ) | (37 | ) | (20 | ) | ||||
Cash flows from investing activities: | ||||||||||||
Disbursements for property, plant and equipment | (33 | ) | (22 | ) | (75 | ) | (62 | ) | ||||
Proceeds from sale of assets (note 8) | 1 | - | 24 | 2 | ||||||||
Change in restricted cash | - | - | (7 | ) | 4 | |||||||
Other | - | 1 | - | 1 | ||||||||
| (32 | ) | (21 | ) | (58 | ) | (55 | ) | ||||
Cash flows from financing activities: | ||||||||||||
Change in operating bank loans | 19 | 17 | 23 | 18 | ||||||||
Increase in long-term debt | 8 | - | 41 | 24 | ||||||||
Repayments of long-term debt | (1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||
Interest paid | (1 | ) | (1 | ) | (21 | ) | (19 | ) | ||||
| 25 | 15 | 41 | 21 | ||||||||
| (22 | ) | (22 | ) | (54 | ) | (54 | ) | ||||
Foreign exchange gain on cash and cash equivalents held in foreign currencies | 1 | - | 4 | 1 | ||||||||
Net decrease in cash and cash equivalents | (21 | ) | (22 | ) | (50 | ) | (53 | ) | ||||
| ||||||||||||
Cash and cash equivalents, beginning of period | 44 | 56 | 73 | 87 | ||||||||
Cash and cash equivalents, end of period | $ | 23 | $ | 34 | $ | 23 | $ | 34 | ||||
The accompanying notes are an integral part of these interim consolidated financial statements.
- 5 -
| TEMBEC INC. BUSINESS SEGMENT INFORMATION |
Quarters ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars)
| Quarter ended March 29, 2014 | |||||||||||||||||||||
| Specialty | |||||||||||||||||||||
| Forest | Cellulose | Paper | Consolidation | ||||||||||||||||||
| Products | Pulp | Pulp | Paper | Corporate | adjustments | Consolidated | ||||||||||||||
Sales: | |||||||||||||||||||||
External | $ | 95 | $ | 128 | $ | 55 | $ | 84 | $ | - | $ | - | $ | 362 | |||||||
Internal | 17 | - | 7 | - | 4 | (28 | ) | - | |||||||||||||
| 112 | 128 | 62 | 84 | 4 | (28 | ) | 362 | |||||||||||||
| |||||||||||||||||||||
Freight and other deductions | 11 | 11 | 11 | 11 | - | - | 44 | ||||||||||||||
Lumber export taxes | (1 | ) | - | - | - | - | - | (1 | ) | ||||||||||||
Cost of sales | 96 | 94 | 47 | 71 | 4 | (28 | ) | 284 | |||||||||||||
Selling, general and administrative | 3 | 5 | 2 | 3 | 5 | - | 18 | ||||||||||||||
Share-based compensation | - | - | - | - | (1 | ) | - | (1 | ) | ||||||||||||
Earnings (loss) beforethe following (adjusted EBITDA): | 3 | 18 | 2 | (1 | ) | (4 | ) | - | 18 | ||||||||||||
Depreciation and amortization | 2 | 3 | 3 | 1 | - | - | 9 | ||||||||||||||
Other items (note 8) | - | - | - | - | 6 | - | 6 | ||||||||||||||
Operating earnings (loss) | $ | 1 | $ | 15 | $ | (1 | ) | $ | (2 | ) | $ | (10 | ) | $ | - | $ | 3 | ||||
Additions to property, plantand equipment | $ | 1 | $ | 40 | $ | 1 | $ | - | $ | - | $ | - | $ | 42 | |||||||
Total assets | $ | 200 | $ | 595 | $ | 152 | $ | 145 | $ | 41 | $ | - | $ | 1,133 | |||||||
Total liabilities | $ | 82 | $ | 242 | $ | 33 | $ | 73 | $ | 485 | $ | - | $ | 915 | |||||||
| Quarter ended March 30, 2013 (note 2) | |||||||||||||||||||||
| Specialty | |||||||||||||||||||||
| Forest | Cellulose | Paper | Consolidation | ||||||||||||||||||
| Products | Pulp | Pulp | Paper | Corporate | adjustments | Consolidated | ||||||||||||||
Sales: | |||||||||||||||||||||
External | $ | 86 | $ | 120 | $ | 114 | $ | 87 | $ | - | $ | - | $ | 407 | |||||||
Internal | 18 | - | 8 | - | 2 | (28 | ) | - | |||||||||||||
| 104 | 120 | 122 | 87 | 2 | (28 | ) | 407 | |||||||||||||
| |||||||||||||||||||||
Freight and other deductions | 10 | 9 | 24 | 11 | - | - | 54 | ||||||||||||||
Lumber export taxes | - | - | - | - | - | - | - | ||||||||||||||
Cost of sales | 84 | 92 | 92 | 68 | 2 | (28 | ) | 310 | |||||||||||||
Selling, general and administrative | 3 | 5 | 2 | 3 | 6 | - | 19 | ||||||||||||||
Share-based compensation | - | - | - | - | - | - | - | ||||||||||||||
Earnings (loss) before the following (adjusted EBITDA): | 7 | 14 | 4 | 5 | (6 | ) | - | 24 | |||||||||||||
Depreciation and amortization | 2 | 3 | 3 | 1 | - | - | 9 | ||||||||||||||
Other items (note 8) | - | - | 22 | - | 2 | - | 24 | ||||||||||||||
Operating earnings (loss) | $ | 5 | $ | 11 | $ | (21 | ) | $ | 4 | $ | (8 | ) | $ | - | $ | (9 | ) | ||||
Additions to property, plant and equipment | $ | - | $ | 22 | $ | 1 | $ | 2 | $ | 1 | $ | - | $ | 26 | |||||||
Total assets | $ | 196 | $ | 442 | $ | 278 | $ | 120 | $ | 24 | $ | - | $ | 1,060 | |||||||
Total liabilities | $ | 80 | $ | 230 | $ | 68 | $ | 124 | $ | 424 | $ | - | $ | 926 | |||||||
- 6 -
| TEMBEC INC. BUSINESS SEGMENT INFORMATION |
Six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars)
| Six months ended March 29, 2014 | |||||||||||||||||||||
| Specialty | |||||||||||||||||||||
| Forest | Cellulose | Paper | Consolidation | ||||||||||||||||||
| Products | Pulp | Pulp | Paper | Corporate | adjustments | Consolidated | ||||||||||||||
Sales: | |||||||||||||||||||||
External | $ | 178 | $ | 254 | $ | 120 | $ | 164 | $ | - | $ | - | $ | 716 | |||||||
Internal | 33 | - | 15 | - | 7 | (55 | ) | - | |||||||||||||
| 211 | 254 | 135 | 164 | 7 | (55 | ) | 716 | |||||||||||||
| |||||||||||||||||||||
Freight and other deductions | 20 | 21 | 25 | 22 | - | - | 88 | ||||||||||||||
Lumber export taxes | - | - | - | - | - | - | - | ||||||||||||||
Cost of sales | 184 | 191 | 104 | 131 | 7 | (55 | ) | 562 | |||||||||||||
Selling, general and administrative | 6 | 10 | 3 | 5 | 11 | - | 35 | ||||||||||||||
Share-based compensation | - | - | - | - | - | - | - | ||||||||||||||
Earnings (loss) beforethe following (adjusted EBITDA): | 1 | 32 | 3 | 6 | (11 | ) | - | 31 | |||||||||||||
Depreciation and amortization | 3 | 7 | 5 | 2 | - | - | 17 | ||||||||||||||
Other items (note 8) | - | - | - | - | (8 | ) | - | (8 | ) | ||||||||||||
Operating earnings (loss) | $ | (2 | ) | $ | 25 | $ | (2 | ) | $ | 4 | $ | (3 | ) | $ | - | $ | 22 | ||||
Additions to property, plantand equipment | $ | 3 | $ | 70 | $ | 2 | $ | 1 | $ | - | $ | - | $ | 76 | |||||||
Total assets | $ | 200 | $ | 595 | $ | 152 | $ | 145 | $ | 41 | $ | - | $ | 1,133 | |||||||
Total liabilities | $ | 82 | $ | 242 | $ | 33 | $ | 73 | $ | 485 | $ | - | $ | 915 | |||||||
| Six months ended March 30, 2013 (note 2) | |||||||||||||||||||||
| Specialty | |||||||||||||||||||||
| Forest | Cellulose | Paper | Consolidation | ||||||||||||||||||
| Products | Pulp | Pulp | Paper | Corporate | adjustments | Consolidated | |||||||||||||||
Sales: | |||||||||||||||||||||
External | $ | 171 | $ | 223 | $ | 224 | $ | 165 | $ | - | $ | - | $ | 783 | |||||||
Internal | 34 | - | 15 | - | 6 | (55 | ) | - | |||||||||||||
| 205 | 223 | 239 | 165 | 6 | (55 | ) | 783 | |||||||||||||
| |||||||||||||||||||||
Freight and other deductions | 19 | 16 | 47 | 22 | - | - | 104 | ||||||||||||||
Lumber export taxes | 1 | - | - | - | - | - | 1 | ||||||||||||||
Cost of sales | 170 | 165 | 184 | 126 | 6 | (55 | ) | 596 | |||||||||||||
Selling, general and administrative | 6 | 10 | 4 | 6 | 12 | - | 38 | ||||||||||||||
Share-based compensation | - | - | - | - | 1 | - | 1 | ||||||||||||||
Earnings (loss) before the following (adjusted EBITDA): | 9 | 32 | 4 | 11 | (13 | ) | - | 43 | |||||||||||||
Depreciation and amortization | 4 | 6 | 8 | 2 | - | - | 20 | ||||||||||||||
Other items (note 8) | - | - | 22 | - | 3 | - | 25 | ||||||||||||||
Operating earnings (loss) | $ | 5 | $ | 26 | $ | (26 | ) | $ | 9 | $ | (16 | ) | $ | - | $ | (2 | ) | ||||
Additions to property, plant and equipment | $ | 2 | $ | 48 | $ | 6 | $ | 3 | $ | 1 | $ | - | $ | 60 | |||||||
Total assets | $ | 196 | $ | 442 | $ | 278 | $ | 120 | $ | 24 | $ | - | $ | 1,060 | |||||||
Total liabilities | $ | 80 | $ | 230 | $ | 68 | $ | 124 | $ | 424 | $ | - | $ | 926 | |||||||
- 7 -
| TEMBEC INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars, unless otherwise noted)
| 1. | Reporting entity and nature of operations |
Tembec Inc. (the “Corporation”) and its subsidiaries (collectively “Tembec” or the “Company”) operate an integrated forest products business. | |
The Corporation is incorporated and domiciled in Canada and listed on the Toronto Stock Exchange under the symbol TMB. The address of the Company's registered office is 800 René-Lévesque Blvd. West, Suite 1050, Montreal, Quebec, Canada, H3B 1X9. | |
| 2. | Basis of presentation |
Statement of compliance | |
These unaudited interim consolidated financial statements and the notes thereto have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including International Accounting Standard (IAS) 34 – Interim Financial Reporting. | |
The accounting policies and the basis of presentation applied in these unaudited interim consolidated financial statements are consistent with those applied and disclosed in the Company’s audited consolidated financial statements for the year ended September 28, 2013, except for the changes in accounting policies described below. Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual profit or loss. The Company’s interim results are not necessarily indicative of its results for a full year. | |
These unaudited interim consolidated financial statements do not include all of the information and disclosures required in the annual financial statements and, accordingly, should be read in conjunction with the Company’s audited consolidated financial statements for the year ended September 28, 2013. | |
These unaudited interim consolidated financial statements were authorized for issue by the Board of Directors on April 28, 2014. | |
Accounting estimates and judgments | |
The preparation of unaudited interim consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expense. Actual results may differ from those estimates. | |
In preparing these unaudited interim consolidated financial statements, the significant judgments made by management in applying the Company’s significant accounting policies and key sources of information were the same as those applied to the consolidated financial statements for the year ended September 28, 2013. | |
Changes in accounting policies | |
At the beginning of the fiscal year, the Company adopted the amended IAS 19,Employee Benefits, which changes the recognition and measurement of defined benefit pension plans expense, other benefit plans expense, termination benefits and enhances the disclosure of employee future benefits. The most significant changes include the accounting for past service costs, which are no longer recognized over a service period, but are instead recognized immediately in the period of a plan amendment. In addition, the expected return on plan assets is now assumed to be equal to the discount rate applied to measure the defined benefit obligation. As such, a net interest cost (income) is calculated on the net defined benefit liability (asset). The Company has restated its comparative period results following the adoption of amended IAS 19. |
- 8 -
| TEMBEC INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars, unless otherwise noted)
| 2. | Basis of presentation (continued) Changes in accounting policies (continued) |
The effect of adopting the amended standard on the consolidated balance sheets was as follows: |
| As reported | Change | Restated | ||||||||
| As at September 29, 2012 | ||||||||||
| Employee future benefits | $ | 285 | $ | 2 | $ | 287 | ||||
| Deficit | $ | (453 | ) | $ | (2 | ) | $ | (455 | ) | |
| As at September 28, 2013 | ||||||||||
| Employee future benefits | $ | 126 | $ | 1 | $ | 127 | ||||
| Deficit | $ | (353 | ) | $ | (1 | ) | $ | (354 | ) |
The effect of adopting the amended standard on the consolidated statement of net earnings (loss) and comprehensive earnings (loss) for the quarter and six months ended March 30, 2013, is as follows:
| Quarter ended March 30, 2013 | ||||||||||
| As reported | Change | Restated | |||||||
Operating loss | $ | (8 | ) | $ | (1 | ) | $ | (9 | ) | |
Net finance costs | 12 | 4 | 16 | |||||||
Income tax expense | 6 | - | 6 | |||||||
Net loss | (26 | ) | (5 | ) | (31 | ) | ||||
Defined benefit pension plans and other benefit plans | 63 | 5 | 68 | |||||||
Foreign currency translation differences for foreign operations | (2 | ) | - | (2 | ) | |||||
Total comprehensive earnings | $ | 35 | $ | - | $ | 35 | ||||
Basic and diluted net loss in dollars per share | $ | (0.26 | ) | $ | (0.31 | ) | ||||
| Six months ended March 30, 2013 | ||||||||||
| As reported | Change | Restated | ||||||||
Operating loss | $ | (1 | ) | $ | (1 | ) | $ | (2 | ) | |
Net finance costs | 23 | 9 | 32 | |||||||
Income tax expense | 12 | - | 12 | |||||||
Net loss | (36 | ) | (10 | ) | (46 | ) | ||||
Defined benefit pension plans and other benefit plans | 63 | 10 | 73 | |||||||
Foreign currency translation differences for foreign operations | 4 | - | 4 | |||||||
Total comprehensive earnings | $ | 31 | $ | - | $ | 31 | ||||
Basic and diluted net loss in dollars per share | $ | (0.36 | ) | $ | (0.46 | ) | ||||
The amended IAS 19 had no impact on cash flows from operating activities, cash flows from investing activities and cash flows from financing activities.
The Company also adopted IFRS 7,Financial Instruments – Disclosures, and IFRS 13,Fair Value Measurement. The adoption of these standards had no significant impact on the unaudited interim consolidated financial statements.
- 9 -
| TEMBEC INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars, unless otherwise noted)
| 3. | Inventories |
| Mar. 29, | Sept. 28, | ||||||
| 2014 | 2013 | ||||||
| Finished goods | $ | 135 | $ | 111 | |||
| Logs and wood chips | 103 | 55 | |||||
| Supplies and materials | 74 | 71 | |||||
| $ | 312 | $ | 237 | ||||
| Inventories carried at net realizable value | $ | 15 | $ | 22 |
During the quarters ended in March 2014 and 2013, cost of sales consists primarily of inventories recognized as an expense. Inventories at March 29, 2014, were written down by $4 million (September 28, 2013 - $4 million) to reflect net realizable value being lower than cost. The write-down and reversal, if any, are included in cost of sales.
| 4. | Property, plant and equipment |
| Net book value | |||||||
| Mar. 29, | Sept. 28, | ||||||
| 2014 | 2013 | ||||||
| Land | $ | 3 | $ | 3 | |||
| Buildings | 44 | 42 | |||||
| Production equipment: | |||||||
| Pulp and paper | 258 | 238 | |||||
| Sawmill | 16 | 15 | |||||
| Forest access roads | 9 | 9 | |||||
| Assets under construction | 242 | 189 | |||||
| $ | 572 | $ | 496 | ||||
In March 2012, the Company announced a major capital investment to upgrade its specialty cellulose manufacturing facility in Temiscaming, Quebec. As at the end of March 2014, the Company had incurred $201 million of capital expenditures for this project and had $23 million of outstanding commitments. For the six-month period ended March 29, 2014, the Company had total additions to property, plant and equipment of $76 million, of which $64 million was for the upgrade of the specialty cellulose mill. | |
| 5. | Operating bank loans |
The Canadian operations are supported by a $175 million asset-based revolving working capital facility expiring in March 2017. As at March 29, 2014, the amount available, based on eligible receivables and inventories, was $141 million of which $77 million was drawn and $53 million was reserved for letters of credit. Interest is calculated based either on the BA Rate, the LIBOR, the Canadian Prime Rate or the U.S. Base Rate, as the case may be, plus an applicable margin. | |
The French operations are supported by “receivable factoring” agreements. As such, the borrowing base fluctuates periodically, depending on shipments and cash receipts. At the end of March 2014, the amount available was $31 million of which $4 million was drawn. |
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| TEMBEC INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars, unless otherwise noted)
| 6. | Long-term debt |
This note provides information about the contractual terms of the Company’s long-term interest-bearing loans and borrowings, which are measured at amortized cost. |
| Mar. 29, | Sept. 28, | |||||||||
| Maturity | 2014 | 2013 | ||||||||
Tembec Industries Inc. - US $305 million - 11.25% senior secured notes | 12/2018 | $ | 337 | $ | 314 | |||||
Tembec Energy LP - 6.35% term loan secured by a first ranking charge | 07/2022 | 20 | 20 | |||||||
Tembec Energy LP - 6.86% term loan secured by a first ranking charge | 10/2022 | 20 | - | |||||||
Tembec Energy LP - 5.5% term loan secured by a second ranking charge | 03/2028 | 60 | 40 | |||||||
Tembec Tartas SAS | Various | 18 | 17 | |||||||
Kirkland Lake Engineered Wood Products Inc. | Various | 9 | 9 | |||||||
Other | Various | 2 | 2 | |||||||
| 466 | 402 | ||||||||
Less current portion | 19 | 16 | ||||||||
Less unamortized financing costs | 17 | 17 | ||||||||
| $ | 430 | $ | 369 |
During the March 2014 quarter, the Company received an advance of $7 million (December 2013 quarter - $13 million) on the Tembec Energy LP – 5.5% term loan secured by a second ranking charge. | |
On October 18, 2013, the Company received the second advance of $20 million bearing interest at 6.86% on the Tembec Energy LP term loan secured by a first ranking charge. This advance is repayable in blended monthly instalments over a period of eight years beginning in November 2014 with a “balloon” payment of $12 million to be repaid in October 2022. The Company has classified $5 million of amounts received from the lender as restricted cash, pending the attainment of certain milestones related to the speciality cellulose project. | |
The Company’s credit agreements contain terms and conditions that could in certain circumstances restrict the ability of the Company to incur or guarantee additional indebtedness, to encumber or dispose of its assets or make certain payments or distributions. | |
| 7. | Share capital |
Net earnings (loss) per share | |
The following table provides the reconciliation between basic and diluted net earnings (loss) per share: |
| Quarters | Six months | ||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||
| (note 2 | ) | (note 2 | ) | |||||||||
Net loss | $ | (28 | ) | $ | (31 | ) | $ | (26 | ) | $ | (46 | ) | |
Weighted average number of common shares outstanding | 100,000,000 | 100,000,000 | 100,000,000 | 100,000,000 | |||||||||
Dilutive effect of employees share options and warrants | - | - | - | - | |||||||||
Weighted average number of diluted common shares outstanding | 100,000,000 | 100,000,000 | 100,000,000 | 100,000,000 | |||||||||
Basic and diluted net loss in dollars per share | $ | (0.28 | ) | $ | (0.31 | ) | $ | (0.26 | ) | $ | (0.46 | ) | |
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| TEMBEC INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars, unless otherwise noted)
| 7. | Share capital (continued) |
Share-based compensation | |
During the December 2013 quarter, non-executive members of the Board were granted 830,581 Deferred Share Units (DSUs). These DSUs vest in three equal amounts over three years beginning in January 2014. | |
During the December 2013 quarter, 557,808 DSUs were granted to senior executives under the Performance- Conditioned Share Unit (PCSU) plan. | |
| 8. | Other items |
The following table provides a summary of the other items by business segment of the Company: |
| Quarters | Six months | ||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||
| (note 2 | ) | (note 2 | ) | |||||||||
Paper Pulp: | |||||||||||||
Impairment loss - Skookumchuck, BC, pulp mill | $ | - | $ | 22 | $ | - | $ | 22 | |||||
| - | 22 | - | 22 | |||||||||
Corporate: | |||||||||||||
Gain on sale of assets | (1 | ) | - | (21 | ) | (2 | ) | ||||||
Settlement loss on BC pension plan | 7 | - | 7 | - | |||||||||
Reorganization - severance costs | - | - | 3 | - | |||||||||
Costs for permanently idled facilities | - | 2 | 3 | 5 | |||||||||
| 6 | 2 | (8 | ) | 3 | ||||||||
| $ | 6 | $ | 24 | $ | (8 | ) | $ | 25 | ||||
2014
On March 10, 2014, the Company recorded a gain of $1 million relating to the sale of its pulp mill located in Chetwynd, British Columbia (BC), for a nominal amount and the assumption of certain liabilities by the buyer.
During the March 2014 quarter, the Company signed an agreement to settle the defined benefit obligation of its BC pension plan and incurred a non-cash settlement loss of $7 million. In relation with the settlement, the Company recorded a $4 million gain in other comprehensive earnings (loss) for previously unrecognized pension assets due to the asset ceiling limit.
On September 30, 2013, the Company announced the BC Lands Sale Initiative. During the December 2013 quarter, the Company completed the sale of various parcels of land for total proceeds of $23 million realizing a gain of $20 million.
During the December 2013 quarter, the Company reorganized certain management functions and roles and recorded a charge of $3 million for severance costs associated with personnel reductions.
During the December 2013 quarter, the Company recorded a charge of $3 million relating to several permanently idled facilities. The costs relate to custodial, site security, legal and remediation activities.
2013
On March 26, 2013, the Company announced that it had reached an agreement to sell its NBSK pulp mill located in Skookumchuck, BC. The assets and liabilities were classified as held for sale. During the March 2013 quarter, the Company recorded an impairment charge of $22 million on the non-current assets to reflect anticipated net proceeds of sale.
During the March 2013 quarter, the Company recorded a charge of $2 million relating to several permanently idled facilities. The costs relate to custodial, site security, legal, pension plans administration expenses and remediation activities. For the six-month period ended March 30, 2013, these charges amounted to $5 million.
During the December 2012 quarter, the Company recorded a gain of $2 million relating to the sale of land and building in Cranbrook, BC.
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| TEMBEC INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars, unless otherwise noted)
| 9. | Net finance costs |
| Quarters | Six months | ||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||
| (note 2 | ) | (note 2 | ) | ||||||||||
Interest on long-term debt | $ | 11 | $ | 10 | $ | 22 | $ | 20 | |||||
Interest on short-term debt | 1 | - | 1 | 1 | |||||||||
Bank charges and other financing expenses | - | 1 | 1 | 1 | |||||||||
Net foreign exchange gain, excluding exchange on long-term debt | (1 | ) | (1 | ) | (1 | ) | (1 | ) | |||||
Exchange loss on long-term debt | 11 | 6 | 23 | 10 | |||||||||
Net interest cost on defined benefit plans | 1 | 2 | 2 | 5 | |||||||||
Interest capitalized on assets under construction | (3 | ) | (2 | ) | (7 | ) | (4 | ) | |||||
| $ | 20 | $ | 16 | $ | 41 | $ | 32 | |||||
| |||||||||||||
Finance costs | $ | 21 | $ | 17 | $ | 42 | $ | 33 | |||||
Finance income | (1 | ) | (1 | ) | (1 | ) | (1 | ) | |||||
Net finance costs | $ | 20 | $ | 16 | $ | 41 | $ | 32 | |||||
| 10. | Income taxes |
The reconciliation of income taxes calculated at the statutory rate to the actual tax provision is as follows: |
| Quarters | Six months | ||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||
| (note 2 | ) | (note 2 | ) | |||||||||
Loss before income taxes | $ | (17 | ) | $ | (25 | ) | $ | (19 | ) | $ | (34 | ) | |
Income tax recovery based on combined federal and provincial income tax rates of 26.2% (2013 - 26.3%) | $ | (4 | ) | $ | (6 | ) | $ | (5 | ) | $ | (8 | ) | |
Increase resulting from: | |||||||||||||
Difference in statutory income tax rates | 1 | 2 | 2 | 4 | |||||||||
Permanent differences and other tax adjustments | 2 | 1 | 4 | 1 | |||||||||
Unrecognized tax asset | 12 | 9 | 6 | 15 | |||||||||
| 15 | 12 | 12 | 20 | |||||||||
Income tax expense | $ | 11 | $ | 6 | $ | 7 | $ | 12 | |||||
Income taxes: | |||||||||||||
Current | $ | 5 | $ | 6 | $ | 9 | $ | 10 | |||||
Deferred | 6 | - | (2 | ) | 2 | ||||||||
Income tax expense | $ | 11 | $ | 6 | $ | 7 | $ | 12 | |||||
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| TEMBEC INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars, unless otherwise noted)
| 11. | Employee future benefits |
The Company measures its defined benefit obligations and the fair value of plan assets at year-end. At the end of each interim reporting period, the Company estimates changes in its accrued benefit liabilities based upon variations in discount rates and rates of return on plan assets, as well as any significant changes to the plans, if any. | |
The following table presents the Company’s employee future benefit costs included in net earnings (loss): |
| Quarters | Six months | ||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||
| (note 2 | ) | (note 2 | ) | ||||||||||
Defined benefit pension plans | $ | 2 | $ | 3 | $ | 4 | $ | 5 | |||||
Defined contribution and other retirement plans | 1 | 2 | 3 | 4 | |||||||||
Other benefit plans | 1 | - | 1 | 1 | |||||||||
Current service cost | $ | 4 | $ | 5 | $ | 8 | $ | 10 | |||||
| |||||||||||||
Administration expenses | $ | 1 | $ | 1 | $ | 1 | $ | 1 | |||||
| |||||||||||||
Net interest cost | $ | 1 | $ | 2 | $ | 2 | $ | 5 | |||||
| |||||||||||||
Settlement loss on BC pension plan (note 8) | $ | 7 | $ | - | $ | 7 | $ | - | |||||
The variation in discount rate on obligations, the return on plan assets excluding amounts included in net interest on the net liability and the revised mortality table generated a gain (loss) on employee future benefits, included in other comprehensive earnings (loss), as follows:
| Quarters | Six months | ||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||
| (note 2 | ) | (note 2 | ) | ||||||||||
Actuarial gain (loss) - variation in discount rate | $ | (38 | ) | $ | 42 | $ | (27 | ) | $ | 42 | |||
Return on plan assets (excluding interest income) | 23 | 26 | 51 | 31 | |||||||||
Actuarial loss - mortality table | (14 | ) | - | (14 | ) | - | |||||||
Effect of limit on recognition of assets | 9 | - | (1 | ) | - | ||||||||
| $ | (20 | ) | $ | 68 | $ | 9 | $ | 73 | ||||
The actuarial loss on variation in discount rate recognized in the statement of comprehensive earnings (loss) at March 29, 2014, was based on a variation of the discount rate for pension plans from 4.60% used at September 28, 2013, to 4.70% at December 28, 2013 and 4.34% at March 29, 2014. The actual rate of return for the six-month period was 9.1% (annualized 18.2%), which is 6.8% higher than the amount recorded in interest income of 2.3% (annualized 4.6%).
During the March 2014 quarter, the Canadian Institute of Actuaries issued the Canadian Pensioners’ Mortality Table for private sector pension plans. An actuarial loss of $14 million was recorded to reflect the impact of this table on the Canadian pension plans.
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| TEMBEC INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars, unless otherwise noted)
| 12. | Financial instruments Fair value |
The carrying value and the fair value of long-term debt are as follows: |
| Mar. 29, | Sept. 28, | ||||||
| 2014 | 2013 | ||||||
| Carrying value | $ | 449 | $ | 385 | |||
| Fair value | $ | 500 | $ | 428 |
Financial risk management
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
| Mar. 29, | Sept. 28, | |||||
| 2014 | 2013 | |||||
Loans and receivables, other than cash, cash equivalents and restricted cash | $ | 160 | $ | 167 | |||
Cash, cash equivalents and restricted cash | $ | 31 | $ | 74 |
Exposure to liquidity risk
The Company has an objective of maintaining liquidity equal to 12 months of maintenance capital expenditures, interest and principal repayments, seasonal working capital requirements and general corporate purposes, which would amount to approximately $135 million to $150 million of liquidity.
Repayment of amounts due within one year is funded by normal collection of current trade accounts receivable. Liquidity in the form of cash, cash equivalents and unused revolving credit facilities is also maintained to assist in the solvency and financial flexibility of the Company. Liquidity as at March 29, 2014, totalled $69 million (September 28, 2013 - $109 million). The Company anticipates that the liquidity will likely remain below its stated objective as the capital expenditures associated with the Temiscaming project continue. In order to address this situation, the Company entered into two secured term loan facilities totalling $133 million of which $33 million is undrawn.
The Company is actively pursuing its BC Land Sales Initiative as well as options to increase liquidity. The Company has recently entered into an agreement to sell additional parcels for cash proceeds of $35 million (see note 14). The closing of the transaction is conditional on the purchaser obtaining adequate financing. There can be no assurance that the transaction will be consummated. The Company is also pursuing other alternatives to enhance liquidity including, but not limited to, the potential sale of other assets, the refinancing of existing indebtedness and other capital market initiatives. There can be no assurance that the Company will be successful in its efforts. The Company’s liquidity is also dependent on generating a sufficient amount of adjusted EBITDA and cash flow from operations. These can be significantly impacted by changes to the relative value of the Canadian dollar, product selling prices and the cost of inputs utilized in manufacturing processes. Based on existing liquidity, current initiatives to obtain additional liquidity and anticipated future operating cash flow, the Company believes that it will be able to adequately fund its operations and meet its future obligations as they become due. This determination could be impacted by economic, financial, competitive, legislative and regulatory factors, as well as other events, that are beyond the Company’s control.
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| TEMBEC INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
Quarters and six months ended March 29, 2014 and March 30, 2013
(unaudited) (in millions of Canadian dollars, unless otherwise noted)
| 12. | Financial instruments (continued) |
The following are the contractual maturities of financial liabilities, including interest payments: |
| March 29, 2014 | |||||||||||||||||||
| Carrying | Contractual | After | |||||||||||||||||
| amount | cash flows | Year 1 | Years 2-3 | Years 4-5 | 5 years | |||||||||||||
Secured bank loans | $ | 452 | (1) | $ | 676 | $ | 56 | $ | 98 | $ | 427 | $ | 95 | ||||||
Unsecured loans | 14 | 15 | 7 | 6 | 1 | 1 | |||||||||||||
Operating bank loans | 81 | 81 | 81 | - | - | - | |||||||||||||
Trade and others | 243 | 243 | 243 | - | - | - | |||||||||||||
| $ | 790 | $ | 1,015 | $ | 387 | $ | 104 | $ | 428 | $ | 96 | |||||||
| (1) before financing costs | |||||||||||||||||||
| 13. | Capital management |
The Company’s long-term objective is to maintain the net debt to total capitalization ratio at 40% or less. The net debt to total capitalization ratio of the Company was 59% as at March 29, 2014 (September 28, 2013 – 52%). The increase was due to a higher debt borrowed primarily to finance the Temiscaming specialty cellulose project. The Company anticipates that the net debt to total capitalization ratio will remain in excess of its target until the Temiscaming project is completed and begins to generate the projected incremental adjusted EBITDA. | |
There were no changes in the Company’s approach to capital management during the period. | |
| 14. | Subsequent event |
On April 25, 2014, the Company announced the conditional sale of 49,500 hectares of land in BC for a price of $35 million plus a seven year earn-out provision pursuant to which the Company would be entitled to additional payments of at least $2 million. The closing of the sale is conditional on the purchaser obtaining adequate financing and other customary conditions. There can be no assurance that the transaction will be consummated. |
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