Stella-Jones Inc.
TSX : SJ

Stella-Jones Inc.

August 14, 2008 07:05 ET

Stella-Jones Reports Second Quarter Results: Recent Acquisition Drives Revenue and Earnings Growth

- Q2 sales grow 45.6% to $123.1 million - Net earnings of $10.0 million compared with $8.1 million last year - Diluted EPS of $0.80, versus $0.64 last year - Semi-annual dividend increased 12.5% to $0.18 per share

MONTREAL, QUEBEC--(Marketwire - Aug. 14, 2008) - Stella-Jones Inc. (TSX:SJ) is pleased to announce financial results for its second quarter and six-month period ended June 30, 2008. The Company reported strong growth in sales and net earnings driven by the contribution of The Burke-Parsons-Bowlby Corporation ("BPB"), acquired on April 1, 2008.

SECOND-QUARTER RESULTS

Sales reached $123.1 million, an increase of $38.6 million, or 45.6% over last year's second quarter sales of $84.5 million. The contribution from BPB amounted to approximately $32.8 million, while organically, sales increased by almost 7.0%. The appreciation of the Canadian dollar, Stella-Jones' reporting currency, reduced the value of U.S. dollar denominated sales by approximately $2.8 million when compared with the same period last year.

The BPB acquisition helped push railway tie sales to $65.7 million, an increase of $34.0 million that also reflects brisk industry demand and increased supply capability following the expansion of the Bangor, Wisconsin facility, which added a treating cylinder in May 2007. A 3.1% growth in utility pole sales to $37.0 million resulted from solid demand for distribution poles as well as from installations that had been delayed in the first quarter. This recovery was offset, however, by lower sales of transmission poles and a lower conversion rate on U.S. utility pole sales. Sales in the consumer lumber category totalled $13.0 million, up 4.0% from last year, while sales of industrial lumber increased 67.6% to $7.4 million as a result of BPB's ancillary product sales.

"We are pleased with our second-quarter results, as BPB's contribution met our expectations," said Brian McManus, President and Chief Executive Officer of Stella-Jones. "Demand in our core markets remains solid, particularly in railway ties, but the transmission pole market was again relatively soft, although activity is expected to be more robust in the second half of the year."

Gross profit in the second quarter of 2008 reached $25.3 million, or 20.6% of sales, compared with $20.3 million, or 24.0% of sales in the same period in 2007. Net earnings were $10.0 million, or $0.80 per share, fully diluted, in the second quarter ended June 30, 2008 compared with $8.1 million, or $0.64 per share, fully diluted, in the corresponding period in 2007.

"As expected, reduced gross profit as a percentage of sales reflected lower margins at BPB, but also a different product mix than a year ago as well as higher preservative and transportation costs caused by rapidly increasing crude oil prices," said George Labelle, Senior Vice-President and Chief Financial Officer. "Our priority remains the integration and optimization of BPB by attaining synergies and sharing best practices among our various North American operations."

SIX-MONTH RESULTS

Sales totalled $189.3 million, an increase of $42.8 million, or 29.2% over the first six months of 2007. In addition to BPB's three-month contribution in 2008, higher sales reflect the contribution of the acquisition of the Arlington, Washington facility for the full period, versus only four months in 2007. Gross profit reached $39.0 million, or 20.6% of sales, up from $36.2 million, or 24.7% of sales, a year earlier. Net earnings were $15.4 million, or $1.21 per share, fully diluted, compared with $14.2 million, or $1.12 per share, fully diluted, last year.

SOLID BALANCE SHEET DESPITE ADDITIONAL DEBT TO FINANCE BPB

As at June 30, 2008, the Company's long-term debt, including the current portion, amounted to $94.8 million, an increase in excess of $47.4 million over borrowings of $47.4 million at the beginning of the year, primarily attributable to the BPB acquisition. As a result, Stella-Jones' ratio of total long-term debt, including the current portion, to shareholders' equity, stood at 0.66:1 on June 30, 2008, compared with 0.37:1 six months earlier.

SEMI-ANNUAL DIVIDEND INCREASED TO $0.18 PER SHARE

The Board of Directors declared a semi-annual dividend of $0.18 per share on the outstanding common shares of Stella-Jones, payable on October 10, 2008 to shareholders of record at the close of business on September 5, 2008. This represents a 12.5% increase over the previous semi-annual dividend.

OUTLOOK

"The acquisition of BPB represents a major step forward in our evolution as a large-scale North American producer of pressure treated wood components for the transportation and utility industries. Our broad footprint gives us the treating capacity, sources of supply and purchasing power to respond to increased demands in all product categories. Strong fundamentals in our core railway tie and utility pole markets should foster organic growth by enabling us to capture more of our existing clients' business and expand our customer base. While strategic acquisitions that meet our stringent criteria and provide synergistic opportunities will remain an integral part of the Company's growth plan, our primary near-term focus will be integrating and optimizing the BPB operations to bring margins close to a level comparable to the remainder of our operations within 18 months," concluded Mr. McManus.

CONFERENCE CALL

Stella-Jones will hold a conference call to discuss these results on Thursday, August 14, 2008, at 10:00 AM Eastern Time. Interested parties can join the call by dialing 1-800-588-4942. Parties unable to call in at this time may access a tape recording of the meeting by calling 1-877-289-8525 and entering the passcode 21279535# on your phone. This tape recording will be available on Thursday, August 14, 2008 as of 12:00 PM Eastern Time until 11:59 PM Eastern Time on Thursday, August 28, 2008.


ABOUT STELLA-JONES

Stella-Jones Inc. (TSX:SJ) is a leading North American producer and marketer of industrial treated wood products, specializing in the production of pressure treated railway ties and timbers as well as wood poles supplied to electrical utilities and telecommunications companies. Other principal products include marine and foundation pilings, construction timbers, highway guardrail posts and treated wood for bridges. The Company also provides treated consumer lumber products and customized services to lumber retailers and wholesalers for outdoor applications. The Company's common shares are listed on the Toronto Stock Exchange.

Except for historical information provided herein, this press release may contain information and statements of a forward-looking nature concerning the future performance of the Company. These statements are based on suppositions and uncertainties as well as on management's best possible evaluation of future events. Such factors may include, without excluding other considerations, fluctuations in quarterly results, evolution in customer demand for the Company's products and services, the impact of price pressures exerted by competitors, and general market trends or economic changes. As a result, readers are advised that actual results may differ from expected results.

NOTICE

The interim unaudited consolidated financial statements of Stella-Jones
Inc. for the second quarter ended June 30, 2008 have not been reviewed by
the Company's external auditors.

(Signed)

George Labelle, Senior Vice-President and Chief Financial Officer



CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)

June 30, December 31,
2008 2007
unaudited
as at June 30, 2008 and December 31, 2007 ($) ($)
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ASSETS
CURRENT ASSETS
Accounts receivable 66,694 26,411
Derivative financial instruments (Note 10) 232 658
Inventories 168,681 142,874
Prepaid expenses 2,222 1,472
Income taxes receivable - 784
Future income taxes 1,970 619
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239,799 172,818

CAPITAL ASSETS 96,122 70,264
DERIVATIVE FINANCIAL INSTRUMENTS (Note 10) 65 274
INTANGIBLE ASSETS (Note 3) 8,790 -
GOODWILL (Note 3) 5,306 -
OTHER ASSETS (Note 4) 1,623 1,143
FUTURE INCOME TAXES 357 357
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352,062 244,856
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LIABILITIES

CURRENT LIABILITIES
Bank indebtedness (Note 5) 62,908 39,026
Accounts payable and accrued liabilities 29,608 21,856
Income taxes payable 405 -
Future income taxes 92 289
Current portion of long-term debt (Note 6) 4,975 4,409
Current portion of asset retirement obligations 1,003 751
Current portion of non-compete payable 519 -
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99,510 66,331

LONG-TERM DEBT (Note 6) 89,795 43,035
FUTURE INCOME TAXES 13,024 5,968
ASSET RETIREMENT OBLIGATIONS 451 467
EMPLOYEE FUTURE BENEFITS 1,430 1,298
NON-COMPETE PAYABLE 5,030 -
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209,240 117,099
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SHAREHOLDERS' EQUITY
CAPITAL STOCK 49,754 46,023
CONTRIBUTED SURPLUS 1,766 4,045
RETAINED EARNINGS 94,139 80,745
ACCUMULATED OTHER COMPREHENSIVE LOSS (2,837) (3,056)
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142,822 127,757
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352,062 244,856
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See accompanying Notes



CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands of dollars, except where specified otherwise)

three months ended June 30, six months ended June 30,
2008 2007 2008 2007
Unaudited (#) (#) (#) (#)
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SHARE CAPITAL

Shares outstanding
- beginning of
period 12,351,646 12,315,873 12,341,088 12,298,015
Stock option plan 3,785 10,000 12,785 26,285
Stock option
agreement 200,000 - 200,000 -
Share purchase
plan 1,746 1,096 3,304 2,669
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Shares outstanding
- end of period 12,557,177 12,326,969 12,557,177 12,326,969
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($) ($) ($) ($)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shares outstanding
- beginning of
period 46,271 45,572 46,023 45,473
Stock option plan 44 145 243 202
Stock option
agreement 3,384 - 3,384 -
Share purchase plan 55 45 104 87
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Shares outstanding
- end of period 49,754 45,762 49,754 45,762
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CONTRIBUTED SURPLUS

Balance - beginning
of period 4,380 2,788 4,045 2,417
Stock-based
compensation 186 508 588 879
Exercise of stock
options (2,800) - (2,867) -
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Balance - end of
period 1,766 3,296 1,766 3,296
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RETAINED EARNINGS

Balance - beginning
of period 86,068 64,102 80,745 58,004
Net earnings for
the period 10,047 8,078 15,370 14,176
Dividends on common
shares (1,976) (1,232) (1,976) (1,232)
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Balance - end of
period 94,139 70,948 94,139 70,948
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ACCUMULATED OTHER
COMPREHENSIVE LOSS

Balance - beginning
of period (2,514) 461 (3,056) (73)
Adoption of new
accounting
standards for
financial
instruments, net
of taxes of $280 - - - 569
Other comprehensive
(loss) gain (323) (1,412) 219 (1,447)
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Balance - end of
period (2,837) (951) (2,837) (951)
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SHAREHOLDERS'
EQUITY 142,822 119,055 142,822 119,055
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See accompanying Notes



CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of dollars, except per share data)

three months ended June 30, six months ended June 30,
2008 2007 2008 2007
Unaudited ($) ($) ($) ($)
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SALES 123,081 84,510 189,263 146,459
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EXPENSES (INCOME)
Cost of sales
(Note 8) 97,777 64,207 150,305 110,265
Selling and
administrative 6,106 5,166 8,762 8,699
Foreign exchange
(gain) loss (192) 417 (161) 485
Amortization of
capital and
intangible assets 1,795 1,300 3,176 2,367
Gain on disposal
of capital assets (4) (4) (34) (16)
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105,482 71,086 162,048 121,800
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OPERATING EARNINGS 17,599 13,424 27,215 24,659
INTEREST ON
LONG-TERM DEBT 1,553 768 2,509 1,405
OTHER INTEREST 727 655 1,177 1,404
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EARNINGS BEFORE
INCOME TAXES 15,319 12,001 23,529 21,850
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PROVISION FOR
INCOME TAXES 5,272 3,923 8,159 7,674
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NET EARNINGS FOR
THE PERIOD 10,047 8,078 15,370 14,176
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NET EARNINGS PER
COMMON SHARE
(Note 7) 0.81 0.66 1.24 1.15

DILUTED NET EARNINGS
PER COMMON SHARE
(Note 7) 0.80 0.64 1.21 1.12
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See accompanying Notes



CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(in thousands of dollars)

three months ended June 30, six months ended June 30,
2008 2007 2008 2007
Unaudited ($) ($) ($) ($)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

NET EARNINGS FOR
THE PERIOD 10,047 8,078 15,370 14,176
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Other comprehensive
earnings:
Net change in
unrealized losses
on translating
financial
statements of
self-sustaining
foreign operation (252) (1,708) 657 (1,892)
Change in fair
value of
derivatives
designated as
cash flow hedges 116 1,158 (153) 1,379
Gain on cash flow
hedges reclassed
to sales (287) (691) (482) (691)
Corresponding
income tax
recovery (expense) 100 (171) 197 (243)
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(323) (1,412) 219 (1,447)
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COMPREHENSIVE
EARNINGS 9,724 6,666 15,589 12,728
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-------------------------------------------------------------------------
See accompanying Notes



CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
three months ended June 30, six months ended June 30,
2008 2007 2008 2007
Unaudited ($) ($) ($) ($)
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-------------------------------------------------------------------------
Cash flows from
operating activities
Net earnings for
the period 10,047 8,079 15,370 14,176
Adjustments for
Amortization of
capital assets 1,425 1,300 2,806 2,367
Amortization of
intangible assets 370 - 370 -
Amortization of
defered financing
charges 21 - 21 -
Change in fair
value of debt 350 - 350 -
Gain on disposal
of capital assets (4) (4) (34) (16)
Employee future
benefits 66 63 132 126
Stock-based
compensation 186 508 588 879
Other (23) 54 (39) 38
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12,438 10,000 19,564 17,570
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CHANGES IN NON-CASH
WORKING CAPITAL
COMPONENTS
Decrease (increase)
in:
Accounts
receivable (11,286) (10,339) (24,624) (14,270)
Inventories 4,658 2.423 4,247 (5,054)
Prepaid expenses 73 186 (567) (453)
Income taxes
receivable 809 - - -
Increase (decrease)
in:
Accounts payable
and accrued
liabilities 2,014 (3,766) (4,732) (2,670)
Income taxes
payable 1,188 (273) 1,188 (858)
Asset retirement
obligations (141) 51 236 177
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(2,685) (11,718) (24,252) (23,128)
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9,753 (1,718) (4,688) (5,558)
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FINANCING ACTIVITIES
(Decrease) increase
in bank indebtedness (6,260) 4,796 9,506 17,834
Increase in
long-term debt 45,309 484 45,630 10,906
Repayment of
long-term debt (6,871) (800) (8,083) (1,372)
Proceeds from
issuance of common
shares 682 189 863 288
Non-compete payable (315) - (315) -
Dividend on common
shares (1,976) (1,232) (1,976) (1,232)
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30,569 3,437 45,625 26,424
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INVESTING ACTIVITIES
Decrease in other
assets 22 113 51 122
Business acquisition (38,038) (39) (38,038) (16,976)
Purchase of capital
assets (2,310) (1,873) (2,984) (4,157)
Proceeds from
disposal of capital
assets 4 80 34 145
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(40,322) (1,719) (40,937) (20,866)
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NET CHANGE IN CASH
AND CASH EQUIVALENTS
- DURING THE PERIOD - - - -
-------------------------------------------------------------------------
CASH AND CASH
EQUIVALENTS
- BEGINNING AND END
OF THE PERIOD - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL
DISCLOSURE
Interest paid 1,702 1,782 3,138 2,865
Income taxes paid 3,120 4,213 6,548 8,600
-------------------------------------------------------------------------
See accompanying Notes



NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Unaudited


NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The interim consolidated financial statements for the six months ended June 30, 2008 and 2007, are unaudited and include estimates and adjustments that the Management of Stella-Jones Inc. (the "Company") consider necessary for a fair presentation of the financial position, shareholders' equity, earnings, comprehensive earnings and cash flows.

The interim consolidated financial statements are reported in Canadian dollars and have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") on a basis consistent with those followed in the annual consolidated financial statements of the Company for the year ended December 31, 2007, except for new accounting policies that were adopted January 1, 2008, as described below. However, they do not include all disclosures required under GAAP for annual financial statements and should be read in conjunction with the Company's latest audited year-end consolidated financial statements and notes.

Certain comparative figures have been reclassified in order to comply with the basis of presentation adopted in the current year.

Principles of consolidation

The unaudited interim consolidated financial statements include the accounts of the Company, its wholly-owned Canadian subsidiaries, Guelph Utility Pole Company Ltd., I.P.B.-W.P.I. International Inc., Bell Pole Canada Inc. and its wholly-owned U.S. subsidiaries, Stella-Jones U.S. Holding Corporation, Stella-Jones Corporation, The Burke-Parsons-Bowlby Corporation, and Stella-Jones U.S. Finance Corporation. The consolidated accounts of Bell Pole Canada Inc. include the accounts of a 50% interest in Kanaka Creek Pole Company Limited, a joint venture which is accounted for under the proportionate consolidation method of accounting.

Changes in accounting policies

The CICA issued the following new accounting standards which were adopted by the Company effective January 1, 2008:

- Handbook Section 3031, "Inventories", replaces Section 3030, "Inventories". The new section prescribes measurement of inventories at the lower of cost and net realizable value. It provides guidance on the determination of cost, prohibits use in the future of the last-in, first-out (LIFO) method, and requires reversal of previous write-downs when there is a subsequent increase in the value of inventories. It also requires greater disclosure regarding inventories and cost of sales, including accounting policies, carrying values and the amount of any inventory write downs. The adoption of this new standard did not have any material impact on our financial results.

- Handbook Section 3862, "Financial Instruments - Disclosures", Handbook Section 3863, "Financial Instruments - Presentation" and Handbook Section 1535, "Capital Disclosures" establish standards for disclosing information about an entities financial instruments and capital. These Sections relate to disclosure and presentation only and did not have an impact on the interim consolidated financial statements. Notes 10 and 11 provide the required information.

The CICA issued the following accounting standards which will be adopted by the Company effective January 1, 2009:

- Handbook Section 3064, "Goodwill and Intangible Assets" will replace Section 3062, "Goodwill and Other Intangible Assets" and Section 3450, "Research and Development Costs". Section 1000, "Financial Statement Concepts" was amended according to Section 3064. This new Section establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit oriented Companies. The Company is presently assessing the impact of these new accounting standards on its consolidated financial statements.

NOTE 2 - BUSINESS ACQUISITION

On April 1, 2008, the Company completed the acquisition of The Burke-Parsons-Bowlby Corporation ("BPB") through a merger with a wholly-owned U.S. subsidiary of the Company, and BPB. BPB produces pressure treated wood products, primarily for the railroad industry. This acquisition included five treating plants located in DuBois, Pennsylvania; Goshen, Virginia; Spencer, West Virginia; and Stanton and Fulton, Kentucky.

Total consideration for the acquisition was approximately $44.0 million (US$43.0 million), including estimated acquisition costs of approximately $1.1 million (US$1.1 million), and cash on hand of $0.1 million (US$0.1 million). This amount includes $33.7 million (US$33.0 million) paid to BPB stockholders through the conversion of each outstanding share of common stock of BPB into the right to receive US$47.78 per share in cash, $3.5 million (US$3.4 million) representing an additional payment equal to BPB's audited net income for its fiscal year ended March 31, 2008, less any distributions to shareholders during that period and other post-closing adjustments, as well as an additional discounted amount of $5.7 million (US$5.6 million) to be paid in equal quarterly instalments over a six-year period with respect to non-compete agreements entered into with certain previous BPB executives.

The acquisition has been accounted for using the purchase method and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on Management's estimate of their fair value as of the acquisition date. The following fair value allocation is preliminary and is based on Management's best estimates and information known at the time of preparing these interim unaudited consolidated financial statements. The purchase price allocation is expected to be completed by December 31, 2008 and consequently, changes could occur mainly with respect to acquisition costs, intangible assets, goodwill and future income taxes. The results of operations of BPB have been included in the interim consolidated financial statements from the acquisition date.

The following is a summary of the net assets acquired at fair values as of the acquisition date:



-----------------------------------------------------------
-----------------------------------------------------------
(in thousands of dollars) ($)

Assets acquired

Non cash working capital 41,600
Capital assets 25,764
Customer relationships 3,453
Non-compete agreements 5,732
Goodwill 5,316
Future income tax assets 1,353
-----------------------------------------------------------
83,218

Liabilities assumed

Notes payable to banks (14,007)
Accounts payable and accrued liabilities (6,858)
Long-term debt (9,206)
Interest-bearing employee deposits (2,134)
Future income tax liabilities (7,061)
-----------------------------------------------------------
Total consideration 43,952

Consideration

Cash, financed by debt 33,716
Purchase price adjustment paid in cash 3,478
Non-compete agreements payable 5,732
Cash on hand (97)
Acquisition costs (including a payable of $182) 1,123
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Total consideration 43,952
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-----------------------------------------------------------


The BPB acquisition was financed through additional borrowings of approximately $40.9 million (US$40.0 million), including the issuance of a $25.5 million (US$25.0 million) unsecured and nonconvertible debenture to the Fonds de solidarite des travailleurs du Quebec (F.T.Q.), a $10.2 million (US$10.0 million) revolving term loan from a Canadian bank and a draw-down on an existing operating margin of $5.1 million (US$5.0 million). Details on the financing are available in Note 5 on Bank Indebtedness and Note 6 on Long-Term Debt.

NOTE 3 - GOODWILL AND INTANGIBLE ASSETS

The Company has recognized goodwill and intangible assets as part of the purchase price allocation of the BPB acquisition. Upon recognition of these assets, the Company adopted the following accounting policies.

Goodwill is not amortized and will be subject to an annual impairment test, or more frequently if events or changes in circumstances indicate that it might be impaired. Testing for impairment is accomplished mainly by determining whether the fair value of a reporting unit, based upon discounted estimated cash flows, exceeds the net carrying amount of that reporting unit as of the assessment date. If the fair value is greater than the net carrying amount, no impairment is necessary. In the event that the net carrying amount exceeds the sum of the discounted estimated cash flows, a second test must be performed whereby the fair value of the reporting unit's goodwill must be estimated to determine if it is less than its net carrying amount. Fair value of goodwill is estimated in the same way as goodwill was determined at the date of the acquisition in a business combination, that is, the excess of the fair value of the reporting unit over the fair value of the identifiable net assets of the reporting unit.

Intangible assets are initially accounted for at fair value which subsequently becomes the cost. The presentation in the consolidated balance sheets is at cost less accumulated amortization and the related amortization expense is included under amortization in the consolidated statements of earnings. For the three-month period ended June 30, 2008, the amortization expense for customer relationships and the non-compete agreements was $136,111 and $234,300 respectively. Amortization is calculated on a straight-line basis over the useful life of the intangible assets as follows:



-----------------------------------------------------------
Customer relationships 3 to 10 years
Non-compete agreements 6 years
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NOTE 4 - OTHER ASSETS

-------------------------------------------------------------------------
(in thousands of dollars) June 30, December 31,
2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($) ($)

Notes receivable 333 360
Accrued benefit asset 782 782
Assets held for resale 508 -
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1,623 1,142
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-------------------------------------------------------------------------


Notes receivable comprise a home relocation mortgage of $221,447 bearing interest at a variable rate per year prescribed by the Canada Revenue Agency and supplier loans with balances of $111,844.

The accrued benefit asset arises from the Bell Pole Canada Inc. pension funds, which is measured for accounting purposes as at December 31 of each year.

The Company has decided to sell an office building and underlying land which were acquired from BPB. These assets are recorded at their fair value. They are considered redundant as a new office is being constructed on newly acquired land.

NOTE 5 - BANK INDEBTEDNESS



-------------------------------------------------------------------------
(in thousands of dollars) June 30, December 31,
2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($) ($)

Demand operating loan arranged with a Canadian
bank (Note 5 (a)) 33,672 21,494
Demand operating loan arranged with a U.S. bank
(Note 5 (b)) 26,354 14,817
Proportionate share of Kanaka Creek Pole Company
Limited demand operating loan (Note 5 (C)) 2,882 2,715
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Total bank indebtedness 62,908 39,026
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(a) The Company has available a credit facility arranged with a Canadian bank, renewable annually, comprised of a maximum demand operating loan of $50,000,000 (December 31, 2007 - $50,000,000) of which $17,120,862 was available as at June 30, 2008. The credit facility also includes a term loan facility of $6,900,000, a bid and performance bond guarantee facility of up to a maximum of $5,000,000, a $5,027,706 capital lease facility, a demand revolving line of credit in the amount of $5,963,000 for the purchase of forward exchange contracts with an aggregate nominal value of $25,100,000, and an interest rate swap facility for up to the full amount outstanding under the term loans.

The operating loan bears interest at the bank's prime rate, the bank's U.S. base rate or LIBOR plus 1.50%. As collateral, the bank holds moveable hypothecs and general security agreements over the universality of the Company's Canadian assets, creating a first charge over all of the Company's Canadian current assets of $141,327,193 and a second ranking charge over all of the Canadian capital assets of $50,816,970, subject to prior loans approved by the Canadian bankers. The bank also holds a first ranking security under Section 427 of the Bank Act over the Company's Canadian inventories.

(b) The U.S. subsidiaries have available a credit facility arranged with a U.S. bank, renewable annually, comprised of a maximum demand operating loan of US$40,000,000 (December 31, 2007 - US$20,000,000) of which US$15,055,540 was available as at June 30, 2008. On April 1, 2008, the demand operating loan was increased to US$40,000,000 to ensure that the Company had sufficient credit facilities to support the additional working capital arising from the BPB acquisition. The operating line of credit bears interest at the bank's prime rate minus 1.75% or LIBOR plus 1.00% (previously U.S. prime rate minus 1.25% or LIBOR plus 1.00%).

As collateral for the U.S. demand operating loan, the U.S. bank holds a first security interest in all assets of the U.S. subsidiaries, except for certain equipment, having a net book value of US$112,774,491 as at June 30, 2008. The bank also has a second security interest on certain equipment of the U.S. subsidiaries having a netbook value of US$34,187,364 as at June 30, 2008. There is no recourse to the Canadian parent company in the event of default by the U.S. subsidiaries. The Canadian parent company has signed an inventory repurchase agreement with the U.S. bank whereby the parent company has agreed to purchase any or all inventory of the U.S. subsidiaries, at book value, upon an event of default by the U.S. subsidiaries if requested by the U.S. bank.

(C) The Company includes in its consolidated financial statements its 50% proportionate share of Kanaka Creek Pole Company Limited, which has a credit facility with a Canadian bank comprised of a $7,000,000 demand operating loan. The demand operating loan bears interest at the bank's prime rate, bank's U.S. base rate, LIBOR plus 1.13% or bankers' acceptance plus 1.13%. One half of the indebtedness, up to a maximum of $5,000,000, has been guaranteed by Bell Pole Canada Inc. and the Company. The Company has also provided an Environmental Indemnity Agreement to the bank with respect to the Maple Ridge property, the site of Kanaka Creek Pole Company Limited's operations, with liability limited to one half of the monies which become due and owing to the bank under such indemnity.



NOTE 6 - LONG-TERM DEBT

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(in thousands of dollars) June 30, December 31,
2008 2007
($) ($)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Long-term debt
Term loans with a Canadian bank (Note 6 (a)) 4,311 4,768
Revolving term loan with a Canadian bank
(Note 6 (b)) 21,784 11,588
Term loans with a U.S. bank (Note 6 (C)) 10,197 3,886
Unsecured and non-convertible debenture (Note 6 (d)) 10,000 10,000
Unsecured and non-convertible debenture (Note 6 (e)) 4,333 4,333
Unsecured and non-convertible debenture (Note 6 (f)) 25,492 -
Promissory note (Note 6 (g)) 765 743
Promissory note (Note 6 (h)) 953 992
Subordinated note (Note 6 (i)) 6,888 6,981
Bond (Note 6 (j)) 4,952 -
Promissory note (Note 6 (k)) 457 -
Promissory note (Note 6 (l)) 365 -
Mortgage loans (Note 6 (m)) 4,480 3,930
Obligations under capital leases (Note 6 (n)) 374 223
-------------------------------------------------------------------------
95,351 47,444
Deferred financing charges (581) -
Total long-term debt 94,770 47,444
-------------------------------------------------------------------------
Less: current portion of long-term debt 5,045 4,409
Less: current portion of deferred financing charges (70) -
-------------------------------------------------------------------------

Long-term debt 89,795 43,035
-------------------------------------------------------------------------
-------------------------------------------------------------------------


(a) The Company has available three term loans of $2,300,000, $2,700,000 and $1,900,000 arranged with a Canadian bank.

Amounts owing under the $2,300,000 term loan are repayable in 19 equal consecutive principal repayments of $82,143 on each three-month anniversary of the date upon which the initial advance was made (December 28, 2005), and a balloon repayment of $739,286 constituting the 20th and final payment of the residual capital balance on December 28, 2010. Subsequent to an interest rate swap agreement, the loan bears interest at a fixed rate of 5.81% over the term of the loan.

Amounts owing under the $2,700,000 term loan are repayable in 19 equal consecutive principal repayments of $96,429 on each three-month anniversary of the date upon which the initial advance was made (February 1, 2006), and a balloon repayment of $867,857 constituting the 20th and final payment of the residual capital balance on February 1, 2011. Subsequent to an interest rate swap agreement, the loan bears interest at a fixed rate of 5.85% over the term of the loan.

Amounts owing under the $1,900,000 term loan are repayable in 19 equal consecutive principal repayments of $100,000 on each three-month anniversary of the date upon which the initial advance was made (December 19, 2005) and shall, in any event, be repaid in full by September 30, 2010. The loan bears interest at a fixed rate of 5.93% over the term of the loan.

(b) As part of the financing for the BPB acquisition, the Company entered into a new two-year revolving term loan with a Canadian bank comprised of a Canadian dollar loan of $11,587,500 and a new U.S. dollar loan of US$10,000,000 as well as an amount not exceeding US$5,000,000 to purchase foreign currency exchange contracts. The new revolving term loan facility matures February 14, 2010. (Previously a two-year revolving term loan comprised of a Canadian dollar loan of $11,587,500 and an amount not exceeding US$5,000,000 to purchase foreign currency exchange contracts. This revolving term loan facility was to have matured February 28, 2009).

For loans in Canadian dollars, the credit facility bears interest at the bank's prime rate plus 0.25% or bankers' acceptance rate plus 1.40% and for loans in U.S. dollars, the credit facility bears interest at the bank's prime rate plus 0.25% or LIBOR plus 1.40%. Previously the revolving term loan did not offer financing conditions for U.S. dollar loans. As collateral, the bank holds moveable hypothecs and general security agreements over all of the Company's Canadian capital assets of $50,816,970 and a second ranking charge over all of the Canadian current assets of $141,327,193. Amounts owing under the revolving term loan are payable at maturity which can be extended each year for one additional year, upon the Company's request and subject to the bank's approval. Starting January 2008, the credit facility will be increased by the equivalent amount of the capital payments of the term facilities provided by the credit facility in Note 6 (a) to a maximum of $27,500,000.

(C) As part of the financing of the BPB acquisition, the Company's U.S. subsidiaries entered into a US$10,000,000 term loan agreement with a U.S. bank. A portion of the proceeds of the loan were used to repay existing term loans in Stella-Jones Corporation of US$1,100,000 and US$4,000,000 with the balance applied against outstanding bank indebtedness in the U.S. subsidiaries. The new term loan is repayable in 84 consecutive monthly instalments of US$119,048. Half of the loan bears interest at the one-month LIBOR rate plus 1.50% and the other half of the loan is subject to an interest rate swap fixing the rate at 5.80% over the term of the loan.

As collateral, the bank has a first priority security interest on certain equipment the Company's U.S. subsidiaries having a net book value of US$34,187,364 as at June 30, 2008. The bank also has a second priority security interest in the accounts receivable and inventory of the Company's U.S. subsidiaries having a book value of US$112,774,491 as at June 30, 2008.

(d) Unsecured and non-convertible debenture bearing interest at 7.72%, repayable beginning July 1, 2011 in five consecutive annual principal repayments of $1,000,000 and a last payment of $5,000,000 on July 1, 2016.

(e) Unsecured and non-convertible debenture bearing interest at 7.0%, repayable after December 31, 2006 in five consecutive annual principal repayments of $333,333 and a last payment of $3,000,000 on December 21, 2012.

(f) Unsecured and non-convertible debenture bearing interest at 7.89%, repayable in five consecutive annual principal repayments of US$2,500,000 starting on April 1, 2013 and a last payment of US$12,500,000 on April 1, 2018. This loan was arranged as part of the financing of the BPB acquisition.

(g) Stella-Jones Corporation borrowed US$750,000 from the Company's majority shareholder, Stella Jones International S.A., by way of a subordinated promissory note. The note is for a term of six years, bears interest at LIBOR plus 4.5% and is repayable in full on the 6th annual anniversary of the date of disbursement or August 3, 2011. The note is unsecured and subordinated in right of payment to the prior payment in full of the U.S. subsidiaries loans to all of its secured lenders.

(h) As part of a previous acquisition, Stella-Jones Corporation assumed an unsecured note payable. The imputed interest rate of the note is 8.0% and is payable in quarterly instalments of US$52,891 including interest through October 2013.

(i) Pursuant to the business acquisition of February 28, 2007, Stella-Jones Corporation issued a note payable to J.H. Baxter & Co. The note is subordinated to existing lenders and bears interest at 5.0%. The note is repayable, in 5 annual principal repayments of US$500,000 with a final payment of US$5,500,000 on the 6th anniversary date. The note was recorded at a fair value of $6,981,288 using an interest rate of 8.0%. The difference between the face value and the fair value of the note is being accreted on an effective yield basis over its term.

(j) Pursuant to the BPB acquisition, the Company assumed a bond issue in favour of the County of Fulton, Kentucky (The Burke-Parsons-Bowlby Project), series 2006, repayable in annual principal repayments of US$200,000 starting on July 2008 through July 2011, US$300,000 starting July 2012 through July 2019 and $US400,000 starting July 2020 through July 2026. The bond bears interest at 2.38% and is secured by substantially all assets of the Company's Fulton, Kentucky facility which have a net book value of US$7,029,033 as at June 30, 2008. The bond was recorded in the interim consolidated financial statements at a fair value of US$4,835,379 using an interest rate of 6.50%. The difference between the face value and the fair value of the bond is being accreted on an effective yield basis over its term.

In order to provide the security for the timely payment of the principal and interest due on the Bonds, the Company entered into an irrevocable letter of credit with the bank that is also the trustee for the Series 2006 Bond Indenture, at an annual fee of 1.0% of the outstanding loan balance. The letter of credit expires on August 15, 2009.

(k) Pursuant to the BPB acquisition, the Company assumed a note payable to the Hickman-Fulton Rural Electric Cooperative Corporation, bearing interest at a fixed rate of 3.0% and repayable in 84 equal monthly instalments of principal and interest of approximately US$6,604 starting January 15, 2008. The note is secured by a US$500,000 irrevocable letter of credit issued by a regional financial institution and expires December 17, 2017. The note was recorded in the interim consolidated financial statements at a fair value of US$462,344 using an interest rate of 5.55%. The difference between the face value and the fair value of the note is being accreted on an effective yield basis over its term.

(l) Pursuant to the BPB acquisition, the Company assumed a note payable to Hickman-Fulton Rural Electric Cooperative Corporation, bearing no interest and repayable in 108 equal monthly instalments of US$4,167 starting January 1, 2009. The note is secured by a US$450,000 irrevocable letter of credit issued by a regional financial institution and expiring December 18, 2017. The note was recorded in the interim consolidated financial statements at a fair value of US$354,217 using an interest rate of 6.0%. The difference between the face value and the fair value of the note is being accreted on an effective yield basis over its term.

(m) The mortgage loans bear interest at a weighted average rate of 6.3% as at June 30, 2008 (December 31, 2007 - 7.2%) and certain specific capital assets with a net book value of $7,825,369 (December 31, 2007 - $6,880,152) have been pledged as collateral. Mortgage loans include loans denominated in U.S. dollars for an amount of US$3,766,934 (December 31, 2007 - US$2,970,328). The loans are repayable in monthly instalments of $78,242 including interest and mature at various dates to December 2016.

(n) The repayment requirements on the long-term debt during the next five years and thereafter are as follows:



--------------------------------------------------------------------------
(in thousands of dollars)
Obligations under capital leases Long-term debt Total
--------------------------------------------------------------------------
Minimum Principal
Payments Interest Principal Principal Repayments
Years ($) ($) ($) ($) ($)
--------------------------------------------------------------------------
Year 1 100 21 79 5,239 5,318
Year 2 80 16 64 4,694 4,758
Year 3 83 10 73 6,736 6,809
Year 4 15 9 6 5,404 5,410
Year 5 158 6 152 14,363 14,515
Thereafter - - - 60,545 60,545
--------------------------------------------------------------------------
436 62 374 96,981 97,355
--------------------------------------------------------------------------
Fair value
adjustment - - - (2,004) (2,004)
--------------------------------------------------------------------------
436 62 374 94,977 95,351
--------------------------------------------------------------------------
--------------------------------------------------------------------------


NOTE 7 - EARNINGS PER SHARE

The following table provides the reconciliation between net earnings per common share and diluted net earnings per common share for the three-month and six-month periods ended June 30:



--------------------------------------------------------------------------
three months ended June 30, six months ended June 30,
2008 2007 2008 2007
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net earnings
applicable to
common shares(i) $10,047 $8,078 $15,370 $14,176
--------------------------------------------------------------------------
Weighted average
number of common
shares
outstanding(i) 12,459 12,310 12,403 12,319
Effect of dilutive
stock options(i) 163 352 299 377
--------------------------------------------------------------------------
Weighted average
number of diluted
common shares
outstanding(i) 12,622 12,662 12,702 12,696
--------------------------------------------------------------------------
Net earnings per
common share $0.81 $0.66 $1.24 $1.15
--------------------------------------------------------------------------
Diluted net earnings
per common share $0.80 $0.64 $1.21 $1.12
--------------------------------------------------------------------------

(i) Net earnings are presented in thousands of dollars and share
information is presented in thousands.


NOTE 8 - COST OF SALES

For the three-month periods ending June 30, 2008 and 2007, cost of sales includes an inventory cost of $84,947,043 and $57,380,319 respectively. For the six-month periods ending June 30, 2008 and 2007, cost of sales includes an inventory cost of $131,949,258 and $98,573,887 respectively.

NOTE 9 - EMPLOYEE FUTURE BENEFITS

The recognized cost for employee future benefits was as follows:



-------------------------------------------------------------------------
(in thousands of dollars)
three months ended June 30, six months ended June 30,
2008 2007 2008 2007
($) ($) ($) ($)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Post retirement
benefit program 66 63 132 126
Defined benefit
pension plans 38 32 76 64
Contributions to
multi-employer plans 73 61 151 137
Contributions to group
registered retirement
savings plans 253 125 462 275
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NOTE 10 - FINANCIAL INSTRUMENTS

Effective January 1, 2008, the Company has adopted the requirements of CICA Handbook Section 3862, "Financial Instruments - Disclosures". This section requires disclosures to enable the users to evaluate the significance of financial instruments for the entity's financial position and performance, and the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks.

This note provides disclosures about financial instruments, fair values, as well as credit, liquidity and market risks associated with financial instruments.

Financial instruments, carrying values and fair values

The Company has determined that the fair value of its short-term financial assets and liabilities approximates their respective carrying amounts as at the balance sheet dates because of the short-term maturity of those instruments. The fair values of the long-term receivables and interest-bearing financial liabilities also approximate their respective carrying amounts. The fair value of forward foreign exchange contracts and swap agreements has been recorded using mark to market information as supplied by a financial institution.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from customers.

The Company's exposure to credit risk is influenced mainly by the individual characteristics of each customer. Management believes that the credit risk of accounts receivable is limited due to the following reasons:

- Geographically, there is no concentration of credit risk.

- The Company deals primarily with utility and telecommunication companies, and other major corporations.

- Historically, trade receivables outstanding for more than 90 days are under 2.0%.

Management has established a credit policy under which each new customer is analyzed individually for creditworthiness before the Company's standard payment and delivery terms and conditions are offered. The Company's review includes external ratings, where available, and credit references from other suppliers. Purchase limits are established for each customer, which represents the maximum open amount without requiring additional approval from Management. A monthly review of the accounts receivable aging is performed by Management for each selling location. Customers that fail to meet the Company's benchmark creditworthiness may transact with the Company only on a prepayment basis. As at June 30, the details of the allowance for doubtful accounts are as follows:



-------------------------------------------------------------------------
(in thousands of dollars)
three months ended June 30, six months ended June 30,
2008 2007 2008 2007
($) ($) ($) ($)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Balance - beginning
of period 251 74 230 33

Provision adjustment 137 31 158 72
-------------------------------------------------------------------------

Balance - end of period 388 105 388 105
-------------------------------------------------------------------------


Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity is to ensure, on a long-term basis, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring losses or risking damage to the Company's reputation.

The Company ensures that it has sufficient credit facilities to support working capital, meet expected operational expenses and service financial obligations. Inventories are a significant component of working capital because of the long periods required to air-season wood, which can occasionally exceed nine months before a sale is made. Details regarding the Company's operating lines of credit can be found in Note 5:

The Company monitors all financial liabilities and ensures it will have sufficient liquidity to meet these future payments. The following table details these obligations as at June 30, 2008:



--------------------------------------------------------------------------
(in thousands of dollars)
Less than After
1 year 1 - 3 years 4 - 5 years 5 years Total
($) ($) ($) ($) ($)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Long-term debt
obligations 5,239 11,430 19,767 60,545 96,981
Capital lease obligations 79 137 158 - 374
Non-compete agreements 1,275 2,550 2,550 954 7,329
--------------------------------------------------------------------------

6,593 14,117 22,475 61,499 104,684
--------------------------------------------------------------------------


Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Company's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.

Currency risk

The Company's exposure to foreign exchange gains or losses from currency fluctuations is related to its sales and purchases in U.S. dollars by its Canadian-based operations and to its U.S. dollar denominated long-term debt held by its Canadian companies. The Company's wholly-owned U.S. subsidiaries are self-sustaining foreign operations and unrealized foreign exchange gains and losses on translating their financial statements are recorded in accumulated other comprehensive loss in shareholders' equity. The Company monitors its transactions in U.S. dollars generated by Canadian-based operations. Its basic hedging activity consists of entering into forward exchange contracts for the sale of U.S. dollars and purchasing certain goods and services in U.S. dollars. The Company will also consider forward exchange contracts for the purchase of U.S. dollars for significant purchases of goods and services that are not covered by natural hedges.

The following table summarizes the Company's derivative financial instruments relating to the sale of foreign currencies through forward foreign exchange contracts as at June 30, 2008:



---------------------------------------------------------------------------
(in thousands of dollars) Notional Average Notional Fair
Amount Exchange Maturity Equivalent Value
Foreign Currency Contracts $US Rate Year $CDN $CDN
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Sell $US/Buy $CDN 950 1.1563 Dec. 2008 1,098 127
Sell $US/Buy $CDN 1,800 1.1494 Dec. 2009 2,069 218
---------------------------------------------------------------------------
2,750 1.1518 3,167 345
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The following table provides information on the impact of a 10.0% strengthening of the U.S. dollar against the Canadian dollar on net earnings and comprehensive earnings for the three and six month periods ended June 30, 2008. For a 10.0% weakening of the U.S. dollar against the Canadian dollar, there would be an equal and opposite impact on net earnings and comprehensive earnings.



-------------------------------------------------------------------------
(in thousands of dollars) three months ended six months ended
June 30, 2008 June 30, 2008
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings 325 832
Comprehensive earnings 4,385 6,010
-------------------------------------------------------------------------


Interest rate risk

As at June 30, 2008, the Company had limited exposure to interest rate risk on long-term debt as 94.3% of the Company's long-term debt is at a fixed rate up to February 2010. After this date, 73.0% of the Company's long-term debt is at a fixed rate up to maturity.

The Company enters into interest rate swaps in order to reduce the impact of fluctuating interest rates on its short-term and long-term debt. These swap agreements require the periodic exchange of payments without the exchange of the notional principal amount on which the payments are based. The Company designates its interest rate hedge agreements as hedges of the underlying debt. Interest expense on the debt is adjusted to include the payments made or received under the interest rate swaps.

The following table summarizes the Company's derivative financial instruments relating to interest rate swaps as at June 30, 2008:



-------------------------------------------------------------------
(in thousands of dollars) Notional Fixed Maturing Notional
Amount Rate Paid Date Equivalent
($) % $CDN
-------------------------------------------------------------------
-------------------------------------------------------------------
Interest rate swap - CDN 2,300 5.81 Dec. 2010 2,300
Interest rate swap - CDN 2,700 5.85 Feb. 2011 2,700
Interest rate swap - US 5,000 5.80 July 2015 5,099
-------------------------------------------------------------------


The fair value of the interest rate swap agreements based on cash settlement requirements as of June 30, 2008 is a loss of $47,325.

NOTE 11 - CAPITAL DISCLOSURES

The Company's objective in managing capital is to ensure sufficient liquidity to pursue its organic growth strategy and undertake selective acquisitions, while at the same time taking a conservative approach towards financial leverage and management of financial risk. The Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares and acquire or sell assets to improve its financial performance and flexibility.

The Company's capital is composed of long-term debt and shareholders' equity which includes capital stock.



-------------------------------------------------------------------------
(in thousands of dollars, except ratios) June 30, December 31,
2008 2007
($) ($)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Long-term debt, including current portion 94,770 47,444
Shareholders' equity 142,822 127,757
-------------------------------------------------------------------------
Total capital 237,592 175,201

Long-term debt to equity ratio 0.66:1 0.37:1
-------------------------------------------------------------------------


The Company's primary uses of capital are to finance increases in non-cash working capital and capital expenditures for capacity expansion as well as acquisitions. The Company currently funds these requirements out of its internally-generated cash flows and operating lines of credit. However, future corporate acquisitions may require new sources of financing.

The primary measure used by the Company to monitor its financial leverage is the long-term debt to equity ratio, which it aims to maintain within a range of 0.30:1 to 0.75:1. The long-term debt to equity ratio is defined as the long-term debt including the current portion divided by shareholders' equity. As at June 30, 2008 the long-term debt to equity ratio was 0.66:1.

The Company is subject to certain covenants on its credit facilities. The covenants include a working capital ratio, debt to tangible net worth ratio, a minimum fixed charge coverage ratio and a minimum requirement for earnings before interest, taxes and amortization. The Company monitors the ratios on a monthly basis. The ratios are also reviewed by the Company's Audit Committee and Board of Directors on a quarterly basis. Other than the covenants required for the credit facilities, the Company is not subject to any externally imposed capital requirements.

NOTE 12 - SEASONALITY

The Company's operations follow a seasonal pattern, with pole, tie and industrial lumber shipments strongest in the second and third quarters to provide industrial end users with product for their summer maintenance projects. Consumer lumber treatment sales also follow the same seasonal pattern. Inventory levels of railway ties and utility poles are typically highest in the first quarter in advance of the summer shipping season. The first and fourth quarters usually generate similar sales.

NOTE 13 - SEGMENT INFORMATION

The Company operates within one dominant business segment, the production and sale of pressure-treated wood.

Contact Information