Form 6-K Norbord Inc. For: Oct 03
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E-mailUNITED STATES SECURITIES AND EXCHANGE COMMISSION | |||||||||||
Washington, D.C. 20549 | |||||||||||
FORM 6-K | ||
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of November 2020
Commission file number: 001-37694
NORBORD INC. (Exact name of registrant as specified in its charter) | ||
1 Toronto Street, Suite 600
Toronto, Ontario, Canada, M5C 2W4
(416) 365-0705
(Address and Telephone Number of Registrant’s Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☐ Form 40-F ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
The information contained in Exhibits 99.2 and 99.3 of this Form 6-K is incorporated by reference into the registrant’s following registration statements on Form F-10: File No. 333-230459, Form F-3: File No. 333-220258 and Form S-8: File Nos. 333-213179 and 333-211895.
EXHIBIT INDEX
The following documents, which are attached as exhibits hereto, are incorporated by reference herein:
Exhibit | Description | ||||
| 99.1 | Press Release, dated November 5, 2020 | ||||
| 99.2 | Unaudited Condensed Interim Consolidated Financial Statements | ||||
| 99.3 | Management’s Discussion and Analysis | ||||
| 99.4 | Form 52 - 109F2 - Certification of Interim Filings – CEO | ||||
| 99.5 | Form 52 - 109F2 - Certification of Interim Filings – CFO | ||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 5, 2020 | NORBORD INC. | |||||||||||||||||||
By: | /s/ Tracy Connelly McGilley | |||||||||||||||||||
Name: Tracy Connelly McGilley | ||||||||||||||||||||
Title: Corporate Secretary | ||||||||||||||||||||
Exhibit 99.1
News Release
NORBORD REPORTS RECORD RESULTS IN THIRD QUARTER 2020; DECLARES C $0.60 PER SHARE QUARTERLY DIVIDEND
Note: Financial references in US dollars unless otherwise indicated.
Q3 2020 HIGHLIGHTS
•Adjusted EBITDA of $322 million and Adjusted earnings of $2.52 per diluted share
•Liquidity of $654 million at quarter-end
•Declared quarterly variable dividend of C $0.60 per share for shareholders of record on December 1, 2020
•100 Mile House, British Columbia mill to close permanently
TORONTO, ON (November 5, 2020) – Norbord Inc. (TSX and NYSE: OSB) today reported Adjusted EBITDA of $322 million for the third quarter of 2020 compared to $84 million in the second quarter of 2020 and $33 million in the third quarter of 2019. The increases versus all comparative periods were primarily driven by significantly higher realized North American oriented strand board (OSB) prices partially offset by higher North American profit share attributed to higher earnings. North American operations generated Adjusted EBITDA of $310 million compared to $84 million in the second quarter of 2020 and $24 million in the third quarter of 2019, and European operations delivered Adjusted EBITDA of $16 million compared to $2 million in the prior quarter and $11 million in the same quarter last year.
“The third quarter of 2020 was Norbord’s strongest quarter ever,” said Peter Wijnbergen, Norbord’s President & CEO. “The recovery in economic activity that unfolded in the latter stages of Q2 carried into Q3, driving strong new housing construction and repair-and-remodelling demand that helped lift North American benchmark OSB prices to all-time highs. Our European results also benefitted from higher quarter-over-quarter panel prices and continued recovery of UK panel demand that had been significantly impacted by the pandemic in the second quarter. Adjusted EBITDA increased nearly tenfold from year-ago levels and was 18% above Norbord’s previous best quarterly result in the second quarter of 2018. I remain particularly pleased with our team’s ability to remain focused on working safely within the strict protocols required by the pandemic while at the same time containing manufacturing costs.”
“Customer demand has been significantly stronger than expected during this unusual period of economic uncertainty. We are optimistic, but we also recognize that our business is cyclical and that it is not yet clear whether the worst of the pandemic is behind us. Today we announce the permanent closure of the 100 Mile House mill in British Columbia, which will reduce Norbord’s North American stated capacity, as the ongoing wood supply shortage in that region makes the reopening of that mill uneconomic. As always, we will remain vigilant, focused on the health and safety of our employees as well as our customers’ needs, and we will manage the business to be resilient and flexible.”
Norbord recorded Adjusted earnings of $204 million or $2.52 per share (basic and diluted) versus Adjusted earnings of $31 million or $0.38 per share (basic and diluted) in the second quarter of 2020 and an Adjusted loss of $9 million or $0.11 per share (basic and diluted) in the third quarter of 2019. Earnings in the current quarter include $10 million of costs related to closure of the 100 Mile House, British Columbia mill. Adjusted earnings (loss) exclude non-recurring or other items and use a normalized income tax rate:
1
Exhibit 99.1
| $ millions | Q3 2020 | Q2 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | ||||||||||||
| Earnings (loss) | 203 | 18 | (17) | 241 | (30) | ||||||||||||
| Adjusted for: | |||||||||||||||||
| Costs related to 100 Mile House closure | 10 | — | — | 10 | — | ||||||||||||
Impairment of assets | — | 16 | 10 | 16 | 10 | ||||||||||||
Loss on disposal of assets | — | 3 | — | 3 | 1 | ||||||||||||
Stock-based compensation and related costs | 2 | 2 | — | 4 | 2 | ||||||||||||
Costs on early extinguishment of 2020 Notes | — | — | — | — | 2 | ||||||||||||
Costs related to 100 Mile House indefinite curtailment | — | — | — | — | 10 | ||||||||||||
Reported income tax expense (recovery) | 61 | 3 | (6) | 72 | (21) | ||||||||||||
| Adjusted pre-tax earnings (loss) | 276 | 42 | (13) | 346 | (26) | ||||||||||||
Income tax (expense) recovery at statutory rate(1) | (72) | (11) | 4 | (90) | 7 | ||||||||||||
Adjusted earnings (loss)(2) | 204 | 31 | (9) | 256 | (19) | ||||||||||||
(1) Represents Canadian combined federal and provincial statutory rate.
(2) Non-IFRS measure.
Market Conditions
In North America, US new home construction activity, the single largest driver of OSB demand, has recovered from the economic impact of COVID-19 seen early in the second quarter. The September seasonally adjusted annualized rate of US housing starts was 1.42 million, which is an 11% year-over-year improvement. The pace of single-family starts, which use approximately three times more OSB than multi-family starts, improved 22% to 1.11 million. The pace of permits (the more forward-looking indicator) was 1.55 million in September, an increase of 8% versus the same period in 2019. The 2020 consensus forecast from US housing economists is approximately 1.36 million starts, 5% higher than 2019 despite the pullback to a seasonally-adjusted pace of 0.93 million in April. Throughout the ongoing pandemic, demand from the repair-and-remodelling sector has continued at record pace.
Reflecting the stronger than expected recovery in North American OSB demand, North American benchmark OSB prices increased significantly as the quarter progressed. Average benchmark prices were higher than all comparative periods and were, for most of the quarter, at record highs. The table below summarizes average benchmark OSB prices by region for the relevant quarters:
| North American region | % of Norbord’s operating capacity | Q3 2020 | Q2 2020 | Q3 2019 | ||||||||||
| North Central | 15% | 578 | 270 | 217 | ||||||||||
| South East | 36% | 572 | 262 | 168 | ||||||||||
| Western Canada | 29% | 579 | 224 | 164 | ||||||||||
In Europe, UK panel demand continued to recover from the COVID 19-related pullback in April and May. Continental demand, which was not impacted by the pandemic, particularly in Germany, remained steady throughout the quarter. In local currency terms, average panel prices were up 6% quarter-over-quarter and down 9% year-over-year.
Performance
In North America, third quarter shipments were up 9% quarter-over-quarter but declined 8% year-over-year. Excluding the Chambord, Quebec mill, Norbord’s North American mills produced at 86% of available capacity in the third quarter of 2020 compared to 74% in the second quarter and 92% in the third quarter of 2019.
2
Exhibit 99.1
Norbord’s third quarter North American OSB cash production costs per unit (excluding mill profit share and freight costs) increased by 4% compared to the prior quarter and were unchanged compared to the same quarter last year.
In Europe, third quarter shipments were up 23% quarter-over quarter, reflecting a strong recovery after the significant curtailments across the Company’s UK mills in the second quarter in response to reduced customer demand due to government-imposed pandemic restrictions. Year-over-year, shipments were up 12%, reflecting the continued ramp-up of the Inverness, Scotland mill. Norbord’s European mills produced at 97% of stated capacity in the third quarter of 2020, compared to 70% in the second quarter and 84% in the third quarter of 2019.
The Company generated net Margin Improvement Program (MIP) gains of $43 million year-to-date due to improved mill productivity and lower controllable manufacturing and overhead costs.
Investment in property, plant and equipment and intangible assets was $28 million in the third quarter ($67 million year-to-date), including $5 million ($44 million project-to-date) in the Inverness Phase 2 project and $1 million ($54 million project-to-date of the $71 million budget) in the Chambord mill rebuild project. At Inverness, the installation of the second wood room, heat energy and drying line is now complete and commissioning is well advanced, and the state-of-the-art continuous press is continuing to ramp up towards its targeted Phase 2 capacity of 945 million square feet (MMsf) (3/8-inch basis).
As part of Norbord's initial COVID-19 Response Plan, Norbord’s budgeted 2020 investment in property, plant and equipment had been reduced from $100 million to $75 million. Based on the strong third quarter results and in line with Norbord’s capital allocation priorities, 2020 investment in property, plant and equipment is now forecast to return to its original budget of $100 million. Looking ahead to next year, while the Company is still in the process of finalizing its capital plans, 2021 capital expenditures are targeted at approximately $150 million. This will include maintenance of business projects, projects focused on reducing manufacturing costs and enhancing process safety across the mills. It also includes further investments to support the Company's strategy to increase the production of specialty products for industrial applications and exports, as well as a portion of the Chambord mill rebuild. The Company has not yet made a restart decision for the Chambord mill, and will only do so when it is sufficiently clear that customers require the production from this mill.
At quarter-end, the Company had unutilized liquidity of $654 million, comprising $240 million in cash and cash equivalents and $414 million in unused credit lines. Operating working capital was $191 million compared to $139 million at the same quarter-end last year, owing primarily to higher accounts receivable, which were attributed to significantly higher North American OSB prices. The Company’s tangible net worth was $1,183 million and net debt to capitalization on a book basis was 27%, with both values well within bank covenants.
Operational Update
Well Positioned to Respond to Changing Conditions
During the third quarter, North American demand for OSB remained extremely strong, resulting in significantly higher benchmark OSB prices. The key indicators for the US housing market, including strong new home sales, housing permits and single family starts, minimal new home inventories, and low mortgage rates, provide a positive outlook for OSB demand. Similarly, repair-and-remodelling demand has been robust and demand from industrial customers has normalized following pandemic-imposed restrictions. Excluding the curtailed 100 Mile House and Chambord mills, Norbord’s operating North American mills ran as close as possible to full operating rates in the third quarter, producing at 92% of capacity. In August, the Company restarted Cordele Line 1 on a limited operating schedule to meet customer orders that Norbord would not have otherwise been able to satisfy. Notwithstanding these positive trends, there remains considerable uncertainty in the broader economic environment as a predicted second wave of the COVID-19 global pandemic appears to be underway. As the
3
Exhibit 99.1
typical seasonally slower period for OSB demand approaches, it is not yet clear what impact this seasonality and the pandemic will have on the Company’s core markets. Should conditions change, Norbord is well positioned to respond.
100 Mile House Permanent Closure
Earlier this year and in reaction to the pandemic, Norbord recognized the need to implement a more flexible operating strategy across its manufacturing platform. The objective was to be more agile in responding to changing market conditions and customer requirements while containing manufacturing costs through more efficient maintenance planning and execution. This strategy has proven to have significant merit and has been adopted as the Company’s standard operating approach. At the same time, it became clear that the 100 Mile House OSB mill was unlikely to have a role to play in the future. As the Company’s highest cost operation, this mill had been indefinitely curtailed since August 2019 in response to a wood supply shortage and rising fibre costs. The Cariboo region in which the mill is located has been under wood supply pressure for the past decade as a result of the mountain pine beetle epidemic and more recently significant wildfires, leading to a 50% reduction in the region’s annual allowable harvest. Taken together, the current and expected ongoing wood supply shortage makes operation of the mill uneconomic and Norbord has decided to permanently close 100 Mile House.
Dividend
The Board of Directors declared a quarterly variable dividend of C $0.60 per common share, payable on December 21, 2020 to shareholders of record on December 1, 2020. Consistent with Norbord’s variable dividend policy and historically balanced approach to capital allocation, the dividend is being increased from the prior quarter’s level of C $0.30 per common share to reflect the Company’s record financial results and improving end-market demand. At the same time, the Company continues to focus on balance sheet flexibility given the economic uncertainty from the ongoing COVID-19 pandemic, the US election and the upcoming Brexit deadline. Any dividends reinvested on December 22, 2020 under the Company’s Dividend Reinvestment Plan will be used by the transfer agent to purchase common shares on the open market.
Norbord’s dividends are declared in Canadian dollars; however, shareholders may opt to receive their dividends in the US dollar equivalent. Details regarding this option are available on Norbord’s website at https://www.norbord.com/investors/shareholder-information/dividends.
Norbord’s variable dividend policy targets the payment to shareholders of a portion of free cash flow
based upon the Company’s financial position, results of operations, cash flow, capital requirements and restrictions under the Company’s revolving bank lines, as well as the market outlook for the Company’s principal products and broader market and economic conditions, among other factors. The Board retains the discretion to amend the Company’s dividend policy in any manner and at any time as it may deem necessary or appropriate in the future. For these reasons, as well as others, the Board in its sole discretion can decide to increase, maintain, decrease, suspend or discontinue the payment of cash dividends in the future.
Normal Course Issuer Bid
Under its Normal Course Issuer Bid (NCIB) that commenced on November 5, 2019 and expired November 4, 2020, Norbord repurchased $6 million worth of shares during the third quarter and acquired 1.4 million common shares under the bid in the past 12 months at a weighted average price of C$33.17 per common share, representing a total cost of $33 million. Norbord has not renewed the NCIB since it expired on November 4, 2020.
4
Exhibit 99.1
Additional Information
Norbord’s Q3 2020 news release, management’s discussion and analysis, consolidated unaudited financial statements and notes to the financial statements have been filed on SEDAR (www.sedar.com), EDGAR (www.sec.gov) and are available in the investor section of the Company’s website at www.norbord.com. Shareholders may receive a hard copy of Norbord’s audited annual financial statements free of charge upon request. The Company has also made available on its website presentation materials containing certain historical and forward-looking information relating to Norbord, including materials that contain additional information about the Company’s financial results. Shareholders are encouraged to read this material.
Conference Call
Norbord will hold a conference call for analysts and institutional investors on Thursday, November 5, 2020 at 11:00 a.m. ET. The call will be broadcast live over the internet via www.norbord.com and www.newswire.ca. An accompanying presentation will be available in the “Investors/Conference Call” section of the Norbord website prior to the start of the call. A replay number will be available approximately one hour after completion of the call and will be accessible until December 5, 2020 by dialing 1-888-203-1112 or 647-436-0148 (passcode 1415831 and pin 2870). Audio playback and a written transcript will be available on the Norbord website.
Norbord Profile
Norbord Inc. is a leading global manufacturer of wood-based panels and the world’s largest producer of oriented strand board (OSB). In addition to OSB, Norbord manufactures particleboard, medium density fibreboard and related value-added products. Norbord has assets of approximately $2.1 billion and employs approximately 2,400 people at 17 plant locations in the United States, Canada and Europe. Norbord is a publicly traded company listed on the Toronto Stock Exchange and New York Stock Exchange under the symbol “OSB”.
-end-
Contact:
Robert B. Winslow, CFA
Vice President, Investor Relations & Corporate Development
Tel. (416) 777-4426
investors@norbord.com
or
Heather Colpitts
Director, Corporate Affairs
Tel. (416) 643-8838
investors@norbord.com
This news release contains forward-looking statements, as defined by applicable securities legislation, including statements related to the Company’s strategy, projects, plans, future financial or operating performance and other statements that express management’s expectations or estimates of future performance. Often, but not always, forward-looking statements can be identified by the use of words such as “set up,” “on track,” “expect,” “estimate,” “forecast,” “target,” “outlook,” “schedule,” “represent,” “continue,” “intend,” “should,” “would,” “could,” “will,” “can,” “might,” “may,” 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
5
Exhibit 99.1
general and specific, which contribute to the possibility that the predictions, forecasts and other forward-looking statements will not occur. These factors include, but are not limited to: (1) developments related to COVID-19 or any other plague, epidemic, pandemic, outbreak of infectious disease or any other public health crisis, including health and safety measures instituted to protect the Company’s employees, government-imposed restrictions or other restrictions that may apply to the Company’s employees and/or operations (including quarantine), the impact on customer demand, supply and distribution and other factors; (2) assumptions in connection with the economic and financial conditions in the US, Europe, Canada and globally; (3) risks inherent to product concentration and cyclicality; (4) effects of competition and product pricing pressures; (5) risks inherent to customer dependence; (6) effects of variations in the price and availability of manufacturing inputs, including continued access to fibre resources at competitive prices and the impact of third-party certification standards; (7) availability of transportation services, including truck and rail services, and port facilities; (8) various events that could disrupt operations, including natural, man-made or catastrophic events and ongoing relations with employees; (9) impact of changes to, or non-compliance with, environmental or other regulations; (10) government restrictions, standards or regulations intended to reduce greenhouse gas emissions; (11) impact of weather and climate change on Norbord’s operations or the operations or demand of its suppliers and customers; (12) impact of any product liability claims in excess of insurance coverage; (13) risks inherent to a capital intensive industry; (14) impact of future outcomes of tax exposures; (15) potential future changes in tax laws, including tax rates; (16) effects of currency exposures and exchange rate fluctuations; (17) future operating costs; (18) availability of financing, bank lines, securitization programs and/or other means of liquidity; (19) impact of future cross-border trade rulings or agreements; (20) implementation of important strategic initiatives and identification, completion and integration of acquisitions; (21) ability to implement new or upgraded information technology infrastructure; (22) impact of information technology service disruptions or failures; and (23) changes in government policy and regulation.
The above list of important factors affecting forward-looking information is not exhaustive. Additional factors are noted elsewhere, and reference should be made to the other risks discussed in filings with Canadian and US securities regulatory authorities. Except as required by applicable law, Norbord does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by, or on behalf of, the Company, 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 “Forward-Looking Statements” section in the February 4, 2020 Annual Information Form and the cautionary statement contained in the “Forward-Looking Statements” section of the 2019 Management’s Discussion and Analysis dated February 4, 2020 and Q3 2020 Management’s Discussion and Analysis dated November 4, 2020.
In evaluating the Company’s business, management uses non-International Financial Reporting Standards (IFRS) financial measures which, in management’s view, are important supplemental measures of the Company’s performance and believes that they are frequently used by investors, securities analysts and other interested persons in the evaluation of Norbord and other similar companies. In this news release, the following non-IFRS financial measures have been used: Adjusted EBITDA, Adjusted earnings (loss), Adjusted earnings (loss) per share, operating working capital, tangible net worth, and net debt to capitalization, book basis. Norbord defines Adjusted EBITDA as earnings (loss) determined in accordance with IFRS before finance costs, interest income, income taxes, depreciation, amortization and non-recurring or other items; Adjusted earnings (loss) as earnings (loss) determined in accordance with IFRS before non-recurring or other items and using a normalized income tax rate; Adjusted earnings (loss) per share is Adjusted earnings (loss) divided by the weighted average number of common shares outstanding (on a basic or diluted basis, as specified); operating working capital as accounts receivable plus inventory and prepaids less accounts payable and accrued liabilities; tangible net worth as shareholders’ equity including certain adjustments; net debt to capitalization, book basis as net debt for financial covenant purposes divided by the sum of net debt for financial covenant purposes and tangible net worth; net debt for financial covenant purposes as net debt excluding other long-term debt and including other liabilities classified as debt for financial covenant purposes, letters of credit and guarantees outstanding, and any bank advances; and net debt as the principal value of long-term debt, including the current portion, other long-term debt and bank advances, if any, less cash and cash equivalents. Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies that may have different financing and capital structures, and/or tax rates. See “Non-IFRS Financial Measures” in Norbord’s 2019 Management’s Discussion and Analysis dated February 4, 2020 and Q3 2020 Management’s Discussion and Analysis dated November 4, 2020 for a quantitative reconciliation of these non-IFRS financial measures to the most directly comparable IFRS measure.
6
Exhibit 99.1
Interim Consolidated Balance Sheets
| (Unaudited) (US $ millions) | Oct 3, 2020 | Dec 31, 2019 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 240 | $ | 20 | |||||||
| Accounts receivable | 246 | 136 | |||||||||
| Taxes receivable | 6 | 63 | |||||||||
| Inventory | 216 | 230 | |||||||||
| Prepaids | 10 | 13 | |||||||||
| 718 | 462 | ||||||||||
| Non-current assets | |||||||||||
| Property, plant and equipment | 1,366 | 1,427 | |||||||||
| Intangible assets | 19 | 21 | |||||||||
| Deferred income tax assets | 1 | 2 | |||||||||
| Other assets | 8 | 9 | |||||||||
| 1,394 | 1,459 | ||||||||||
| $ | 2,112 | $ | 1,921 | ||||||||
| Liabilities and shareholders’ equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable and accrued liabilities | $ | 281 | $ | 259 | |||||||
| Taxes payable | 49 | 1 | |||||||||
| 330 | 260 | ||||||||||
| Non-current liabilities | |||||||||||
| Long-term debt | 658 | 657 | |||||||||
| Other long-term debt | — | 68 | |||||||||
| Other liabilities | 41 | 40 | |||||||||
| Deferred income tax liabilities | 202 | 192 | |||||||||
| 901 | 957 | ||||||||||
| Shareholders’ equity | 881 | 704 | |||||||||
| $ | 2,112 | $ | 1,921 | ||||||||
7
Exhibit 99.1
Interim Consolidated Statements of Earnings (Loss)
| (Unaudited) Periods ended Oct 3 and Oct 5 (US $ millions, except per share information) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| Sales | $ | 725 | $ | 435 | $ | 1,613 | $ | 1,358 | |||||||||||||||
| Cost of sales | (399) | (400) | (1,123) | (1,240) | |||||||||||||||||||
| General and administrative expenses | (6) | (2) | (13) | (9) | |||||||||||||||||||
| Depreciation and amortization | (36) | (35) | (103) | (104) | |||||||||||||||||||
| Loss on disposal of assets | — | — | (3) | (1) | |||||||||||||||||||
Impairment of assets | — | (10) | (16) | (10) | |||||||||||||||||||
| Costs related to 100 Mile House closure | (10) | — | (10) | — | |||||||||||||||||||
Costs related to 100 Mile House indefinite curtailment | — | — | — | (2) | |||||||||||||||||||
| Operating income (loss) | 274 | (12) | 345 | (8) | |||||||||||||||||||
| Non-operating items: | |||||||||||||||||||||||
| Finance costs | (10) | (11) | (32) | (34) | |||||||||||||||||||
| Interest income | — | — | — | 1 | |||||||||||||||||||
| Costs on early extinguishment of 2020 Notes | — | — | — | (10) | |||||||||||||||||||
| Earnings (loss) before income tax | 264 | (23) | 313 | (51) | |||||||||||||||||||
| Income tax (expense) recovery | (61) | 6 | (72) | 21 | |||||||||||||||||||
| Earnings (loss) | $ | 203 | $ | (17) | $ | 241 | $ | (30) | |||||||||||||||
| Earnings (loss) per common share | |||||||||||||||||||||||
| Basic and diluted | $ | 2.51 | $ | (0.21) | $ | 2.98 | $ | (0.37) | |||||||||||||||
Interim Consolidated Statements of Comprehensive Income (Loss)
| (Unaudited) Periods ended Oct 3 and Oct 5 (US $ millions) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| Earnings (loss) | $ | 203 | $ | (17) | $ | 241 | $ | (30) | |||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Items that will not be reclassified to earnings (loss): | |||||||||||||||||||||||
| Actuarial loss on post-employment obligations | — | — | (1) | (5) | |||||||||||||||||||
| Items that may be reclassified subsequently to earnings (loss): | |||||||||||||||||||||||
| Foreign currency translation gain (loss) on foreign operations | 13 | (7) | (6) | (13) | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | 13 | (7) | (7) | (18) | |||||||||||||||||||
| Comprehensive income (loss) | $ | 216 | $ | (24) | $ | 234 | $ | (48) | |||||||||||||||
8
Exhibit 99.1
Interim Consolidated Statements of
Changes in Shareholders’ Equity
| (Unaudited) Periods ended Oct 3 and Oct 5 (US $ millions) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| Share capital | |||||||||||||||||||||||
| Balance, beginning of period | $ | 1,264 | $ | 1,280 | $ | 1,278 | $ | 1,280 | |||||||||||||||
| Issue of common shares upon exercise of options | 4 | — | 5 | — | |||||||||||||||||||
| Common shares repurchased and cancelled | (3) | — | (18) | (24) | |||||||||||||||||||
| Reverse accrual for common shares repurchased and cancelled under ASPP | — | — | — | 24 | |||||||||||||||||||
| Balance, end of period | $ | 1,265 | $ | 1,280 | $ | 1,265 | $ | 1,280 | |||||||||||||||
| Merger reserve | $ | (96) | $ | (96) | $ | (96) | $ | (96) | |||||||||||||||
| Contributed surplus | |||||||||||||||||||||||
| Balance, beginning of period | $ | 4 | $ | 4 | $ | 4 | $ | 4 | |||||||||||||||
| Stock based compensation | 1 | — | 1 | — | |||||||||||||||||||
| Stock options exercised | (1) | — | (1) | — | |||||||||||||||||||
| Balance, end of period | $ | 4 | $ | 4 | $ | 4 | $ | 4 | |||||||||||||||
| Retained deficit | |||||||||||||||||||||||
| Balance, beginning of period | $ | (283) | $ | (231) | $ | (299) | $ | (168) | |||||||||||||||
| Earnings (loss) | 203 | (17) | 241 | (30) | |||||||||||||||||||
| Common share dividends | (19) | (24) | (34) | (73) | |||||||||||||||||||
| Common shares repurchased and cancelled | (3) | — | (10) | (19) | |||||||||||||||||||
| Reverse accrual for common shares repurchased and cancelled under ASPP | — | — | — | 18 | |||||||||||||||||||
Balance, end of period(i) | $ | (102) | $ | (272) | $ | (102) | $ | (272) | |||||||||||||||
| Accumulated other comprehensive loss | |||||||||||||||||||||||
| Balance, beginning of period | $ | (203) | $ | (208) | $ | (183) | $ | (197) | |||||||||||||||
| Other comprehensive income (loss) | 13 | (7) | (7) | (18) | |||||||||||||||||||
| Balance, end of period | $ | (190) | $ | (215) | $ | (190) | $ | (215) | |||||||||||||||
| Shareholders’ equity | $ | 881 | $ | 701 | $ | 881 | $ | 701 | |||||||||||||||
(i) Retained deficit comprised of: | ||||||||||||||
| Deficit arising on cashless exercise of warrants in 2013 | $ | (263) | $ | (263) | ||||||||||
| All other retained earnings (deficit) | 161 | (9) | ||||||||||||
| $ | (102) | $ | (272) | |||||||||||
9
Exhibit 99.1
Interim Consolidated Statements of Cash Flows
| (Unaudited) Periods ended Oct 3 and Oct 5 (US $ millions) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| CASH PROVIDED BY (USED FOR): | |||||||||||||||||||||||
| Operating activities | |||||||||||||||||||||||
| Earnings (loss) | $ | 203 | $ | (17) | $ | 241 | $ | (30) | |||||||||||||||
| Items not affecting cash: | |||||||||||||||||||||||
| Depreciation and amortization | 36 | 35 | 103 | 104 | |||||||||||||||||||
| Deferred income tax | 6 | (13) | 13 | 19 | |||||||||||||||||||
Impairment of assets | — | 10 | 16 | 10 | |||||||||||||||||||
| Costs related to 100 Mile House closure | 10 | — | 10 | — | |||||||||||||||||||
Costs related to 100 Mile House indefinite curtailment | — | (1) | — | 1 | |||||||||||||||||||
| Costs on early extinguishment of 2020 Notes | — | — | — | 10 | |||||||||||||||||||
| Loss on disposal of assets, net | — | — | 3 | 1 | |||||||||||||||||||
| Other items | — | 9 | 8 | 16 | |||||||||||||||||||
| 255 | 23 | 394 | 131 | ||||||||||||||||||||
| Net change in non-cash operating working capital balances | (46) | 13 | (69) | (59) | |||||||||||||||||||
| Net change in taxes receivable and taxes payable | 53 | 16 | 101 | (81) | |||||||||||||||||||
| 262 | 52 | 426 | (9) | ||||||||||||||||||||
| Investing activities | |||||||||||||||||||||||
| Investment in property, plant and equipment | (19) | (28) | (63) | (105) | |||||||||||||||||||
| Investment in intangible assets | (1) | (2) | (3) | (3) | |||||||||||||||||||
| (20) | (30) | (66) | (108) | ||||||||||||||||||||
| Financing activities | |||||||||||||||||||||||
| Accounts receivable securitization (repayments) drawings | — | (55) | (68) | 27 | |||||||||||||||||||
| Issuance of debt | — | — | — | 350 | |||||||||||||||||||
| Repayment of debt | — | (240) | — | (240) | |||||||||||||||||||
| Common share dividends paid | (19) | (24) | (34) | (73) | |||||||||||||||||||
| Debt issuance costs | — | (2) | (1) | (6) | |||||||||||||||||||
| Premium on early extinguishment of 2020 Notes | — | (9) | — | (9) | |||||||||||||||||||
| Issue of common shares | 3 | — | 4 | — | |||||||||||||||||||
| Repurchase of common shares | (6) | — | (28) | (43) | |||||||||||||||||||
| Repayment of lease obligations | (3) | (2) | (9) | (8) | |||||||||||||||||||
| (25) | (332) | (136) | (2) | ||||||||||||||||||||
Foreign exchange revaluation on cash and cash equivalents held | 3 | (2) | (4) | (6) | |||||||||||||||||||
| Cash and cash equivalents | |||||||||||||||||||||||
| Increase (decrease) during period | 220 | (312) | 220 | (125) | |||||||||||||||||||
| Balance, beginning of period | 20 | 315 | 20 | 128 | |||||||||||||||||||
| Balance, end of period | $ | 240 | $ | 3 | $ | 240 | $ | 3 | |||||||||||||||
10
Exhibit 99.2
Interim Consolidated Balance Sheets
| (Unaudited) (US $ millions) | Note | Oct 3, 2020 | Dec 31, 2019 | |||||||||||
| Assets | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | 240 | $ | 20 | ||||||||||
| Accounts receivable | 3 | 246 | 136 | |||||||||||
| Taxes receivable | 6 | 63 | ||||||||||||
| Inventory | 4 | 216 | 230 | |||||||||||
| Prepaids | 10 | 13 | ||||||||||||
| 718 | 462 | |||||||||||||
| Non-current assets | ||||||||||||||
| Property, plant and equipment | 7, 17 | 1,366 | 1,427 | |||||||||||
| Intangible assets | 19 | 21 | ||||||||||||
| Deferred income tax assets | 1 | 2 | ||||||||||||
| Other assets | 8 | 9 | ||||||||||||
| 1,394 | 1,459 | |||||||||||||
| $ | 2,112 | $ | 1,921 | |||||||||||
| Liabilities and shareholders’ equity | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable and accrued liabilities | $ | 281 | $ | 259 | ||||||||||
| Taxes payable | 49 | 1 | ||||||||||||
| 330 | 260 | |||||||||||||
| Non-current liabilities | ||||||||||||||
| Long-term debt | 5 | 658 | 657 | |||||||||||
| Other long-term debt | 3 | — | 68 | |||||||||||
| Other liabilities | 6 | 41 | 40 | |||||||||||
| Deferred income tax liabilities | 202 | 192 | ||||||||||||
| 901 | 957 | |||||||||||||
| Shareholders’ equity | 881 | 704 | ||||||||||||
| $ | 2,112 | $ | 1,921 | |||||||||||
(See accompanying notes)
Commitments and Contingencies (note 15)
Subsequent Event (note 3)
1
Exhibit 99.2
Interim Consolidated Statements of Earnings (Loss)
| (Unaudited) Periods ended Oct 3 and Oct 5 (US $ millions, except per share information) | Note | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||||
| Sales | 17 | $ | 725 | $ | 435 | $ | 1,613 | $ | 1,358 | |||||||||||||||||
| Cost of sales | (399) | (400) | (1,123) | (1,240) | ||||||||||||||||||||||
| General and administrative expenses | (6) | (2) | (13) | (9) | ||||||||||||||||||||||
| Depreciation and amortization | 17 | (36) | (35) | (103) | (104) | |||||||||||||||||||||
| Loss on disposal of assets | — | — | (3) | (1) | ||||||||||||||||||||||
Impairment of assets | 9 | — | (10) | (16) | (10) | |||||||||||||||||||||
| Costs related to 100 Mile House closure | 10 | (10) | — | (10) | — | |||||||||||||||||||||
| Costs related to 100 Mile House indefinite curtailment | 10 | — | — | — | (2) | |||||||||||||||||||||
| Operating income (loss) | 274 | (12) | 345 | (8) | ||||||||||||||||||||||
| Non-operating items: | ||||||||||||||||||||||||||
| Finance costs | (10) | (11) | (32) | (34) | ||||||||||||||||||||||
| Interest income | — | — | — | 1 | ||||||||||||||||||||||
| Costs on early extinguishment of 2020 Notes | — | — | — | (10) | ||||||||||||||||||||||
| Earnings (loss) before income tax | 264 | (23) | 313 | (51) | ||||||||||||||||||||||
| Income tax (expense) recovery | 11 | (61) | 6 | (72) | 21 | |||||||||||||||||||||
| Earnings (loss) | $ | 203 | $ | (17) | $ | 241 | $ | (30) | ||||||||||||||||||
| Earnings (loss) per common share | 12 | |||||||||||||||||||||||||
| Basic and diluted | $ | 2.51 | $ | (0.21) | $ | 2.98 | $ | (0.37) | ||||||||||||||||||
(See accompanying notes)
Interim Consolidated Statements of Comprehensive Income (Loss)
| (Unaudited) Periods ended Oct 3 and Oct 5 (US $ millions) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | ||||||||||||||||||||||
| Earnings (loss) | $ | 203 | $ | (17) | $ | 241 | $ | (30) | ||||||||||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||||||||||||
| Items that will not be reclassified to earnings (loss): | ||||||||||||||||||||||||||
| Actuarial loss on post-employment obligations | — | — | (1) | (5) | ||||||||||||||||||||||
| Items that may be reclassified subsequently to earnings (loss): | ||||||||||||||||||||||||||
Foreign currency translation gain (loss) on foreign operations | 13 | (7) | (6) | (13) | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 13 | (7) | (7) | (18) | ||||||||||||||||||||||
| Comprehensive income (loss) | $ | 216 | $ | (24) | $ | 234 | $ | (48) | ||||||||||||||||||
(See accompanying notes)
2
Exhibit 99.2
Interim Consolidated Statements of
Changes in Shareholders’ Equity
| (Unaudited) Periods ended Oct 3 and Oct 5 (US $ millions) | Note | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||||
| Share capital | 8 | |||||||||||||||||||||||||
| Balance, beginning of period | $ | 1,264 | $ | 1,280 | $ | 1,278 | $ | 1,280 | ||||||||||||||||||
| Issue of common shares upon exercise of options | 4 | — | 5 | — | ||||||||||||||||||||||
| Common shares repurchased and cancelled | (3) | — | (18) | (24) | ||||||||||||||||||||||
| Reverse accrual for common shares repurchased and cancelled under ASPP | — | — | — | 24 | ||||||||||||||||||||||
| Balance, end of period | $ | 1,265 | $ | 1,280 | $ | 1,265 | $ | 1,280 | ||||||||||||||||||
| Merger reserve | 8 | $ | (96) | $ | (96) | $ | (96) | $ | (96) | |||||||||||||||||
| Contributed surplus | 8 | |||||||||||||||||||||||||
| Balance, beginning of period | $ | 4 | $ | 4 | $ | 4 | $ | 4 | ||||||||||||||||||
| Stock-based compensation | 1 | — | 1 | — | ||||||||||||||||||||||
| Stock options exercised | (1) | — | (1) | — | ||||||||||||||||||||||
| Balance, end of period | 8 | $ | 4 | $ | 4 | $ | 4 | $ | 4 | |||||||||||||||||
| Retained deficit | ||||||||||||||||||||||||||
| Balance, beginning of period | $ | (283) | $ | (231) | $ | (299) | $ | (168) | ||||||||||||||||||
| Earnings (loss) | 203 | (17) | 241 | (30) | ||||||||||||||||||||||
| Common share dividends | (19) | (24) | (34) | (73) | ||||||||||||||||||||||
| Common shares repurchased and cancelled | 8 | (3) | — | (10) | (19) | |||||||||||||||||||||
| Reverse accrual for common shares repurchased and cancelled under ASPP | 8 | — | — | — | 18 | |||||||||||||||||||||
Balance, end of period(i) | $ | (102) | $ | (272) | $ | (102) | $ | (272) | ||||||||||||||||||
| Accumulated other comprehensive loss | ||||||||||||||||||||||||||
| Balance, beginning of period | $ | (203) | $ | (208) | $ | (183) | $ | (197) | ||||||||||||||||||
| Other comprehensive income (loss) | 13 | (7) | (7) | (18) | ||||||||||||||||||||||
| Balance, end of period | 8 | $ | (190) | $ | (215) | $ | (190) | $ | (215) | |||||||||||||||||
| Shareholders’ equity | $ | 881 | $ | 701 | $ | 881 | $ | 701 | ||||||||||||||||||
(See accompanying notes)
(i) Retained deficit comprised of: | ||||||||||||||
| Deficit arising on cashless exercise of warrants in 2013 | $ | (263) | $ | (263) | ||||||||||
| All other retained earnings (deficit) | 161 | (9) | ||||||||||||
| $ | (102) | $ | (272) | |||||||||||
3
Exhibit 99.2
Interim Consolidated Statements of Cash Flows
| (Unaudited) Periods ended Oct 3 and Oct 5 (US $ millions) | Note | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||||
| CASH PROVIDED BY (USED FOR): | ||||||||||||||||||||||||||
| Operating activities | ||||||||||||||||||||||||||
| Earnings (loss) | $ | 203 | $ | (17) | $ | 241 | $ | (30) | ||||||||||||||||||
| Items not affecting cash: | ||||||||||||||||||||||||||
| Depreciation and amortization | 17 | 36 | 35 | 103 | 104 | |||||||||||||||||||||
| Deferred income tax | 11 | 6 | (13) | 13 | 19 | |||||||||||||||||||||
| Impairment of assets | 9 | — | 10 | 16 | 10 | |||||||||||||||||||||
| Costs related to 100 Mile House closure | 10 | 10 | — | 10 | — | |||||||||||||||||||||
Costs related to 100 Mile House indefinite curtailment | — | (1) | — | 1 | ||||||||||||||||||||||
| Costs on early extinguishment of 2020 Notes | — | — | — | 10 | ||||||||||||||||||||||
| Loss on disposal of assets, net | — | — | 3 | 1 | ||||||||||||||||||||||
| Other items | 13 | — | 9 | 8 | 16 | |||||||||||||||||||||
| 255 | 23 | 394 | 131 | |||||||||||||||||||||||
| Net change in non-cash operating working capital balances | 13 | (46) | 13 | (69) | (59) | |||||||||||||||||||||
| Net change in taxes receivable and taxes payable | 53 | 16 | 101 | (81) | ||||||||||||||||||||||
| 262 | 52 | 426 | (9) | |||||||||||||||||||||||
| Investing activities | ||||||||||||||||||||||||||
| Investment in property, plant and equipment | (19) | (28) | (63) | (105) | ||||||||||||||||||||||
| Investment in intangible assets | (1) | (2) | (3) | (3) | ||||||||||||||||||||||
| (20) | (30) | (66) | (108) | |||||||||||||||||||||||
| Financing activities | ||||||||||||||||||||||||||
| Accounts receivable securitization (repayments) drawings | 3 | — | (55) | (68) | 27 | |||||||||||||||||||||
| Issuance of debt | — | — | — | 350 | ||||||||||||||||||||||
| Repayment of debt | — | (240) | — | (240) | ||||||||||||||||||||||
| Common share dividends paid | (19) | (24) | (34) | (73) | ||||||||||||||||||||||
| Debt issuance costs | — | (2) | (1) | (6) | ||||||||||||||||||||||
| Premium on early extinguishment of 2020 Notes | — | (9) | — | (9) | ||||||||||||||||||||||
| Issue of common shares | 8 | 3 | — | 4 | — | |||||||||||||||||||||
| Repurchase of common shares | 8 | (6) | — | (28) | (43) | |||||||||||||||||||||
| Repayment of lease obligations | 7 | (3) | (2) | (9) | (8) | |||||||||||||||||||||
| (25) | (332) | (136) | (2) | |||||||||||||||||||||||
Foreign exchange revaluation on cash and cash equivalents held | 3 | (2) | (4) | (6) | ||||||||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||||||||
| Increase (decrease) during period | 220 | (312) | 220 | (125) | ||||||||||||||||||||||
| Balance, beginning of period | 20 | 315 | 20 | 128 | ||||||||||||||||||||||
| Balance, end of period | $ | 240 | $ | 3 | $ | 240 | $ | 3 | ||||||||||||||||||
(See accompanying notes, including note 13 for supplemental cash flow information)
4
Exhibit 99.2
Notes to the Interim Consolidated Financial Statements
(in US $, unless otherwise noted)
In these unaudited condensed consolidated interim financial statements (interim financial statements) 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, which are related parties by virtue of holding a significant equity interest in the Company.
NOTE 1. NATURE AND DESCRIPTION OF THE COMPANY
Norbord is an international producer of wood-based panels with 17 mills in the United States, Canada and Europe. Norbord is a publicly traded company listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE). The ticker symbol on both exchanges is “OSB”. The Company is incorporated under the Canada Business Corporations Act and is headquartered in Toronto, Ontario, Canada.
At period-end, Brookfield's interest was approximately 43% of the outstanding common shares of the Company.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
(a) Statement of Compliance
These interim financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, on a basis consistent with the accounting policies Norbord disclosed in its audited consolidated financial statements as at, and for the year ended, December 31, 2019 unless noted otherwise in note 2(c). These interim financial statements do not contain all of the disclosures that are required in annual financial statements prepared under International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and should be read in conjunction with Norbord’s 2019 audited annual financial statements which include information necessary or useful to understanding Norbord’s business and financial statement presentation. Norbord’s interim results are not necessarily indicative of its results for a full year.
These interim financial statements were authorized for issuance by the Board of Directors of the Company on November 4, 2020.
(b) Basis of Presentation
These interim financial statements include the accounts of the Company and all of its wholly-owned subsidiaries.
(c) Changes in Accounting Policies
(i)Financial Instruments
In September 2019, the IASB issued amendments to IFRS 9 with regards to the interest rate benchmark reform. These amendments provide targeted relief for financial instruments qualifying for hedge accounting to address uncertainties related to the ongoing reform of interbank offered rates. The amendments became effective for the Company on January 1, 2020 and did not have any impact on its interim financial statements.
(d) Future Changes in Accounting Policies
(i)Property, Plant and Equipment
In May 2020, the IASB issued amendments to IAS 16 with regards to sale proceeds before property, plant and equipment is available for intended use. These amendments include the requirement to recognize in earnings any proceeds and related costs from selling items produced while an asset is being prepared for its intended use, and clarify the requirement to capitalize costs of testing whether an asset is functioning properly. The amendments are effective on January 1, 2022. The Company is currently assessing the impact of these amendments on its financial statements.
5
Exhibit 99.2
NOTE 3. ACCOUNTS RECEIVABLE
The Company has the ability to draw up to $125 million under a multi-currency accounts receivable securitization program with a third-party trust sponsored by a highly rated Canadian financial institution. The program is revolving and has an evergreen commitment subject to termination on 12 months’ notice. Under the program, the Company has transferred substantially all of its present and future trade accounts receivable to the trust, on a fully serviced basis, for proceeds consisting of cash and deferred purchase price. However, the asset derecognition criteria under IFRS have not been met and the transferred accounts receivable remain recorded as an asset.
At period-end, the Company had transferred but continued to recognize $228 million (December 31, 2019 – $110 million) in trade accounts receivable, and the Company recorded $nil drawings as other long-term debt (December 31, 2019 – $68 million) relating to this financing program. The level of accounts receivable transferred under the program fluctuates with the level of shipment volumes, product prices and foreign exchange rates. The amount the Company is able to draw under the program at any point in time depends on the level of accounts receivable transferred and timing of cash settlements, concentration limits and enhancement ratios. At period-end, the maximum available drawings under the program was $124 million. The amount the Company chooses to draw under the program will fluctuate with the Company’s cash requirements at that point in time. Any drawings are presented as other long-term debt on the balance sheet and are excluded from the net debt to total capitalization calculation for financial covenant purposes (note 5). The utilization charge, which is based on money market rates plus a margin, and other program fees are recorded as finance costs. Year-to-date, the utilization charges on drawings ranged from 1.6% to 2.8% (2019 – 1.6% to 4.1%).
The securitization program contains no financial covenants; however, the program is subject to minimum credit-rating requirements. The Company must maintain a long-term issuer credit rating of at least single B (mid) or the equivalent. As at November 4, 2020, the Company’s ratings were BB (Standard & Poor’s Ratings Services) and Ba1 (Moody’s Investors Service).
NOTE 4. INVENTORY
(US $ millions) | Oct 3, 2020 | Dec 31, 2019 | |||||||||
| Raw materials | $ | 57 | $ | 62 | |||||||
| Finished goods | 75 | 81 | |||||||||
| Operating and maintenance supplies | 84 | 87 | |||||||||
| $ | 216 | $ | 230 | ||||||||
At period-end, the provision to reflect inventories at the lower of cost and net realizable value was $20 million (December 31, 2019 – $18 million).
NOTE 5. LONG-TERM DEBT
| (US $ millions) | Oct 3, 2020 | Dec 31, 2019 | |||||||||
| Principal value | |||||||||||
| 6.25% senior secured notes due April 2023 | $ | 315 | $ | 315 | |||||||
| 5.75% senior secured notes due July 2027 | 350 | 350 | |||||||||
| 665 | 665 | ||||||||||
| Less: Unamortized debt issue costs | (7) | (8) | |||||||||
| $ | 658 | $ | 657 | ||||||||
Revolving Bank Lines
In May 2020, the Company completed an amendment to its committed revolving bank lines to extend the maturity date of the total aggregate commitment to May 2022 and to increase the aggregate commitment from $245 million to $300 million. The facility 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 OSB inventory and property, plant and equipment. This lien is shared pari passu with holders of the 2023 and 2027 senior secured notes.
6
Exhibit 99.2
At period-end, none (December 31, 2019 – none) of the revolving bank lines were drawn as cash, $10 million (December 31, 2019 – $8 million) was utilized for letters of credit and guarantees and $290 million (December 31, 2019 – $237 million) was available to support short-term liquidity requirements.
The revolving bank lines contain two quarterly financial covenants: minimum tangible net worth of $500 million and maximum net debt to total capitalization, book basis, of 65%. The Company was in compliance with the financial covenants at period-end.
NOTE 6. OTHER LIABILITIES
| (US $ millions) | Oct 3, 2020 | Dec 31, 2019 | ||||||||||||
| Defined benefit pension obligations | $ | 19 | $ | 16 | ||||||||||
| Lease obligations | 12 | 12 | ||||||||||||
| Accrued employee benefits | 5 | 6 | ||||||||||||
| Reforestation obligations | 4 | 4 | ||||||||||||
| Unrealized monetary hedge loss | — | 1 | ||||||||||||
| Other | 1 | 1 | ||||||||||||
| $ | 41 | $ | 40 | |||||||||||
NOTE 7. LEASES
During the quarter and year-to-date, less than $1 million (2019 – less than $1 million) and $2 million (2019 – $2 million), respectively, of payments related to short-term leases was included in cost of sales. During the quarter and year-to-date, finance costs include less than $1 million (2019 – less than $1 million) and $1 million (2019 – $1 million), respectively, related to lease liabilities.
During the quarter and year-to-date, total cash outflows related to all leases were $4 million (2019 – $4 million) and $12 million (2019 – $11 million), respectively.
Leases of certain production equipment contain residual value guarantees of the right-of-use assets at the end of the contract term. At period-end, the expected amount payable under these residual value guarantees was less than $1 million (2019 – less than $1 million).
NOTE 8. SHAREHOLDERS’ EQUITY
Share Capital
| 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| Shares (millions) | Amount (US $ millions) | Shares (millions) | Amount (US $ millions) | |||||||||||||||||
| Common shares outstanding, beginning of period | 81.5 | $ | 1,278 | 81.7 | $ | 1,280 | ||||||||||||||
Issuance of common shares upon exercise of options | 0.3 | 5 | — | — | ||||||||||||||||
Reverse accrual for shares repurchased and/or cancelled in 2019 | — | — | 1.6 | 24 | ||||||||||||||||
Shares repurchased in 2018 and cancelled in 2019 | — | — | (0.2) | (2) | ||||||||||||||||
Shares repurchased and cancelled in 2020 and 2019 | (1.1) | (18) | (1.4) | (22) | ||||||||||||||||
| Common shares outstanding, end of period | 80.7 | $ | 1,265 | 81.7 | $ | 1,280 | ||||||||||||||
Normal Course Issuer Bid (NCIB)
In October 2019, the Company renewed its NCIB in accordance with TSX rules. Under the NCIB, the Company may purchase up to 4,083,429 of its common shares, representing 5% of Norbord’s issued and outstanding common shares of 81,668,583 as of October 22, 2019, pursuant to TSX rules. Daily purchases of common shares may not exceed 72,970 shares subject to the Company’s ability to make “block” purchases under the rules of the TSX. In response to the COVID-19 pandemic, the TSX had temporarily doubled the daily purchase limit such that Norbord was permitted to purchase up to 145,940 shares per day until June 30, 2020.
7
Exhibit 99.2
In September 2020, the Company entered into an automatic share purchase plan (ASPP) in order to facilitate the repurchase of its common shares under its NCIB during the regularly scheduled quarterly trading blackout period. During the quarter, the Company repurchased and cancelled 0.2 million common shares under the ASPP for a total cost of $6 million, $3 million of which represents a reduction in share capital and the remaining $3 million was charged to retained earnings.
Under its prior ASPP entered into in December 2019, the Company repurchased and cancelled 0.1 million common shares under the ASPP for a total cost of $2 million, $1 million of which represents a reduction in share capital and the remaining $1 million was charged to retained earnings during the first quarter of 2020.
During the first quarter of 2020, after expiry of the December 2019 ASPP, the Company also repurchased and cancelled an additional 0.9 million common shares under the current NCIB for a total cost of $20 million. Of the total cost, $14 million represents a reduction in share capital and the remaining $6 million was charged to retained earnings.
Under its prior NCIB that commenced on November 5, 2018 and expired on November 4, 2019, the Company previously sought and received approval from the TSX to purchase up to 5,191,965 of its common shares, representing 10% of Norbord’s public float of 51,919,654 as of October 22, 2018, pursuant to TSX rules. Daily purchases of common shares could not exceed 79,704 subject to the Company’s ability to make “block” purchases under the rules of the TSX. The Company had exhausted its prior NCIB limit.
During the first quarter of 2019, the Company repurchased and cancelled 1.4 million common shares under the ASPP entered into in December 2018 for a total cost of $39 million. Of the total cost, $22 million represented a reduction in share capital and the remaining $17 million was charged to retained earnings. During the first quarter of 2019, 0.2 million shares purchased and accrued for in 2018 were also cancelled. Total cost relating to these shares was $4 million, of which $2 million represented a reduction in share capital and the remaining $2 million was charged to retained earnings.
Purchases were made on the open market by the Company through the facilities of the TSX, the NYSE or Canadian or US alternative trading systems, if eligible, in accordance with the requirements of the TSX and applicable securities laws. The price that the Company paid for any such common shares was the market price of such shares at the time of acquisition.
Merger Reserve
On March 31, 2015, the Company and Ainsworth Lumber Co. Ltd. (Ainsworth) completed an arrangement under which the Company acquired all of the outstanding common shares of Ainsworth in an all-share transaction. The Company elected not to account for this transaction as a business combination under IFRS 3, Business Combinations, as the transaction represented a combination of entities under common control of Brookfield. Accordingly, the book values of the two entities were combined and no adjustments were made to reflect fair values or to recognize any new assets or liabilities of either entity.
The merger reserve represents the difference between the fair value of the Norbord common shares on the date of issuance as consideration and the book value of Ainsworth’s net assets exchanged.
Stock Options
Year-to-date, no stock options were granted (2019 – no stock options) and stock option expense of $1 million was recorded with a corresponding increase in contributed surplus (2019 – less than $1 million).
Year-to-date, 0.3 million common shares (2019 – less than 0.1 million common shares) were issued as a result of options exercised under the stock option plan for total cash proceeds of $4 million (2019 – less than $1 million) in addition to $1 million (2019 – less than $1 million) representing the vested amount of stock options transferred from contributed surplus.
Accumulated Other Comprehensive Loss
(US $ millions) | Oct 3, 2020 | Dec 31, 2019 | |||||||||
Foreign currency translation loss on foreign operations, net of tax of $(3) (December 31, 2019 – $(4)) | $ | (151) | $ | (145) | |||||||
Net loss on hedge of net investment in foreign operations, net of tax of $3 (December 31, 2019 – $3) | (8) | (8) | |||||||||
| Actuarial loss on defined benefit pension obligations, net of tax of $9 (December 31, 2019 – $9) | (31) | (30) | |||||||||
| Accumulated other comprehensive loss, net of tax | $ | (190) | $ | (183) | |||||||
8
Exhibit 99.2
NOTE 9. IMPAIRMENT OF ASSETS
During the second quarter of 2020, the Company recorded a non-cash impairment loss of $16 million related to idle production assets at the Grande Prairie, Alberta mill. These assets were deemed to be surplus following a review of the likelihood of their future use based on factors including relevant operating plans, raw material availability and the limited potential for redeployment of these assets.
NOTE 10. 100 MILE HOUSE PERMANENT CLOSURE
In the fourth quarter of 2018, an impairment loss of $80 million was recorded with respect to the Company's mill in 100 Mile House, British Columbia reflecting the reduction in the annual allowable cut and the longer-term trend of high wood costs in the region. During the third quarter of 2019, the Company indefinitely curtailed this mill as a result of a wood supply shortage and high wood prices. A $2 million charge was recognized for severance and related costs in the second quarter of 2019..
The Company has decided to permanently close this mill. As a result, an additional $10 million charge has been recognized representing an impairment on the remaining carrying values of this mill's property, plant and equipment to their recoverable amount determined based on fair value less costs of disposal and inventory as the indicators of impairment existed at October 3, 2020, as well as to provide for severance and related costs.
NOTE 11. INCOME TAX
Income tax (expense) recovery recognized in the statement of earnings comprises the following:
(US $ millions) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| Current income tax (expense) recovery | $ | (55) | $ | (7) | $ | (59) | $ | 40 | |||||||||||||||
| Deferred income tax (expense) recovery | (6) | 13 | (13) | (19) | |||||||||||||||||||
| $ | (61) | $ | 6 | $ | (72) | $ | 21 | ||||||||||||||||
NOTE 12. EARNINGS (LOSS) PER COMMON SHARE
| (US $ millions, except share and per share information, unless otherwise noted) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| Earnings (loss) available to common shareholders | $ | 203 | $ | (17) | $ | 241 | $ | (30) | |||||||||||||||
| Common shares (millions): | |||||||||||||||||||||||
| Weighted average number of common shares outstanding | 80.8 | 81.7 | 81.0 | 81.8 | |||||||||||||||||||
Dilutive stock options(1) | 0.2 | — | — | — | |||||||||||||||||||
| Diluted number of common shares | 81.0 | 81.7 | 81.0 | 81.8 | |||||||||||||||||||
| Earnings (loss) per common share: | |||||||||||||||||||||||
| Basic and diluted | $ | 2.51 | $ | (0.21) | $ | 2.98 | $ | (0.37) | |||||||||||||||
(1) Applicable if dilutive and when the weighted average daily closing share price for the period was greater than the exercise price for stock options. For the quarter and year-to-date period, there were stock options of 0.2 million and 0.9 million, respectively (quarter and year-to-date ended October 5, 2019 – 0.7 million and 0.5 million, respectively), that were not taken into account in the calculation of diluted earnings per share because their effect was anti-dilutive.
9
Exhibit 99.2
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
Other items comprise:
| (US $ millions) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| Stock-based compensation | $ | — | $ | 1 | $ | 3 | $ | 3 | |||||||||||||||
| Pension funding greater than expense | — | — | (1) | (2) | |||||||||||||||||||
| Cash interest paid less (greater) than interest expense | — | 9 | (1) | 10 | |||||||||||||||||||
| Amortization of debt issue costs | — | — | 1 | 1 | |||||||||||||||||||
Unrealized foreign exchange loss on translation of monetary balances | 2 | — | 8 | 4 | |||||||||||||||||||
| Other | (2) | (1) | (2) | — | |||||||||||||||||||
| $ | — | $ | 9 | $ | 8 | $ | 16 | ||||||||||||||||
The net change in non-cash operating working capital balances comprises:
| (US $ millions) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| Cash (used for) provided by: | |||||||||||||||||||||||
| Accounts receivable | $ | (105) | $ | (7) | $ | (114) | $ | 1 | |||||||||||||||
| Prepaids | (2) | (8) | 3 | (8) | |||||||||||||||||||
| Inventory | (5) | 15 | 11 | 1 | |||||||||||||||||||
| Accounts payable and accrued liabilities | 66 | 13 | 31 | (53) | |||||||||||||||||||
| $ | (46) | $ | 13 | $ | (69) | $ | (59) | ||||||||||||||||
Cash interest and income taxes comprises:
| (US $ millions) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| Cash interest paid | $ | (10) | $ | (1) | $ | (34) | $ | (21) | |||||||||||||||
| Cash interest received | — | — | — | 1 | |||||||||||||||||||
| Cash income taxes paid | (2) | (3) | (3) | (69) | |||||||||||||||||||
| Cash income taxes received | — | 12 | 45 | 27 | |||||||||||||||||||
The net change in financial liabilities arising from financing activities comprises:
| (US $ millions) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| Long-term debt | $ | — | $ | (240) | $ | — | $ | 106 | |||||||||||||||
| Other long-term debt | — | (55) | (68) | 27 | |||||||||||||||||||
| Net (decrease) increase in financial liabilities | $ | — | $ | (295) | $ | (68) | $ | 133 | |||||||||||||||
Cash and non-cash movements of changes in financial liabilities arising from financing activities comprises:
| (US $ millions) | Q3 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||
| Cash movements: | |||||||||||||||||||||||
| Accounts receivable securitization (repayments) drawings | $ | — | $ | (55) | $ | (68) | $ | 27 | |||||||||||||||
| Issuance of debt | — | — | — | 350 | |||||||||||||||||||
| Repayment of debt | — | (240) | — | (240) | |||||||||||||||||||
| Debt issuance costs | — | (2) | (1) | (6) | |||||||||||||||||||
| — | (297) | (69) | 131 | ||||||||||||||||||||
| Non-cash movements: | |||||||||||||||||||||||
| Amortization of debt issue costs | — | — | 1 | 1 | |||||||||||||||||||
| Debt issuance costs | — | 2 | — | 1 | |||||||||||||||||||
| — | 2 | 1 | 2 | ||||||||||||||||||||
| Net (decrease) increase in financial liabilities | $ | — | $ | (295) | $ | (68) | $ | 133 | |||||||||||||||
10
Exhibit 99.2
NOTE 14. FINANCIAL INSTRUMENTS
Non-Derivative Financial Instruments
The net book values and fair values of non-derivative financial instruments were as follows:
| Oct 3, 2020 | Dec 31, 2019 | |||||||||||||||||||||||||
(US $ millions) | Financial Instrument Category | Net Book Value | Fair Value | Net Book Value | Fair Value | |||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||
| Cash and cash equivalents | Fair value through profit or loss | $ | 240 | $ | 240 | $ | 20 | $ | 20 | |||||||||||||||||
| Accounts receivable | Amortised cost | 246 | 246 | 136 | 136 | |||||||||||||||||||||
Other assets(1) | Amortised cost | — | — | 1 | 1 | |||||||||||||||||||||
| $ | 486 | $ | 486 | $ | 157 | $ | 157 | |||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||||||||
| Accounts payable and accrued liabilities | Amortised cost | $ | 281 | $ | 281 | $ | 259 | $ | 259 | |||||||||||||||||
Long-term debt(2) | Amortised cost | 665 | 709 | 665 | 702 | |||||||||||||||||||||
| Other long-term debt | Amortised cost | — | — | 68 | 68 | |||||||||||||||||||||
Other liabilities(1) | Amortised cost | 10 | 10 | 12 | 12 | |||||||||||||||||||||
| $ | 956 | $ | 1,000 | $ | 1,004 | $ | 1,041 | |||||||||||||||||||
(1) Excludes lease obligations, defined benefit pension asset and obligations scoped out of IFRS 9, Financial instruments (note 6).
(2) Principal value of long-term debt excluding debt issue costs of $7 million (2019 – $8 million) (note 5).
The carrying values of the Company's non-derivative financial instruments approximate fair value, except where disclosed below. As at October 3, 2020, the provision for doubtful accounts was less than $1 million (December 31, 2019 – less than $1 million).
Derivative Financial Instruments
Canadian Dollar Monetary Hedge
At period-end, the Company had foreign currency forward contracts representing a notional amount of C $14 million (December 31, 2019 – C $52 million) in place to buy Canadian dollars and sell US dollars with maturities in October 2020 (December 31, 2019 – buy US dollars and sell Canadian dollars). The fair value of these contracts at period-end is an unrealized loss of less than $1 million (December 31, 2019 – an unrealized loss of $1 million); the carrying value of the derivative instrument is equivalent to the unrealized loss at period-end. During the quarter, net realized gains on the Company's matured hedges were less than $1 million (2019 – net realized gains of less than $1 million). Year-to-date, net realized gains on the Company's matured hedges were $2 million (2019 – less than $1 million).
Euro Cash Flow Hedge
At period-end, the Company had foreign currency options representing a notional amount of €35 million (December 31, 2019 – €30 million notional amount) in place to buy Pounds Sterling and sell Euros with maturities between December 2020 and June 2021. The fair value of these contracts at period-end is an unrealized loss of less than $1 million (December 31, 2019 – unrealized gain of less than $1 million). During the quarter, net realized losses on the Company's matured hedges were $nil (2019 – less than $1 million). Year-to-date, net realized losses on the Company's matured hedges were less than $1 million (2019 – less than $1 million).
Derivative instruments are measured at fair value as determined using valuation techniques under Level 2 of the fair value hierarchy. The fair values of over-the-counter derivative financial instruments are based on broker quotes or observable market rates. Those quotes are tested for reasonableness by discounting expected future cash flows using market interest and exchange rates for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument for the Company and counterparty when appropriate. 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 and are recorded in earnings as they occur.
NOTE 15. COMMITMENTS AND CONTINGENCIES
The Company has provided certain guarantees, 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. In the normal course of its business
11
Exhibit 99.2
activities, the Company is subject to claims and legal actions that may be made by its customers, suppliers and others. While the final outcome with respect to actions outstanding or pending as at period-end cannot be predicted with certainty, the Company believes the resolution will not have a material effect on the Company’s financial position, financial performance, or cash flows.
The Company has entered into various commitments as follows:
Payments Due by Period | |||||||||||||||||||||||
(US $ millions) | Less than 1 Year | 1–5 Years | Thereafter | Total | |||||||||||||||||||
| Purchase commitments | $ | 37 | $ | 30 | $ | 41 | $ | 108 | |||||||||||||||
| Lease obligations | 8 | 10 | 4 | 22 | |||||||||||||||||||
| Reforestation obligations | 2 | 1 | 1 | 4 | |||||||||||||||||||
| $ | 47 | $ | 41 | $ | 46 | $ | 134 | ||||||||||||||||
Purchase commitments relate to the purchase of property, plant and equipment and long-term purchase contracts with minimum fixed payment amounts.
NOTE 16. RELATED PARTY TRANSACTIONS
In the normal course of operations, Norbord enters into various transactions with related parties which have been measured at exchange value and recognized in the interim financial statements. The following transactions have occurred between Norbord and its related parties during the normal course of business.
Brookfield
Norbord periodically engages the services of Brookfield and its affiliates for various financial, real estate and other business services. During the quarter and year-to-date, the fees for services rendered were less than $1 million (2019 – less than $1 million) and $1 million, respectively (2019 – less than $1 million).
Other
Sales to Asian markets are handled by Interex Forest Products Ltd. (Interex), a cooperative sales company over which Norbord, as a 25% shareholder, has significant influence. During the quarter and year-to-date, net sales of $8 million (2019 – $20 million) and $36 million (2019 – $55 million), respectively, were made to Interex. At period-end, $1 million (December 31, 2019 – $4 million) due from Interex was included in accounts receivable. At period-end, the investment in Interex was less than $1 million (December 31, 2019 – less than $1 million) and is included in other assets.
12
Exhibit 99.2
NOTE 17. GEOGRAPHIC SEGMENTS
The Company operates principally in North America and Europe. Sales by geographic segment are determined based on the origin of shipment.
| Q3 2020 | ||||||||||||||||||||||||||
| (US $ millions) | North America | Europe | Unallocated | Total | ||||||||||||||||||||||
| Sales | $ | 599 | $ | 126 | $ | — | $ | 725 | ||||||||||||||||||
EBITDA(1) | 300 | 16 | (6) | 310 | ||||||||||||||||||||||
| Depreciation and amortization | 30 | 6 | — | 36 | ||||||||||||||||||||||
| Additions to property, plant and equipment | 15 | 12 | — | 27 | ||||||||||||||||||||||
| Q3 2019 | ||||||||||||||||||||||||||
| (US $ millions) | North America | Europe | Unallocated | Total | ||||||||||||||||||||||
| Sales | $ | 319 | $ | 116 | $ | — | $ | 435 | ||||||||||||||||||
EBITDA(1) | 14 | 11 | (2) | 23 | ||||||||||||||||||||||
| Depreciation and amortization | 29 | 6 | — | 35 | ||||||||||||||||||||||
| Additions to property, plant and equipment | 19 | 12 | — | 31 | ||||||||||||||||||||||
| 9 mos 2020 | ||||||||||||||||||||||||||
| (US $ millions) | North America | Europe | Unallocated | Total | ||||||||||||||||||||||
| Sales | $ | 1,275 | $ | 338 | $ | — | $ | 1,613 | ||||||||||||||||||
EBITDA(1) | 433 | 28 | (13) | 448 | ||||||||||||||||||||||
| Depreciation and amortization | 85 | 18 | — | 103 | ||||||||||||||||||||||
| Additions to property, plant and equipment | 38 | 26 | — | 64 | ||||||||||||||||||||||
| Property, plant and equipment | 1,080 | 286 | — | 1,366 | ||||||||||||||||||||||
| 9 mos 2019 | ||||||||||||||||||||||||||
| (US $ millions) | North America | Europe | Unallocated | Total | ||||||||||||||||||||||
| Sales | $ | 966 | $ | 392 | $ | — | $ | 1,358 | ||||||||||||||||||
EBITDA(1) | 52 | 53 | (9) | 96 | ||||||||||||||||||||||
| Depreciation and amortization | 85 | 19 | — | 104 | ||||||||||||||||||||||
| Additions to property, plant and equipment | 63 | 27 | — | 90 | ||||||||||||||||||||||
Property, plant and equipment(2) | 1,147 | 280 | — | 1,427 | ||||||||||||||||||||||
(1) EBITDA is a non-IFRS financial measure, which the Company uses to assess segment performance and operating results. The Company defines EBITDA as earnings before finance costs, interest income, income tax, depreciation and amortization, and costs on early extinguishment of debt. Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies.
(2) Balance as at December 31, 2019.
NOTE 18. IMPACT OF COVID-19
As the severity and duration of the COVID-19 pandemic remains uncertain, the Company's business, financial results and financial condition could be negatively impacted in the future. The Company could experience other future impacts as a result of COVID-19, including, but not limited to, the carrying values of the Company's property, plant and equipment, the measurement of the assets and obligations under its defined benefit pension plans, its estimate of the annual effective tax rate for the year, and its allowance for expected credit losses. At this time, the Company is unable to estimate with a reasonable degree of confidence the extent of the impact of the COVID-19 pandemic on the Company’s future operating financial performance.
13
Exhibit 99.3
NOVEMBER 4, 2020
Management’s Discussion and Analysis
INTRODUCTION
This Management’s Discussion and Analysis (MD&A) provides a review of the significant developments that impacted Norbord’s performance during the period. The information in this section should be read in conjunction with the unaudited condensed consolidated interim financial statements (interim financial statements) for the period ended October 3, 2020 and the audited consolidated financial statements and annual MD&A in the 2019 annual report.
In this MD&A, “Norbord” or “the Company” means Norbord Inc. and all of its consolidated subsidiaries and affiliates, 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 holding a significant equity interest in the Company.
Annual financial data provided within has been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (the IASB) and interim financial data has been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting. Additional information on Norbord, including the Company’s annual information form and other documents publicly filed by the Company, is available on the Company’s website at www.norbord.com, the System for Electronic Document Analysis and Retrieval (SEDAR) administered by the Canadian Securities Administrators (the CSA) at www.sedar.com and on the Electronic Data Gathering, Analysis and Retrieval System (EDGAR) section of the US Securities and Exchange Commission (the SEC) website at www.sec.gov/edgar.shtml.
Some of the statements included or incorporated by reference in this MD&A constitute forward-looking statements within the meaning of applicable securities legislation. Forward-looking statements are based on various assumptions and are subject to various risks. See the cautionary statement contained in the Forward-Looking Statements section.
The Company has prepared this MD&A with reference to National Instrument 51-102 – Continuous Disclosure Obligations of the CSA. The Company is an eligible issuer under the Multijurisdictional Disclosure System (MJDS) and complies with the US reporting requirements by filing its Canadian disclosure documents with the SEC. As an MJDS issuer, the Company is permitted to prepare this MD&A in accordance with the disclosure requirements of the CSA, whose requirements are different from those of the SEC.
This MD&A provides financial and operating results for the three month and nine month periods ended October 3, 2020 and additional disclosure of material information up to and including November 4, 2020. All financial references in the MD&A are stated in US dollars unless otherwise noted.
In evaluating the Company’s business, management uses non-IFRS financial measures which, in management’s view, are important supplemental measures of the Company’s performance and believes that they are frequently used by investors, securities analysts and other interested persons in the evaluation of Norbord and other similar companies. In this MD&A, the following non-IFRS financial measures have been used: Adjusted EBITDA, Adjusted earnings (loss), Adjusted earnings (loss) per share, cash provided by (used for) operating activities per share, operating working capital, total working capital, capital employed, return on capital employed (ROCE), return on equity (ROE), net debt, net debt for
1
Exhibit 99.3
financial covenant purposes, tangible net worth, net debt to capitalization, book basis, and net debt to capitalization, market basis. These non-IFRS financial measures are described in the Non-IFRS Financial Measures section. Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies that may have different financing and capital structures, and/or tax rates. Where appropriate, a quantitative reconciliation of the non-IFRS financial measure to the most directly comparable IFRS measure is also provided.
BUSINESS OVERVIEW & STRATEGY
Norbord is a leading global manufacturer of wood-based panels with 17 mills in the United States (US), Canada and Europe. Norbord is the largest global producer of oriented strand board (OSB) with annual capacity of 9 billion square feet (Bsf) (3⁄8-inch basis). In North America, Norbord owns 13 OSB mills located in the Southern region of the US, Western Canada, Quebec, Ontario and Minnesota. In Europe, the Company operates one OSB mill, two particleboard production facilities and one medium density fibreboard (MDF) production facility in the United Kingdom (UK) and one OSB mill in Belgium, and is the UK’s largest panel producer. The Company reports its operations in two geographic segments, North America and Europe, with 79% of its panel production capacity in North America and 21% in Europe.
Norbord’s business strategy is focused entirely on the wood-based panels sector – in particular OSB – in North America, Europe and Asia. Norbord’s financial goal is to achieve top-quartile ROCE among North American forest products companies over the business cycle. Since 2002, Norbord's ROCE has averaged 24% annually.
Maintaining balance sheet flexibility is an important element of Norbord’s financing strategy. Management believes that its record of superior operational performance, disciplined capital allocation and prudent balance sheet management will enable it to access public and private capital markets (subject to financial market conditions). At October 3, 2020, Norbord had unutilized available liquidity of $654 million, comprising $240 million in cash and cash equivalents, $290 million in revolving bank lines and $124 million in available drawings under its accounts receivable securitization program. The Company’s tangible net worth was $1,183 million and net debt to total capitalization on a book basis was 27%, with both ratios well within bank covenants.
SUMMARY OF THIRD QUARTER 2020
Norbord's third quarter results were the strongest ever in the Company's history, reflecting all-time high North American benchmark OSB prices, with the North Central benchmark price averaging $578 per thousand square feet (Msf) (7/16-inch basis) for the quarter, up 114% from the previous quarter and 166% against the same quarter last year. South East benchmark prices increased 118% and 240%, and Western Canada increased 158% and 253%, respectively. Driving these record increases is strong pent-up demand from US homebuilding. The seasonally adjusted annualized rate of US housing starts recovered from a low of 0.93 million in April to 1.42 million in September. In addition, strong demand continued from repair-and-remodelling. As a result, Norbord’s third quarter North American shipments were up 9% quarter-over-quarter. Quarterly shipments were down 8% year-over-year and year-to-date shipments were down 9% primarily due to the indefinite curtailment of the 100 Mile House, British Columbia mill in August 2019 and limited production from Line 1 at the Cordele, Georgia mill (which was originally curtailed in November 2019, but resumed production in August 2020 on a limited operating schedule in response to stronger than expected North American OSB demand).
In the UK, Norbord's largest European market, demand has recovered from the significant curtailments taken in the second quarter in response to reduced customer demand due to government-imposed pandemic restrictions. Norbord’s European segment quarterly Adjusted EBITDA increased $14 million versus the prior quarter and $5 million versus the same quarter last year primarily due to higher shipment volumes. Quarterly shipments were up 23% quarter-over-quarter and 12% year-over-year, and year-to-date shipments were down 3%.
2
Exhibit 99.3
Norbord generated operating income of $274 million in the third quarter of 2020, versus $31 million in the prior quarter and an operating loss of $12 million in the same quarter last year. Year-to-date, Norbord generated operating income of $345 million versus an operating loss of $8 million in the same period last year. Norbord generated Adjusted EBITDA of $322 million in the third quarter of 2020 versus $84 million in the prior quarter and $33 million in the same quarter last year. Year-to-date, Norbord generated Adjusted EBITDA of $481 million versus $111 million in the same period last year. The increase against all prior year comparative periods was primarily due to higher North American OSB prices, partially offset by higher North American profit share costs attributed to higher earnings. The quarter-over-quarter increase is also due to higher shipment volumes. The year-to-date increase was also due to lower input prices, which were offset by lower shipment volumes.
The following table reconciles Adjusted EBITDA to the most directly comparable IFRS measure:
(US $ millions) | Q3 2020 | Q2 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||||||||||
Earnings (loss) | $ | 203 | $ | 18 | $ | (17) | $ | 241 | $ | (30) | ||||||||||||||||||||||
Add: Finance costs | 10 | 10 | 11 | 32 | 34 | |||||||||||||||||||||||||||
Less: Interest income | — | — | — | — | (1) | |||||||||||||||||||||||||||
Add: Costs on early extinguishment of 2020 Notes | — | — | — | — | 10 | |||||||||||||||||||||||||||
Add: Depreciation and amortization | 36 | 32 | 35 | 103 | 104 | |||||||||||||||||||||||||||
Add: Income tax expense (recovery) | 61 | 3 | (6) | 72 | (21) | |||||||||||||||||||||||||||
EBITDA | 310 | 63 | 23 | 448 | 96 | |||||||||||||||||||||||||||
Add: Costs related to 100 Mile House closure | 10 | — | — | 10 | — | |||||||||||||||||||||||||||
Add: Impairment of assets | — | 16 | 10 | 16 | 10 | |||||||||||||||||||||||||||
Add: Loss on disposal of assets | — | 3 | — | 3 | 1 | |||||||||||||||||||||||||||
Add: Stock-based compensation and related costs | 2 | 2 | — | 4 | 2 | |||||||||||||||||||||||||||
Add: Costs related to 100 Mile House indefinite curtailment | — | — | — | — | 2 | |||||||||||||||||||||||||||
Adjusted EBITDA(1) | $ | 322 | $ | 84 | $ | 33 | $ | 481 | $ | 111 | ||||||||||||||||||||||
(1)Non-IFRS measure; see Non-IFRS Financial Measures section.
Norbord recorded earnings of $203 million ($2.51 per basic and diluted share) in the third quarter of 2020, up from earnings of $18 million ($0.22 per basic and diluted share) in the second quarter of 2020 and up from a loss of $17 million ($0.21 per basic and diluted share) in the third quarter of 2019. Year-to-date, Norbord recorded earnings of $241 million ($2.98 per basic and diluted share) versus a loss of $30 million ($0.37 per basic and diluted share) in the same period last year. Excluding the impact of non-recurring or other items and using a normalized Canadian statutory tax rate, Norbord recorded Adjusted earnings of $204 million ($2.52 per basic and diluted share) in the third quarter of 2020, compared to $31 million ($0.38 per basic and diluted share) in the second quarter of 2020 and an Adjusted loss of $9 million ($0.11 per basic and diluted share) in the third quarter of 2019. Year-to-date, Norbord recorded Adjusted earnings of $256 million ($3.16 per basic and diluted share), compared to an Adjusted loss of $19 million ($0.23 per basic and diluted share). The fluctuations in Adjusted earnings versus all comparative periods were driven primarily by the fluctuations in Adjusted EBITDA, as discussed above.
3
Exhibit 99.3
The following table reconciles Adjusted earnings (loss) to the most directly comparable IFRS measure:
(US $ millions) | Q3 2020 | Q2 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||||||||||
Earnings (loss) | $ | 203 | $ | 18 | $ | (17) | $ | 241 | $ | (30) | ||||||||||||||||||||||
Add: Costs related to 100 Mile House closure | 10 | — | — | 10 | — | |||||||||||||||||||||||||||
Add: Impairment of assets | — | 16 | 10 | 16 | 10 | |||||||||||||||||||||||||||
Add: Loss on disposal of assets | — | 3 | — | 3 | 1 | |||||||||||||||||||||||||||
Add: Stock-based compensation and related costs | 2 | 2 | — | 4 | 2 | |||||||||||||||||||||||||||
Add: Costs on early extinguishment of 2020 Notes | — | — | — | — | 10 | |||||||||||||||||||||||||||
Add: Costs related to 100 Mile House indefinite curtailment | — | — | — | — | 2 | |||||||||||||||||||||||||||
Add: Reported income tax expense (recovery) | 61 | 3 | (6) | 72 | (21) | |||||||||||||||||||||||||||
Adjusted pre-tax earnings (loss) | 276 | 42 | (13) | 346 | (26) | |||||||||||||||||||||||||||
Less: Income tax (expense) recovery at statutory rate(1) | (72) | (11) | 4 | (90) | 7 | |||||||||||||||||||||||||||
Adjusted earnings (loss)(2) | $ | 204 | $ | 31 | $ | (9) | $ | 256 | $ | (19) | ||||||||||||||||||||||
(1)Represents Canadian combined federal and provincial statutory rate.
(2)Non-IFRS measure; see Non-IFRS Financial Measures section.
Home construction activity, particularly in the US, influences OSB demand and pricing. Fluctuations in North American OSB demand and prices significantly affect Norbord’s results given 79% of the Company’s panel production capacity is located in North America. For the last four quarters, approximately 45% of Norbord’s North American OSB sales volume went into the new home construction sector, approximately 25% went into specialty applications (which include industrial and export markets), and approximately 30% went into repair-and-remodelling. Management believes this diversification provides opportunities to maximize profitability while limiting the Company’s relative exposure to the new home construction segment during periods of soft housing activity.
The long-term fundamentals, such as new household formation and replacement of housing stock, underpin demand for new homes in the US, the largest market for the Company’s products. Norbord’s European operations and Asian exports are exposed to different market dynamics relative to North America and this has provided meaningful market and geographic diversification for the Company. Combined with Norbord’s strong financial liquidity and solid customer partnerships, the Company believes it is well positioned through the cycle.
Fluctuations in the prices the Company pays for raw material inputs significantly impacts operating costs. Wood fibre, resin, wax and energy account for approximately 60% of Norbord's OSB cash production costs. The prices for these commodities are determined by economic and market conditions. Resin used in the OSB manufacturing process is a petrochemical product, and therefore its price typically follows global oil prices. Global resin prices had been trending downward since the fourth quarter of 2018, bottomed in the second quarter of 2020 and have since been trending upward. Norbord continues to pursue aggressive Margin Improvement Program (MIP) initiatives to reduce raw material usages and improve productivity to offset potentially higher uncontrollable costs. Year-to-date, Norbord generated $43 million in MIP gains.
4
Exhibit 99.3
SUMMARY OF FINANCIAL AND OPERATING HIGHLIGHTS
(US $ millions, except per share information, unless otherwise noted) | Q3 2020 | Q2 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||||||||||
SALES AND EARNINGS | ||||||||||||||||||||||||||||||||
Sales | 725 | 421 | 435 | 1,613 | 1,358 | |||||||||||||||||||||||||||
Operating income (loss) | 274 | 31 | (12) | 345 | (8) | |||||||||||||||||||||||||||
Adjusted EBITDA(1) | 322 | 84 | 33 | 481 | 111 | |||||||||||||||||||||||||||
Earnings (loss) | 203 | 18 | (17) | 241 | (30) | |||||||||||||||||||||||||||
Adjusted earnings (loss)(1) | 204 | 31 | (9) | 256 | (19) | |||||||||||||||||||||||||||
PER COMMON SHARE EARNINGS | ||||||||||||||||||||||||||||||||
Earnings (loss), basic | 2.51 | 0.22 | (0.21) | 2.98 | (0.37) | |||||||||||||||||||||||||||
Earnings (loss), diluted | 2.51 | 0.22 | (0.21) | 2.98 | (0.37) | |||||||||||||||||||||||||||
Adjusted earnings (loss), basic(1) | 2.52 | 0.38 | (0.11) | 3.16 | (0.23) | |||||||||||||||||||||||||||
Adjusted earnings (loss), diluted(1) | 2.52 | 0.38 | (0.11) | 3.16 | (0.23) | |||||||||||||||||||||||||||
Dividends declared(2) | 0.30 | 0.05 | 0.40 | 0.55 | 1.20 | |||||||||||||||||||||||||||
BALANCE SHEET | ||||||||||||||||||||||||||||||||
Total assets | 2,112 | 1,785 | 1,862 | |||||||||||||||||||||||||||||
Long-term debt(3) | 658 | 657 | 656 | |||||||||||||||||||||||||||||
Net debt for financial covenant purposes(1) | 436 | 655 | 675 | |||||||||||||||||||||||||||||
Net debt to capitalization, market basis(1) | 18 | % | 26 | % | 25 | % | ||||||||||||||||||||||||||
Net debt to capitalization, book basis(1) | 27 | % | 40 | % | 40 | % | ||||||||||||||||||||||||||
KEY STATISTICS | ||||||||||||||||||||||||||||||||
Shipments (MMsf–3/8”) | ||||||||||||||||||||||||||||||||
North America | 1,523 | 1,400 | 1,654 | 4,382 | 4,810 | |||||||||||||||||||||||||||
Europe | 493 | 402 | 440 | 1,394 | 1,435 | |||||||||||||||||||||||||||
Indicative average OSB price ($/Msf–7/16”, unless otherwise indicated) | ||||||||||||||||||||||||||||||||
North Central | 578 | 270 | 217 | 371 | 206 | |||||||||||||||||||||||||||
South East | 572 | 262 | 168 | 359 | 184 | |||||||||||||||||||||||||||
Western Canada | 579 | 224 | 164 | 350 | 159 | |||||||||||||||||||||||||||
Europe (€/m3)(4) | 253 | 251 | 269 | 248 | 280 | |||||||||||||||||||||||||||
KEY PERFORMANCE METRICS | ||||||||||||||||||||||||||||||||
Return on capital employed (ROCE)(1) | 83 | % | 21 | % | 8 | % | 40 | % | 10 | % | ||||||||||||||||||||||
Return on equity (ROE)(1) | 97 | % | 17 | % | (5) | % | 40 | % | (3) | % | ||||||||||||||||||||||
Cash provided by (used for) operating activities | 262 | 125 | 52 | 426 | (9) | |||||||||||||||||||||||||||
Cash provided by (used for) operating activities per share(1) | 3.24 | 1.55 | 0.64 | 5.26 | (0.11) | |||||||||||||||||||||||||||
(1)Non-IFRS measure; see Non-IFRS Financial Measures section.
(2)Dividends declared per share stated in Canadian dollars.
(3)Includes current and non-current long-term debt.
(4)European indicative average OSB price represents the gross delivered price to the largest continental market.
Sales
Total sales in the quarter were $725 million, compared to $421 million in the second quarter of 2020 and $435 million in the third quarter of 2019. Quarter-over-quarter, total sales increased by $304 million or 72%. In North America, sales increased by 82% primarily due to significantly higher realized OSB prices and a 9% increase in shipment volumes. In Europe, sales increased by 38% primarily due to a 23% increase in shipment volumes and higher average panel prices. Year-over-year, total sales increased by $290 million or 67%. In North America, sales increased by 88% due to higher realized OSB prices, partially offset by an 8% decrease in shipment volumes. In Europe, sales were 9% higher due to a 12% increase in shipment volumes partially offset by lower average panel prices.
5
Exhibit 99.3
Year-to-date, total sales were $1,613 million, compared to $1,358 million in the same period last year, an increase of $255 million or 19%. In North America, sales increased by 32% primarily due to higher realized OSB prices, partially offset by a 9% decrease in shipment volumes. In Europe, sales decreased by 14% due to lower average panel prices and a 3% decrease in shipment volumes.
Markets
In North America, US new home construction activity, the single largest driver of OSB demand, has recovered from the economic impact of COVID-19 seen early in the second quarter. The September seasonally adjusted annualized rate of US housing starts was 1.42 million, which is an 11% year-over-year improvement. The pace of single-family starts, which use approximately three times more OSB than multifamily starts, improved 22% to 1.11 million. The pace of permits (the more forward-looking indicator) was 1.55 million in September, an increase of 8% versus the same period in 2019. Year-to-date, US housing starts were up 6% with single family starts also up 6%. The 2020 consensus forecast from US housing economists is approximately 1.36 million starts, approximately 5% higher than 2019. Throughout the ongoing pandemic, demand from the repair-and-remodelling sector has continued at record pace.
Reflecting the stronger than expected recovery in US home construction activity, North American benchmark OSB prices increased significantly as the quarter progressed. Average benchmark prices were higher than all comparative periods and were, for most of the quarter, at record highs. The table below summarizes average benchmark OSB prices by region for the relevant quarters:
North American Region | % of Norbord’s Estimated Annual Operating Capacity(1) | Q3 2020 ($/Msf-7/16”) | Q2 2020 ($/Msf-7/16”) | Q3 2019 ($/Msf-7/16”) | ||||||||||||||||||||||
North Central | 15 | % | $ | 578 | $ | 270 | $ | 217 | ||||||||||||||||||
South East | 36 | % | 572 | 262 | 168 | |||||||||||||||||||||
Western Canada | 29 | % | 579 | 224 | 164 | |||||||||||||||||||||
(1)Based on the annual capacity figures as at December 31, 2019 and exclude the indefinitely curtailed Chambord, Quebec mill, which represents 7% of estimated annual capacity.
In Europe, UK panel demand continued to recover from the COVID 19-related pullback in April and May. Continental demand, which was not impacted by the pandemic, particularly in Germany, remained steady throughout the quarter. In local currency terms, average panel prices were up 6% quarter-over-quarter but down 9% year-over-year.
Historically, the UK has been a net importer of panel products and Norbord is the largest domestic producer. A weaker Pound Sterling relative to the Euro is advantageous to Norbord’s primarily UK-based operations as it improves sales opportunities within the UK and supports Norbord’s export program into the continent. During the third quarter of 2020, the Pound Sterling ranged from 1.08 to 1.13, averaging 1.10 against the Euro, compared to 1.13 in the prior quarter and 1.10 in the same quarter last year.
Operating Results
Adjusted EBITDA(1) (US $ millions) | Q3 2020 | Q2 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||||||||||
North America | $ | 310 | $ | 84 | $ | 24 | $ | 462 | $ | 65 | ||||||||||||||||||||||
Europe | 16 | 2 | 11 | 28 | 53 | |||||||||||||||||||||||||||
Unallocated | (4) | (2) | (2) | (9) | (7) | |||||||||||||||||||||||||||
Total | $ | 322 | $ | 84 | $ | 33 | $ | 481 | $ | 111 | ||||||||||||||||||||||
(1)Non-IFRS measure; see Non-IFRS Financial Measures section.
6
Exhibit 99.3
Adjusted EBITDA Variance
The components of the Adjusted EBITDA change are summarized in the variance table below:
(US $ millions) | Q3 2020 vs. Q2 2020 | Q3 2020 vs. Q3 2019 | 9 mos 2020 vs. 9 mos 2019 | ||||||||||||||
Adjusted EBITDA – current period | $ | 322 | $ | 322 | $ | 481 | |||||||||||
Adjusted EBITDA – comparative period | 84 | 33 | 111 | ||||||||||||||
Variance | 238 | 289 | 370 | ||||||||||||||
Mill nets(1) | 231 | 296 | 376 | ||||||||||||||
Volume(2) | 36 | 4 | (25) | ||||||||||||||
Key input prices(3) | — | 8 | 23 | ||||||||||||||
Key input usage(3) | (2) | (4) | (8) | ||||||||||||||
Mill profit share and bonus | (16) | (19) | (20) | ||||||||||||||
Other operating costs and foreign exchange(4) | (11) | 4 | 24 | ||||||||||||||
Total | $ | 238 | $ | 289 | $ | 370 | |||||||||||
(1)The mill nets variance represents the estimated impact of changes in realized pricing across all products. Mill nets are calculated as sales (net of outbound freight costs) divided by shipment volumes.
(2)The volume variance represents the impact of shipment volume changes across all products.
(3)The key inputs include fibre, resin, wax and energy.
(4)The other operating costs and foreign exchange category covers all remaining variances including labour and benefits, and maintenance.
North America
Norbord’s North American operations generated $310 million in Adjusted EBITDA in the third quarter of 2020, an increase of $226 million from $84 million in the second quarter of 2020 and an increase of $286 million from $24 million in the third quarter of 2019. Year-to-date, North American operations generated $462 million in Adjusted EBITDA, an increase of $397 million from $65 million in the same period last year. The increases versus all comparative periods were primarily driven by significantly higher realized OSB prices partially offset by higher profit share attributed to higher earnings. The quarter-over-quarter increase was also due to higher shipment volumes, partially offset by higher Canadian stumpage-driven fibre costs and higher maintenance-related costs. The year-over-year increase was partially offset by higher Canadian stumpage-driven fibre costs and higher raw material usages which negated the benefit of lower resin and wax costs. Year-to-date, the increase was also due to lower resin, wax and energy prices, improved productivity and lower overheads partially offset by lower shipment volumes and higher raw material usages.
Norbord’s third quarter North American OSB cash production costs per unit (excluding mill profit share and freight costs) increased by 4% compared to the second quarter of 2020, were unchanged compared to the third quarter of 2019 and decreased 4% year-to-date. Quarter-over-quarter, unit costs increased primarily due to higher Canadian stumpage-driven fibre costs and higher maintenance-related costs, partially offset by the unit cost benefit of higher production volume. Year-over-year, unit costs were unchanged as lower resin and wax costs were offset by higher Canadian stumpage-driven fibre costs and higher raw material usages. Year-to-date, unit costs were lower primarily due to lower resin, wax and energy prices, improved productivity and lower overheads, partially offset by higher raw material usages and product mix.
Production remains indefinitely curtailed at the Chambord, Quebec mill since the third quarter of 2008. In 2018, the Board of Directors approved a $71 million investment to rebuild and prepare the mill for an eventual restart when warranted by customer demand (see Chambord Rebuild Project). Production also remained indefinitely curtailed at the 100 Mile House mill during the quarter (see 100 Mile House Permanent Closure below). In August 2020, Norbord resumed production on a limited operating schedule on Cordele Line 1 (see Operational Update below). These three lines represent 18% of Norbord’s estimated annual capacity in North America.
Excluding the Chambord mill, Norbord’s mills produced at 86% of available capacity in the third quarter of 2020 compared to 74% in the second quarter of 2020 and 92% in the third quarter of 2019. The quarter-over-quarter increase in capacity utilization (which is based on fiscal days in each period) was due to the curtailments taken in the prior quarter to
7
Exhibit 99.3
align production volume with reduced customer demand, and the resumption of limited production at Cordele Line 1 during the current quarter. The year-over-year decrease was due to the 2019 indefinite curtailment of 100 Mile House and the limited production schedule on Cordele Line 1 in the current quarter.
100 Mile House Permanent Closure
In the fourth quarter of 2018, an impairment loss of $80 million was recorded with respect to the Company's mill in 100 Mile House, British Columbia reflecting the reduction in the annual allowable cut and the longer-term trend of high wood costs in the region. During the third quarter of 2019, the Company indefinitely curtailed this mill as a result of a wood supply shortage and high wood prices. A $2 million charge was recognized for severance and related costs in the second quarter of 2019.
The Company has decided to permanently close this mill (see Operational Update below). As a result, an additional $10 million charge has been recognized representing an impairment on the remaining carrying values of this mill's property, plant and equipment to their recoverable amount determined based on fair value less costs of disposal and inventory as the indicators of impairment existed at October 3, 2020, as well as to provide for severance and related costs.
Operational Update
During the third quarter, demand for North American OSB remained extremely strong, resulting in significantly higher benchmark OSB prices. The key indicators for the US housing market, including strong new home sales, housing permits and single family starts, minimal new home inventories, and low mortgage rates, provide a positive outlook for OSB demand. Similarly, repair-and-remodelling demand has been robust and demand from industrial customers has normalized following pandemic-imposed restrictions. Excluding the curtailed 100 Mile House and Chambord mills, Norbord’s operating North American mills ran as close as possible to full operating rates in the third quarter, producing at 92% of capacity. In August, the Company restarted Cordele Line 1 on a limited operating schedule to meet customer orders that Norbord would not have otherwise been able to satisfy. Notwithstanding these positive trends, there remains considerable uncertainty in the broader economic environment as a predicted second wave of the COVID-19 global pandemic appears to be underway. As the typical seasonally slower period for OSB demand approaches, it is not yet clear what impact this seasonality and this pandemic will have on the Company’s core markets. Should conditions change, Norbord is well positioned to respond.
Earlier this year and in reaction to the pandemic, Norbord recognized the need to implement a more flexible operating strategy across its manufacturing platform. The objective was to be more agile in responding to changing market conditions and customer requirements while containing manufacturing costs through more efficient maintenance planning and execution. This strategy has proven to have significant merit and has been adopted as the Company's standard operating approach. At the same time, it became clear that the 100 Mile House mill was unlikely to have a role to play in the future. As the Company’s highest cost operation, this mill had been indefinitely curtailed since August 2019 in response to a wood supply shortage and rising fibre costs. The Cariboo region in which the mill is located has been under wood supply pressure for the past decade as a result of the mountain pine beetle epidemic and more recently significant wildfires, leading to a 50% reduction in the region’s annual allowable harvest. Taken together, the current and expected ongoing wood supply shortage makes operation of the mill uneconomic and Norbord has decided to permanently close 100 Mile House.
8
Exhibit 99.3
Europe
Norbord’s European operations generated $16 million in Adjusted EBITDA in the third quarter of 2020, an increase of $14 million versus the second quarter of 2020 and $5 million versus the same quarter last year. Year-to-date, European operations generated $28 million in Adjusted EBITDA, a decrease of $25 million versus the same period last year. Quarter-over-quarter, the increase was primarily due to higher shipment volumes as well as higher average panel prices, lower raw material and energy prices, and improved productivity partially offset by higher maintenance-related costs. Year-over-year, the increase was primarily due to higher shipment volumes, as well as improved productivity, lower raw material and energy prices, partially offset by lower average panel prices. Year-to-date, the decrease was primarily due to lower average panel prices and shipment volumes, partially offset by lower raw material and energy prices, improved productivity and lower raw material usages.
The European mills produced at 97% of stated capacity in the third quarter of 2020, compared to 70% in the second quarter of 2020 and 84% in the third quarter of 2019. Capacity utilization was higher versus the prior quarter due to curtailments taken at the UK mills in response to pandemic-driven reduced customer demand in the second quarter, partially offset by the continued ramp-up of the Inverness, Scotland mill, which started up in the fourth quarter of 2017. The latter also drove the higher capitalization utilization year-over-year.
Margin Improvement Program (MIP)
The Company generated net MIP gains of $43 million year-to-date due to improved mill productivity and lower controllable manufacturing and overhead costs. MIP is measured relative to the prior year at constant prices and exchange rates.
FINANCE COSTS, DEPRECIATION AND AMORTIZATION, AND INCOME TAX
(US $ millions) | Q3 2020 | Q2 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||||||||||
Finance costs | $ | (10) | $ | (10) | $ | (11) | $ | (32) | $ | (34) | ||||||||||||||||||||||
Interest income | — | — | — | — | 1 | |||||||||||||||||||||||||||
Depreciation and amortization | (36) | (32) | (35) | (103) | (104) | |||||||||||||||||||||||||||
Income tax (expense) recovery | (61) | (3) | 6 | (72) | 21 | |||||||||||||||||||||||||||
Finance Costs
Finance costs in the third quarter of 2020 were in line with the second quarter of 2020. Against all prior year periods, finance costs were lower primarily due to lower drawings under the accounts receivable securitization program (see Accounts Receivable Securitization).
Depreciation and Amortization
The Company uses the units-of-production method to depreciate its production equipment. Fluctuations in depreciation expense reflect relative changes in production levels by mill.
Income Tax
A tax expense of $61 million was recorded in the third quarter of 2020 on pre-tax earnings of $264 million. The effective tax rate differs from the Canadian statutory rate principally due to rate differences on foreign activities, fluctuations in relative currency values and the recognition of certain non-recurring income tax recoveries.
9
Exhibit 99.3
LIQUIDITY AND CAPITAL RESOURCES
(US $ millions, except per share information, unless otherwise noted) | Q3 2020 | Q2 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||||||||||
Cash provided by (used for) operating activities | $ 262 | $ 125 | $ 52 | $ 426 | $ (9) | |||||||||||||||||||||||||||
Cash provided by (used for) operating activities per share(1) | 3.24 | 1.55 | 0.64 | 5.26 | (0.11) | |||||||||||||||||||||||||||
Operating working capital(1) | 191 | 152 | 139 | |||||||||||||||||||||||||||||
Total working capital(1) | 388 | 183 | 195 | |||||||||||||||||||||||||||||
Additions to property, plant and equipment and intangible assets | 28 | 14 | 33 | 67 | 93 | |||||||||||||||||||||||||||
Net debt to capitalization, market basis(1) | 18 | % | 26 | % | 25 | % | ||||||||||||||||||||||||||
Net debt to capitalization, book basis(1) | 27 | % | 40 | % | 40 | % | ||||||||||||||||||||||||||
(1)Non-IFRS measure; see Non-IFRS Financial Measures section.
At quarter-end, the Company had unutilized available liquidity of $654 million, comprising $240 million in cash and cash equivalents, $290 million in revolving bank lines and $124 million in available drawings under its accounts receivable securitization program, which the Company believes is sufficient to fund expected short-term cash requirements.
Senior Secured Notes Due 2023
The Company’s $315 million senior secured notes due April 2023 bear an interest rate of 6.25%.
Senior Secured Notes Due 2027
The Company's $350 million senior secured notes due July 2027 bear an interest rate of 5.75%.
Revolving Bank Lines
The Company has an aggregate commitment of $300 million under committed revolving bank lines which bear interest at money market rates plus a margin that varies with the Company’s credit rating. The maturity date of the aggregate commitment is May 2022. The bank lines are secured by a first lien on the Company’s North American OSB inventory and property, plant and equipment. This lien is shared pari passu with the holders of the 2023 and 2027 senior secured notes.
At period-end, none (December 31, 2019 – none) of the revolving bank lines were drawn as cash and $10 million (December 31, 2019 – $8 million) was utilized for letters of credit and guarantees.
The bank lines contain two quarterly financial covenants: minimum tangible net worth of $500 million and maximum net debt to total capitalization, book basis, of 65%. For the purposes of the tangible net worth calculation, the following adjustments have been made as at period-end:
● | the IFRS transitional adjustments to shareholders’ equity of $21 million at January 1, 2011 are added back; | |||||||
● | changes to other comprehensive income subsequent to January 1, 2011 are excluded; | |||||||
● | impairment of assets charge for 2018 is excluded; | |||||||
● | intangible assets (other than timber rights and software acquisition and development costs) are excluded; and | |||||||
● | the impact of the change in functional currency of Ainsworth on shareholders’ equity of $155 million is excluded. | |||||||
Net debt for financial covenant purposes includes total debt, principal amount excluding any drawings on the accounts receivable securitization program, less cash and cash equivalents, plus other liabilities classified as debt for financial covenant purposes, letters of credit and guarantees issued, and any bank advances. At period-end, the Company’s tangible net worth was $1,183 million and net debt for financial covenant purposes was $436 million. Net debt to total capitalization, book basis, was 27%. The Company was in compliance with the financial covenants at period-end.
10
Exhibit 99.3
Norbord’s capital structure at period-end consisted of the following:
(US $ millions) | Oct 3, 2020 | Dec 31, 2019 | ||||||||||||
Long-term debt, principal value | $ | 665 | $ | 665 | ||||||||||
Add: Other long-term debt | — | 68 | ||||||||||||
Less: Cash and cash equivalents | (240) | (20) | ||||||||||||
Net debt | 425 | 713 | ||||||||||||
Less: Other long-term debt | — | (68) | ||||||||||||
Add: Other liabilities classified as debt for financial covenant purposes | 1 | 2 | ||||||||||||
Add: Letters of credit and guarantees | 10 | 8 | ||||||||||||
Net debt for financial covenant purposes | $ | 436 | $ | 655 | ||||||||||
Shareholders’ equity | $ | 881 | $ | 704 | ||||||||||
Add: 2018 impairment of assets (net of tax) | 59 | 59 | ||||||||||||
Add: Other comprehensive income change(1) | 67 | 60 | ||||||||||||
Add: Impact of Ainsworth changing functional currencies | 155 | 155 | ||||||||||||
Add: IFRS transitional adjustments | 21 | 21 | ||||||||||||
Tangible net worth for financial covenant purposes | $ | 1,183 | $ | 999 | ||||||||||
Total capitalization | $ | 1,619 | $ | 1,654 | ||||||||||
Net debt to capitalization, market basis | 18 | % | 24 | % | ||||||||||
Net debt to capitalization, book basis | 27 | % | 40 | % | ||||||||||
(1)Cumulative subsequent to January 1, 2011.
Accounts Receivable Securitization
The Company has the ability to draw up to $125 million under a multi-currency accounts receivable securitization program with a third-party trust sponsored by a highly rated Canadian financial institution. The program is revolving and has an evergreen commitment subject to termination on 12 months’ notice. Under the program, the Company has transferred substantially all of its present and future trade accounts receivable to the trust on a fully serviced basis for proceeds consisting of cash and deferred purchase price. However, the asset derecognition criteria under IFRS have not been met and the transferred accounts receivable remain recorded as an asset.
At period-end, the Company had transferred but continued to recognize $228 million in trade accounts receivable, and recorded drawings of nil as other long-term debt relating to this financing program. The level of accounts receivable transferred under the program fluctuates with the level of shipment volumes, product prices and foreign exchange rates. The amount the Company is able to draw under the program at any point in time depends on the level of accounts receivable transferred, concentration limits and credit enhancement ratios. At period-end, the maximum available drawings under the program were $124 million. The amount the Company chooses to draw under the program will fluctuate with the Company’s cash requirements at that point in time. Any drawings are presented as other long-term debt on the balance sheet and are excluded from the net debt to capitalization calculation for financial covenant purposes. The utilization charge, which is based on money market rates plus a margin, and other program fees are recorded as finance costs. Year-to-date, the utilization charges on drawings ranged from 1.6% to 2.8% (2019 - 1.6% to 4.1%).
The securitization program contains no financial covenants. However, the program is subject to minimum credit rating requirements. The Company must maintain a long-term issuer credit rating of at least single B (mid) or the equivalent. As at November 4, 2020, the Company's ratings were BB (Standard & Poor’s Ratings Services) and Ba1 (Moody’s Investors Service), both with a stable outlook.
11
Exhibit 99.3
Other Liquidity and Capital Resources
Operating working capital, consisting of accounts receivable, inventory and prepaids less accounts payable and accrued liabilities, was $191 million at period-end, compared to $152 million at July 4, 2020 and $139 million at October 5, 2019. The Company aims to minimize the amount of capital held as operating working capital and continues to manage it at minimal levels.
Both the quarter-over-quarter increase in operating working capital of $39 million and the year-over-year increase of $52 million were primarily due to higher accounts receivable, partially offset by higher accounts payable and accrued liabilities. Higher accounts receivable was attributed to the significantly higher North American OSB prices. Higher accounts payable and accrued liabilities is attributed to timing of payments and higher incentive accruals.
Total working capital, which includes operating working capital plus cash and cash equivalents and taxes receivable less bank advances and taxes payable, was $388 million at period-end, compared to $183 million at July 4, 2020 and $195 million at October 5, 2019. The quarter-over-quarter and year-over-year increases were primarily due to the higher cash balance and the higher operating working capital balance, partially offset by higher taxes payable. The year-over-year decrease was also attributed to lower taxes receivable.
Operating activities generated $262 million of cash or $3.24 per share in the third quarter of 2020, $125 million or $1.55 per share in the second quarter of 2020 and $52 million or $0.64 per share consumed in the third quarter of 2019. The higher generation of cash versus both comparative periods was mainly attributed to higher earnings in the current quarter.
INVESTMENTS
Investment in property, plant and equipment and intangible assets was $28 million in the third quarter of 2020, $14 million in the second quarter of 2020 and $33 million in the third quarter of 2019. The fluctuation versus the comparative periods was primarily attributable to the timing of executing on various capital projects.
As part of Norbord's initial COVID-19 Response Plan, Norbord’s budgeted 2020 investment in property, plant and equipment had been reduced from $100 million to $75 million for maintenance of business projects and projects focused on reducing manufacturing costs across the Company’s mills, as well as a portion of the Chambord mill rebuild and Inverness phase 2 projects (both described below). Based on the strong third quarter results and in line with Norbord's capital allocation priorities, 2020 investment in property, plant and equipment is now forecasted to return to its original budget of $100 million. The budget also includes investments to support the Company’s strategy to increase the production of specialty products for industrial applications and exports. These investments will be funded with cash on hand, cash generated from operations and, if necessary, drawings under the Company’s accounts receivable securitization program or committed revolving bank lines.
Inverness Project
During the first phase of the project, the Company invested $147 million to modernize and expand its Inverness OSB mill, including moving the unused second press from the Grande Prairie, Alberta mill. The project was substantially completed and the new line started up in the fourth quarter of 2017, with no disruption to existing production capacity, and the mill's stated capacity was increased from 395 to 720 MMsf (3/8-inch basis). The new finishing end was installed in 2018 and commissioned during the first quarter of 2019.
In January 2019, the Board of Directors approved a $46 million (£35 million) second phase investment to further expand capacity at the Inverness mill by 225 MMsf (3/8-inch basis) (200,000 cubic metres) through the addition of a second wood room and dryer. This project was substantially completed during the current quarter and is consistent with the Company’s strategy of growing its European OSB capacity to serve continued substitution growth in its key markets. During the first nine months of 2020, $16 million was invested ($44 million project-to-date), with $5 million invested during the quarter.
12
Exhibit 99.3
Chambord Rebuild Project
Production remains indefinitely curtailed at the Chambord mill since the third quarter of 2008. The Company believes North American OSB demand will continue to grow over the long-term. In order to support this anticipated growth and enhance the competitive position of the Company’s overall manufacturing operations, Norbord has been investing since 2018 to rebuild and prepare the mill for an eventual restart. The Company has not yet made a restart decision, and will only do so when it is sufficiently clear that customers require the production from this mill. The $71 million budgeted project involves replacing the dryers and investing in the wood-handling and finishing end areas to streamline the mill’s manufacturing process and reduce costs, as well as upgrades to process and personal safety systems, electrical systems and environmental equipment that will bring the mill up to current standards after more than a decade of curtailment. The government of Quebec is investing up to C $4.8 million (US $3.6 million) in the project; to-date, less than C $1 million has been received. Further, the Company’s investment will qualify for Canadian investment tax credits and Quebec’s rebate program for large electricity users which will reduce cash income taxes and electricity costs, respectively, once the mill is operational. During the first nine months of 2020, $3 million was invested ($54 million project-to-date), with $1 million invested during the quarter.
2021 Capital Spending Budget
Looking ahead to next year, while the Company is still in the process of finalizing its capital plans, the 2021 capital expenditure target is expected to be approximately $150 million. This will include maintenance of business projects, projects focused on reducing manufacturing costs and enhancing process safety across the mills and mobile equipment leases that must be capitalized under IFRS 16. It also includes further investments to support the Company's strategy to increase the production of specialty products for industrial applications and exports, as well as a portion of the Chambord mill rebuild.
CAPITALIZATION
At November 4, 2020, there were 80.7 million common shares outstanding. In addition, 1.4 million stock options were outstanding, of which 49% were fully vested.
Normal Course Issuer Bid
In October 2019, Norbord renewed its normal course issuer bid (NCIB) in accordance with TSX rules. Under the bid, Norbord may purchase up to 4,083,429, representing 5% of the Company’s issued and outstanding common shares of 81,668,583 as of October 22, 2019, pursuant to TSX rules prior to the bid's expiry date of November 4, 2020. Daily purchases of common shares may not exceed 72,970 subject to the Company’s ability to make "block" purchases under the rules of the TSX. In response to the COVID-19 pandemic, the TSX had temporarily doubled the daily purchase limit under all NCIBs such that Norbord was permitted to purchase up to 145,940 shares per day until June 30, 2020.
During the first quarter of 2020, 1.0 million shares were purchased under this bid at a cost of $22 million. However, to preserve financial flexibility given the uncertainty surrounding the short- and medium-term outlook, the Company minimized share repurchases starting in early March. During the third quarter of 2020, the Company resumed purchases under this bid and 0.2 million shares were purchased at a cost of $6 million. Substantially all common shares purchased under the bid were cancelled. Norbord has repurchased a total of 1.4 million shares to-date under its current bid at a cost of $33 million.
Norbord believed that the market price of its common shares was attractive as they were trading significantly below replacement cost and management's view of intrinsic value and that the purchase of these common shares was an appropriate use of the Company’s funds in light of potential benefits to remaining shareholders.
Purchases were made on the open market by Norbord through the facilities of the TSX, the NYSE or Canadian or US alternative trading systems, if eligible, in accordance with the requirements of the TSX and applicable securities laws. The price that Norbord paid for any such common shares was the market price of such shares at the time of acquisition.
13
Exhibit 99.3
Dividends
Norbord’s variable dividend policy targets the payment to shareholders of a portion of free cash flow based upon the Company’s financial position, results of operations, cash flow, capital requirements and restrictions under the Company’s revolving bank lines, as well as the market outlook for the Company’s principal products and broader market and economic conditions, among other factors. Under this policy, the Board of Directors has declared the following dividends:
(C $) | Quarterly Dividend Declared per Common Share | ||||
Q2 2013 to Q4 2014 | $ 0.60 | ||||
Q1 2015 & Q2 2015 | 0.25 | ||||
Q3 2015 to Q1 2017 | 0.10 | ||||
Q2 2017 | 0.30 | ||||
Q3 2017 | 0.50 | ||||
Q4 2017 to Q2 2018 | 0.60 | ||||
Q3 2018 | 4.50 | ||||
Q4 2018 | 0.60 | ||||
Q1 2019 to Q3 2019 | 0.40 | ||||
Q4 2019 to Q1 2020 | 0.20 | ||||
Q2 2020 | 0.05 | ||||
Q3 2020 | 0.30 | ||||
The Board retains the discretion to amend the Company’s dividend policy in any manner and at any time as it may deem necessary or appropriate in the future. For these reasons, as well as others, the Board in its sole discretion can decide to increase, maintain, decrease, suspend or discontinue the payment of cash dividends in the future.
Under Norbord’s variable dividend policy, $34 million (2019 – $73 million) was paid out during the first nine months of 2020 primarily using cash on hand.
FINANCIAL INSTRUMENTS
The Company utilizes various derivative financial instruments to manage risk and make better use of capital. The fair values of these instruments are reflected on the Company’s balance sheet and are disclosed in note 14 to the interim financial statements.
14
Exhibit 99.3
TRANSACTIONS WITH RELATED PARTIES
In the normal course of operations, the Company enters into various transactions with related parties which have been measured at exchange value and recognized in the interim financial statements. The following transactions have occurred between the Company and its related parties during the normal course of operations:
Brookfield
As of November 4, 2020, Brookfield held approximately 43% of the common shares outstanding. The Company periodically engages the services of Brookfield and its affiliates for various financial, real estate and other business services. During the quarter and year-to-date, the fees for services rendered were less than $1 million (2019 – less than $1 million) and $1 million, respectively (2019 – less than $1 million).
Other
Sales to Asian markets are handled by Interex Forest Products Ltd. (Interex), a cooperative sales company over which Norbord, as a 25% shareholder, has significant influence. During the quarter and year-to-date, net sales of $8 million (2019 – $20 million) and $36 million (2019 – $55 million) were made to Interex. At period-end, $1 million (December 31, 2019 – $4 million) due from Interex was included in accounts receivable. At period-end, the investment in Interex was less than $1 million (December 31, 2019 – less than $1 million).
15
Exhibit 99.3
SELECTED QUARTERLY INFORMATION
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
(US $ millions, except per share information, unless otherwise noted) | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | ||||||||||||||||||||||||||||||||||||||||||
| SALES AND EARNINGS | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales | 725 | 421 | 467 | 373 | 435 | 447 | 476 | 501 | ||||||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | 274 | 31 | 40 | (8) | (12) | (2) | 6 | (46) | ||||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA(1) | 322 | 84 | 75 | 27 | 33 | 36 | 42 | 70 | ||||||||||||||||||||||||||||||||||||||||||
| Earnings (loss) | 203 | 18 | 20 | (12) | (17) | (14) | 1 | (28) | ||||||||||||||||||||||||||||||||||||||||||
Adjusted earnings (loss)(1) | 204 | 31 | 21 | (11) | (9) | (8) | (2) | 26 | ||||||||||||||||||||||||||||||||||||||||||
| PER COMMON SHARE EARNINGS | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings (loss), basic | 2.51 | 0.22 | 0.25 | (0.15) | (0.21) | (0.17) | 0.01 | (0.32) | ||||||||||||||||||||||||||||||||||||||||||
| Earnings (loss), diluted | 2.51 | 0.22 | 0.25 | (0.15) | (0.21) | (0.17) | 0.01 | (0.32) | ||||||||||||||||||||||||||||||||||||||||||
Adjusted earnings (loss), basic(1) | 2.52 | 0.38 | 0.26 | (0.13) | (0.11) | (0.10) | (0.02) | 0.30 | ||||||||||||||||||||||||||||||||||||||||||
Adjusted earnings (loss), diluted(1) | 2.52 | 0.38 | 0.26 | (0.13) | (0.11) | (0.10) | (0.02) | 0.30 | ||||||||||||||||||||||||||||||||||||||||||
Dividends declared(2) | 0.30 | 0.05 | 0.20 | 0.20 | 0.40 | 0.40 | 0.40 | 0.60 | ||||||||||||||||||||||||||||||||||||||||||
| BALANCE SHEET | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | 2,112 | 1,785 | 1,904 | 1,921 | 1,862 | 2,207 | 1,942 | 1,942 | ||||||||||||||||||||||||||||||||||||||||||
Long-term debt(3) | 658 | 657 | 677 | 657 | 656 | 896 | 550 | 550 | ||||||||||||||||||||||||||||||||||||||||||
Net debt for financial covenant purposes(1) | 436 | 655 | 665 | 655 | 675 | 601 | 564 | 435 | ||||||||||||||||||||||||||||||||||||||||||
Net debt to capitalization, market basis(1) | 18 | % | 26 | % | 26 | % | 24 | % | 25 | % | 20 | % | 17 | % | 13 | % | ||||||||||||||||||||||||||||||||||
Net debt to capitalization, book basis(1) | 27 | % | 40 | % | 40 | % | 40 | % | 40 | % | 36 | % | 34 | % | 28 | % | ||||||||||||||||||||||||||||||||||
| KEY STATISTICS | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shipments (MMsf–3/8”) | ||||||||||||||||||||||||||||||||||||||||||||||||||
North America | 1,523 | 1,400 | 1,459 | 1,335 | 1,654 | 1,587 | 1,569 | 1,602 | ||||||||||||||||||||||||||||||||||||||||||
Europe | 493 | 402 | 499 | 396 | 440 | 474 | 521 | 452 | ||||||||||||||||||||||||||||||||||||||||||
| Indicative average OSB price ($/Msf–7/16”, unless otherwise indicated) | ||||||||||||||||||||||||||||||||||||||||||||||||||
North Central | 578 | 270 | 271 | 223 | 217 | 188 | 211 | 243 | ||||||||||||||||||||||||||||||||||||||||||
South East | 572 | 262 | 251 | 199 | 168 | 186 | 197 | 203 | ||||||||||||||||||||||||||||||||||||||||||
Western Canada | 579 | 224 | 255 | 190 | 164 | 153 | 160 | 184 | ||||||||||||||||||||||||||||||||||||||||||
Europe (€/m3)(4) | 253 | 251 | 241 | 247 | 269 | 285 | 287 | 299 | ||||||||||||||||||||||||||||||||||||||||||
| KEY PERFORMANCE METRICS | ||||||||||||||||||||||||||||||||||||||||||||||||||
Return on capital employed (ROCE)(1) | 83 | % | 21 | % | 18 | % | 7 | % | 8 | % | 9 | % | 10 | % | 17 | % | ||||||||||||||||||||||||||||||||||
Return on equity (ROE)(1) | 97 | % | 17 | % | 11 | % | (6) | % | (5) | % | (4) | % | (1) | % | 10 | % | ||||||||||||||||||||||||||||||||||
Cash provided by (used for) operating activities | 262 | 125 | 39 | 28 | 52 | 36 | (97) | 126 | ||||||||||||||||||||||||||||||||||||||||||
Cash provided by (used for) operating activities per share(1) | 3.24 | 1.55 | 0.48 | 0.34 | 0.64 | 0.44 | (1.18) | 1.46 | ||||||||||||||||||||||||||||||||||||||||||
(1)Non-IFRS measure; see Non-IFRS Financial Measures section.
(2)Dividends declared per share stated in Canadian dollars.
(3)Includes current and non-current long term debt.
(4)European indicative average OSB price represents the gross delivered price to the largest continental market.
Quarterly results are impacted by seasonal factors such as weather and building activity. Market demand varies seasonally, as homebuilding activity and repair-and-remodelling work – the principal end uses of OSB – are generally stronger in the spring and summer months. Adverse weather can also limit access to logging areas, which can affect the supply of fibre to
16
Exhibit 99.3
Norbord’s operations. OSB shipment volumes and prices are affected by these factors as well as by global supply and demand conditions.
Operating working capital is typically built up in the first quarter of the year primarily due to log inventory purchases in the northern regions of North America. This inventory is generally consumed in the spring and summer months.
The demand for and the price of OSB in North America are significant variables affecting the comparability of Norbord’s results over the past eight quarters. Fluctuations in earnings during that time mirror fluctuations in the demand for and the price of OSB in North America. The Company estimates that the annualized impact on Adjusted EBITDA of a $10 per Msf (7⁄16-inch basis) change in the realized North American OSB price, when operations are running at full capacity, is approximately $64 million or $0.79 per basic share (approximately $47 million or $0.58 per basic share based on the last 12 months of production). Regional pricing variations, particularly in the Southern US and Western Canada, make the North Central benchmark price a useful, albeit imperfect, proxy for overall North American OSB pricing. Similarly in Europe, regional pricing variations and product mix also make the European OSB indicative price a useful, albeit imperfect, proxy for overall European OSB pricing. The Company estimates that the annualized impact on Adjusted EBITDA of a €10 per 000m3 change in the realized European OSB price, when operations are running at full capacity, is approximately $12 million or $0.15 per basic share. Further, premiums obtained on value-added products, the pricing lag effect of maintaining an order file, and volume and trade discounts cause realized prices to differ from the benchmarks for both North America and Europe.
Global commodity prices affect the prices of key raw material inputs, primarily wood fibre, resin, wax and energy. Prices for resin, a petroleum-based product, generally follow global oil prices and had been trending downwards since the fourth quarter of 2018, bottomed in the second quarter of 2020 and have since been trending upward.
Norbord has significant exposure to the Canadian dollar with approximately 37% of its global (47% of North American) panel production capacity located in Canada. The Company estimates that the favourable impact of a one-cent (US) decrease in the value of the Canadian dollar would positively impact annual Adjusted EBITDA by approximately $6 million when all six of Norbord’s Canadian OSB mills operate at full capacity. Norbord also has exposure to the Euro as all but one of the Company’s European production facilities are located in the UK and export sales to the continent are denominated in Euros. The Company estimates that the favourable impact of a one-pence (UK) decrease in the value of the Euro would positively impact annual Adjusted EBITDA by less than $1 million when all UK production facilities operate at full capacity.
Items that are not related to ongoing business operations and/or non-cash that had a significant impact on quarterly results include:
Costs Related to 100 Mile House Closure – Included in the third quarter of 2020 is a $10 million ($0.12 per basic and diluted share) pre-tax loss related to a non-cash impairment charge, and severance and other related costs resulting from the closure of the 100 Mile House mill (see 100 Mile House Permanent Closure in the Operating Results section).
Impairment of Assets – Included in the second quarter of 2020 is a $16 million ($0.20 per basic and diluted share) non-cash pre-tax loss related to an impairment charge at the Company's Grande Prairie mill. Included in the third quarter of 2019 is a $10 million ($0.12 per basic and diluted share) non-cash pre-tax loss related to an impairment charge at the Company’s Cordele mill. Included in the fourth quarter of 2018 is an $80 million ($0.93 per basic and $0.92 per diluted share) non-cash pre-tax loss related to an impairment charge at the Company’s 100 Mile House mill.
Loss on Disposal of Assets – Included in the second quarter of 2020 is a $3 million ($0.04 per basic and diluted share) non-cash loss related to obsolete operating and maintenance supplies and on the disposal of obsolete production equipment. Included in the fourth quarters of 2019 and 2018 is a $2 million ($0.02 per basic and diluted share) non-cash loss related to
17
Exhibit 99.3
obsolete operating and maintenance supplies. Included in the second quarter of 2019 is a $1 million ($0.01 per basic and diluted share) non-cash loss on the disposal of production equipment based on capital projects completed during the quarter.
Stock-based Compensation and Related Costs – Included in the third and second quarters of 2020 is $2 million ($0.02 per basic and diluted share) of stock-based compensation and related revaluation costs. Included in the fourth, second and first quarters of 2019 is $1 million ($0.01 per basic and diluted share) of similar costs.
Costs on Early Debt Extinguishment – Included in the second quarter of 2019 is a $9 million ($0.11 per basic and diluted share) premium paid on the early extinguishment of the senior secured notes due 2020 and a related $1 million ($0.01 per basic and diluted share) non-cash write-off of net unamortized debt issue costs.
Costs Related to 100 Mile House Indefinite Curtailment – Included in the second quarter of 2019 is $2 million ($0.02 per basic and diluted share) of severance and other related costs resulting from the indefinite curtailment of the 100 Mile House mill in August 2019.
The following table reconciles Adjusted earnings (loss) to the most directly comparable IFRS measure:
(US $ millions) | Q3 2020 | Q2 2020 | Q1 2020 | Q4 2019 | Q3 2019 | Q2 2019 | Q1 2019 | Q4 2018 | ||||||||||||||||||||||||||||||||||||||||||
| Earnings (loss) | $ | 203 | $ | 18 | $ | 20 | $ | (12) | $ | (17) | $ | (14) | $ | 1 | $ | (28) | ||||||||||||||||||||||||||||||||||
| Add: Costs related to 100 Mile House closure | 10 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Add: Impairment of assets | — | 16 | — | — | 10 | — | — | 80 | ||||||||||||||||||||||||||||||||||||||||||
| Add: Loss on disposal of assets | — | 3 | — | 2 | — | 1 | — | 2 | ||||||||||||||||||||||||||||||||||||||||||
Add: Stock-based compensation and related costs | 2 | 2 | — | 1 | — | 1 | 1 | — | ||||||||||||||||||||||||||||||||||||||||||
Add: Costs on early extinguishment of 2020 Notes | — | — | — | — | — | 10 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Add: Costs related to 100 Mile House indefinite curtailment | — | — | — | — | — | 2 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Add: Reported income tax expense (recovery) | 61 | 3 | 8 | (6) | (6) | (10) | (5) | (26) | ||||||||||||||||||||||||||||||||||||||||||
| Adjusted pre-tax earnings (loss) | 276 | 42 | 28 | (15) | (13) | (10) | (3) | 28 | ||||||||||||||||||||||||||||||||||||||||||
Less: Income tax (expense) recovery at statutory rate(1) | (72) | (11) | (7) | 4 | 4 | 2 | 1 | (2) | ||||||||||||||||||||||||||||||||||||||||||
| Adjusted earnings (loss) | $ | 204 | $ | 31 | $ | 21 | $ | (11) | $ | (9) | $ | (8) | $ | (2) | $ | 26 | ||||||||||||||||||||||||||||||||||
(1)Represents Canadian combined federal and provincial statutory rate of 26%.
18
Exhibit 99.3
The following table reconciles Adjusted EBITDA to the most directly comparable IFRS measure:
(US $ millions) | Q3 2020 | Q2 2020 | Q1 2020 | Q4 2019 | Q3 2019 | Q2 2019 | Q1 2019 | Q4 2018 | ||||||||||||||||||||||||||||||||||||||||||
| Earnings (loss) | $ | 203 | $ | 18 | $ | 20 | $ | (12) | $ | (17) | $ | (14) | $ | 1 | $ | (28) | ||||||||||||||||||||||||||||||||||
| Add: Finance costs | 10 | 10 | 12 | 11 | 11 | 12 | 11 | 9 | ||||||||||||||||||||||||||||||||||||||||||
| Less: Interest income | — | — | — | (1) | — | — | (1) | (1) | ||||||||||||||||||||||||||||||||||||||||||
Add: Costs on early extinguishment of 2020 Notes | — | — | — | — | — | 10 | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Add: Depreciation and amortization | 36 | 32 | 35 | 32 | 35 | 34 | 35 | 34 | ||||||||||||||||||||||||||||||||||||||||||
| Add: Income tax expense (recovery) | 61 | 3 | 8 | (6) | (6) | (10) | (5) | (26) | ||||||||||||||||||||||||||||||||||||||||||
| EBITDA | 310 | 63 | 75 | 24 | 23 | 32 | 41 | (12) | ||||||||||||||||||||||||||||||||||||||||||
| Add: Costs related to 100 Mile House closure | 10 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Add: Impairment of assets | — | 16 | — | — | 10 | — | — | 80 | ||||||||||||||||||||||||||||||||||||||||||
| Add: Loss on disposal of assets | — | 3 | — | 2 | — | 1 | — | 2 | ||||||||||||||||||||||||||||||||||||||||||
Add: Stock-based compensation and related costs | 2 | 2 | — | 1 | — | 1 | 1 | — | ||||||||||||||||||||||||||||||||||||||||||
Add: Costs related to 100 Mile House indefinite curtailment | — | — | — | — | — | 2 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA(1) | $ | 322 | $ | 84 | $ | 75 | $ | 27 | $ | 33 | $ | 36 | $ | 42 | $ | 70 | ||||||||||||||||||||||||||||||||||
(1)Non-IFRS measure; see Non-IFRS Financial Measures section.
CHANGES IN ACCOUNTING POLICIES
(i)Financial Instruments
In September 2019, the IASB issued amendments to IFRS 9 with regards to the interest rate benchmark reform. These amendments provide targeted relief for financial instruments qualifying for hedge accounting to address uncertainties related to the ongoing reform of interbank offered rates. The amendments became effective for the Company on January 1, 2020 and did not have any impact on its interim financial statements.
FUTURE CHANGES IN ACCOUNTING POLICIES
(i)Property, Plant and Equipment
In May 2020, the IASB issued amendments to IAS 16 with regards to sale proceeds before property, plant and equipment is available for intended use. These amendments include the requirement to recognize in earnings any proceeds and related costs from selling items produced while an asset is being prepared for its intended use, and clarify the requirement to capitalize costs of testing whether an asset is functioning properly. The amendments are effective on January 1, 2022. The Company is currently assessing the impact of these amendments on its financial statements.
SIGNIFICANT ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATES
Management has selected appropriate accounting policies and made certain estimates and assumptions that affect the reported amounts and other disclosure in the interim financial statements. These accounting policies, judgements and estimates are described in the 2019 audited financial statements of the Company or in the section above.
19
Exhibit 99.3
RISKS AND UNCERTAINTIES
In addition to those risks and uncertainties described in Norbord’s annual MD&A and included in the 2019 annual report available on Norbord’s website, SEDAR and EDGAR, Norbord’s results may be impacted by risks associated with COVID-19 and the related global reduction in commerce and substantial volatility in stock markets and commodity prices. Health and safety measures instituted to protect Norbord’s employees, voluntary changes and government-imposed restrictions that may apply to Norbord’s operations, and the impact of COVID-19 on customer demand, supply and distribution and other factors may result in a decrease of liquidity, cash flow and/or the valuation of Norbord’s long-lived assets, and Norbord may be unable to achieve its expected returns.
INTERNAL CONTROLS OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES
There have been no changes in Norbord’s internal controls over financial reporting and disclosure controls and procedures during the three months ended October 3, 2020 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting and its disclosure controls and procedures. In addition, there was no material impact to Norbord’s internal controls over financial reporting or disclosure controls and procedures as a result of any remote working arrangements in response to the COVID-19 pandemic.
NON-IFRS FINANCIAL MEASURES
The following non-IFRS financial measures have been used in this MD&A. Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Each non-IFRS financial measure is defined below. Where appropriate, a quantitative reconciliation of the non-IFRS financial measure to the most directly comparable IFRS measure is provided.
Adjusted earnings (loss) is defined as earnings (loss) determined in accordance with IFRS before non-recurring or other items and using a normalized income tax rate. Non-recurring items include the impairment of assets charge, costs related to the indefinite curtailment and closure of the 100 Mile House mill and costs on early extinguishment of the 2020 Notes. Other items include non-cash losses on disposal of assets, and stock-based compensation and related revaluation costs. The actual income tax expense is added back and a tax expense calculated at the Canadian combined federal and provincial statutory rate is deducted. Adjusted earnings (loss) per share is Adjusted earnings (loss) divided by the weighted average number of common shares outstanding (on a basic or diluted basis, as specified).
The following table reconciles Adjusted earnings (loss) to the most directly comparable IFRS measure:
(US $ millions) | Q3 2020 | Q2 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||||||||||
Earnings (loss) | $ | 203 | $ | 18 | $ | (17) | $ | 241 | $ | (30) | ||||||||||||||||||||||
| Add: Costs related to 100 Mile House closure | 10 | — | — | 10 | — | |||||||||||||||||||||||||||
Add: Impairment of assets | — | 16 | 10 | 16 | 10 | |||||||||||||||||||||||||||
Add: Loss on disposal of assets | — | 3 | — | 3 | 1 | |||||||||||||||||||||||||||
Add: Stock-based compensation and related costs | 2 | 2 | — | 4 | 2 | |||||||||||||||||||||||||||
Add: Costs on early extinguishment of 2020 Notes | — | — | — | — | 2 | |||||||||||||||||||||||||||
Add: Costs related to 100 Mile House indefinite curtailment | — | — | — | — | 10 | |||||||||||||||||||||||||||
Add: Reported income tax expense (recovery) | 61 | 3 | (6) | 72 | (21) | |||||||||||||||||||||||||||
Adjusted pre-tax earnings (loss) | 276 | 42 | (13) | 346 | (26) | |||||||||||||||||||||||||||
Less: Income tax (expense) recovery at statutory rate(1) | (72) | (11) | 4 | (90) | 7 | |||||||||||||||||||||||||||
Adjusted earnings (loss) | $ | 204 | $ | 31 | $ | (9) | $ | 256 | $ | (19) | ||||||||||||||||||||||
(1)Represents Canadian combined federal and provincial statutory rate.
20
Exhibit 99.3
Adjusted EBITDA is defined as earnings (loss) determined in accordance with IFRS before finance costs, interest income, income taxes, depreciation, amortization and other non-recurring or other items. Non-recurring items include the impairment of assets charge, costs related to the indefinite curtailment and closure of the 100 Mile House mill and costs on early extinguishment of the 2020 Notes. Other items include non-cash losses on disposal of assets, and stock-based compensation and related revaluation costs. As Norbord operates in a cyclical commodity business, Norbord interprets Adjusted EBITDA over the cycle as a useful indicator of the Company’s ability to incur and service debt and meet capital expenditure requirements. In addition, Norbord views Adjusted EBITDA as a measure of gross profit and interprets Adjusted EBITDA trends as indicators of relative operating performance.
The following table reconciles Adjusted EBITDA to the most directly comparable IFRS measure:
(US $ millions) | Q3 2020 | Q2 2020 | Q3 2019 | 9 mos 2020 | 9 mos 2019 | |||||||||||||||||||||||||||
Earnings (loss) | $ | 203 | $ | 18 | $ | (17) | $ | 241 | $ | (30) | ||||||||||||||||||||||
Add: Finance costs | 10 | 10 | 11 | 32 | 34 | |||||||||||||||||||||||||||
Less: Interest income | — | — | — | — | (1) | |||||||||||||||||||||||||||
Add: Costs on early extinguishment of 2020 Notes | — | — | — | — | 10 | |||||||||||||||||||||||||||
Add: Depreciation and amortization | 36 | 32 | 35 | 103 | 104 | |||||||||||||||||||||||||||
Add: Income tax expense (recovery) | 61 | 3 | (6) | 72 | (21) | |||||||||||||||||||||||||||
EBITDA(1) | 310 | 63 | 23 | 448 | 96 | |||||||||||||||||||||||||||
| Add: Costs related to 100 Mile House closure | 10 | — | — | 10 | — | |||||||||||||||||||||||||||
Add: Impairment of assets | — | 16 | 10 | 16 | 10 | |||||||||||||||||||||||||||
Add: Loss on disposal of assets | — | 3 | — | 3 | 1 | |||||||||||||||||||||||||||
Add: Stock-based compensation and related costs | 2 | 2 | — | 4 | 2 | |||||||||||||||||||||||||||
Add: Costs related to 100 Mile House indefinite curtailment | — | — | — | — | 2 | |||||||||||||||||||||||||||
Adjusted EBITDA | $ | 322 | $ | 84 | $ | 33 | $ | 481 | $ | 111 | ||||||||||||||||||||||
The following tables reconcile Adjusted EBITDA per geographic segment to EBITDA:
Q3 2020 | ||||||||||||||||||||||||||
(US $ millions) | North America | Europe | Unallocated | Total | ||||||||||||||||||||||
EBITDA(1) | $ | 300 | $ | 16 | $ | (6) | $ | 310 | ||||||||||||||||||
Add: Costs related to 100 Mile House closure | 10 | — | — | 10 | ||||||||||||||||||||||
Add: Loss on disposal of assets | — | — | — | — | ||||||||||||||||||||||
Add: Stock-based compensation and related costs | — | — | 2 | 2 | ||||||||||||||||||||||
Adjusted EBITDA | $ | 310 | $ | 16 | $ | (4) | $ | 322 | ||||||||||||||||||
Q2 2020 | ||||||||||||||||||||||||||
(US $ millions) | North America | Europe | Unallocated | Total | ||||||||||||||||||||||
EBITDA(1) | $ | 65 | $ | 2 | $ | (4) | $ | 63 | ||||||||||||||||||
Add: Impairment of assets | 16 | — | — | 16 | ||||||||||||||||||||||
Add: Loss on disposal of assets | 3 | — | — | 3 | ||||||||||||||||||||||
Add: Stock-based compensation and related costs | — | — | 2 | 2 | ||||||||||||||||||||||
Adjusted EBITDA | $ | 84 | $ | 2 | $ | (2) | $ | 84 | ||||||||||||||||||
21
Exhibit 99.3
Q3 2019 | ||||||||||||||||||||||||||
(US $ millions) | North America | Europe | Unallocated | Total | ||||||||||||||||||||||
EBITDA(1) | $ | 14 | $ | 11 | $ | (2) | $ | 23 | ||||||||||||||||||
Add: Impairment of assets | 10 | — | — | 10 | ||||||||||||||||||||||
Adjusted EBITDA | $ | 24 | $ | 11 | $ | (2) | $ | 33 | ||||||||||||||||||
| 9 mos 2020 | ||||||||||||||||||||||||||
(US $ millions) | North America | Europe | Unallocated | Total | ||||||||||||||||||||||
EBITDA(1) | $ | 433 | $ | 28 | $ | (13) | $ | 448 | ||||||||||||||||||
| Add: Costs related to 100 Mile House closure | 10 | — | — | 10 | ||||||||||||||||||||||
Add: Impairment of assets | 16 | — | — | 16 | ||||||||||||||||||||||
Add: Loss on disposal of assets | 3 | — | — | 3 | ||||||||||||||||||||||
Add: Stock-based compensation and related costs | — | — | 4 | 4 | ||||||||||||||||||||||
Adjusted EBITDA | $ | 462 | $ | 28 | $ | (9) | $ | 481 | ||||||||||||||||||
| 9 mos 2019 | ||||||||||||||||||||||||||
(US $ millions) | North America | Europe | Unallocated | Total | ||||||||||||||||||||||
EBITDA(1) | $ | 52 | $ | 53 | $ | (9) | $ | 96 | ||||||||||||||||||
Add: Impairment of assets | 10 | — | — | 10 | ||||||||||||||||||||||
Add: Loss on disposal of assets | 1 | — | — | 1 | ||||||||||||||||||||||
Add: Stock-based compensation and related costs | — | — | 2 | 2 | ||||||||||||||||||||||
Add: Costs related to 100 Mile House indefinite curtailment | 2 | — | — | 2 | ||||||||||||||||||||||
Adjusted EBITDA | $ | 65 | $ | 53 | $ | (7) | $ | 111 | ||||||||||||||||||
(1)EBITDA is defined as earnings before finance costs, interest income, income tax, depreciation and amortization, and costs on early extinguishment of 2020 Notes.
Operating working capital is defined as accounts receivable plus inventory and prepaids less accounts payable and accrued liabilities. Operating working capital is a measure of the investment in accounts receivable, inventory, prepaids, accounts payable and accrued liabilities required to support operations. The Company aims to minimize its investment in operating working capital; however, the amount will vary with seasonality and with sales expansions and contractions.
(US $ millions) | Oct 3, 2020 | Jul 4, 2020 | Dec 31, 2019 | Oct 5, 2019 | ||||||||||||||||||||||
Accounts receivable | $ | 246 | $ | 137 | $ | 136 | $ | 141 | ||||||||||||||||||
Inventory | 216 | 208 | 230 | 217 | ||||||||||||||||||||||
Prepaids | 10 | 8 | 13 | 19 | ||||||||||||||||||||||
Accounts payable and accrued liabilities | (281) | (201) | (259) | (238) | ||||||||||||||||||||||
Operating working capital | $ | 191 | $ | 152 | $ | 120 | $ | 139 | ||||||||||||||||||
Total working capital is operating working capital plus cash and cash equivalents and taxes receivable less bank advances, if any, and taxes payable.
(US $ millions) | Oct 3, 2020 | Jul 4, 2020 | Dec 31, 2019 | Oct 5, 2019 | ||||||||||||||||||||||
Operating working capital | $ | 191 | $ | 152 | $ | 120 | $ | 139 | ||||||||||||||||||
Cash and cash equivalents | 240 | 20 | 20 | 3 | ||||||||||||||||||||||
Taxes receivable | 6 | 12 | 63 | 59 | ||||||||||||||||||||||
Taxes payable | (49) | (1) | (1) | (6) | ||||||||||||||||||||||
Total working capital | $ | 388 | $ | 183 | $ | 202 | $ | 195 | ||||||||||||||||||
22
Exhibit 99.3
Capital employed is defined as the sum of property, plant and equipment, intangible assets and operating working capital. Capital employed is a measure of the total investment in a business in terms of property, plant and equipment, intangible assets and operating working capital.
(US $ millions) | Oct 3, 2020 | Jul 4, 2020 | Dec 31, 2019 | Oct 5, 2019 | ||||||||||||||||||||||
Property, plant and equipment | $ | 1,366 | $ | 1,367 | $ | 1,427 | $ | 1,392 | ||||||||||||||||||
Intangible assets | 19 | 20 | 21 | 21 | ||||||||||||||||||||||
Accounts receivable | 246 | 137 | 136 | 141 | ||||||||||||||||||||||
Inventory | 216 | 208 | 230 | 217 | ||||||||||||||||||||||
Prepaids | 10 | 8 | 13 | 19 | ||||||||||||||||||||||
Accounts payable and accrued liabilities | (281) | (201) | (259) | (238) | ||||||||||||||||||||||
Capital employed | $ | 1,576 | $ | 1,539 | $ | 1,568 | $ | 1,552 | ||||||||||||||||||
ROCE (return on capital employed) is annualized Adjusted EBITDA divided by average quarterly or year-to-date capital employed. ROCE is a measurement of financial performance, focusing on cash generation and the effective use of capital. As Norbord operates in a cyclical commodity business, it monitors ROCE over the cycle as a useful means of comparing businesses in terms of efficiency of management. Norbord targets top-quartile ROCE among North American forest products companies over the cycle.
ROE (return on equity) is annualized Adjusted earnings (loss) divided by average quarterly or year-to-date common shareholders’ equity adjusted for the 2018 net impairment of assets charge. ROE is a measure that allows common shareholders to determine how effectively their invested capital is being employed. As Norbord operates in a cyclical commodity business, it looks at ROE over the cycle and targets top-quartile performance among North American forest products companies.
(US $ millions) | Oct 3, 2020 | Jul 4, 2020 | Dec 31, 2019 | Oct 5, 2019 | ||||||||||||||||||||||
Shareholders' equity | $ | 881 | $ | 686 | $ | 704 | $ | 701 | ||||||||||||||||||
Add: 2018 impairment of assets (net of tax) | 59 | 59 | 59 | 59 | ||||||||||||||||||||||
Shareholders' equity for ROE | $ | 940 | $ | 745 | $ | 763 | $ | 760 | ||||||||||||||||||
Cash provided by (used for) operating activities per share is calculated as cash provided by (used for) operating activities as determined under IFRS, divided by the weighted average number of common shares outstanding.
Net debt is the principal value of long-term debt, including the current portion, other long-term debt and bank advances, if any, less cash and cash equivalents. Net debt for financial covenant purposes is net debt excluding other long-term debt and including other liabilities classified as debt for financial covenant purposes, letters of credit and guarantees outstanding, and any bank advances. Net debt is a useful indicator of a company’s debt position. Net debt comprises:
(US $ millions) | Oct 3, 2020 | Jul 4, 2020 | Dec 31, 2019 | Oct 5, 2019 | ||||||||||||||||||||||
Long-term debt, principal value | $ | 665 | $ | 665 | $ | 665 | $ | 665 | ||||||||||||||||||
Add: Other long-term debt | — | — | 68 | 27 | ||||||||||||||||||||||
Less: Cash and cash equivalents | (240) | (20) | (20) | (3) | ||||||||||||||||||||||
Net debt | 425 | 645 | 713 | 689 | ||||||||||||||||||||||
Less: Other long-term debt | — | — | (68) | (27) | ||||||||||||||||||||||
Add: Other liabilities classified as debt for financial covenant purposes | 1 | 1 | 2 | 2 | ||||||||||||||||||||||
Add: Letters of credit and guarantees | 10 | 9 | 8 | 11 | ||||||||||||||||||||||
Net debt for financial covenant purposes | $ | 436 | $ | 655 | $ | 655 | $ | 675 | ||||||||||||||||||
23
Exhibit 99.3
Tangible net worth consists of shareholders’ equity including certain adjustments. A minimum tangible net worth is one of two financial covenants contained in the Company’s committed bank lines. For financial covenant purposes, tangible net worth excludes the 2018 net impairment of assets charge, all IFRS transitional adjustments and all movement in cumulative other comprehensive income subsequent to January 1, 2011 (includes those movements related to the translation of Ainsworth in prior periods).
(US $ millions) | Oct 3, 2020 | Jul 4, 2020 | Dec 31, 2019 | Oct 5, 2019 | ||||||||||||||||||||||
Shareholders’ equity | $ | 881 | $ | 686 | $ | 704 | $ | 701 | ||||||||||||||||||
Add: 2018 impairment of assets (net of tax) | 59 | 59 | 59 | 59 | ||||||||||||||||||||||
Add: Other comprehensive income movement(1) | 67 | 80 | 60 | 92 | ||||||||||||||||||||||
Add: Impact of Ainsworth changing functional currencies | 155 | 155 | 155 | 155 | ||||||||||||||||||||||
Add: IFRS transitional adjustments | 21 | 21 | 21 | 21 | ||||||||||||||||||||||
Tangible net worth | $ | 1,183 | $ | 1,001 | $ | 999 | $ | 1,028 | ||||||||||||||||||
(1)Cumulative subsequent to January 1, 2011.
Net debt to capitalization, book basis, is net debt for financial covenant purposes divided by the sum of net debt for financial covenant purposes and tangible net worth. Net debt to capitalization on a 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. In addition, a maximum net debt to capitalization, book basis, is one of two financial covenants contained in the Company’s committed bank lines.
Net debt to capitalization, market basis, is net debt for financial covenant purposes divided by the sum of net debt for financial covenant purposes and market capitalization. Market capitalization is the number of common shares outstanding at period-end multiplied by the trailing 12-month average per share market price (in Canadian dollars) of $33.63 for the third quarter of 2020, $30.94 for the second quarter of 2020 and $33.51 for the third quarter of 2019. 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, it believes the market basis to be superior to the book basis in measuring the true strength and flexibility of its balance sheet.
FORWARD-LOOKING STATEMENTS
This document 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 “set up,” “on track,” “believes,” “expects,” “targets,” “outlook,” “scheduled,” “estimates,” “represents,” “forecasts,” “aims,” “predicts,” “plans,” “projects,” “anticipates,” “intends,” “supports,” “continues,” “suggests,” “considers,” “pro forma,” “potential,” “future” or variations of such words and phrases, or negative versions thereof, or statements that certain actions, events or results “can,” “may,” “could,” “would,” “should,” “might” or “will” be taken, occur or be achieved. 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.
Examples of such statements include, but are not limited to, comments with respect to: (1) outlook for the markets for products, including North American and European OSB demand; (2) expectations regarding future product pricing; (3) outlook for operations; (4) expectations regarding mill capacity; (5) objectives; (6) strategies to achieve those objectives; (7) expected financial results including the expected results of the MIP; (8) sensitivity to changes in product prices, such as the price of OSB; (9) sensitivity to changes in foreign exchange rates; (10) sensitivity to key input prices, such as the price of fibre, resin, wax and energy; (11) expectations regarding compliance with environmental regulations; (12) expectations regarding income tax rates; (13) expectations regarding contingent liabilities and guarantees, including the outcome of pending litigation; (14) expectations regarding the amount, timing and benefits of capital investments; (15) expectations
24
Exhibit 99.3
regarding the amount and timing of dividend payments; (16) historical, forecasted and other forward-looking information published by third parties such as the US Census Bureau, FEA (Forest Economic Advisors, LLC), APA-The Engineered Wood Association, Office for National Statistics and EUROCONSTRUCT which the Company may refer to but has not independently verified; and (17) plans implemented in response to COVID-19 and its impact on Norbord.
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. These factors include, but are not limited to: (1) developments related to COVID-19 or any other plague, epidemic, pandemic, outbreak of infectious disease or any other public health crisis, including health and safety measures instituted to protect the Company's employees, government-imposed restrictions or other restrictions that may apply to the Company's employees and/or operations (including quarantine), the impact on customer demand, supply and distribution and other factors; (2) assumptions in connection with the economic and financial conditions in the US, Canada, Europe and globally; (3) risks inherent to product concentration and cyclicality; (4) effects of competition and product pricing pressures; (5) risks inherent to customer dependence; (6) effects of variations in the price and availability of manufacturing inputs, including continued access to fibre resources at competitive prices, and the impact of third-party certification standards; (7) availability of transportation services, including truck and rail services, and port facilities; (8) various events that could disrupt operations, including natural, man-made or catastrophic events and ongoing relations with employees; (9) impact of changes to, or non-compliance with, environmental or other regulations; (10) government restrictions, standards or regulations intended to reduce greenhouse gas emissions; (11) impact of weather and climate change on Norbord’s operations or the operations or demand of its suppliers and customers; (12) impact of any product liability claims in excess of insurance coverage; (13) risks inherent to a capital intensive industry; (14) impact of future outcomes of tax exposures; (15) potential future changes in tax laws, including tax rates; (16) effects of currency exposures and exchange rate fluctuations; (17) future operating costs; (18) availability of financing, bank lines securitization programs and/or other means of liquidity; (19) impact of future cross border trade rulings or agreements; (20) implementation of important strategic initiatives and identification, completion and integration of acquisitions; (21) ability to implement new or upgraded information technology infrastructure; (22) impact of information technology service disruptions or failures; and (23) changes in government policy and regulation.
The above list of important factors affecting forward-looking information is not exhaustive. Additional factors are noted elsewhere, and reference should be made to the other risks discussed in filings with Canadian and United States securities regulatory authorities. Except as required by applicable law, Norbord does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by, or on behalf of, the Company, 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.
25
Exhibit 99.4
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, Peter Wijnbergen, President and Chief Executive Officer of Norbord Inc., certify the following:
| 1. | Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Norbord Inc. (the “issuer”) for the interim period ended October 3, 2020. | ||||||||||
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. | ||||||||||
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. | ||||||||||
| 4. | Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. | ||||||||||
| 5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings | ||||||||||
| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that | ||||||||||
(i) | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and | ||||||||||
(ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and | ||||||||||
| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. | ||||||||||
| 5.1 | Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013 framework. | ||||||||||
| 5.2 | N/A | ||||||||||
| 5.3 | N/A | ||||||||||
| 6. | Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 5, 2020 and ended on October 3, 2020, that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. | ||||||||||
Date: November 5, 2020
| (signed) Peter Wijnbergen | ||
| Peter Wijnbergen President and Chief Executive Officer | ||
Exhibit 99.5
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, Robin Lampard, Senior Vice President and Chief Financial Officer of Norbord Inc., certify the following:
| 1. | Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Norbord Inc. (the “issuer”) for the interim period ended October 3, 2020. | ||||||||||
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. | ||||||||||
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. | ||||||||||
| 4. | Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. | ||||||||||
| 5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings | ||||||||||
| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that | ||||||||||
(i) | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and | ||||||||||
(ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and | ||||||||||
| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. | ||||||||||
| 5.1 | Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013 framework. | ||||||||||
| 5.2 | N/A | ||||||||||
| 5.3 | N/A | ||||||||||
| 6. | Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 5, 2020 and ended on October 3, 2020, that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. | ||||||||||
Date: November 5, 2020
| (signed) Robin Lampard | ||
| Robin Lampard Senior Vice President and Chief Financial Officer | ||
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