Note: Financial references in US dollars unless otherwise indicated
HIGHLIGHTS
- Achieved breakeven EBITDA vs. a loss of $60 million in 2008
- Limited EBITDA loss from North American mills to $8 million vs.
$51 million in 2008
- Generated positive EBITDA of $17 million in Europe vs. $4 million in
2008
- Generated margin improvements of $29 million
- Improved safety performance by 50% to a 'best ever' OSHA rate of 0.96
- Completed program to divest non-core assets in North America
- Completed recapitalization program, including $200 million Rights
Offering and financial covenant amendments
For the full year, Norbord generated breakeven EBITDA compared to negative EBITDA of
"I am pleased with the progress made in 2009 to improve Norbord's earning potential," said Barrie Shineton, President and CEO. "As expected, markets for our building material products were weak again this year as the historic collapse in both US and UK housing activity and the fallout from the global financial market breakdown continued through most of 2009. Against this backdrop, Norbord conserved cash by curtailing considerable production capacity and reducing overhead costs. These actions, together with lower key input prices, led to our breakeven EBITDA result. We also completed significant recapitalization initiatives during the year.
While generating negative earnings is never acceptable, we head into 2010 with our 'house in order' and a more positive building materials market outlook, particularly in
Market Conditions
US housing starts in 2009 were approximately 0.55 million, down from 0.9 million in 2008, 1.35 million in 2007 and 1.8 million in 2006.
For the full year, North Central benchmark OSB prices averaged
In the fourth quarter, the North Central benchmark OSB prices averaged
North American housing markets and OSB prices declined throughout the first half of 2009, reached a bottom mid-year and began to trend up in the third and fourth quarters. The relative strength of fourth quarter OSB prices was due to weather-related log shortages and low distribution chain inventories. Demand was also supported in part by housing activity generated by the Home Buyer Tax Credit program as the original
In the UK, where the majority of Norbord's European assets are located, year-over-year housing starts declined 20%. However, the second half of the year saw a gradual improvement, with
European average prices declined by 20% for OSB, 16% for MDF and 6% for particleboard in 2009 versus 2008. Prices for all three product lines were under pressure at the beginning of 2009 and stabilized by mid-year. OSB prices began to recover, particularly in the fourth quarter, as a result of improved demand, low supply chain inventories and higher imported plywood prices across
Performance
Norbord's North American OSB mills operated at approximately 60% of capacity in both the fourth quarter and the full year compared to 80% of capacity in 2008. Norbord operated at approximately 80% of its European capacity throughout the year.
Norbord's North American per unit OSB production costs increased 8% in the fourth quarter versus the third quarter of 2009 due primarily to higher resin prices, lower production volumes, and higher energy and resin usages. OSB cash production costs in the quarter were still significantly lower than the prior year, down 11% versus the fourth quarter of 2008. For the full year, per unit OSB costs decreased 7% from 2008 as lower key input prices more than offset the impact of lower production volumes.
Norbord's Margin Improvement Program helped the Company improve its competitive position throughout the year, generating savings of
At year end, Norbord had unutilized liquidity of
Capital investments totaled
Developments
As previously announced, the Company implemented a share consolidation on the basis of one post-consolidated common share for every ten pre-consolidated common shares. The effective date for the share consolidation was
In 2009, Norbord divested its non-core MDF assets in Deposit, New York and formed a joint venture for its non-core hardwood plywood business in Cochrane, Ontario.
Additional Information
Norbord's year-end 2009 letter to shareholders, news release, management's discussion & analysis, audited financial statements and notes to the financial statements have been filed on SEDAR (www.sedar.com) and are available in the investor section of the Company's website at www.norbord.com. Shareholders are encouraged to read this material.
Conference Call
Norbord will hold a conference call for analysts and institutional investors on
Norbord Profile
Norbord Inc. is an international producer of wood-based panels with assets of
This news release contains forward-looking statements, as defined in applicable legislation. Often, but not always, words such as "believe," "will," "expect," "expects," "expected," "forecast," "estimate," "estimates," "estimated," "likely," "may," "agreed to," "would," and other expressions which are predictions of or indicate future events, trends or prospects and which do not relate to historical matters identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Norbord to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
Although Norbord believes it has a reasonable basis for making these forward-looking statements, readers are cautioned not to place undue reliance on such forward-looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, which contribute to the possibility that the predictions, forecasts and other forward-looking statements will not occur. Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include: general economic conditions; risks inherent with product concentration; effects of competition and product pricing pressures; risks inherent with customer dependence; effects of variations in the price and availability of manufacturing inputs; risks inherent with a capital intensive industry; and other risks and factors described from time to time in filings with Canadian securities regulatory authorities.
Except as required by applicable laws, Norbord does not undertake to update any forward-looking statements, whether as a result of new information, future events or otherwise, or to publicly update or revise the above list of factors affecting this information. See the "Caution Regarding Forward-Looking Information" statement in the
To our Shareholders,
Norbord was faced with significant challenges again in 2009. However, our performance through the year was better than we anticipated.
We started the year on the defensive. Markets for our building material products remained exceptionally weak due to the ongoing deterioration of housing activity in both the US and the UK. Our priorities were twofold: stabilize the balance sheet and conserve cash.
I'm pleased to report that we progressed well in both areas.
We completed a
We also closed two of our oriented strand board (OSB) mills for an indefinite period of time and reduced production at six other mills to conserve cash. In total, we curtailed 40% of our OSB capacity in
These efforts, along with our initiatives to lower overhead costs and a dramatic decline in manufacturing input prices, had a positive impact on our financial performance. We ended 2009 with breakeven EBITDA and limited losses to
Norbord Well Positioned for Eventual Housing Recovery
Negative earnings are never acceptable. However, we believe that Norbord is in a stronger position going in to 2010 than we were at this time last year.
A housing market recovery, albeit fragile, is evident in
Our European mills will benefit from economic recovery within the UK. Unemployment is moderating and credit availability has improved for most qualified home buyers in the UK. Our operations also benefit from the weak Pound Sterling relative to the Euro, a trend that provides both stronger local sales opportunities and new export opportunities for our UK-based business. The UK housing market differs from
Norbord's sales strategy limits exposure to new home construction. Our sales to industrial and home improvement centres in 2009 were effective in limiting our exposure to cyclical new home construction. Sales growth in these market segments will be a key focus in 2010. Looking to 2011 and beyond, Norbord will maintain strong relationships with the biggest and the best national suppliers to home builders. Sales to this segment will grow as the housing recovery takes hold.
Our recapitalization program is complete and financial ratios are stable. We are operating well within our financial covenant ratios and believe we have sufficient access to liquidity to manage through the remainder of this housing downturn. We were also pleasantly surprised by the recent enactment of The Worker, Homeownership and Business Assistance Act in the US, which provided a
The benefits of overhead cost reduction initiatives are being realized. Our already lean corporate structure was pared down further in 2009 to reflect the smaller size of our business. We have reduced overhead costs by 30% since 2007 by eliminating bonus payments, reducing headcount and cutting most consulting and travel expenses. The full benefit of our decision to indefinitely curtail two OSB mills will flow through and have a positive impact on our 2010 results.
2009: Best Ever Safety Results
In 2009, we reduced our overall incident rate by approximately 50% compared to 2008, achieving our 'best ever' OSHA rate of 0.96. The mills in Genk,
Improved Business Outlook
We enter 2010 on the offensive. Recapitalization initiatives are complete. We have adjusted our production capacity to conserve cash. Our customer strategy has limited our exposure to new home construction. And, the worst of the global economic downturn is behind us. The shape of housing recovery in
We appreciate that the current downturn has been difficult for both our employees and our shareholders. However, we fully expect to generate strong shareholder returns as the housing recovery takes hold in both
Thank you for your continued support.
(signed)
J. Barrie Shineton
This letter includes forward-looking statements, as defined by applicable securities legislation. Often, but not always, forward-looking statements can be identified by the use of words such as "would," "expect," "positions," "when," "if," "should," "must," "believe," "view," "when," or variations of such words and phrases or statements that certain actions "may," "could," "must," "would," "might," or "will" be undertaken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Norbord to be materially different from any future results, performance or achievement expressed or implied by the forward-looking statements. See the cautionary language in the Forward-Looking Statements section of the 2009 Management's Discussion and Analysis dated
Management's Responsibility for the Financial Statements
The accompanying consolidated financial statements and all information in this annual report are the responsibility of management and have been approved by the Board of Directors.
The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. Financial statements are not precise since they include certain amounts based upon estimates and judgments. When alternative methods exist, management has chosen those it deems to be the most appropriate in the circumstances in order to ensure that the consolidated financial statements are presented fairly, in all material respects, in accordance with Canadian generally accepted accounting principles.
The Company maintains systems of internal controls, which are designed to provide reasonable assurance that accounting records are reliable and to safeguard the Company's assets.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out this responsibility principally through its Audit Committee.
The Audit Committee is appointed by the Board and reviews the consolidated financial statements and management's discussion and analysis; considers the report of the external auditors; assesses the adequacy of the internal controls of the Company; approves the services provided by the external auditors; examines the fees and expenses for audit services; and recommends to the Board the independent auditors for appointment by the shareholders. The Committee reports its findings to the Board of Directors for consideration when approving the consolidated financial statements for issuance to the shareholders.
J. Barrie Shineton Robin E. Lampard
President and Chief Executive Senior Vice President and Chief
Officer Financial Officer
Auditors' Report
To the Shareholders of Norbord Inc.
We have audited the consolidated balance sheets of Norbord Inc. as at
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
Consolidated Statements of Earnings
-------------------------------------------------------------------------
Years ended December 31 (US $ millions, except
per share information) 2009 2008
-------------------------------------------------------------------------
Net sales $ 718 $ 943
-------------------------------------------------------------------------
Earnings before interest, income tax,
depreciation, provision for non-core operation,
foreign exchange loss and litigation settlement - (60)
Provision for non-core operation (note 11) (4) (4)
Foreign exchange loss (3) -
Interest expense (notes 3 and 7) (36) (49)
Interest and other income - 3
Litigation settlement (note 19) - (32)
-------------------------------------------------------------------------
Earnings before income tax and depreciation (43) (142)
Depreciation (note 2) (48) (68)
Income tax recovery (note 12) 33 95
-------------------------------------------------------------------------
Earnings $ (58) $ (115)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share (note 10)
Basic and diluted $ (1.35) $ (7.62)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------
Years ended December 31 (US $ millions) 2009 2008
-------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR):
Operating Activities
Earnings $ (58) $ (115)
Items not affecting cash:
Depreciation (note 2) 48 68
Future income taxes (note 12) 22 (80)
Other items (note 13) 9 (22)
-------------------------------------------------------------------------
21 (149)
Net change in non-cash operating working capital
balances (note 13) (11) 51
Net change in tax receivable (45) 85
-------------------------------------------------------------------------
(35) (13)
-------------------------------------------------------------------------
Investing Activities
Investment in property, plant and equipment (14) (27)
Realized net investment hedge gain (loss) (note 16) (2) 26
Other 3 3
-------------------------------------------------------------------------
(13) 2
-------------------------------------------------------------------------
Financing Activities
Revolving bank lines drawn (repaid) (note 7) (34) 19
Brookfield debt facility drawn (repaid) (note 7) (35) 35
Issue of common shares, net (note 9) 97 65
Issue of warrants, net (note 9) 21 14
Repurchase of 8 - 1/8% debentures (note 7) - (197)
Dividends paid - (33)
-------------------------------------------------------------------------
49 (97)
-------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ 1 $ (108)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents, beginning of year $ 20 $ 128
Cash and cash equivalents, end of year (note 13) 21 20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
Consolidated Balance Sheets
-------------------------------------------------------------------------
As at December 31 (US $ millions) 2009 2008
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 13) $ 21 $ 20
Accounts receivable (note 3) 27 12
Tax receivable (note 12) 57 13
Inventory (note 4) 71 81
-------------------------------------------------------------------------
176 126
Property, plant and equipment (note 5) 860 885
Other assets (note 6) 7 33
-------------------------------------------------------------------------
$ 1,043 $ 1,044
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $140 $146
Long-term debt (note 7) 471 542
Other liabilities (note 8) 9 14
Future income taxes (note 12) 89 74
Shareholders' equity (note 9) 334 268
-------------------------------------------------------------------------
$ 1,043 $ 1,044
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
On behalf of the Board:
Robert J. Harding J. Barrie Shineton
Chair President and Chief Executive
Officer
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income
-------------------------------------------------------------------------
Years ended December 31 (US $ millions) 2009 2008
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
Share Capital
Balance, beginning of year $ 238 $ 150
Issue of common shares, net (note 9) 97 65
Dividend reinvestment plan (note 9) - 23
-------------------------------------------------------------------------
Balance, end of year $ 335 $ 238
-------------------------------------------------------------------------
Contributed Surplus
Balance, beginning of year $ 17 $ 1
Issue of warrants, net (note 9) 21 14
Stock-based compensation (note 9) 1 2
-------------------------------------------------------------------------
Balance, end of year $ 39 $ 17
-------------------------------------------------------------------------
Retained Earnings
Balance, beginning of year $ 24 $ 204
Adoption of new accounting standards (note 2) 2 1
-------------------------------------------------------------------------
Adjusted balance, beginning of year 26 205
Earnings (58) (115)
Common share dividends - (56)
Future income taxes - acquisition of control
(note 12) - (8)
-------------------------------------------------------------------------
Balance, end of year $ (32) $ 26
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of year $ (13) $ 4
Other comprehensive income (loss) 5 (17)
-------------------------------------------------------------------------
Balance, end of year $ (8) $ (13)
-------------------------------------------------------------------------
Shareholders' equity $ 334 $ 268
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)
Earnings $ (58) $ (115)
Other comprehensive income (loss):
Foreign currency translation - (10)
Future income taxes 5 (7)
-------------------------------------------------------------------------
Comprehensive income (loss) $ (53) $ (132)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
Notes to the Consolidated Financial Statements
(in US $, unless otherwise noted)
In these notes "Norbord" means Norbord Inc. and all of its consolidated
subsidiaries and affiliates, and "Company" means Norbord Inc. as a
separate corporation, unless the context implies otherwise. "Brookfield"
means Brookfield Asset Management Inc. or any of its consolidated
subsidiaries and affiliates, a related party, by virtue of a controlling
equity interest in the Company.
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries including a newly formed joint venture, True
North Hardwood Plywood Inc., which has been proportionately consolidated
effective January 31, 2009. This hardwood plywood operation is non-core
and represents less than 5% of both total sales and assets.
Effective October 16, 2009, the Company consolidated all of its issued
and outstanding common shares on the basis of one post-consolidation
common share for every 10 pre-consolidation common share (notes 9 and
10). All references to common share and per common share data for all
periods presented in the consolidated financial statements have been
adjusted to reflect the common share consolidation.
Use of Estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles (GAAP) requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates are required in
assessing net recoverable amounts and net realizable values,
depreciation, tax and other provisions, hedge effectiveness and fair
value.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and investment grade
money market securities and bank term deposits with maturities of 90 days
or less from the date of purchase. Cash and cash equivalents are recorded
at cost, which approximates market value.
Inventories
Inventories of raw materials and operating and maintenance supplies are
valued at the lower of cost and net realizable value, with cost
determined on an average cost basis.
Inventories of finished goods are valued at the lower of cost and net
realizable value, with cost determined on an average cost basis. Cost
includes direct material, direct labour and an allocation of overhead.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Property and plant
includes land and buildings. Buildings are depreciated on a straight-line
basis over 20 to 40 years. Production equipment is depreciated using the
units of production basis effective March 29, 2009 (note 2). This method
amortizes the cost of equipment over the estimated units that will be
produced during its estimated useful life which ranges from 10 to 25
years. The rates of depreciation are intended to fully depreciate
manufacturing and non-manufacturing assets over their useful life. These
periods are assessed from time to time to ensure that they continue to
approximate the useful lives of the related assets.
Property, plant and equipment are tested for recoverability whenever
events or changes in circumstances indicate that the carrying amount may
not be recoverable. The recoverability assessment is based on the
Company's estimates and assumptions. If these estimates change in the
future, the Company could be required to reduce the carrying value of
property, plant and equipment resulting in an impairment charge.
Employee Future Benefits
Norbord sponsors various defined benefit and defined contribution pension
plans, which cover substantially all employees and are funded in
accordance with applicable plan and regulatory requirements. The benefits
under Norbord's defined benefit pension plans are generally based on an
employee's length of service and the final five years' average salary,
and the plans do not provide for indexation of benefit payments.
The measurement date for all defined pension plans is December 31. The
obligations associated with Norbord's defined benefit pension plans are
actuarially valued using the projected unit credit method pro-rated on
services, management's best estimate assumptions for expected investment
performance, salary escalation and health care cost trend rates, and a
current market discount rate. For the purpose of calculating the expected
return on plan assets, those assets are measured at fair value. Prior
service costs related to plan amendments and transitional assets are
amortized on a straight-line basis over the estimated average remaining
service lives (EARSL) of the employee groups. The net actuarial gains or
losses in excess of 10% of the greater of the accrued benefit obligation
and the fair value of plan assets are amortized on a straight-line basis
over EARSL.
Financial Instruments
The Company utilizes derivative financial instruments solely to manage
its foreign currency, interest rate, and commodity price exposures in the
ordinary course of business. Derivatives are not used for trading or
speculative purposes. All hedging relationships, risk management
objectives, and hedging strategies are formally documented and
periodically assessed to ensure that the changes in the value of these
derivatives are highly effective in offsetting changes in the fair
values, net investments or cash flows of the hedged exposures.
Accordingly, all gains and losses (realized and unrealized, as
applicable) on such derivatives are recognized in the same manner as
gains and losses on the underlying exposure being hedged. Any resulting
carrying amounts are included in other assets if there is an unrealized
gain on the derivative, or in other liabilities if there is an unrealized
loss on the derivative.
The fair value of the Company's derivative financial instruments are
determined by using quoted prices in active markets for identical assets
and liabilities. These fair values reflect the estimated amount that the
Company would have paid or received if required to settle all outstanding
contracts at year-end. This fair value represents a point-in-time
estimate that may not be relevant in predicting the Company's future
earnings or cash flows.
The Company is exposed to credit risk in the event of non-performance by
its derivative counterparties. However, the Company's Board-approved
financial policies require that derivative transactions be executed only
with approved highly rated counterparties under master netting
agreements; therefore, the Company does not anticipate any non-
performance. The fair value measurements of the Company's derivative
financial instruments are classified as Level 2 of a three-level
hierarchy as fair value of these derivative instruments include
observable market inputs.
The carrying value of the Company's non-derivative financial instruments
approximates fair value, except where disclosed in these notes. Fair
values disclosed are determined using actual quoted market prices or, if
not available, indicated prices based on similar publicly-traded
instruments.
Debt Issue Costs
The Company accounts for transaction costs that are directly attributable
to the issuance of long-term debt by deducting such costs from the
carrying value of the long-term debt. The capitalized transaction costs
are amortized to earnings over the term of the related long-term debt.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Accordingly, future tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Future tax assets and liabilities are
measured using enacted or substantively enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. In addition, the effect on
future tax assets and liabilities of a change in tax rates is recognized
in income in the year that includes the enactment or substantive
enactment date. The Company assesses recoverability of future income tax
assets based on the Company's estimates and assumptions. Future income
tax assets are recorded at an amount that the Company considers is more
likely than not to be realized.
Stock Options
The Company accounts for stock options using the fair value method. Under
the fair value method, compensation expense for options is measured at
the grant date using the Black-Scholes option pricing model and
recognized in earnings on a straight-line basis over the vesting period.
Warrants
The Company accounts for warrants using the fair value method. Under the
fair value method, the value of warrants is measured at the issue date
using the Black-Scholes option pricing model, reduced by any related
issue costs.
Revenue Recognition
Net sales are recognized when the risks and rewards of ownership pass to
the purchaser. This is generally when goods are shipped. Sales are
recorded net of third-party transportation and discounts.
Sales are governed by contract or by standard industry terms. Revenue is
not recognized prior to the completion of those terms. The majority of
product is shipped via third-party transport on a freight-on-board
shipping point basis. In all cases, product is subject to quality testing
by the Company to ensure it meets applicable standards prior to shipment.
Translation of Foreign Currencies
The accounts of subsidiaries having a functional currency other than the
US dollar are translated using the current rate method. Gains or losses
on translation are deferred and included in accumulated other
comprehensive income. Gains or losses on foreign currency-denominated
balances and transactions that are designated as hedges of net
investments in these subsidiaries are reported in the same manner as
translation adjustments.
Monetary assets and liabilities denominated in currencies other than an
entity's functional currency are translated at the rate of exchange
prevailing at year-end. Gains or losses on translation of these items are
included in the consolidated statements of earnings. Gains or losses on
transactions that hedge these items are also included in the consolidated
statements of earnings.
Gains or losses on transactions that serve to hedge future foreign
currency-denominated cash flows are recognized and reported in the same
manner as the cash flows being hedged.
NOTE 2. CHANGES IN ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING
ESTIMATES
Property, Plant and Equipment
In accordance with Canadian Institute of Chartered Accountants (CICA)
Handbook Section 3061, Property, Plant and Equipment, depreciation
methods should be reviewed on a regular basis and significant events may
indicate a need to revise depreciation methods. The Company had utilized
the straight line method of depreciation for production equipment, which
allocates cost equally to each period. In a period of fluctuating
production levels, the straight line depreciation method does not result
in rational allocation of the cost of equipment to production.
Consequently, effective March 29, 2009, the Company changed to the unit
of production depreciation method for its production assets. This method
allocates the equipment costs to the actual units produced based on
estimated annual capacity over the remaining useful lives of the assets.
The impact of this change has been applied prospectively as a change in
an estimate, and it resulted in a $12 million reduction in depreciation
expense in 2009.
Goodwill and Intangible Assets
In February 2008, the CICA issued Handbook Section 3064, Goodwill and
Intangible Assets, replacing Handbook Sections 3062, Goodwill and Other
Intangible Assets and 3450, Research and Development Costs and Emerging
Issues Committee (EIC) Abstract 27, Revenues and Expenditures during the
Pre-Operating Period. Section 3064 establishes standards for the
recognition, measurement, presentation and disclosure of goodwill
subsequent to its initial recognition and intangible assets by profit-
oriented enterprises. This new standard became effective January 1, 2009.
The impact of adopting this new standard was a $6 million increase in
property, plant and equipment, a $4 million decrease in other assets, a
$1 million increase in opening retained earnings, and a $1 million
increase in future income tax liability as at January 1, 2008. The impact
of adopting this new standard was a $2 million decrease in depreciation
expense and a $1 million increase in income tax expense for the year
ended December 31, 2008. The increase to property, plant and equipment
arises from the concurrent retraction of EIC Abstract 27. The Company has
retroactively reclassified costs incurred in the pre-operating period
which were previously capitalized as intangible assets to the cost of
production equipment in accordance with Section 3061, Property, Plant and
Equipment. The costs include materials, labour and overhead costs
directly attributable to the construction of the capital asset. The rate
of depreciation is intended to fully depreciate the cost over 25 years
which approximates the useful life of the production equipment.
Previously, the amortization period for these capitalized costs was three
years.
Credit Risk and Fair Value of Financial Assets and Financial Liabilities
In January 2009, the CICA issued EIC Abstract 173, Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities. The EIC
requires the Company to take into account the Company's own credit risk
and the credit risk of the counterparty in determining the fair value of
financial assets and financial liabilities, including derivative
instruments. There is no material impact on the Company's financial
statements in adopting this new standard.
Financial Instruments - Disclosures
In May 2009, the CICA amended Section 3862, Financial Instruments -
Disclosures, to include additional disclosure requirements about fair
market value measurements for financial instruments and liquidity risk
disclosures. These amendments require a three-level hierarchy that
reflects the significance of the inputs used in making the fair value
measurements. Fair values of assets and liabilities included in Level 1
are determined by reference to quoted prices in active markets for
identical assets and liabilities. Assets and liabilities in Level 2
include valuations using inputs other than quoted prices for which all
significant outputs are observable, either directly or indirectly. Level
3 valuations are based on inputs that are unobservable and significant to
the overall fair value measurement. This new standard became effective
for the Company on December 31, 2009, and the related disclosure is
included in note 1 to the consolidated financial statements.
FUTURE CHANGES IN ACCOUNTING POLICIES
International Financial Reporting Standards (IFRS)
In February 2008, the Accounting Standards Board (AcSB) confirmed that
International Financial Reporting Standards (IFRS) will replace Canadian
GAAP for publicly accountable enterprises for financial periods beginning
on or after January 1, 2011.
Business Combinations
In January 2009, the CICA issued Handbook Section 1582, Business
Combinations, which requires that all assets and liabilities of an
acquired business will be recorded at fair value at acquisition.
Obligations for contingent considerations and contingencies will also be
recorded at fair value at the acquisition date. The standard also states
that acquisition-related costs will be expensed as incurred and that
restructuring charges will be expensed in periods after the acquisition
date. The new standard applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first
annual reporting period on or following January 1, 2011. The Company will
assess the impact of this new standard at the time of any applicable
acquisitions.
Consolidations and Non-Controlling Interests
In January 2009, the CICA issued Handbook Section 1601, Consolidations,
and Section 1602, Non-Controlling Interests. Section 1601 establishes
standards for the preparation of consolidated financial statements.
Section 1602 establishes standards for accounting for a non-controlling
interest in a subsidiary in consolidated financial statements subsequent
to a business combination. These standards apply to interim and annual
consolidated financial statements relating to fiscal years beginning on
or after January 1, 2011. The Company is currently assessing the impact
of this new standard on its financial statements.
NOTE 3. ACCOUNTS RECEIVABLE
Norbord has an $85 million accounts receivable securitization program
with a highly rated financial institution. The program commenced in
November 2007 for an initial commitment period of 10 months with
automatic extensions each four-month anniversary date unless terminated
by either party prior to such an anniversary date. Under the program,
Norbord has transferred substantially all of its present and future trade
accounts receivable to the financial institution, on a fully serviced
basis, for proceeds consisting of cash and deferred purchase price.
Norbord can increase or decrease the cash component of proceeds on each
settlement date, subject to the program limit.
At December 31, 2009, Norbord recorded cash proceeds of $62 million (2008
- $68 million) relating to this program. The utilization charge, which is
based on money market rates plus a fixed margin, and other program fees
are recorded as interest expense. In 2009, the utilization charge and
program fees included in interest expense totalled $2 million (2008 - $2
million).
The securitization program is subject to the following financial
covenants with which the Company must comply on a quarterly basis:
minimum tangible net worth of $300 million and maximum net debt to total
capitalization on a book basis of 65%. At year-end, the Company's
tangible net worth was $334 million and net debt to total capitalization
on a book basis was 58%. In addition, the program contains trade accounts
receivable portfolio performance covenants and standard reporting
requirements. The program is not subject to any credit-rating
requirements.
NOTE 4. INVENTORY
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Raw materials $ 13 $ 20
Finished goods 33 32
Operating and maintenance supplies 25 29
-------------------------------------------------------------------------
$ 71 $ 81
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2009, the provision to reflect inventories at the
lower of cost and net realizable value was $1 million (2008 -
$3 million).
The amount of inventory recognized as an expense during the year was:
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Cost of inventories $ 680 $ 949
Depreciation on property, plant & equipment 47 67
-------------------------------------------------------------------------
$ 727 $ 1,016
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Accumul- Accumul-
ated ated
Depreci- Net Book Depreci- Net Book
Cost ation Value Cost ation Value
-------------------------------------------------------------------------
Land $12 $ - $12 $12 $ - $12
Buildings 236 116 120 232 105 127
Production
equipment 1,495 767 728 1,476 730 746
-------------------------------------------------------------------------
$1,743 $883 $860 $1,720 $835 $885
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2009, production equipment includes construction in
progress of $1 million (2008 - $4 million).
NOTE 6. OTHER ASSETS
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Unrealized net investment hedge gains (note 16) $ 2 $ 26
Unrealized interest rate swap gains (note 16) 4 6
Other 1 1
-------------------------------------------------------------------------
$ 7 $ 33
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The unrealized net investment hedge gains and unrealized interest rate
swap gains are offset by unrealized losses on the underlying exposures
being hedged.
NOTE 7. LONG-TERM DEBT
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Principal value
7 1/4% debentures due 2012 $ 240 $ 240
Senior notes due 2017 200 200
Revolving bank lines 27 57
Brookfield debt facility - 35
-------------------------------------------------------------------------
467 532
Debt issue costs (6) (4)
Deferred interest rate swap gains 6 8
Unrealized interest rate swap gains (note 6) 4 6
-------------------------------------------------------------------------
$ 471 $ 542
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Maturities of long-term debt are as follows:
-------------------------------------------------------------------------
(US $ millions) 2010 2011 2012 2013 Thereafter Total
-------------------------------------------------------------------------
Maturities of
long-term debt $ - $ 27 $ 240 $ - $ 200 $ 467
-------------------------------------------------------------------------
As at December 31, 2009, the effective interest rate on the Company's
debt-related obligations including the impact of the interest rate swaps
was 6.1% (2008 - 6.2%). Interest expense on long-term debt for the year,
including the impact of interest rate swaps, was $34 million (2008 - $45
million). Total interest paid during the year was $34 million (2008 - $53
million).
Senior Notes Due in 2017
The Company's senior notes, due in 2017, bear an interest rate that
varies with the Company's credit ratings. As at December 31, 2009, the
interest rate was 7.95% (2008 - 7.95%). The average interest rate in 2009
was 7.95% (2008 - 7.61%).
Revolving Bank Lines
In April 2009, the Company completed amendments to its committed
revolving bank lines. Under the amended terms, an aggregate commitment of
$205 million has been extended to May 2011 and bears interest at money
market rates plus a margin that varies with the Company's credit rating.
The bank lines are secured by a first lien on the Company's North
American oriented strand board (OSB) inventory and property, plant and
equipment. This lien is shared pari passu with holders of the 2012
debentures, 2017 senior notes, and Brookfield debt facility.
The bank lines contain two quarterly financial covenants: minimum
tangible net worth of $250 million and maximum net debt to total
capitalization on a book basis of 70%. Effective January 1, 2011, the
maximum net debt to total capitalization on a book basis covenant will be
reduced to 60%. Net debt includes total debt less any drawings under the
Brookfield debt facility, less cash and cash equivalents plus letters of
credit issued. At year-end, the Company's tangible net worth was
$334 million and net debt for financial covenant purposes was
$454 million (note 15). Net debt to total capitalization on a book basis
was 58%.
As at December 31, 2009, $27 million of the revolving bank lines was
drawn as cash, $8 million was utilized for letters of credit, and $170
million was available to support short-term liquidity requirements.
Brookfield Debt Facility
Concurrent with the amendments to the revolving bank lines described
above, the Company amended its debt facility with Brookfield. This
facility decreased from $100 million to $50 million, bears interest equal
to the greater of 8% or US base rate plus 1/2%, matures in June 2011 and
is subordinated to the revolving bank lines. Any drawings under the
facility are treated as tangible net worth for financial covenant
purposes.
In January 2009, the Company repaid $35 million of the Brookfield debt
facility using proceeds from the Rights Offering (note 9). As at December
31, 2009, the facility was undrawn. Interest expense and the standby fee
on the facility were less than $1 million for the year (2008 -
$4 million).
Interest Rate Swaps
As at December 31, 2009, the Company had outstanding interest rate swaps
of $115 million (2008 - $115 million). The terms of these swaps
correspond to the terms of the underlying hedged debt. The unrealized
interest rate swap gains are offset by unrealized losses on the
underlying exposures being hedged.
8 1/8% Debentures Repaid in 2008
In the first quarter of 2008, the 8 1/8% debentures with a principal
value of $197 million were repurchased by the Company.
NOTE 8. OTHER LIABILITIES
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Accrued employee benefits $ 6 $ 3
Unrealized net investment hedge losses (note 16) - 8
Other liabilities 3 3
-------------------------------------------------------------------------
$ 9 $ 14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The unrealized net investment hedge losses are offset by unrealized gains
on the underlying exposures being hedged.
NOTE 9. SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Capital stock:
Share capital $ 335 $ 238
Contributed surplus 39 17
-------------------------------------------------------------------------
374 255
Retained earnings (32) 26
Accumulated other comprehensive loss (8) (13)
-------------------------------------------------------------------------
$ 334 $ 268
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Rights Offering
On January 6, 2009, pursuant to a Standby Purchase Agreement entered into
in connection with a Rights Offering ("the Offering") filed in November
2008, Brookfield completed the standby commitment through which it
purchased an additional 16.3 million common shares and 81.5 million
common share purchase warrants for gross proceeds of approximately
$120 million (CAD $144 million) (note 18). Share issue costs, including
the standby fee paid to Brookfield based on 1% of the gross proceeds of
the Offering, were approximately $2 million.
On December 24, 2008, the Company issued 11.0 million common shares and
54.8 million warrants to shareholders that exercised rights under the
Offering and received gross proceeds of $79 million (CAD $96 million).
Net proceeds from the Offering were used to repay drawings under the
Brookfield debt facility and revolving bank lines.
Share Capital
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Shares Amount Shares Amount
(million) (US$ millions) (million) (US$ millions)
-------------------------------------------------------------------------
Common shares
outstanding,
beginning of year 26.9 $ 238 14.7 $ 150
Issue of common shares,
net 16.3 97 11.0 65
Dividend reinvestment
plan (note 18) - - 1.2 23
-------------------------------------------------------------------------
Common shares
outstanding, end of
year 43.2 $ 335 26.9 $ 238
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2009, the authorized capital stock of the Company is
as follows: an unlimited number of Class A and Class B preferred shares,
an unlimited number of non-voting participating shares and an unlimited
number of common shares.
Share Consolidation
On April 29, 2009, the Company's shareholders passed a special resolution
approving the amendment of Norbord's restated articles of incorporation
to consolidate its issued and outstanding common shares on the basis of
one post-consolidation common share for every 10 pre-consolidation common
shares. The Company's shareholders authorized the Board to effect the
share consolidation, if and when it was deemed to be in the best interest
of the Company, up to October 31, 2009.
On October 13, 2009, the Company's Board of Directors authorized the
consolidation of all of the Company's issued and outstanding common
shares effective October 16, 2009. The Company's shares began trading on
a consolidated basis on October 21, 2009. The outstanding common shares
were reduced from 431.8 million to 43.2 million to reflect the impact of
the common share consolidation.
All references to common share and per common share data for all periods
presented in the consolidated financial statements have been adjusted to
reflect the common share consolidation (notes 1 and 10).
Contributed Surplus
Contributed surplus is comprised of transactions on account of warrants
issued under the Offering and stock options issued under the Company's
stock option plan.
Warrants
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Warrants Amount Warrants Amount
(million) (US$ millions) (million) (US$ millions)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, beginning
of year 54.8 $ 14 - $ -
Issue of warrants 81.5 21 54.8 14
-------------------------------------------------------------------------
Balance, end of year 136.3 $ 35 54.8 $ 14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pursuant to the Standby Purchase Agreement entered into in connection
with the Offering, 81.5 million warrants were issued to Brookfield on
January 6, 2009. On December 24, 2008, the Company issued 54.8 million
warrants to shareholders that exercised rights under the Offering. As a
result of the share consolidation, 10 whole common share purchase
warrants entitle the holder to purchase one common share at a price of
CAD $13.60 at any time prior to December 24, 2013.
Stock Options
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
(millions) Price (CAD$) (millions) Price (CAD$)
-------------------------------------------------------------------------
Balance, beginning
of year 0.3 $ 73.70 0.2 $ 77.30
Options granted 1.0 6.50 0.1 60.90
Options exercised - - - 14.10
-------------------------------------------------------------------------
Balance, end of year 1.3 $ 21.47 0.3 $ 73.70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable at year-end 0.2 $ 68.19 0.1 $ 64.70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Under the Company's stock option plan, the Board of Directors of the
Company may issue stock options to certain employees of the Company.
These options vest over a five-year period and expire ten years from the
date of issue. In 2009, stock option expense of $1 million was recorded
against contributed surplus (2008 - $2 million). As a result of the share
consolidation, the exercise prices and outstanding options were adjusted
by a factor of 10.
The following table summarizes the weighted average exercise prices and
the weighted average remaining contractual life of the balances of stock
options outstanding at December 31, 2009:
-------------------------------------------------------------------------
Options Outstanding Options Vested
-------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Remaining Exercise Exercise
Prices Contractual Price Price
(CAD$) Options Life (CAD$) Options (CAD$)
-------------------------------------------------------------------------
$0.10 6,850 1.08 $ 0.10 6,850 $ 0.10
$5.40 - $6.50 1,010,818 9.02 6.49 10,818 5.40
$8.40 - $11.70 11,058 2.37 9.22 11,058 9.22
$38.30 23,080 4.08 38.30 23,080 38.30
$60.09 90,630 8.10 60.09 18,126 60.09
$87.30 - $111.30 152,510 6.22 97.14 89,438 97.64
-------------------------------------------------------------------------
1,294,946 8.44 $ 21.47 159,370 $ 68.19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 10. EARNINGS PER COMMON SHARE
-------------------------------------------------------------------------
(US $ millions, except per share information,
unless otherwise noted) 2009 2008
-------------------------------------------------------------------------
Earnings available to common shareholders $ (58) $ (115)
-------------------------------------------------------------------------
Common shares (millions):
Weighted average number of common shares
outstanding 42.9 15.1
Stock options (1) - -
Warrants (1) - -
-------------------------------------------------------------------------
Diluted number of common shares 42.9 15.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share:
Basic and diluted $ (1.35) $ (7.62)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Applicable when the weighted average share price for the year was
greater than the exercise price for vested stock options and
warrants.
Stock options issued under the Company's stock option plan (note 9) and
warrants issued under the Offering (note 9) were excluded from the
calculation of diluted earnings per common share because the impact would
be anti-dilutive. If dilutive in the future, they would be included to
the extent that the exercise prices were less than the average market
price of the Company's common shares during the year.
NOTE 11. PROVISION FOR NON-CORE OPERATION
In 2009, the Company recorded a $4 million provision, primarily for the
write-down of certain property, plant and equipment and inventory to net
realizable value relating to the sale of a medium density fibreboard
(MDF) mill in Deposit, New York, for proceeds of $2 million.
In 2008, the Company recorded a $4 million provision relating to
severance arising from the permanent closure of a particleboard line at
the Genk, Belgium site. The provision was substantially paid in 2008.
NOTE 12. INCOME TAX
Future income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities in the financial
statements and the amounts used for income tax purposes.
Income tax recovery comprises the following:
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Current income tax $ 55 $ 15
Future income tax (22) 80
-------------------------------------------------------------------------
Income tax recovery $ 33 $ 95
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The differences between income taxes computed using statutory tax rates
and income tax as recorded are as follows:
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Earnings before income tax $ (91) $ (210)
-------------------------------------------------------------------------
Income tax recovery at combined statutory rates (29) (64)
Effect of:
Rate differences on foreign activities (39) (31)
Non-recognition of the benefit of current year's
tax losses 23 12
Foreign exchange gain (loss) 8 (17)
Other 4 5
-------------------------------------------------------------------------
Income tax recovery $ (33) $ (95)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The income tax effects of temporary differences that give rise to future
income taxes are as follows:
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Property, plant and equipment $ (153) $ (170)
Benefit of tax loss carry forwards 87 112
Investment tax credits 5 8
Other future income tax liabilities 7 (12)
-------------------------------------------------------------------------
(54) (62)
Valuation allowance (35) (12)
-------------------------------------------------------------------------
Future income taxes, net $ (89) $ (74)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprised of:
Current future income tax asset $ - $ -
Long-term future income tax liability (89) (74)
-------------------------------------------------------------------------
$ (89) $ (74)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income and income-related tax refunds (net) received during the year were
$10 million (2008 - $75 million). In November 2009, the United States
(US) government passed The Worker, Homeownership and Business Assistance
Act which extended the current US loss carry back period from two to five
years with respect to either the 2008 or 2009 net operating losses. As a
result, the Company has carried back its 2008 losses to the prior years
and has recorded a net tax receivable of approximately $55 million as at
December 31, 2009. This tax refund was received subsequent to year-end.
As at December 31, 2009, the Company had tax operating loss carryforwards
of approximately (pnds stlg)11 million and (euro)45 million from
operations in the United Kingdom and Belgium, respectively. These losses
can be carried forward indefinitely to offset future taxable income. The
Company has tax operating losses of CAD $53 million and US $117 million
from operations in Canada and the United States, respectively, which
expire between 2028 and 2029. The Company also has approximately
CAD $7 million worth of Investment Tax Credits (ITCs) available to
reduce future Canadian tax liabilities. The ITCs expire between 2010 and
2020. The loss carryforwards and credits may be utilized over the next
several years to eliminate cash taxes otherwise payable, and they will
enhance future cash flows. Certain future tax benefits have been included
in future income taxes in the consolidated financial statements. A
valuation allowance was recorded related to future income tax assets
that, in the judgement of management, are not likely to be realized.
Rights Offering
On December 24, 2008, upon completion of their basic subscription
privilege under the Offering (note 9), Brookfield's ownership interest in
the Company increased to approximately 60%. As at December 31, 2008,
Canadian tax legislation prohibited capital losses from being used to
shelter capital gains realized in fiscal periods subsequent to the
acquisition of control date. As a result of Brookfield's acquisition of
control for Canadian tax purposes, future income tax assets of $8 million
were charged to retained earnings in the fourth quarter of 2008 relating
to capital loss carryforwards not available for future use in Canada.
These tax attributes were reinstated and recorded through the statement
of earnings in 2009 as a result of Canadian income tax legislation which
was substantively enacted during the year permitting the election to
apply available capital losses against unrealized built-in gains on
certain eligible assets as at the acquisition of control date.
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
Other items under operating activities comprise:
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Cash provided by (used for):
Amortization of deferred interest rate
swap gains (note 7) $ (2) $ (3)
Pension funding greater than pension
expense (note 14) (1) (1)
Income and income-related tax payments (note 12) - (10)
Provision for non-core operation (note 11) 4 -
Other 8 (8)
-------------------------------------------------------------------------
$ 9 $ (22)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The net change in non-cash operating working capital balance comprises:
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Cash provided by (used for):
Accounts receivable $ (8) $ 36
Inventory 9 37
Accounts payable and accrued liabilities (12) (22)
-------------------------------------------------------------------------
$ (11) $ 51
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents comprises:
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Cash $ 8 $ 17
Cash equivalents 13 3
-------------------------------------------------------------------------
$ 21 $ 20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 14. EMPLOYEE BENEFIT PLANS
Pension Plans
Norbord has a number of pension plans in which participation is available
to substantially all employees. Norbord's obligations under its defined
benefit pension plans are determined periodically through the preparation
of actuarial valuations, which are generally required every three years.
The most recent actuarial valuation was conducted as of December 31,
2006. The next valuation to be conducted as of December 31, 2009 will be
completed and filed by September 30, 2010.
Information about the Company's defined benefit pension plans is as
follows:
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Change in Accrued Benefit Obligation
During the Year:
Accrued benefit obligation, beginning of year $ 54 $ 81
Employee contributions - 1
Current service cost 1 2
Interest on accrued benefit obligation 4 4
Benefits paid (4) (5)
Net actuarial loss (gain) 6 (13)
Foreign currency exchange rate impact 8 (15)
Transfer - (1)
-------------------------------------------------------------------------
Accrued benefit obligation, end of year(1) $ 69 $ 54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Change in Plan Assets During the Year:
Plan assets, beginning of year $ 40 $ 59
Actual return on plan assets 7 (7)
Employer contributions 3 4
Employee contributions - 1
Benefits paid (4) (5)
Foreign currency exchange rate impact 6 (11)
Transfer - (1)
-------------------------------------------------------------------------
Plan assets, end of year(1) $ 52 $ 40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reconciliation of Funded Status:
Accrued benefit obligation $ 69 $ 54
Plan assets 52 40
-------------------------------------------------------------------------
Accrued benefit obligation in excess of
plan assets (17) (14)
Unamortized net actuarial loss 22 18
Unamortized prior service costs - -
Unamortized net transitional asset (4) (4)
-------------------------------------------------------------------------
Net accrued benefit (liability) $ 1 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) All plans have accrued benefit obligations in excess of plan assets.
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Components of Net Periodic Pension Expense:
Current service cost $ 1 $ 2
Interest on accrued benefit obligation 4 4
Actual return on plan assets (7) 7
Net actuarial loss (gain) 6 (13)
Difference between actual and expected return
on plan assets 2 (11)
Difference between actual and recognized net
actuarial gain (loss) (4) 15
Amortization of transition asset - (1)
-------------------------------------------------------------------------
Net periodic pension expense $ 2 $ 3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Significant Weighted Average Actuarial
Assumptions:
Used in calculation of net periodic pension
expense for the year:
Discount rate 6.4% 5.3%
Expected long-term rate of return on
plan assets 7.7% 7.8%
Rate of compensation increase 3.6% 3.7%
Used in calculation of accrued benefit
obligation, end of year:
Discount rate 5.9% 6.4%
Rate of compensation increase 3.6% 3.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The weighted average asset allocation of Norbord's defined benefit
pension plan assets is as follows:
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Asset category:
Equity investments 62% 54%
Fixed income investments 38% 46%
-------------------------------------------------------------------------
Total assets 100% 100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating costs include $4 million (2008 - $5 million) related to
contributions to Norbord's defined contribution pension plans.
NOTE 15. CAPITAL MANAGEMENT
Norbord's capital management objective is to achieve top-quartile return
on equity (ROE) and cash return on capital employed (ROCE) over the
business cycle among North American forest products companies to enable
it to retain access to public and private capital markets, subject to
financial market conditions. This objective is unchanged from the prior
year.
Norbord monitors its capital structure using two key measures of its
relative debt position. While the Company considers both book and market
basis metrics, the Company believes the market basis to be superior to
the book basis in measuring the true strength and flexibility of its
balance sheet.
Net debt to capitalization, book basis, is net debt divided by the sum of
net debt and tangible net worth. Net debt consists of the principal value
of long-term debt, including the current portion and bank advances less
cash and cash equivalents and drawings under the Brookfield debt
facility. Consistent with the treatment under the Company's financial
covenants, drawings under the Brookfield debt facility are excluded from
net debt and treated as a component of tangible net worth, and letters of
credit are included in net debt. Tangible net worth consists of
shareholders' equity and drawings under the Brookfield debt facility.
Net debt to capitalization, market basis, is net debt divided by the sum
of net debt and market capitalization. Net debt is calculated as outlined
above under net debt, to capitalization, book basis. Market
capitalization is the number of common shares outstanding at period end
multiplied by the trailing 12-month average per share market price.
Market basis capitalization is intended to correct for the low historical
book value of Norbord's asset base relative to its fair value.
Norbord's capital structure at period end consisted of the following:
-------------------------------------------------------------------------
(US $ millions) 2009 2008
-------------------------------------------------------------------------
Long-term debt, principal value $ 467 $ 532
Less: Drawings under Brookfield debt facility(1) - (35)
Less: Cash and cash equivalents (21) (20)
-------------------------------------------------------------------------
Net debt 446 477
Plus: Letters of credit 8 -
-------------------------------------------------------------------------
Net debt for financial covenant purposes 454 477
-------------------------------------------------------------------------
Shareholders' equity 334 268
Plus: Drawings under Brookfield debt facility(1) - 35
-------------------------------------------------------------------------
Tangible net worth 334 303
-------------------------------------------------------------------------
Total capitalization $ 788 $ 780
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net debt to capitalization, book basis 58% 61%
Net debt to capitalization, market basis 48% 32%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Drawings under the Company's Brookfield debt facility are treated as
equity for bank line financial covenant purposes.
The Company's $205 million in committed revolving bank lines contain the
following financial covenants related to capital management that the
Company must comply with on a quarterly basis: minimum tangible net worth
of $250 million and maximum net debt to total capitalization on a book
basis of 70%. Effective January 1, 2011, the maximum net debt to total
capitalization on a book basis covenant will be reduced to 60%. Drawings
under the Company's Brookfield debt facility are treated as equity for
bank line financial covenant purposes. At year-end, the Company's
tangible net worth was $334 million and net debt to total capitalization
on a book basis was 58%.
Pursuant to the Offering (note 9), the Company raised $79 million
(CAD $96 million) of shareholders' equity in December 2008 and a further
$120 million (CAD $144 million) in January 2009. Related share issue
costs were approximately $2 million. The net proceeds were used to repay
drawings under the Brookfield debt facility and revolving bank lines.
NOTE 16. FINANCIAL INSTRUMENTS
Norbord has exposure to market, counterparty credit, and liquidity risk.
Norbord's primary risk management objective is to protect the Company's
balance sheet, earnings and cash flow in support of achieving top-
quartile return on equity (ROE) and cash return on capital employed
(ROCE) among North American forest products companies.
Norbord's financial risk management activities are governed by Board-
approved financial policies that cover risk identification, tolerance,
measurement, hedging limits, hedging products, authorization levels, and
reporting. Derivative contracts that are deemed to be highly effective in
offsetting changes in the fair value, net investment or cash flows of
hedged items are designated as hedges of specific exposures. Gains and
losses on these instruments are recognized in the same manner as the item
being hedged. Hedge ineffectiveness, if any, is measured and included in
current period earnings.
Market Risk
Norbord purchases commodity inputs, issues debt at fixed and floating
interest rates, invests surplus cash, sells product and purchases inputs
in foreign currencies, and invests in foreign operations. These
activities expose the Company to market risk from changes in commodity
prices, interest rates and foreign exchange rates, which affect the
Company's balance sheet, earnings and cash flows. The Company uses
derivatives as part of its overall financial risk management policy to
manage certain exposures to market risk that result from these
activities.
Commodity Price Risk
Norbord is exposed to commodity price risk on most of its manufacturing
inputs, principally wood fibre, resin and energy. These manufacturing
inputs are purchased primarily on the open market in competition with
other users of such resources and prices are influenced by factors beyond
Norbord's control.
Norbord monitors market developments in all commodity prices to which it
is materially exposed. No liquid futures markets exist for the majority
of Norbord's commodity inputs but, where possible, Norbord will hedge a
portion of its commodity price exposure up to Board-approved limits in
order to reduce the potential negative impact of rising commodity input
prices. Should Norbord decide to hedge any of this exposure, it will
lock-in prices directly with its suppliers and, if unfeasible, purchase
financial hedges where liquid markets exist.
At December 31, 2009, Norbord has hedged approximately 35% of its 2010
expected natural gas consumption by locking-in the price directly with
its suppliers. Approximately 70% of Norbord's electricity is purchased in
regulated markets, and Norbord has hedged approximately 25% of its 2010
deregulated electricity consumption. While these contracts are
derivatives, they are exempt from being accounted for as financial
instruments as they were normal purchases for the purpose of receipt.
Interest Rate Risk
Norbord's financing strategy is to access public and private capital
markets to raise long-term core financing and utilize the banking market
to provide committed standby credit facilities to support its short-term
cash flow needs. The Company has fixed-rate debt, which subjects it to
interest rate price risk, and has floating-rate debt, which subjects it
to interest rate cash flow risk. In addition, the Company invests surplus
cash in bank deposits and short-term money market securities.
The Company enters into interest rate swaps to convert a portion of its
debt from fixed to floating rates. At period end, $115 million in
interest rate swaps were outstanding (note 7). The terms of these swaps
correspond to the terms of the underlying hedged debt.
From time to time, the Company can recoupon its portfolio of interest
rate swaps to more efficiently manage cash flow and credit exposure. Any
gains or losses realized are deferred and amortized over the remaining
term of the debt against which the swaps were designated as hedges. At
period end, $6 million in interest rate swap gains were deferred and
included in the carrying value of long-term debt in the consolidated
balance sheet (note 7). In 2009, amortization of $2 million (2008 -
$3 million) was included in interest expense (note 13).
Currency Risk
Norbord's foreign exchange exposure arises from the following sources:
- Net investments in self-sustaining foreign operations, limited to
Norbord's investment in its European operations
- Net Canadian dollar-denominated monetary assets and liabilities
- Committed or anticipated foreign currency-denominated transactions,
primarily Canadian dollar costs in Norbord's Canadian operations and
Euro revenues in Norbord's UK operations
The Company's policy is to manage all significant balance sheet foreign
exchange exposures by entering into cross-currency swaps and forward
foreign exchange contracts. The Company may hedge a portion of future
foreign currency-denominated cash flows using forward foreign exchange
contracts or options for periods up to three years in order to reduce the
potential negative effect of a strengthening Canadian dollar versus the
US dollar, or a weakening Euro versus the Pound Sterling.
Counterparty Credit Risk
Norbord invests surplus cash in bank deposits and short-term money market
securities, sells its product to customers on standard market credit
terms, and uses derivatives to manage its market risk exposures. These
activities expose the Company to counterparty credit risk that would
result if the counterparty failed to meet its obligations in accordance
with the terms and conditions of its contracts with the Company.
Norbord operates in a cyclical commodity business. Accounts receivable
credit risk is mitigated through established credit management
techniques, including conducting financial and other assessments to
establish and monitor a customer's creditworthiness, setting customer
limits, monitoring exposures against these limits, and in some instances,
purchasing credit insurance or obtaining trade letters of credit. At
period end, the key performance metrics on the Company's accounts
receivable are in line with prior periods. As at December 31, 2009, the
provision for doubtful accounts was two $1 million (2008 - less
than $1 million). In 2009, Norbord had two customers whose purchases
represented greater than 10% of total net sales.
Under an accounts receivable securitization program, Norbord has
transferred substantially all of its present and future trade accounts
receivable to a highly rated financial institution, on a fully serviced
basis, for proceeds consisting of cash and deferred purchase price. At
December 31, 2009, Norbord recorded cash proceeds of $62 million (2008 -
$68 million) relating to this program. The fair value of the deferred
purchase price approximates its carrying value as a result of the short
accounts receivable collection cycle and negligible historical credit
losses.
Surplus cash is only invested with counterparties meeting minimum credit
quality requirements and issuer and concentration limits. Derivative
transactions are executed only with approved high-quality counterparties
under master netting agreements. The Company monitors and manages its
concentration of counterparty credit risk on an ongoing basis.
The Company's maximum counterparty credit exposure at period end consists
of the carrying amount of cash and cash equivalents and accounts
receivable, which approximates fair value, and the fair value of
derivative financial assets.
Liquidity Risk
Norbord strives to maintain sufficient financial liquidity at all times
in order to participate in investment opportunities as they arise, as
well as to withstand sudden adverse changes in economic circumstances.
Management forecasts cash flows for its current and subsequent fiscal
years to identify financing requirements. These requirements are then
addressed through a combination of committed credit facilities and access
to capital markets.
At period end, Norbord had $21 million in cash and cash equivalents, $170
million in unutilized committed revolving bank lines and $50 million
unutilized under the Brookfield debt facility.
Management believes that, subject to achieving its business plans, the
Company has sufficient liquidity for the foreseeable future.
Financial Liabilities
The following table summarizes the aggregate amount of contractual future
cash outflows for the Company's financial liabilities:
-------------------------------------------------------------------------
Payments Due by Period
(US $ millions) 2010 2011 2012 2013 Thereafter Total
-------------------------------------------------------------------------
Principal $ - $ 27 $ 240 $ - $ 200 $ 467
Interest 31 30 30 16 55 162
-------------------------------------------------------------------------
Long-term debt,
including interest $ 31 $ 57 $ 270 $ 16 $ 255 $ 629
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-Derivative Financial Instruments
The net book values and fair values of non-derivative financial
instruments at year-end were as follows:
2009 2008
-------------------------------------------------------------------------
Financial
Instrument
(US $ Classif- Net Book Fair Net Book Fair
millions) ication Value Value Value Value
-------------------------------------------------------------------------
Financial
Assets:
Cash Held-
and cash for-
equivalents trading $ 21 $ 21 $ 20 $ 20
Loans
and
Accounts receiv-
receivable ables 27 27 12 12
Loans
and
Tax receiv-
receivable ables 57 57 13 13
-------------------------------------------------------------------------
$ 105 $ 105 $ 45 $ 45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial
Liabilities:
Accounts
payable
and Other
accrued liabil-
liabilities ities $ 140 $ 140 $ 146 $ 146
Other
Long-term liabil-
debt ities 471 474 542 376
-------------------------------------------------------------------------
$ 611 $ 614 $ 688 $ 522
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Derivative Financial Instruments
Information about derivative financial instruments at year-end was as
follows:
-------------------------------------------------------------------------
2009
-------------------------------------------------------------------------
Unrealized
(US $ millions, gain/(loss) Realized
unless otherwise Notional at period gain/(loss) Sensitivity
noted) Value end(1) year-to-date to 1% change
-------------------------------------------------------------------------
Currency hedges:
Net investment
UK (pnds stlg) 56 $ 1 $ 8 $ 1
Belgium (euro) 40 1 (10) 1
Monetary
liabilities CAD $ 9 - 2 -
Interest rate
hedges:
Interest rate
swaps $115 4 - 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008
-------------------------------------------------------------------------
Unrealized
(US $ millions, gain/(loss) Realized
unless otherwise Notional at period gain/(loss) Sensitivity
noted) Value end(1) year-to-date to 1% change
-------------------------------------------------------------------------
Currency hedges:
Net investment
UK (pnds stlg) 103 $ 26 $ 14 $ 2
Belgium (euro) 79 (8) 12 1
Monetary
liabilities CAD $ 18 - (5) -
Future Committed
Transaction (note 9) CAD $144 1 - 1
Interest rate hedges:
Interest rate swaps $115 6 - 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The carrying values of the derivative financial instruments are
equivalent to the unrealized gain (loss) at period end.
Realized and unrealized gains and losses on derivative financial
instruments are offset by realized and unrealized losses and gains on the
underlying exposures being hedged. The fair values of the Company's
derivative and non derivative financial instruments are determined by
using quoted prices in active markets for identical assets and
liabilities (Level 1).
NOTE 17. COMMITMENTS AND CONTINGENCIES
Tax Exposures
In the normal course of operations, the Company is subject to various
uncertainties concerning the interpretation and application of tax laws
in the filing of its tax returns in operating jurisdictions that could
materially affect the Company's cash flows. There can be no assurance
that the tax authorities will not challenge the Company's filing
positions.
The Company is engaged in ongoing discussions with tax authorities
regarding the Company's transfer pricing methodology. These tax
authorities could challenge the validity of the Company's policies which
generally involve areas of taxation open to various interpretations and a
significant degree of judgment in applying the tax law to the Company's
circumstances. If the tax authorities are successful in challenging the
Company's transfer pricing methodology, it may have a material adverse
effect on the Company's results of operations or cash flows. Norbord uses
all available information in determining its transfer pricing methodology
and in seeking to manage transfer pricing and other taxation issues to a
satisfactory conclusion. Taking account of external professional advice,
the Company continues to believe that its taxable income has been
reported in accordance with tax law requirements and has not recorded a
provision related to this matter. The ultimate resolution of this matter
is dependent upon continuing negotiations with the relevant tax
authorities and potentially appeals under the tax law.
Other
The Company has provided certain commitments and indemnifications,
including those related to former businesses. The maximum amounts from
many of these items cannot be reasonably estimated at this time. However,
in certain circumstances, the Company has recourse against other parties
to mitigate the risk of loss.
The Company has entered into various commitments as follows:
-------------------------------------------------------------------------
Payments Due by Period
(US $ millions) 2010 2011 2012 2013 Thereafter Total
-------------------------------------------------------------------------
Purchase obligations $ 34 $ 21 $ 7 $ 5 $ 24 $ 91
Operating leases 2 1 1 1 2 7
-------------------------------------------------------------------------
$ 36 $ 22 $ 8 $ 6 $ 26 $ 98
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 18. RELATED PARTY TRANSACTIONS
In the normal course of operations, the Company enters into various
transactions on market terms with related parties which have been
measured at exchange value and recognized in the consolidated financial
statements. The following transactions have occurred between the Company
and Brookfield during the normal course of business.
Rights Offering
In connection with the Offering (note 9), the Company entered into a
Standby Purchase Agreement with Brookfield, in which Brookfield agreed to
exercise all of its rights and to purchase any units not otherwise
subscribed to by other shareholders of the Company. On December 24,
2008, Brookfield paid $72 million (CAD $87 million) to purchase 9.9
million common shares and 49.6 million common share purchase warrants
through their basic subscription privilege, which increased their
ownership interest to approximately 60% of the Company's issued and
outstanding common shares. Ten whole common share purchase warrants
entitle the holder to purchase one common share at a price of CAD $13.60
at any time prior to December 24, 2013. On January 6, 2009, Brookfield
paid $120 million (CAD $144 million) to acquire 16.3 million common
shares and 81.5 million common share purchase warrants under the Standby
Purchase Agreement, increasing its ownership interest to approximately
75%. A standby fee of approximately $2 million was paid to Brookfield
based on 1% of the gross proceeds of the Offering.
Brookfield Debt Facility
Concurrent with the amendments to the revolving bank lines (note 7), the
Company decreased its debt facility with Brookfield from $100 million to
$50 million. The facility bears interest equal to the greater of 8% or
US base rate plus 1/2%, matures in June 2011 and is subordinated to the
revolving bank lines. Any drawings under the facility are treated as
tangible net worth for financial covenant purposes. In January 2009, the
Company repaid $35 million of the facility with proceeds from the Rights
Offering (note 9). As at December 31, 2009, the facility was undrawn.
Interest expense and the standby fee on the facility were less than
$1 million for the year (2008 - $ 4 million).
Indemnity Commitment
As at December 31, 2009, total future costs related to a 1999 asset
purchase agreement between the Company and Brookfield for which Norbord
provided an indemnity are estimated at less than $1 million and are
included in other liabilities in the consolidated balance sheet.
Dividend Reinvestment Plan (DRIP)
In 2008, Brookfield elected to receive all of its dividends totaling
$21 million as common shares which were distributed under the Company's
Dividend Reinvestment Program (DRIP). The DRIP permits Canadian
shareholders to elect to receive their dividends as common shares. In
November 2008, the Company announced the suspension of quarterly dividend
payments on its common shares.
Other
The Company provides certain administrative services to Brookfield or its
affiliates which were charged on a cost recovery basis. In addition, the
Company periodically engages the services of Brookfield or its affiliates
for various financial, real estate and other business advisory services.
In 2009, the fees for these services were less than $1 million (2008 -
less than $1 million) and were charged at market rates.
NOTE 19. LITIGATION SETTLEMENT
In May 2008, Norbord entered into settlement agreements related to an
antitrust litigation lawsuit to limit the risks and costs associated with
a prolonged trial. Norbord vigorously contests the plaintiffs'
allegations and continues to vehemently deny that it violated US
antitrust or any other laws. Under the terms of the settlement
agreements, in 2008, Norbord paid $30 million into an escrow account for
the benefit of members of the direct purchaser class and $2 million into
an escrow account for the benefit of members of the indirect purchaser
classes.
NOTE 20. GEOGRAPHIC SEGMENTS
The Company has a single reportable segment. The Company operates
principally in North America and Europe. Net sales by geographic segment
are determined based on the origin of shipment and therefore include
export sales.
-------------------------------------------------------------------------
2009
-------------------------------------------------------------------------
North
(US $ millions) America Europe Unallocated Total
-------------------------------------------------------------------------
Net sales $ 406 $ 312 $ - $ 718
EBITDA(1) (8) 17 (9) -
Depreciation 29 18 1 48
Property, plant and
equipment 665 193 2 860
Investment in property,
plant and equipment 12 2 - 14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008
-------------------------------------------------------------------------
North
(US $ millions) America Europe Unallocated Total
-------------------------------------------------------------------------
Net sales $ 538 $ 405 $ - $ 943
EBITDA(1) (51) 4 (13) (60)
Depreciation 41 26 1 68
Property, plant and
equipment 688 194 3 885
Investment in property,
plant and equipment 25 2 - 27
-------------------------------------------------------------------------
(1) EBITDA is earnings before interest, income tax, depreciation,
provision for non-core operation, foreign exchange loss and
litigation settlement.
NOTE 21. COMPARATIVE FIGURES
Certain 2008 figures have been reclassified to conform with current
year's presentation.
For further information: Anita Veel, Director, Corporate & Regulatory Affairs, Tel. (416) 643-8838, [email protected]
Share this article