Brampton Brick Limited
TSX : BBL.A

Brampton Brick Limited

May 09, 2011 20:08 ET

Brampton Brick Reports Results for the First Quarter Ended March 31, 2011

BRAMPTON, ONTARIO--(Marketwire - May 9, 2011) -

(All amounts are stated in thousands of Canadian dollars, except per share amounts.)

Brampton Brick Limited (TSX:BBL.A) today reported a loss of $4,425, or $0.40 per share, for the first quarter ended March 31, 2011, compared to a loss of $3,785, or $0.35 per share, for the first quarter of 2010. The aggregate weighted average number of Class A Subordinate Voting shares ("Class A shares") and Class B Multiple Voting shares ("Class B shares") outstanding was 10,936,554 in both periods.

Revenues for the quarter were $10,616 compared to $12,144 in 2010. The net decrease of $1,528 was primarily due to lower clay brick shipments offset in part by higher shipments of concrete masonry products and a small increase in revenues of the highly seasonal Landscape Products business segment.

During the first quarter of 2011 the Company reviewed the remaining useful life of plant and production equipment which resulted in changes in the expected useful life of certain production equipment. As a result, depreciation expense, which is included in Cost of Sales in the Consolidated Statement of Comprehensive Income (Loss) decreased by $999 for the three month period ended March 31, 2011 compared to the same period in 2010.

Selling expenses were $248, or approximately 14.1%, higher than last year as a result of increased advertising and marketing expenditures to support the introduction of new products and to expand the Company's market profile. General and administrative expenses increased by $214, or approximately 17.6%, primarily due to a higher provision for potentially uncollectible accounts.

The operating loss for the quarter was $3,561 compared to $2,916 for the first quarter of 2010.

The increase in finance costs to $919 for the first quarter of 2011 from $824 in 2010 was primarily due to the additional interest expense in the current period on the $9,000 subordinated secured debenture which was issued on February 26, 2010.

The Company's share of the loss from its 50% joint venture interest in Universal Resource Recovery Inc. ("Universal") amounted to $714 in the first quarter of 2011 compared to $600 in 2010. Universal's composting operations, which were voluntarily suspended in the second half of 2010, resumed in December 2010 and were being ramped up in phases through the first quarter of 2011.

The recovery of income taxes for the first quarter of 2011 reflected an effective income tax rate of approximately 14.8% compared to an effective income tax rate of approximately 12.4% in 2010. These rates are significantly lower than the normalized rates of approximately 26.25% in 2011 and 29.00% in 2010 primarily due to the fact that the Company did not record a deferred tax asset with respect to the future income tax benefit pertaining to the non-capital losses incurred by the Company's U.S. operations. Other items which impacted the effective income tax rates were the fluctuations from period to period of permanent differences between accounting income and taxable income as well as the tax impact in 2010 of various IFRS adjustments to the pre-tax loss.

More detailed discussion with respect to each operating business segment follows:

MASONRY PRODUCTS

For the three month period ended March 31, 2011, this business segment incurred an operating loss of $996 on revenues of $9,740 compared to an operating loss of $112 on revenues of $11,433 for the corresponding period in 2010.

Brick shipments in the Canadian market were lower than last year due, primarily, to poor weather conditions which resulted in a reduction in housing starts in the first quarter of this year. In the U.S. market, brick shipments were up over 2010 although this market continues to be impacted by historically low levels of residential construction activity.

Sales volumes of concrete masonry products continued to grow, increasing by approximately 76% over the first quarter of 2010 as a result of increased recognition and acceptance of these products in the marketplace.

The decrease in revenues was partially offset by a decrease in depreciation expense as a result of a change in estimated useful life of certain production equipment. Higher advertising and marketing expenses related to the introduction of new products negatively impacted operating results for the quarter.

LANDSCAPE PRODUCTS

The Landscape Products business segment incurred an operating loss of $2,565 for the three month period ended March 31, 2011 compared to $2,804 in 2010.

The improvement in operating results was the result of higher sales volumes and an increase in average selling prices.

Revenues were $876 for the first quarter of 2011 compared to $711 last year reflecting the low level of activity during the winter months.

CASH FLOWS

Cash flow used for operating activities for the period ended March 31, 2011 totaled $4,430 compared to $4,368 for the same period last year. The impact of the decline in depreciation expense was substantially offset by lower net working capital requirements during the quarter, including lower cash disbursements for trade payables.

Cash utilized for purchases of property, plant and equipment totaled $1,057 for the quarter, including approximately $420 related to new products, compared to $315 in 2010.

Advances to Universal during the first quarter of 2011 were $975 compared to $1,000 for the same period in 2010.

On February 26, 2010, the Company completed a $9,000 subordinated secured debenture financing. In connection therewith, a $3,000 unsecured promissory note payable, which was due in December, 2009 but not paid, was refinanced as part of the debenture issue. Certain parties, including a Director of the Company, holding an indirect interest in $1,100 of the $3,000 promissory note payable, subscribed for an equal or greater principal amount of the debenture issue. The remaining parties, including a Director of the Company, holding an indirect interest in $1,900 of the $3,000 promissory note payable, agreed to accept a new unsecured promissory note with identical terms and conditions as the previous promissory note, except that the new promissory note was due in full on September 30, 2010. The new promissory note was repaid on the due date.

The subordinated debenture was recorded for accounting purposes at its fair value which, net of transaction costs incurred in the amount of $377, amounted to $8,623 and is being carried at amortized cost. The transaction costs are being amortized over the term of the loan resulting in an effective interest rate of 11.89%. As at March 31, 2011 the unamortized transaction costs were $240.

FINANCIAL CONDITION

The Company's Masonry Products and Landscape Products business segments are seasonal in nature. The Landscape Products business is affected to a greater degree than the Masonry Products business. As a result of this seasonality, operating results are impacted accordingly and cash requirements are generally expected to increase through the first half of the year and decline through the second half of the year.

As at March 31, 2011, bank operating advances were $8,434. This represented an increase of $6,610 from the amount outstanding at December 31, 2010. Trade payables totaled $10,683 at March 31, 2011 compared to $9,638 at December 31, 2010.

The ratio of total liabilities to shareholders' equity was 0.57:1 at March 31, 2011 compared to 0.49:1 at December 31, 2010. The increase in this ratio from December 2010 to March 2011 was primarily due to the increase in bank operating advances, as noted above, and lower retained earnings resulting from the loss incurred for the quarter ended March 31, 2011.

As at March 31, 2011, working capital was $14,423, representing a working capital ratio of 1.57:1. Comparable figures for working capital and the working capital ratio at December 31, 2010 were $18,499 and 2.07:1, respectively. Cash and cash equivalents totaled $4,293 at March 31, 2011 compared to $5,383 at December 31, 2010.

The Company has an operating credit facility of $15,000. This is a demand facility which is secured primarily by trade receivables and inventories of the Company's Masonry Products and Landscape Products business segments in both Canada and the U.S. The actual amount that the Company may borrow under this facility is determined based on standard margin formulas for trade receivables and inventories. The borrowing limit is reduced by the amount of the mark-to-market exposure on the interest rate swap contract. Utilization at March 31, 2011 was $9,972, including $8,434 for bank operating advances, $316 for outstanding letters of credit and $1,222 for the mark-to-market exposure on the interest rate swap contract.

The Company expects that future cash flows from operations, cash and cash equivalents on hand and the unutilized balance of its operating credit facility will be sufficient to satisfy its obligations as they become due.

The Company was in compliance with all financial covenants under its long-term debt agreement as at March 31, 2011 and anticipates that it will maintain compliance throughout the year.

CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

Effective January 1, 2011, the Company is required to prepare and report its financial statements in accordance with International Financial Reporting Standards ("IFRS"). Comparative information for 2010 was required to be restated to comply with IFRS, including an opening Consolidated Balance Sheet as at January 1, 2010.

Accordingly, in the accompanying Selected Financial Information, all amounts as at January 1, 2010 and December 31, 2010 and for the three month period ended March 31, 2010 have been restated to comply with the requirements of IFRS.

In the following discussion the term GAAP refers to Canadian GAAP before the adoption of IFRS.

A summary of the more significant financial effects of the conversion to IFRS on the Company's Consolidated Financial Statements is as follows:

a) Property, plant and equipment

Upon transition to IFRS, the Company elected to use the fair value as deemed cost election for properties and certain production equipment utilized in its Canadian Masonry Products and Landscape Products business segments. As a result, the net carrying value of land and machinery and equipment as at January 1, 2010 increased by $35,366 and $20,025, respectively. The aggregate increase, net of related deferred income tax liabilities of $9,426, amounted to $45,965 and was reflected as an adjustment to Retained Earnings in the January 1, 2010 opening Consolidated Balance Sheet.

The increase in the carrying value of machinery and equipment resulted in an increase in depreciation expense of approximately $519 for the interim period ended March 31, 2010 from the amount reported under previous GAAP.

b) Asset impairment

Under Impairment of Assets ("IAS 36"), asset impairments are determined based on the assessment of the difference between the carrying amount and recoverable amount of the assets in a cash generating unit (CGU). The Company has determined that the Brampton clay brick plant, the Canadian concrete plants (Markham, Milton and Brampton), the Farmersburg, Indiana clay brick plant and the Wixom, Michigan concrete plant are the CGUs for purposes of the asset impairment tests. The standard requires that an impairment is determined based on the recoverable amount of the CGU. The recoverable amount is the higher of the amount determined under the "value in use" or "fair value less costs to sell" basis. An impairment charge is recognized when the carrying value of the CGU exceeds its recoverable amount. Under IFRS, an impairment loss for a CGU can be reversed if there has been a change in the estimates used to determine the recoverable amount, however the reversal of an impairment loss shall not exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the CGU in prior periods.

Under the previous GAAP methodology, which utilized undiscounted future cash flows to determine the recoverable amount, the asset impairment evaluations completed as at January 1, 2010 and December 31, 2010 indicated that there was no impairment of any of the Company's CGUs.

Under IFRS, discounted cash flows are utilized to determine the recoverable amount. The Company completed its asset impairment evaluations with respect to its Brampton clay brick plant, the Canadian concrete plants (Markham, Milton and Brampton) and the Wixom, Michigan concrete plant and concluded that there was no impairment as at January 1, 2010 or at December 31, 2010.

The asset impairment evaluation as at January 1, 2010 with respect to the Farmersburg, Indiana clay brick plant indicated an impairment and, accordingly, an impairment loss of $10,571 was recognized in the January 1, 2010 opening Consolidated Balance Sheet for property, plant and equipment. The loss was recorded in retained earnings.

The decrease in the carrying value of property, plant and equipment as at January 1, 2010 with respect to this impairment loss resulted in a decrease in depreciation expense of approximately $127 for the interim period ended March 31, 2010.

As at December 31, 2010, the Company evaluated the impairment loss recorded as at January 1, 2010 for possible reversal, and concluded that the impairment loss had reversed by an aggregate $885, net of exchange differences. The impairment loss decreased due to an improvement in the estimated future cash flows. The reversal of the loss was recorded in the Consolidated Statement of Comprehensive Income (Loss) in the fourth quarter of 2010.

c) Accounting for joint venture

The Company's 50% joint venture interest in Universal was accounted for under previous GAAP using the proportionate consolidation method. The Company's share of Universal's assets, liabilities, revenues, expenses and cash flows were included in the consolidated financial statements on a line- by-line basis. Upon conversion to IFRS, the Company elected to account for this investment using the equity method of accounting. Under this method, the Company's net investment in Universal is now reflected on one line in the Consolidated Balance Sheet and its share of the equity income or loss and related cash inflows and outflows are reflected on one line in the Consolidated Statement of Comprehensive Income (Loss) and Consolidated Statement of Cash Flows, respectively.

Universal is a private company in Canada and is not required to comply with IFRS. However, the accounting policies of Universal have been reviewed and adjustments have been made for reporting purposes, where necessary, to ensure consistency with the policies adopted by the Company. On January 1, 2010, an impairment assessment of Universal's property, plant and equipment was performed in accordance with IAS 36, which resulted in an impairment charge that increased the loss that is shared by the joint venture partners under the equity method of accounting. Accordingly, the Company recorded an increase in its share of the loss in Universal of $3,119 on transition to IFRS. The recoverability of Universal's property, plant and equipment was re-evaluated at December 31, 2010 in accordance with IAS 36 which resulted in a partial reversal of the impairment charge recorded as at January 1, 2010. This resulted in a reduction in the Company's share of the loss in Universal for the fourth quarter and year ended December 31, 2010 of $1,880 compared to the previously reported share of loss under previous GAAP. The Company's share of loss in Universal measured under IFRS was $805 for the year ended December 31, 2010.

d) Foreign currency translation

The Company has concluded that the functional currency of its U.S. subsidiaries is the U.S. dollar. The Company now translates all assets and liabilities included in the financial statements of its U.S. subsidiaries into Canadian dollars at current exchange rates in effect at the balance sheet date, revenues and expenses are translated at average exchange rates prevailing during the period and translation gains or losses are reflected in other comprehensive income (loss).

Previously, non-monetary assets and liabilities were translated at historical exchange rates in effect at the dates of the transactions, revenues and expenses were translated at average exchange rates prevailing during the period and unrealized translation gains or losses were recognized in the Consolidated Statement of Comprehensive Income (Loss).

The financial impact of this change was a decrease in the carrying value of current assets of approximately $263 at January 1, 2010 and approximately $241 at December 31, 2010, a decrease in the carrying value of property, plant equipment of approximately $1,954 at January 1, 2010 and approximately $4,708 at December 31, 2010. Other comprehensive loss increased by $1,528 for the three month period ended March 31, 2010.

In addition, the Company has elected, in accordance with the IFRS transitional provisions, to reset the cumulative translation adjustment account, which includes gains and losses arising from the translation of its U.S. subsidiaries prior to January 1, 2010, to zero. Accordingly, Accumulated other comprehensive loss and Retained earnings were each reduced by $3,829 as at January 1, 2010.

The Company's business is seasonal. Historically, sales are greater in the second and third quarters of each year than in the first and fourth quarters. The Landscape Products business segment is affected to a greater degree than the Masonry Products business. Consequently, the results of operations and cash flows for the three month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year.

Certain statements contained herein constitute "forward-looking statements". Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those identified under "Risks and Uncertainties" in the Company's 2010 Annual Report, which may cause actual results, performance or achievements of the Company to be materially different from any future result, performance or achievements expressed or implied by such forward-looking statements.

Brampton Brick is Canada's second largest manufacturer of clay brick, serving markets in Ontario, Quebec and the Northeast and Midwestern United States from its brick manufacturing plants located in Brampton, Ontario and Farmersburg, Indiana. To complement the clay brick product line, the Company also manufactures a range of concrete masonry products, including stone veneer products marketed under the Stoneworkstrade name. Concrete interlocking paving stones, retaining walls, garden walls and enviro products are manufactured in Markham, Milton and Brampton, Ontario and Wixom, Michigan. These products are sold to markets in Ontario, Quebec, Michigan, New York, Pennsylvania, Ohio, Kentucky, Illinois and Indiana under the Oakstrade name. Products are used for residential construction and for industrial, commercial, and institutional building projects. The Company also holds a 50% joint-venture interest in Universal Resource Recovery Inc., which operates a waste composting facility in Welland, Ontario.

Selected Financial Information
(unaudited) (in thousands of Canadian dollars)
March 31December 31January 1
CONSOLIDATED BALANCE SHEET201120102010
ASSETS
Current assets
Cash and cash equivalents$4,293$5,383$2,886
Trade and other receivables8,1296,1366,278
Inventories25,68223,75417,488
Income taxes recoverable85771,730
Promissory note receivable1,335
Other assets741574617
39,70235,85430,334
Non-current assets
Property, plant and equipment173,238175,163183,827
Investment in Universal Resource Recovery Inc.5,8235,5621,567
Total assets$218,763$216,579$215,728
LIABILITIES
Current liabilities
Bank operating advances$8,434$1,824$750
Trade payables10,6839,6388,526
Income taxes payable8258251,572
Current portion of long-term debt3,0783,0753,512
Current portion of derivative financial instrument583604867
Decommissioning provisions5150100
Other liabilities1,6251,3391,174
25,27917,35516,501
Non-current liabilities
Long-term debt37,15337,27130,971
Derivative financial instrument639828917
Decommissioning provisions944942905
Deferred income tax liabilities15,20315,12115,181
Total liabilities$79,218$71,517$64,475
EQUITY
Equity attributable to owners of the parent
Share capital33,68933,68933,689
Contributed surplus1,7151,6581,488
Accumulated other comprehensive loss(3,766)(2,617)
Retained earnings107,795112,220114,630
$139,433$144,950$149,807
Non-controlling interests1121121,446
Total equity$139,545$145,062$151,253
Total liabilities and equity$218,763$216,579$215,728
Selected Financial Information
(unaudited) (in thousands of Canadian dollars, except per share amounts)
Three months ended March 31
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)20112010
Revenues$10,616$12,144
Cost of sales10,71512,166
Selling expenses2,0011,753
General and administrative expenses1,4311,217
Other (income) expense30(76)
14,17715,060
Operating loss(3,561)(2,916)
Finance (expense) income
Finance costs(919)(824)
Finance income217
(917)(807)
Share of loss from investment in Universal Resource Recovery Inc.(714)(600)
Loss before income taxes(5,192)(4,323)
Recovery of (provision for) income taxes
Current849398
Deferred(82)140
767538
Loss for the period$(4,425)$(3,785)
Net income (loss) attributable to:
Owners of the parent$(4,425)$(3,800)
Non-controlling interests15
Loss for the period$(4,425)$(3,785)
Other comprehensive loss
Foreign currency translation$(1,149)$(1,528)
Total comprehensive loss for the period$(5,574)$(5,313)
Total comprehensive income (loss) attributable to:
Owners of the parent$(5,574)$(5,328)
Non-controlling interests15
Total comprehensive loss for the period$(5,574)$(5,313)
Loss per Class A and Class B share$(0.40)$(0.35)
Weighted average Class A and Class B shares outstanding (000's)10,93710,937
Selected Financial Information
(unaudited) (in thousands of Canadian dollars)
Three months ended March 31
CONSOLIDATED STATEMENT OF CASH FLOWS20112010
Cash provided by (used for)
Operating activities
Loss for the period$(4,425)$(3,785)
Items not affecting cash and cash equivalents
Depreciation1,7172,744
Deferred income taxes82(140)
Unrealized foreign currency exchange loss (gain)31(86)
Share of loss in investment in Universal Resource Recovery Inc.714600
Gain on derivative financial instruments(210)(209)
Net interest expense1,1291,032
Other5770
(905)226
Changes in non-cash operating items
Trade and other receivables(2,015)(3,154)
Inventories(2,074)(584)
Other assets(171)(143)
Trade payables1,299116
Income taxes payable (net)(850)(1,028)
Other liabilities286200
(3,525)(4,593)
Payments for decommissioning of assets(1)
Cash used for operating activities(4,430)(4,368)
Investing activities
Purchase of property, plant and equipment(1,057)(315)
Advances to Universal Resource Recovery Inc.(975)(1,000)
Cash used for investment activities(2,032)(1,315)
Financing activities
Increase in bank operating advances6,6104,770
Issuance of subordinated debentures7,505
Repayment of long-term debt(77)(60)
Interest paid on term loans and bank operating advances(1,068)(929)
Payments on obligations under capital leases(94)(64)
Cash provided by financing activities5,37111,222
Foreign exchange on cash held in foreign currency1(10)
Increase (decrease) in cash and cash equivalents(1,090)5,529
Cash and cash equivalents at the beginning of the period5,3832,886
Cash and cash equivalents at the end of the period$4,293$8,415
Selected Financial Information
(unaudited) (in thousands of Canadian dollars)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to owners of the parent
Share CapitalContributed
Surplus
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
TotalNon-controlling
interest
Total Equity
Balance - January 1, 2011$33,689$1,658$(2,617)$112,220$144,950$112$145,062
Loss for the period(4,425)(4,425)(4,425)
Other comprehensive loss (net of taxes)(1,149)(1,149)(1,149)
Comprehensive loss for the period(1,149)(4,425)(5,574)(5,574)
Share-based compensation575757
Balance - March 31, 2011$33,689$1,715$(3,766)$107,795$139,433$112$139,545
Balance - January 1, 2010$33,689$1,488$$114,630$149,807$1,446$151,253
Loss for the period(3,800)(3,800)15(3,785)
Other comprehensive loss (net of taxes)(1,528)(1,528)-(1,528)
Comprehensive loss for the period(1,528)(3,800)(5,328)15(5,313)
Share-based compensation727272
Balance - March 31, 2010$33,689$1,560$(1,528)$110,830$144,551$1,461$146,012

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