Norbord Reports Higher First Quarter Earnings on Record Production23 April 2006
Norbord Inc. (TSX:NBD) today reported earnings for the first quarter of 2006 of $58 million or $0.40 per share compared to earnings of $52 million or $0.36 per share in the fourth quarter of 2005. In the first quarter of 2005, Norbord reported earnings of $84 million or $0.55 per share.
"Norbord's first quarter 2006 results were stronger than the previous quarter in spite of a 10% reduction in benchmark North American OSB prices," said Barrie Shineton, Norbord President and CEO. "Record production and lower North American costs helped offset lower OSB prices. Higher mill net realizations and improved European performance also contributed to the excellent results."
"Given the favourable fundamentals supporting North American OSB demand and limited new capacity coming on stream this year, we expect 2006 will be another solid year for Norbord," said Mr. Shineton.
Performance
Norbord achieved record panel production during the quarter. Total OSB produced was 8% higher than the previous quarter - half of this due to operating improvements. Better performance at our Genk, Belgium mill contributed to a 15% increase in European OSB volume over the previous quarter.
North American OSB operating costs decreased 5% versus the previous quarter as input costs decreased, and production gains drove per unit costs down. Our European mills, on the other hand, continued to experience increased energy costs.
Benchmark North Central OSB prices averaged $285 during the first quarter of 2006 versus $317 in the fourth quarter of 2005. North American OSB demand remains strong with annualized U.S. housing starts exceeding 2.0 million units in the first quarter. North American OSB supply increased marginally during the quarter as new capacity continues to ramp up.
In Europe, product prices increased during the quarter and demand, particularly in Germany, is improving.
Net debt to total capitalization was 18% on a market value basis, in line with the previous quarter. Capital spending totaled $35 million during the quarter, including $26 million for the Cordele expansion project. Annualized return on equity for the quarter was 43%.
Developments
Construction of the second OSB line at Cordele, Georgia is on track for start-up in the fourth quarter of 2006. When completed, this investment will further strengthen Norbord's position as one of the lowest-cost OSB producers in the world.
Capital initiatives are underway to address the high energy costs in Europe. Biomass heat energy systems are being installed in Cowie, Scotland and Genk, Belgium, which will reduce European natural gas consumption by about one-third.
During the first quarter, Norbord repurchased approximately 1.1 million common shares at a cost of $11 million under a normal course issuer bid. This bid allows the company to repurchase up to 9.0 million common shares until November 1, 2006.
Dividend
The Board of Directors declared a quarterly dividend of CAD $0.10 per common share, payable on June 21, 2006 to shareholders of record on June 1, 2006. Norbord's Canadian common shareholders may participate in the Company's Dividend Reinvestment Plan.
Norbord Profile
Norbord Inc. is an international producer of wood-based panels with assets of $1.3 billion. We employ approximately 2,700 people at 16 plant locations in the United States, Europe and Canada. We are one of the world's largest producers of oriented strand board (OSB). In addition to OSB, we manufacture particleboard, medium density fiberboard (MDF), hardwood plywood, I-joists and related value-added products. Norbord is a publicly-traded company listed on the Toronto Stock Exchange under the symbol NBD.
Annual General Meeting
Norbord's annual general meeting will be held Friday April 21st, at 10:30 a.m. EDT at the TSX Auditorium, The Exchange Tower, in Toronto, Ontario. The meeting will be webcast live at Norbord's website at www.norbord.com.
This news release and attached Shareholders Letter contain forward- looking statements, as defined in applicable legislation. The words "expect", "on track", "will" 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 and the US Securities and Exchange Commission.
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 March 1, 2006 Annual Information Form and the caution contained in the "Forward-Looking Statements" section of the 2005 Management's Discussion and Analysis dated January 31, 2006.
LETTER TO SHAREHOLDERS
----------------------
April 21, 2006
Dear Norbord Shareholder,
The strong results Norbord reported in 2005 continued through the first quarter of 2006. First quarter earnings exceeded the previous quarter in spite of lower North American OSB prices.
This excellent first quarter is the result of good performance across all our operations:
- Record panel production in North America and Europe;
- Lower North American OSB production costs;
- Higher mill net realizations; and
- Improved European performance.
North American OSB prices have come off their highs, but remain well above trend. First quarter housing starts and building permits were stronger than the recent headlines implied. In fact, these indicators were well ahead of last year's first quarter levels. In addition, builder backlogs have increased over last year. All this suggests we should continue to see solid demand in the first half of this year as seasonal home construction activity picks up.
Natural gas prices in Europe remain at record high levels. To mitigate the impact of these cost increases, we have initiated two projects to increase biomass usage for heat energy in Genk, Belgium and Cowie, Scotland. Improving product prices and strengthening demand on the continent will also help offset higher operating costs.
Our expansion project in Cordele, Georgia continues to be on-budget and on-time for startup in the fourth quarter. This is one of our key priorities for the year.
During the first quarter, we repurchased approximately 1.1 million shares under our 9.0 million share normal course issuer bid. We will continue to repurchase our common shares because we believe they represent good value.
We believe our cost position is one of the lowest in the industry, and will improve further upon completion of the Cordele expansion project. Being low cost is important, as it is the only way to generate attractive earnings and cash flow during weaker markets and softer pricing.
We are confident that 2006 will be another good year for Norbord. The underlying fundamentals are supportive and we will continue to focus on productivity improvements and cost containment.
I look forward to reporting on our second quarter progress in late July.
(signed)
Barrie Shineton
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
April 20, 2006
The Management's Discussion and Analysis (MD&A) provides a review of the significant developments that impacted Norbord's performance during the period. Norbord's significant accounting policies and other financial disclosures are contained in the audited annual financial statements and accompanying notes. All financial references in the MD&A are stated in US dollars unless otherwise noted.
Some of the statements included or incorporated by reference in this MD&A constitute forward-looking statements within the meaning of applicable legislation. Forward-looking statements are based on various assumptions and are subject to various risks. See the caution contained in the "Forward- Looking Statements" section in this MD&A.
EBITDA, EBITDA margin, operating working capital, total working capital, capital employed, ROCE, ROE, net debt, net debt to capitalization, book basis, net debt to capitalization, market basis and book value per share are non-GAAP measures described in the Definitions section. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. There are no directly comparable GAAP measures to any of these measures. Where appropriate, a quantitative reconciliation of the non-GAAP measure to the nearest comparable GAAP measure is also provided.
Additional information on Norbord, including the annual information form and the 2005 annual report, containing the MD&A and audited annual financial statements is available on SEDAR at www.sedar.com.
Overview
Norbord is an international producer of wood-based panels with 16 plant locations in the United States, Europe and Canada. It is one of the world's largest producers of OSB with annual capacity of 4.4 billion square feet (3/8-inch basis). The core of Norbord's OSB business is located in the US South. The Company is also one of the largest producers of wood-based panels in Europe. The geographical breakdown of property, plant and equipment is approximately 66% US, 27% Europe and 7% Canada.
Norbord's business strategy is focused entirely on the wood panels sector - specifically OSB - in North America and Europe.
Norbord's financial goal is to achieve top quartile return on equity (ROE) and cash return on capital employed (ROCE) among North American forest products companies. Norbord met this target in 2005 and management believes this target will be met again in 2006.
Maintaining investment grade debt ratings is integral to Norbord's financing strategy. This provides for long-term access to public and private capital markets on attractive terms. Ratings on Norbord debt have been consistently investment grade since 1992. At the end of the quarter, Norbord was well positioned with a net debt to capitalization of 18% on a market basis and 36% on a book basis. The Company's strong balance sheet provides the flexibility to respond to strategic growth opportunities.
Norbord manages its business to provide for a sustainable dividend to be paid quarterly to common shareholders throughout the business cycle. At April 1, 2006, the Board of Directors had declared 62 consecutive quarterly common dividends of CAD $0.10 per share.
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Operating Results
1st Qtr 4th Qtr 1st Qtr
(US$ millions, unless otherwise noted) 2006 2005 2005
-------------------------------------------------------------------------
Return on equity (ROE) 43% 41% 62%
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Net sales $ 368 $ 351 $ 404
EBITDA 111 110 157
EBITDA margin 30% 31% 39%
Depreciation 22 23 22
Capital investments 35 37 14
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OSB shipments (MMsf 3/8") 1,082 1,021 1,013
Average OSB price - North Central
($/Msf 7/16") 285 317 364
Average OSB price - Europe (EUR/m(3))(1) 197 182 214
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>>
(1) Commencing the first quarter 2006, "Average OSB price - Europe"
represents the Company's estimate of average realized pricing in
continental Europe. Prior period figures have been changed
accordingly.
Outstanding results continued in the quarter, driven by North American OSB prices which averaged $285, close to 10% above the five year average. Return on equity (ROE) was 43% on an annualized basis for the quarter, compared to 41% and 62% for the fourth and first quarters of 2005, respectively. ROE is a measure for shareholders to determine how effectively their money is being employed. Capital initiatives, including CAD $1.00 special dividends paid in each of the third quarter of 2004 and second quarter of 2005, and the share repurchase program, have maintained an efficient capital structure contributing to the continued high ROE levels. Pre-tax return on capital employed (ROCE) averaged 46% in the quarter. ROCE is a key measurement of financial performance, focusing on cash generation and the efficient use of capital.
EBITDA of $111 million was generated in the first quarter of 2006, versus $110 million in the previous quarter and $157 million in the first quarter of 2005. Norbord recorded an increase in EBITDA over the prior quarter as record OSB production and lower North American per unit OSB production costs offset the impact of lower North American OSB benchmark pricing. Improved mill net realizations relative to benchmark and European results also contributed. As compared to the first quarter of 2005, the primary driver of the change in EBITDA is the change in North American OSB price. EBITDA changes are summarized in the variance table below. EBITDA margins remained solid at 30% in the quarter, compared to 31% for the previous quarter and 39% in the first quarter of 2005.
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1st Qtr 2006 1st Qtr 2006
EBITDA Variance vs. vs.
(US$ millions) 4th Qtr 2005 1st Qtr 2005
-------------------------------------------------------------------------
EBITDA - current period $ 111 $ 111
EBITDA - comparative period 110 157
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Variance $ 1 $ (46)
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Mill nets(1) $ (11) $ (50)
Volume(2) 11 10
Key input prices(3) (1) (11)
Other(4) 2 5
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$ 1 $ (46)
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(1) The mill net variance represents the change in realized pricing
across all products. Mill net is calculated as net sales divided by
shipment volume.
(2) The volume variance represents the impact of shipment volume changes
across all products.
(3) Key inputs include fibre, resin and energy.
(4) Other category covers all remaining variances including, but not
limited to; labour and benefits, supplies and maintenance, key input
usages, and the impact of foreign exchange.
>>
North American OSB markets remained relatively strong with benchmark North Central OSB prices for the first quarter averaging $285, close to 10% above the five year average and 10% below the fourth quarter of 2005.
The fundamentals supporting North American OSB demand continue to be strong. U.S. housing starts exceeded 2.0 million units (seasonally adjusted annualized rate) in the first quarter, in line with the first quarter of 2005. Favourable demographics and relatively low interest rates continue to drive the demand for housing, the principal market for OSB. North American OSB supply in the quarter has increased marginally as new mills in Florida and British Columbia ramp up.
In the first quarter of 2006, Norbord's OSB production was up 8% over the fourth quarter of 2005 with approximately one-half due to production improvements and the balance due to fewer scheduled maintenance and vacation shuts taken in the quarter. As compared to the first quarter of 2005, OSB production is up 4% principally due to production improvements.
Gains from the Margin Improvement Program (MIP) of $14 million year-to- date, measured relative to 2005 at constant prices and exchange rates, limited the impact of manufacturing cost increases on EBITDA. Globally, Norbord is on track to deliver its MIP target of $35 million for the full year 2006.
The forest products industry was challenged with significantly higher energy, resin and fibre costs during 2005, particularly in the second half of the year. In North America, these cost pressures abated somewhat in the first quarter. Norbord's North American per unit OSB production costs, net of employee profit share, were down 5% over the fourth quarter of 2005 due to the benefit of additional production volume, reduced energy usage and decreased key input prices. As compared to the first quarter of 2005, North American per unit OSB production costs are up 2% as the benefit of additional production volume and reduced energy usage is offset by the aforementioned cost pressures.
In Europe, market conditions are showing signs of improvement. European OSB prices have increased 8% over the fourth quarter of 2005 as demand improved, particularly in Germany. European MDF mill nets increased 4% over the fourth quarter of 2005. Production at the European mills was strong in the quarter. First quarter operational improvements at the Genk mill resulted in a 15% increase in total European OSB production over the fourth quarter of 2005.
The strengthening market conditions and improving productivity of our mills continues to be offset by increasing costs in Europe, particularly in energy and resin. For example, in the UK, the average price of natural gas for the first quarter increased 60% over the first quarter of 2005. A number of initiatives are underway to address these cost pressures, including the installation of a biomass energy system at the Cowie MDF mill. This GBP 2 million project is currently underway and is expected to be operational in the third quarter of 2006. An investment of EUR 10 million for a heat energy system for the Genk OSB line was recently approved and is expected to be operational in the fourth quarter of 2007. When complete, these two initiatives are expected to reduce European natural gas consumption by approximately 30%. These higher input costs have resulted in the decision to decommission the oldest MDF line at Cowie in the second quarter. Norbord's total European MDF output will decline by about 20% in the short term but is expected to grow back to about 90% of pre-closure production by the end of 2007 through further operational improvements at our remaining line. There are no material costs associated with the decommissioning.
Net sales in the quarter were $368 million, compared to $351 million and $404 million in the fourth and first quarters of 2005 respectively. The change in quarterly net sales is principally due to changes in North American OSB prices.
Interest expense of $7 million and depreciation expense of $22 million were in line with prior quarters.
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Liquidity and Capital Resources
(US$ millions, except per share 1st Qtr 4th Qtr 1st Qtr
information, unless otherwise noted) 2006 2005 2005
------------------------------------------------------------------------
Cash provided by operating activities $ 30 $ 121 $ 40
Cash provided by operating activities per
share 0.21 0.83 0.26
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Operating working capital 73 19 78
Total working capital 204 174 283
Capital investments 35 37 14
Net debt to capitalization, market basis 18% 17% 14%
Net debt to capitalization, book basis 36% 35% 29%
-------------------------------------------------------------------------
>>
Cash provided by operating activities in the quarter was $30 million or $0.21 per share compared to $121 million in the fourth quarter of 2005 and $40 million in the first quarter of 2005. The decrease from the first quarter of 2005 is principally attributable to higher earnings in the comparable period. The decrease from the fourth quarter of 2005 is attributable to the seasonal increase in operating working capital.
Operating working capital, consisting of accounts receivable and inventory less accounts payable and accrued liabilities was $73 million at April 1, 2006, as compared to $19 million at December 31, 2005. The Company aims to minimize the amount of capital held as operating working capital. The higher balance is attributable to seasonal factors and compares favourably to the $78 million balance at the end of the first quarter of 2005. Total working capital at April 1, 2006 was $204 million including $131 million in cash and cash equivalents.
In addition to cash on hand and cash generated from operations, the Company has $200 million of committed unsecured revolving bank lines available to support short-term liquidity requirements of which $3 million were utilized for letters of credit at April 1, 2006. These bank lines mature in May 2009.
Cash dividends of $13 million were paid in the quarter in line with comparative periods.
Norbord's net debt stood at $309 million at period end, representing 18% of capitalization on a market basis and 36% of capitalization on a book basis. The Company's strong balance sheet provides the flexibility to respond to strategic growth opportunities.
Purchase of Common Shares
Between November 2, 2005 and November 1, 2006, the Company may purchase on the open market up to 9.0 million common shares under a share repurchase program. During the first quarter of 2006, 1.1 million shares were purchased and cancelled at a cost of $11 million. Under the current program, up to an additional 7.9 million common shares may be purchased and cancelled. In the first quarter of 2005, 1.8 million shares were purchased and cancelled at a cost of $19 million under the previous program.
Outstanding Shares
At April 20, 2006, there were 144.0 million common shares outstanding. In addition, 1.9 million employee stock options were outstanding, of which approximately one-third were fully vested.
Capital Investments
Construction continues on a second OSB line at Cordele, Georgia that will create one of the largest and most efficient OSB manufacturing facilities in the world. The expansion will add 550 million square feet (3/8-inch basis) of production capacity at a cost of approximately $135 million. The project is scheduled to start production in the fourth quarter of 2006. Once complete, this initiative will increase Norbord's North American OSB production capacity by 15% and will further strengthen its position as one of the largest OSB producers in the US South.
In the first quarter of 2006, capital investments were $35 million including $26 million for the Cordele mill expansion project. Norbord's 2006 capital investments are expected to be $60 million plus the remaining $97 million of the $135 million Cordele mill expansion project. Approximately 85% of the capital investments in 2006 will be for productivity improvements and strategic initiatives. In addition, interest of approximately $6 million (first quarter - $1 million) is expected to be capitalized relating to the Cordele project. The 2006 capital investments will be funded by cash on hand and cash generated by operations.
Guarantee of Certain Fraser Papers Obligations
On June 30, 2004, the Company completed the distribution of its paper and timberlands business (Fraser Papers) to its common shareholders. Norbord continues to guarantee certain obligations of Fraser Papers under operating lease commitments, purchase commitments, landfill closure commitments, and commodity hedging contracts. The maximum potential amount of future payments that Norbord could be required to make under these obligations is estimated to be $27 million (December 31, 2005 - $13 million). The estimate has increased since December 31, 2005 to reflect the amount claimed in a lawsuit in respect of the closure of the Park Falls pulp mill. The estimate excludes the amount of potential future payments related to guarantees of derivative contracts that cannot be quantified due to their nature. No amounts have been recorded in the consolidated balance sheet with respect to these guarantees.
In 2005, Norbord extended the requirement for Fraser Papers to cash collateralize the remaining guarantees for an additional year in exchange for a fee based on the total guarantees outstanding. Fraser Papers has committed to use its best efforts to remove Norbord from these guarantees and has agreed to provide letters of credit or other acceptable collateral to secure any guarantees which remain outstanding on December 27, 2006. As security for these ongoing financial commitments to Fraser Papers, Norbord has the right, at any time, to require Fraser Papers to provide a fixed first charge security interest over Fraser Papers' manufacturing facilities. The Company's share of the estimated proceeds from liquidation of this security would be sufficient to cover the maximum potential amount of future payments under the guarantees. In addition, Fraser Papers has indemnified Norbord against any future obligations arising from released or previously unidentified guarantees. To date, the fees for providing these guarantees is less than $1 million.
Class Action Lawsuit
Norbord and seven other North American OSB producers have been named as defendants in several lawsuits filed in the United States District Court for the Eastern District of Pennsylvania. The lawsuits allege that these eight North American OSB producers violated United States and various state antitrust and other laws by allegedly agreeing to fix prices and reduce the supply of OSB from June 1, 2002 through the present.
The named plaintiffs seek to have the cases certified as class actions. One group of plaintiffs seeks to certify a class of persons and entities that purchased OSB in the United States directly from any of the named North American OSB producers between June 1, 2002 and the present. Other plaintiffs seek to certify one or more classes of persons and entities that purchased OSB in various states and the District of Columbia indirectly between June 1, 2002 and the present.
Norbord believes that the lawsuits are entirely without merit and intends to defend them vigorously.
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Selected Quarterly Information
2006 2005 2004
(US$ millions, except -------------------------------------------------
per share information, 1st 4th 3rd 2nd 1st 4th 3rd 2nd
unless otherwise noted) Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
-------------------------------------------------------------------------
Key Performance Metrics
Return on equity (ROE) 43% 41% 38% 45% 62% 30% 40% 51%
Cash provided by operating
activities 30 121 55 98 40 107 133 266
Cash provided by operating
activities per share 0.21 0.83 0.38 0.67 0.26 0.71 0.88 1.78
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Net Sales and Earnings
Net Sales 368 351 338 369 404 335 364 439
EBITDA 111 110 100 128 157 89 156 231
Earnings 58 52 45 67 84 41 77 127
Per Common Share
Earnings
Basic 0.40 0.36 0.31 0.39 0.56 0.26 0.51 0.85
Diluted 0.40 0.36 0.31 0.39 0.55 0.26 0.50 0.84
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Key Statistics
OSB shipments
(MMsf 3/8") 1,082 1,021 1,062 1,040 1,013 998 947 950
Average OSB price - North
Central ($/Msf 7/16") 285 317 303 297 364 264 353 437
Average OSB price -
Europe (EUR/m(3))(1) 197 182 190 208 214 223 234 229
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(1) Commencing the first quarter 2006, "Average OSB price - Europe"
represents the Company's estimate of average realized pricing in
continental Europe. Prior period figures have been changed
accordingly.
>>
The price of OSB is the primary factor affecting the comparability of results over the past eight quarters. Fluctuations in earnings during that time mirror fluctuations in the price of OSB in North America. The annualized impact of a $10 per Msf (7/16-inch basis) change in the North American OSB price on EBITDA is approximately $30 million or approximately $0.14 per share. Regional pricing variations, particularly in the US South, make the North Central benchmark price a useful albeit imperfect proxy for overall North American OSB pricing. Further, the pricing lag effect of maintaining an order file, premiums obtained on value added products, and volume and trade discounts cause realized prices to differ from the benchmark.
Norbord has a relatively low exposure to the Canadian dollar due to a comparatively small manufacturing base in Canada, comprising 7% of property, plant and equipment. The Company estimates the unfavourable impact of a US one cent increase in the Canadian dollar to negatively impact annual earnings by approximately $1 million or less than $0.01 per share.
Quarterly results are also impacted by seasonal factors such as weather and building activity. Market demand varies seasonally, as building activity and repair and renovation work, the principal end use for Norbord's products, is generally stronger in the spring and summer months. Adverse weather, typically in the first and fourth quarters, can also limit access to logging areas, which can affect the supply and price of fibre to Norbord's operations. Shipment volumes and commodity prices are affected by these factors as well as by global supply and demand conditions.
One-time items that had a significant impact on quarterly results include the $0.06 per share impact of foreign exchange on the redemption of preferred shares in the second quarter of 2005, and the $6 million charge ($0.04 per share) for call premiums on the redemption of debentures in the third quarter of 2004.
Definitions
The following non-GAAP measures have been used in this MD&A. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. There are no directly comparable GAAP measures to any of these measures. Each non-GAAP measure is defined below. Where appropriate, a quantitative reconciliation of the non-GAAP measure to the nearest comparable GAAP measure is provided.
EBITDA is earnings before interest, income taxes, depreciation and amortization. Norbord views EBITDA as a measure of gross profit and interprets EBITDA trends as an indicator of relative operating performance. EBITDA is presented as a useful indicator of a company's ability to incur and service debt and meet capital expenditure requirements. The following table reconciles EBITDA to the nearest comparable GAAP measure:
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-------------------------------------------------------------------------
1st Qtr 4th Qtr 1st Qtr
(US dollar millions) 2006 2005 2005
-------------------------------------------------------------------------
Earnings $ 58 $ 52 $ 84
Add: Interest expense 7 8 7
Less: Interest and other income (1) (2) (1)
Add: Income tax 25 29 45
Add: Depreciation 22 23 22
-------------------------------------------------------------------------
EBITDA $ 111 $ 110 $ 157
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
EBITDA margin (%) is EBITDA as a percentage of net sales.
Operating working capital is accounts receivable plus inventory less accounts payable.
Total working capital is operating working capital plus cash and cash equivalents.
Capital employed is the sum of property, plant and equipment, operating working capital and other assets. The following table reconciles capital employed to the nearest comparable GAAP measure:
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-------------------------------------------------------------------------
Apr 1 Dec 31 Dec 31
(US dollars millions) 2006 2005 2004
-------------------------------------------------------------------------
Property, plant and equipment $ 935 $ 921 $ 927
Accounts receivable 148 145 150
Inventory 115 99 90
Accounts payable and accrued liabilities (190) (225) (238)
Other assets 3 4 5
Unrealized balance sheet hedge gain (loss)(1) (4) - (16)
-------------------------------------------------------------------------
Capital employed $ 1,007 $ 944 $ 918
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Included in other liabilities
>>
ROCE (return on capital employed) is EBITDA divided by capital employed. ROCE is a key measurement of financial performance, focusing on cash generation and the efficient use of capital.
ROE (return on equity) is earnings available to common shareholders (earnings less preferred share dividends) divided by common shareholders' equity. The ratio is expressed on an annualized basis. ROE is a measure for common shareholders to determine how effectively their money is being employed.
Net debt is long-term debt including the current portion and bank advances less cash and cash equivalents. Net debt is a useful indicator of a company's debt position. The following table reconciles net debt to the nearest comparable GAAP measure:
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-------------------------------------------------------------------------
Apr 1 Dec 31 Dec 31
(US dollars millions) 2006 2005 2004
-------------------------------------------------------------------------
Long-term debt $ 440 $ 440 $ 450
Current portion of long-term debt - - 1
Cash and cash equivalents (131) (155) (215)
-------------------------------------------------------------------------
Net debt $ 309 $ 285 $ 236
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Net debt to capitalization, book basis is net debt divided by the sum of net debt and shareholders' equity. Net debt to capitalization, book basis is a measure of a company's relative debt position. Norbord interprets this measure as an indicator of the relative strength and flexibility of its balance sheet.
Net debt to capitalization, market basis is net debt divided by the sum of net debt and market capitalization. Market capitalization is the number of common shares outstanding at period end multiplied by the trailing twelve- 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. Net debt to capitalization, market basis is a key measure of a company's relative debt position and Norbord interprets this measure as an indicator of the relative strength and flexibility of its balance sheet. 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.
Book value per share is common shareholders' equity divided by common shares outstanding.
Forward-Looking Statements
This document contains forward-looking statements, as defined in applicable legislation. The words "believes", "on track", "may", "will", "scheduled", "expected", "estimated" 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 and the US Securities and Exchange Commission.
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 March 1, 2006 Annual Information Form and the caution contained in the "Forward-Looking Statements" section of the 2005 Management's Discussion and Analysis dated January 31, 2006.
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SHIPMENTS
---------
-------------------------------------------------------------------------
1st Qtr 4th Qtr 1st Qtr
2006 2005 2005
-------------------------------------------------------------------------
OSB (MMsf-3/8") 1,082 1,021 1,013
Particleboard (MMsf-3/8")(1) 157 138 165
MDF (MMsf-3/8") 149 132 146
Plywood (MMsf-3/8") 22 19 20
I-joist (MM lineal feet) 11 11 13
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(1) Excludes particleboard consumed internally (51 MMsf, 43 MMsf, 48
MMsf, for each of the above periods, respectively).
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INSERT LETTER TO SHAREHOLDERS HERE
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NORBORD INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(unaudited)
1st Qtr 1st Qtr
(US $ millions, except per share information) 2006 2005
-------------------------------------------------------------------------
Earnings
Net sales $ 368 $ 404
-------------------------------------------------------------------------
Earnings before interest, income tax and
depreciation 111 157
Interest and other income 1 1
Interest expense (7) (7)
-------------------------------------------------------------------------
Earnings before income tax and depreciation 105 151
Depreciation (22) (22)
Income tax (note 4) (25) (45)
-------------------------------------------------------------------------
Earnings $ 58 $ 84
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share (note 3)
- Basic $ 0.40 $ 0.56
- Diluted $ 0.40 $ 0.55
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained Earnings
Balance, beginning of period $ 412 $ 387
Earnings 58 84
Common share dividends (13) (12)
Repurchase of common shares (note 2) (10) (17)
-------------------------------------------------------------------------
Balance, end of period $ 447 $ 442
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
NORBORD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
1st Qtr 1st Qtr
(US $ millions) 2006 2005
-------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR):
Operating Activities
Earnings $ 58 $ 84
Items not affecting cash:
Depreciation 22 22
Future income taxes (note 4) 2 9
Other items (2) (2)
-------------------------------------------------------------------------
80 113
Net change in non-cash working capital balances (50) (73)
-------------------------------------------------------------------------
30 40
-------------------------------------------------------------------------
Investing Activities
Capital investments (35) (14)
Other 4 (6)
-------------------------------------------------------------------------
(31) (20)
-------------------------------------------------------------------------
Financing Activities
Dividends (13) (12)
Issue of common shares (note 2) 1 1
Repurchase of common shares (note 2) (11) (19)
-------------------------------------------------------------------------
(23) (30)
-------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ (24) $ (10)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
NORBORD INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
Apr 1 Dec 31
(US $ millions) 2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 131 $ 155
Accounts receivable 148 145
Inventory 115 99
Future income taxes 3 4
-------------------------------------------------------------------------
397 403
Property, plant and equipment 935 921
Other assets 3 4
-------------------------------------------------------------------------
$ 1,335 $ 1,328
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 190 $ 225
Long-term debt 440 440
Other liabilities 35 31
Future income taxes 111 110
Shareholders' equity (note 2) 559 522
-------------------------------------------------------------------------
$ 1,335 $ 1,328
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See accompanying notes)
NORBORD INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(In millions of US dollars, except per share information)
Note 1 - Basis of Presentation
------------------------------
The interim financial statements are unaudited and follow the accounting
policies summarized in the notes to the annual consolidated financial
statements. Certain prior period amounts have been reclassified to
conform to the current period's presentation.
The interim financial statements do not conform in all respects to the
disclosure requirements of Canadian generally accepted accounting
principles for annual financial statements and should, therefore, be read
in conjunction with the annual consolidated financial statements of
Norbord Inc. which includes information necessary or useful to
understanding the Company's business and financial statement
presentation. In particular, the Company's significant accounting
policies and practices are presented as Note 1 to the annual consolidated
financial statements.
Note 2 - Shareholders' Equity
-----------------------------
During the quarter, the Company repurchased and cancelled 1.1 million
common shares (2005 - 1.8 million common shares) for $11 (2005 - $19)
under a normal course issuer bid.
During the quarter, 0.2 million common shares were issued as a result of
options exercised under the stock option plan for proceeds of $1. In
addition, 0.4 million options were granted under the stock option plan.
Year-to-date, cost of sales include less than $1 related to stock based
compensation expense.
Note 3 - Earnings per Common Share
----------------------------------
Earnings per common share are calculated as follows:
1st Qtr 1st Qtr
2006 2005
-------------------------------------------------------------------------
Earnings available to common shareholders:
Earnings $ 58 $ 84
Less: Preferred share dividends - -
------------------------
$ 58 $ 84
------------------------
------------------------
Common shares (millions):
Weighted average number of common shares
outstanding 144.6 149.0
Stock options 0.7 1.3
------------------------
Diluted number of common shares 145.3 150.3
------------------------
------------------------
Earnings per common share:
Basic $ 0.40 $ 0.56
Diluted $ 0.40 $ 0.55
-------------------------------------------------------------------------
Stock options issued under the Company's stock option plan were included
in the calculation of diluted number of common shares to the extent the
exercise price of those options was less than the average market price of
the Company's common shares during the period.
Note 4 - Income Tax
-------------------
Interim income tax is calculated based on expected annual effective tax
rates.
1st Qtr 1st Qtr
2006 2005
-------------------------------------------------------------------------
Current tax expense $ 23 $ 36
Future income tax expense 2 9
-------------------------------------------------------------------------
Income tax expense $ 25 $ 45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 5 - Related Party Transactions
-----------------------------------
During the quarter, the Company provided certain administrative services
to a party related by virtue of being under common significant influence.
In addition, the Company periodically engages the services of a party
related by virtue of being under common significant influence. Year-to-
date, the fees for these services are less than $1.
Note 6 - Commitments and Contingencies
--------------------------------------
Foreign Exchange Hedges
-----------------------
The Company has outstanding forward foreign exchange contracts of
GBP 4 (2005 - GBP 21) and EUR 64 (2005 - EUR 60) and cross-currency swaps
of GBP 125 (2005 - GBP 125), which are designated as hedges against its
net investments in Europe. During the period, the Company realized a gain
of nil (2005 - loss of $1) on its matured net investment hedges, and at
period end, the Company had an unrealized loss of $4 (2005 - loss of $9)
on its outstanding net investment hedges. These realized and unrealized
gains are offset by realized and unrealized losses on the net investments
being hedged.
In addition, at period end, the Company has outstanding forward foreign
exchange contracts of CAD $26 (2005 - CAD $43), which are designated as a
hedge against certain Canadian dollar-denominated monetary liabilities.
During the period, the Company realized a gain of nil (2005 - $1) on its
matured monetary liability hedges, and at period end, the Company had an
unrealized gain of nil (2005 - nil) on these outstanding hedges. These
realized and unrealized gains are offset by realized and unrealized
losses on the monetary liabilities being hedged.
The Company has entered into various commitments for capital expenditures
and services in connection with the Cordele mill expansion project. The
Company has outstanding forward foreign exchange contracts of EUR 7 (2005
- nil) which are designated as hedges against certain of these
commitments denominated in Euros. No gains or losses were realized during
the period, and at period end, the Company had an unrealized loss of nil
on the outstanding hedges. These realized and unrealized losses are
offset by realized and unrealized gains on the purchase commitments being
hedged.
The Company has entered into forward foreign exchange contracts of
CAD $16, which are designated as a hedge of future Canadian dollar-
denominated net costs. At period end, the Company had an unrealized loss
of nil (2005 - nil) on the outstanding hedges.
Guarantee of Certain Fraser Papers Obligations
----------------------------------------------
On June 30, 2004, the Company completed the distribution of its paper and
timberlands business (Fraser Papers) to its common shareholders. Norbord
continues to guarantee certain obligations of Fraser Papers under
operating lease commitments, purchase commitments, and commodity hedging
contracts. The maximum potential amount of future payments that Norbord
could be required to make under these obligations is estimated to be $27.
This estimate excludes the amount of potential future payments related to
guarantees of derivative contracts that cannot be quantified due to their
nature. No amounts have been recorded in the consolidated balance sheet
with respect to these guarantees.
In 2005, Norbord extended the requirement for Fraser Papers to cash
collateralize the remaining guarantees for an additional year in exchange
for a fee based on the total guarantees outstanding. Fraser Papers has
committed to use its best efforts to remove Norbord from these guarantees
and has agreed to provide letters of credit or other acceptable
collateral to secure any guarantees which remain outstanding on December
27, 2006. As security for these ongoing financial commitments to Fraser
Papers, Norbord has the right, at any time, to require Fraser Papers to
provide a fixed first charge security interest over Fraser Papers'
manufacturing facilities. The Company's share of the estimated proceeds
from liquidation of this security would be sufficient to cover the
maximum potential amount of future payments under the guarantees. In
addition, Fraser Papers has indemnified Norbord against any future
obligations arising from released or previously unidentified guarantees.
Class Action Lawsuit
--------------------
Norbord and seven other North American OSB producers have been named as
defendants in several lawsuits filed in the United States District Court
for the Eastern District of Pennsylvania. The lawsuits allege that these
eight North American OSB producers violated United States and various
state antitrust and other laws by allegedly agreeing to fix prices and
reduce the supply of OSB from June 1, 2002 through the present.
The named plaintiffs seek to have the cases certified as class actions.
One group of plaintiffs seeks to certify a class of persons and entities
that purchased OSB in the United States directly from any of the named
North American OSB producers between June 1, 2002 and the present. Other
plaintiffs seek to certify one or more classes of persons and entities
that purchased OSB in various states and the District of Columbia
indirectly between June 1, 2002 and the present.
Norbord believes that the lawsuits are entirely without merit and intends
to defend them vigorously.
>>
For further information: Robin Lampard, Vice President, Treasurer, (416) 643-8843, robin.lampard@norbord.com
Source: newswire
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