CanWel Building Materials Group Ltd.
2018 Annual Report
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
Table of Contents2018 Letter to Shareholders 2Management’s Discussion and Analysis 3Consolidated Financial Statements 26Notes to the Consolidated Financial Statements 35Corporate Information 78 CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
Letter to Shareholders
Following a strong finish to 2017 fueled by strong organic growth and strategic
acquisitions, in 2018, we maintained our focus and disciplined approach in
the continued pursuit of growth, profitability and shareholder value creation.
Nearly all of the key financial metrics of your Company including revenues,
gross profit, EBITDA and net income exceeded previous record levels. We
were able to accomplish these results despite some softness in the macro
economic backdrop, and the impact of a material decline in lumber, OSB
and panel pricing which started during the third quarter, and which impacted
demand for our products.
CanWel continued to deliver robust financial results in 2018 as a result of
the resilient business foundation we have been building for our shareholders
since 1999. We are also extremely proud to celebrate CanWel’s 30th anniversary and our 15th anniversary
as a TSX listed company in 2019.
Our efforts and successes in 2018 led to strength and improvement across all of our key financial metrics
with revenues, gross profit, and EBITDA and net income showing significant year-over-year improvement.
Revenues, gross profit, EBITDA, and net income increased to $1.29 billion, $192.9 million, $71.2 million,
and $30.0 million, respectively, these improvements are mainly attributable to our continued focus on
operational efficiencies, gross margin optimization, overall cost management, and notably a sound and
disciplined acquisition strategy.
While there is always more work to do, we are pleased with the net impact of our acquisitions to date, which
have provided us the foundation for these record results, a vaster footprint and deeper brand awareness
in many parts of Canada, and the west coast of the U.S.
During the year, CanWel successfully completed a bought deal offering of senior unsecured notes for
total gross proceeds of $60.0 million (the “Notes”), an offering that was the first of its kind in the Canadian
capital markets. This was done as part of CanWel’s balance sheet optimization plan to support ongoing
growth objectives. While the net proceeds of the offering were initially applied to reduce bank debt, the
Notes provide CanWel with readily available growth capital at an attractive locked-in cost, in a rising
interest rate environment.
Despite, the pricing headwinds in the second half of 2018 which was essentially unprecedented in the
pace of decline from the robust pricing we saw starting in 2017, we remain very enthusiastic and confident
about the growth prospects ahead, and look forward to further demonstrating the strength and leverage
available in our business model as we continue to take advantage of sensible organic growth opportunities.
as well as strategic scenarios where we can accelerate growth.
I would like to take this opportunity to extend my appreciation to the Board of Directors for their continued
wisdom and stewardship. I would also like to thank our employees, customers, suppliers and our share-
holders for your ongoing support and loyalty.
Sincerely,
Amar S. Doman
Chairman and CEO
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
CanWel Building Materials Group Ltd.
Management’s Discussion and Analysis
March 5, 2019
This Management’s Discussion and Analysis (“MD&A”) provides a review of the significant developments that have
impacted CanWel Building Materials Group Ltd. (the “Company”), in the quarter and year ended December 31, 2018
relative to 2017. This discussion of the financial condition and results of operations of the Company should be read in
conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended
December 31, 2018 (the “2018 Consolidated Financial Statements”). The financial information in this MD&A has been
prepared in accordance with International Financial Reporting Standards (“IFRS”), applicable to the preparation of
financial statements.
This MD&A, the associated 2018 Consolidated Financial Statements and the 2018 Letter to Shareholders (the “2018
Reporting Documents”) contain historical information, descriptions of current circumstances and statements about
potential future developments and anticipated financial results, performance or achievements of the Company and its
subsidiaries. The latter statements, which are forward-looking statements, are presented to provide guidance to the
reader but their accuracy depends on a number of assumptions and are subject to various known and unknown risks
and uncertainties. Forward-looking statements are included under the headings “Business Overview”, “Outlook”,
“Commitments and Contingencies”, “Sales and Gross Margin”, “Dividend Policy” and “Liquidity and Capital Resources”.
When used in this MD&A, such statements may contain such words as “may,” “will,” “intend,” “should,” “expect,”
“believe,” “outlook,” “predict,” “remain,” “anticipate,” “estimate,” “potential,” “continue,” “plan,” “could,” “might,” “project,”
“targeting” or the inverse or negative of these terms or other similar terminology. Forward-looking information in the
2018 Reporting Documents includes, without limitation, statements regarding funding requirements, dividends,
commodity pricing, interest rates, economic data and housing starts. These statements are based on management’s
current expectations regarding future events and operating performance, are based on information currently available
to management, speak only as of the date of the 2018 Reporting Documents and are subject to risks which are
described in the Company’s current Annual Information Form dated March 29, 2018 (“AIF”) and the Company’s public
filings on the Canadian Securities Administrators’ website at www.sedar.com (“SEDAR”) and as updated from time to
time, and would include, but are not limited to, dependence on market economic conditions, sales and margin risk,
acquisition and integration risks and operational risks related thereto, competition, information system risks, availability
of supply of products, risks associated with the introduction of new product lines, product design risk, product liability
risk, environmental risks, volatility of commodity prices, inventory risks, customer and vendor risks, contract performance
risk, availability of credit, credit risks, performance bond risk, currency risks, interest rate risks, tax risks, risks of
legislative changes, international trade and tariff risks, resource industry risks, resource extraction risks, risks relating to
remote operations, forestry management and silviculture, fire and natural disaster risks, key executive risk and litigation
risks. These risks and uncertainties may cause actual results to differ materially from those contained in the statements.
Such statements reflect management’s current views and are based on certain assumptions. Some of the key
assumptions include, but are not limited to, assumptions regarding the performance of the Canadian and the United
States economies, interest rates, exchange rates, capital and loan availability, commodity pricing, the Canadian and the
US housing and building materials markets; international trade matters; post acquisition operation of a business; the
amount of the Company’s cash flow from operations; tax laws; laws and regulations relating to the protection of the
environment and natural resources; and the extent of the Company’s future acquisitions and capital spending
requirements or planning in respect thereto, including but not limited to the performance of any such business and its
operation. They are, by necessity, only estimates of future developments and actual developments may differ materially
from these statements due to a number of known and unknown factors. Investors are cautioned not to place undue
reliance on these forward-looking statements. All forward-looking information in the 2018 Reporting Documents is
qualified by these cautionary statements. Although the forward-looking information contained in these 2018 Reporting
Documents is based on upon what management believes are reasonable assumptions, there can be no assurance that
actual results will be consistent with these forward-looking statements. Certain statements included in the 2018
Reporting Documents may be considered “financial outlook” for purposes of applicable securities laws, and such
financial outlook may not be appropriate for purposes other than these 2018 Reporting Documents. In addition, there
are numerous risks associated with an investment in the Company’s common shares and senior unsecured notes,
which are also further described in the “Risks and Uncertainties” section in these 2018 Reporting Documents and in
the “Risk Factors” section of the Company’s AIF, and as updated from time to time in the Company’s other public filings
on SEDAR.
3
4
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
The forward-looking statements contained in the 2018 Reporting Documents are made as of the date of this report, and
should not be relied upon as representing the Company’s views as of any date subsequent to the date of this report.
Except as required by applicable law, the Company undertakes no obligation to publicly update or otherwise revise any
forward-looking statement, whether as a result of new information, future events, or otherwise.
The information in this report is as at March 5, 2019, unless otherwise indicated. All amounts are reported in Canadian
dollars.
1.
2.
In the discussion, reference is made to EBITDA, which represents earnings from continuing operations before interest, including
amortization of deferred financing costs, provision for income taxes, depreciation and amortization. This is not a generally accepted
earnings measure under IFRS and does not have a standardized meaning under IFRS, and therefore the measure as calculated by
the Company may not be comparable to similarly-titled measures reported by other companies. EBITDA is presented as management
believes it is a useful indicator of a Company’s ability to meet debt service and capital expenditure requirements and because the
Company interprets trends in EBITDA as an indicator of relative operating performance. EBITDA should not be considered by an
investor as an alternative to net earnings or cash flows as determined in accordance with IFRS. For a reconciliation of EBITDA to the
most directly comparable measures calculated in accordance with IFRS refer to “Reconciliation of Net Earnings to Earnings before
Interest, Tax, Depreciation and Amortization (EBITDA) and Adjusted EBITDA”.
In the discussion, reference is made to Adjusted EBITDA, which is EBITDA as defined above, before certain non-recurring or unusual
items. This is not a generally accepted earnings measure under IFRS and does not have a standardized meaning under IFRS, The
measure as calculated by the Company may not be comparable to similarly-titled measures reported by other companies. Adjusted
EBITDA is presented as management believes it is a useful indicator of the Company’s ability to meet debt service and capital
expenditure requirements from its regular business, before non-recurring items. Adjusted EBITDA should not be considered by an
investor as an alternative to net earnings or cash flows as determined in accordance with IFRS. For a reconciliation from Adjusted
EBITDA to the most directly comparable measures calculated in accordance with IFRS refer to “Reconciliation of Net Earnings to
Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) and Adjusted EBITDA”.
3. Reference is also made to free cash flow of the Company. This is a non-IFRS measure generally used by Canadian companies as an
indicator of financial performance. The measure as calculated by the Company might not be comparable to similarly-titled measures
reported by other companies. Management believes that this measure provides investors with an indication of the cash available for
distribution to shareholders of the Company. The Company defines free cash flow as cash flow from operating activities excluding
changes in non-cash working capital, and after maintenance of business capital expenditures.
Business Overview
The Company is a leading wholesale distributor of building materials and home renovation products and provider of
wood pressure treating services in Canada and regionally in the Western United States and Hawaii. The Company
services the new home construction, home renovation and industrial markets by supplying the retail and wholesale
lumber and building materials industry, hardware stores, industrial and furniture manufacturers and similar concerns.
The Company’s operations also includes timber ownership and management of private timberlands and Crown forest
licenses, full service logging and trucking operations, and post-peeling and pressure treating for the agricultural
market through CanWel Fibre Corp. (“CFC”). On October 2, 2017, the Company acquired the Honsador Building
Products group of companies (“Honsador”), as described below, with an incumbent position in the State of Hawaii,
further expanding the Company’s presence in the US building distribution and treating markets. In 2018, the Company
continued with its expansion and growth plans, completing the purchase of a partially constructed lumber pressure
treating plant near Portland, Oregon on June 12, 2018 and a lumber pressure treating plant in Woodland, California
on December 3, 2018.
Offering of Senior Unsecured Notes
On October 9, 2018, the Company completed a bought deal prospectus offering of senior unsecured notes (the
“Unsecured Notes”) denominated in principal amounts of one thousand dollars, resulting in gross proceeds of $60.0
million. The offering was underwritten by a syndicate of underwriters led by National Bank Financial Inc., and including
GMP Securities L.P., Canaccord Genuity Corp., CIBC World Markets Inc., Raymond James Ltd., RBC Dominion
Securities Inc., and Haywood Securities Inc. The Unsecured Notes trade on the Toronto Stock Exchange under the
symbol CWX.NT.A.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
The Unsecured Notes accrue interest at the rate of 6.375% per annum, payable on a semi-annual basis, maturing
on October 9, 2023. While the net proceeds of the offering were initially used for the repayment of bank debt, the
Unsecured Notes provide the Company with readily available growth capital at an attractive locked-in cost, in a rising
interest rate environment.
Purchase of Superior Forest Products, Inc. and Western Wood
Treating, Inc.
On June 12, 2018, the Company acquired certain assets and the business of Superior Forest Products, Inc. (now
doing business as Oregon Cascade Building Materials “OCBM”) (the “OCBM Acquisition”). Based in Junction City,
Oregon, OCBM will provide lumber pressure treating services for customers predominantly based in Oregon and
Washington. The OCBM Acquisition is expected to complement the Company’s existing treated lumber and specialty
wood products business in the United States. The plant is undergoing testing and completion of permitting, and is
expected to commence customer shipments in 2019.
On December 3, 2018, the Company acquired certain assets and the business of Western Wood Treating, Inc. (now
doing business as Woodland Wood Preservers, Ltd. “Woodland”) (the “Woodland Acquisition”). Based in Woodland,
California, Woodland specializes in pressure treated wood products. The Woodland Acquisition is expected to expand
the Company’s presence in the United States treating markets.
5
The foreign exchange rates used to translate purchase price consideration and fair values of assets acquired were
based on the exchange rates published by the Bank of Canada as at the date of the above noted acquisitions
(collectively, “2018 Acquisitions”).
Further information regarding the preliminary purchase price allocation is contained in Note 7 of the 2018
Consolidated Financial Statements.
Purchase of Honsador Building Products Group
On October 2, 2017, the Company completed the acquisition of all issued and outstanding shares of Honsador
Acquisition Corp., the parent company of the Honsador group of companies (the “Honsador Acquisition”), a leading
distributor of building products and electrical supplies, and the largest producer of pressure-treated wood in Hawaii.
The Honsador Acquisition is expected to expand the Company’s presence in the United States building distribution
and treating markets, and provide an incumbent position in the State of Hawaii.
Total purchase consideration comprised of US$81.3 million, including certain preliminary post-closing adjustments.
The foreign exchange rate used to translate cash purchase consideration and fair value of assets acquired and
liabilities assumed was based on the exchange rate published by the Bank of Canada as at the date of the
Honsador Acquisition.
Further information regarding the purchase price allocation is contained in Note 7 of the 2018 Consolidated Financial
Statements.
Normal Course Issuer Bid
On November 22, 2018, the Company commenced a Normal Course Issuer Bid (“NCIB”) with respect to its common
shares. Under the terms of the NCIB, the Company may purchase for cancellation up to 6,085,605 of its common
shares at market prices. At December 31, 2018, the Company had not repurchased any of its common shares.
Subsequent to the end of the year, on January 3, 2019, the Company cancelled 142,200 of its common shares
purchased pursuant to the NCIB.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
2017 Private Placement
On October 2, 2017, and concurrent with the Honsador Acquisition, the Company completed a private placement of
9,832,500 subscription receipts at a price of $5.85 each, resulting in gross proceeds of $57.5 million (the “2017
Private Placement”), including subscription receipts to certain insiders(1) for proceeds of $5.6 million. The 2017 Private
Placement was pursuant to a bought deal underwritten by a syndicate of underwriters led by GMP Securities L.P.,
and included National Bank Financial Inc., Canaccord Genuity Corp., Raymond James Ltd., Cormark Securities Inc.
and Haywood Securities Inc.
Cash proceeds raised from the 2017 Private Placement, net of issuance costs, were used as partial consideration
for the Honsador Acquisition. Upon the closing of the Honsador Acquisition, the subscription receipts issued were
converted into a total of 9,832,500 common shares in accordance with their terms.
2017 Public Offering
On April 18, 2017, the Company completed a public offering of 6,598,470 common shares, by way of prospectus, at
a price of $6.10 each, resulting in gross proceeds of $40.3 million (the “2017 Public Offering”). The 2017 Public
Offering was pursuant to a bought deal underwritten by a syndicate of underwriters led by GMP Securities L.P., and
included National Bank Financial Inc., Canaccord Genuity Corp., Haywood Securities Inc., Raymond James Ltd., and
Cormark Securities Inc.
6
Cash proceeds raised from the 2017 Public Offering, net of issuance costs, were used for reducing the Company’s
existing revolving loan facility, which was drawn on October 2, 2017, as partial consideration for the Honsador
Acquisition, and for general corporate purposes.
Annuity Contract
During the fourth quarter of 2017, the Company purchased an annuity for $36.0 million through its defined benefit
pension plan in order to mitigate its exposure to potential future volatility fluctuations in the related pension obligations
and plan assets. Upon closing of the annuity purchase, non-cash actuarial based transaction costs of $4.4 million
were recognized in other comprehensive income (loss), reflecting the difference in the annuity rate (which is
comparable to solvency rates) as compared to the discount rate used to value the pension obligations on a going
concern basis. Further information regarding the Company’s pension plan and this transaction is included under the
headings “Employee Future Benefits” and “Significant Accounting Judgments and Estimates”, and Note 20 of the
2018 Consolidated Financial Statements.
Foreign Exchange Forward Contracts
At December 31, 2018, the Company held various outstanding foreign exchange contracts to purchase an aggregate
of US$9.0 million at exchange rates ranging between 1.3175 and 1.3225 for economic hedging purposes, and
unrealized gains totaling $400,000 were recorded in Other income.
During the year ended December 31, 2017, in order to reduce exposure to fluctuations in the United States - Canada
dollar exchange rate with respect to the Honsador Acquisition, the Company entered into various foreign exchange
contracts: to purchase US$40.0 million at an exchange rate of 1.2402, US$20.0 million at an exchange rate of 1.2213,
US$10.0 million at an exchange rate of 1.2154, and US$10.0 million at an exchange rate of 1.2437. Upon settlements,
realized gains totaling $1.4 million were recorded in Other income in the Company’s audited consolidated financial
statements and notes thereto for the year ended December 31, 2017. Upon the closing of the Honsador Acquisition,
the Company used the total purchased funds of US$80.0 million as partial consideration for the acquisition.
1. For further details, see www.sedi.ca.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Seasonality
The Company’s sales are subject to seasonal variances that fluctuate in accordance with the normal home building
season, particularly in the Canadian market. The Company generally experiences higher sales in the second and
third quarters compared to the first and fourth quarters. In addition, forestry operations and harvesting activities can
be compromised by inaccessibility to some sites during wet seasons and extreme winter weather conditions, resulting
in decreased harvest and customer delivery levels. This creates a timing difference between free cash flow earned
and dividends paid. While the Company has leveled dividends to provide a regular income stream to shareholders
over the course of a year, the second and third quarters have historically been the Company’s most profitable.
Housing Starts
The seasonally adjusted annualized rate for overall Canadian housing starts was 212,843 in 2018 versus 219,763 in
2017, a decrease of 3.1%. The seasonally adjusted annualized rate for single detached units, a more relevant
indicator for the Company, amounted to 62,520 for the fourth quarter of 2018 versus 73,668 in the same period of
2017, a decrease of 15.1%(1).
The seasonally adjusted annualized rate for overall US housing starts reached 1,256,000 units in the fourth quarter
of 2018 versus 1,192,000 in 2017(2).
7
Construction Materials Pricing
After experiencing approximately eighteen months of generally increasing prices since the beginning of 2017, lumber,
plywood and oriented strand board (“OSB”) prices(3) peaked in June 2018, then experienced significant declines
towards the end of the third quarter of 2018, and continued to decline into the fourth quarter of 2018.
1. As reported by CMHC. For further information, see “Outlook”.
2. As reported by the US Census Bureau.
3. As reported by Natural Resources Canada.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Results of Operations
Selected Annual Information
(in $ millions, per share in dollars)
Sales
Earnings before income taxes
Net earnings
Net earnings before non-recurring items (1)
Net earnings per share (basic and diluted)
Net earnings per share (basic and diluted), before non-recurring items (1)
8
Total assets
Long-term debt (2)
Total debt
Dividends declared to shareholders
Dividends declared to shareholders (per share)
Weighted average basic shares outstanding
Total shares outstanding
Fiscal Year Ended December 31,
2018
2017
2016
1,291.3
1,136.0
978.3
41.1
30.0
30.6
0.39
0.39
803.8
287.6
298.7
43.5
0.56
35.8
28.8
31.6
0.42
0.46
722.8
207.4
218.3
38.4
0.56
51.9
44.2
21.8
0.86
0.40
563.7
183.2
192.7
30.3
0.56
77,713,148
77,744,598
68,271,808
51,409,974
77,659,655
61,152,898
1. Net earnings before gain on bargain purchase relating to business acquisitions, restructuring costs and directly attributable
acquisition related costs.
2. Excludes current portion of long-term debt.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Comparison of the Year Ended December 31, 2018 and
December 31, 2017
Overall Performance
The following table shows the Company’s segmented results for the year ended December 31, 2018:
(in $ thousands)
2018
Adjustments
and
eliminations(1)
$
Distribution
$
Forestry
$
Revenue
Consolidated
$
Distribution
$
Forestry
$
2017
Adjustments
and
eliminations(1)
$
Consolidated
$
External customers
Inter-segment
1,240,765
-
50,530
1,594
-
(1,594)
1,291,295
-
1,080,289
-
55,661
882
-
(882)
1,135,950
-
1,240,765
52,124
(1,594)
1,291,295
1,080,289
56,543
(882)
1,135,950
9
Specified expenses
Depreciation and
amortization
Finance costs
13,411
9,160
5,011
2,512
Net earnings
26,289
3,726
Purchase of
property, plant
and equipment (2)
8,048
5,708
-
-
-
-
18,422
11,672
9,039
5,876
5,719
2,394
30,015
28,133
672
13,756
4,335
7,653
-
-
-
-
14,758
8,270
28,805
11,988
1.
2.
Includes inter-segment eliminations and income and expenses that are not allocated to reportable business segments.
Includes property, plant and equipment acquired through finance leases as well as the purchase of the partially completed treating
plant in Oregon in June of 2018.
Sales and Gross Margin
Sales for the year ended December 31, 2018 were $1,291.3 million versus $1,136.0 million in 2017, representing an
increase of $155.3 million or 13.7%, due to the factors discussed below.
Sales for the Distribution segment increased by $160.5 million or 14.9%, largely due to the inclusion of the results
from the Honsador Acquisition, higher construction materials pricing earlier in 2018, and the Company’s continuing
focus on its product mix strategies and target customer base.
Sales for the Forestry segment decreased by $4.4 million or 7.8%, inclusive of inter-segment sales. The decrease in
sales relative to 2017 is largely due to the elimination of non-profitable sales from the since closed non-core Forestry
segment operations, which were partially offset by an increase in sales due to comparatively more favorable pricing
and weather conditions for harvesting during 2018. As was the case in 2017, third quarter 2018 sales however were
negatively affected by wildfires in British Columbia, with Company harvesting activities temporarily halted due to
forest area closures, resulting in decreased harvest and customer delivery levels. Direct impact to the Company’s
forest lands from the wildfires was minimal.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
The Company’s sales by product group in the year were made up of 58% construction materials, compared to 61%
last year, with the remaining balance resulting from specialty and allied products of 34% (2017 - 33%), and forestry
and other of 8% (2017 - 6%).
Gross margin dollars increased to $192.9 million in the current year, versus $152.2 million in 2017, an increase of
$40.7 million or 26.7%. Gross margin percentage was 14.9% during the year, an increase from the 13.4% that was
achieved in 2017. This increase in margin dollars and margin percentage reflects the positive impacts from the
Honsador Acquisition, as well as higher construction materials pricing earlier in the current year.
Expenses
Expenses for the year ended December 31, 2018 were $139.4 million versus $105.8 million in 2017, an increase of
$33.6 million or 31.8% due to the factors discussed below. As a percentage of sales, expenses were 10.8%, versus
9.3% in 2017.
Distribution, selling and administration expenses were $120.9 million, versus $90.2 million in 2017, an increase of
$30.7 million or 34.0%. The increase is primarily due to expenses relating to the Honsador operations. As a
percentage of sales, these expenses were 9.4%, versus 7.9% in 2017.
10
In the year ended December 31, 2018, depreciation and amortization expenses were $18.4 million, compared with
$14.8 million in 2017, an increase of $3.6 million or 24.3%. Depreciation and amortization expense for the Building
Materials Distribution segment increased by $4.4 million or 48.4%, mainly due to the depreciation and amortization
resulting from the Honsador Acquisition. Depreciation and amortization for the Forestry segment decreased by
$708,000 or 12.4%, mainly due to certain equipment becoming fully depreciated.
Restructuring Costs
Restructuring costs for the year ended December 31, 2017 of $834,000 were related to a closure of non-core Forestry
segment operations.
Operating Earnings
For the year ended December 31, 2018, operating earnings were $53.6 million versus $46.4 million in 2017, an
increase of $7.2 million or 15.5%, due to the foregoing factors.
Finance Costs
Finance costs for the year ended December 31, 2018 were $11.7 million versus $8.3 million in 2017, an increase of
$3.4 million or 41.0%. Finance costs for the Distribution segment were $3.3 million higher than in 2017, mainly due
to higher average borrowings, higher interest rates on the Company’s variable rate revolving loan facility, and the
issuance of Unsecured Notes in the fourth quarter of 2018. The increase in the average balance of the revolving loan
facility was primarily driven by the Honsador operations and higher construction material prices earlier in the year.
Finance costs for the Forestry segment were largely in line with 2017, with a slight increase of $119,000.
Acquisition Costs
Acquisition costs during the year were $753,000, compared to $3.0 million in 2017, a decrease of $2.2 million or
74.9%. These costs include management resources as well as legal, environmental, financial and other advisory
services directly attributable to acquisitions. In 2017, these costs were primarily attributable the Honsador
Acquisition, and in 2018, these were attributable to the 2018 Acquisitions.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Earnings before Income Taxes
For the year ended December 31, 2018, earnings before income taxes were $41.1 million versus earnings of
$35.7 million in 2017, an increase of $5.4 million or 15.1% due to the foregoing factors.
Provision for Income Taxes
For the year ended December 31, 2018, the provision for income taxes was $11.1 million compared with $7.0 million
in 2017, an increase of $4.1 million or 58.6%. This provision is a function of pre-tax earnings generated during the
year. Additionally, the comparative prior year includes a tax recovery reflecting US tax reform enacted in December
2017, necessitating a partial reversal of previously recognized tax provisions.
Net Earnings
As a result of the foregoing factors, net earnings for the year ended December 31, 2018 were $30.0 million versus
$28.8 million in 2017, an increase of $1.2 million or 4.2% as discussed above.
Fourth Quarter Results
A summary of the unaudited results for the three months ended December 31, 2018 and 2017 is as follows:
11
(in $ thousands, per share in dollars)
Sales
Gross margin
Gross margin %
Distribution, selling and administration expenses
Depreciation and amortization
Expenses
Operating earnings
Finance costs
Acquisition costs
Other loss
(Loss) Earnings before income taxes
Recovery of income taxes
Net earnings
Net earnings per share
Three months ended December 31 ,
2017
2018
$264,040
38,603
14.6%
$276,220
43,126
15.6%
29,745
5,040
34,785
3,818
(3,134 )
(753 )
-
(69 )
(439 )
$370
0.00
30,185
4,643
34,828
8,298
(2,358 )
(1,806 )
(625 )
3,509
(2,248 )
$5,757
0.07
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Overall Performance
The following table shows the Company’s segmented results for the quarter ended December 31, 2018:
Three months ended December 31, 2018
Distribution
$
Forestry
$
Adjustments
and
eliminations(1)
$
Consolidated
$
Distribution
$
Three months ended December 31, 2017
Adjustments
and
eliminations(1)
$
Consolidated
$
Forestry
$
Revenue
External customers
Inter-segment
251,614
-
12,426
84
-
(84)
264,040
-
261,441
-
14,779
199
-
(199)
276,220
-
251,614
12,510
(84)
264,040
261,441
14,978
(199)
276,220
12
Specified expenses
Depreciation and
amortization
Finance costs
3,494
2,356
1,546
778
Net earnings
72
298
Purchase of
property, plant
and equipment (2)
5,185
1,250
-
-
-
-
5,040
3,134
3,212
1,705
1,431
653
370
5,340
417
6,435
1,389
896
-
-
-
-
4,643
2,358
5,757
2,285
1.
2.
Includes inter-segment eliminations and income and expenses that are not allocated to reportable business segments.
Includes property, plant and equipment acquired through finance leases.
Sales and Gross Margin
Sales for the three month period ended December 31, 2018 were $264.0 million versus $276.2 million in 2017, a
decrease of $12.2 million or 4.4%, due to the factors discussed below.
Sales for the Distribution segment decreased by $9.8 million or 3.8% compared to the same period in 2017, largely
due to the impact of a significant fall in construction materials pricing in the second half of 2018. This decrease was
partially offset by the results for the Company’s US operations due to more favorable market conditions, and
continuing focus on product mix strategies and target customer base.
Sales for the Forestry segment decreased by $2.5 million or 16.5%, inclusive of inter-segment sales. The decrease
was largely due to wet weather conditions followed by heavy snowfall, with harvesting activities temporarily halted,
resulting in decreased harvest and customer delivery levels. This segment was operating in line with seasonal
expectations in the comparative 2017 period.
The Company’s sales by product group in the quarter were made up of 52% construction materials, compared to
61% during the same quarter last year, with the remaining balance of sales resulting from specialty and allied products
of 39% (2017 - 33%) and forestry and other of 9% (2017 - 6%).
Gross margin dollars decreased to $38.6 million in the quarter compared to $43.1 million in the comparative quarter
of 2017, a decrease of $4.5 million or 10.5%. Gross margin percentage was 14.6% in the quarter, a decrease from
the 15.6% achieved in the same quarter of 2017. This decrease in margin percentage and dollars is mainly due to
the aforementioned impact of the decrease in construction materials pricing.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Expenses
Expenses for the three month period ended December 31, 2018 were $34.8 million, consistent with the same quarter
of 2017. As a percentage of sales, expenses were 13.2% in the quarter, versus 12.6% during the comparative quarter
in 2017.
Distribution, selling and administration expenses decreased by $440,000 or 1.5%, to $29.7 million in the fourth quarter
of 2018, from $30.2 million in the same period of 2017. The decrease is primarily due to lower personnel costs
reflecting the decreased sales activity. As a percentage of sales these expenses were 11.3% in the quarter, compared
to 10.9% in the comparative period in 2017.
In the three month period ended December 31, 2018, depreciation and amortization expenses were $5.0 million,
versus $4.6 million in the comparative period, an increase of $397,000 or 8.6%, mainly due to regular maintenance
of capital expenditures and depreciation thereof of the Company`s operating equipment. Depreciation and
amortization expense for the Building Materials Distribution segment increased by $282,000 or 8.8%. The Forestry
segment experienced a slight increase in depreciation and amortization of $115,000 or 8.0%.
Operating Earnings
For the quarter ended December 31, 2018, operating earnings were $3.8 million, versus $8.3 million in the
comparative quarter in 2017, a decrease of $4.5 million or 54.0%, due to the foregoing factors.
13
Finance Costs
Finance costs for the fourth quarter of 2018 were $3.1 million, an increase of $776,000 or 32.9% from $2.4 million in
the same period in 2017. Finance costs for the Distribution segment were $651,000 or 38.2% higher than the same
quarter in 2017, mainly due to the issuance of the aforementioned Unsecured Notes, which were used for repayment
of the Company`s secured bank debt, resulting in a higher blended interest rate. Finance costs for the Forestry
segment were similar with the comparative period of 2017, with a slight increase of $125,000.
Acquisition Costs
Acquisition costs during the fourth quarter were $753,000, compared to $1.8 million in 2017, a decrease of $1.1
million or 58.3%. These costs include management resources as well as legal, environmental, financial and other
advisory services directly attributable to acquisitions. In the fourth quarter of 2017, these costs were primarily
attributable the Honsador Acquisition, and in 2018, these were attributable to the 2018 Acquisitions.
(Loss) Earnings before Income Taxes
For the quarter ended December 31, 2018, loss before income taxes was $69,000, compared to earnings of $3.5
million in the comparative quarter of 2017, a decrease in earnings of $3.6 million or 102.0% due to the factors
discussed above.
Recovery of Income Taxes
For the quarter ended December 31, 2018, the recovery of income taxes was $439,000, compared with $2.2 million
in the same quarter of 2017, a decrease in the recovery of $1.8 million or 80.5%. This provision is a function of the
pre-tax earnings generated in the quarter. The recovery in the fourth quarter of 2017 reflects the US tax reform
enacted in December 2017, necessitating a partial reversal of previously recognized tax provisions.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Net Earnings
Net earnings for the quarter ended December 31, 2018 were $370,000 compared to $5.8 million for the period in
2017, a decrease of $5.4 million or 93.6% due to the foregoing factors.
Summary of Quarterly Results
For the Quarters ended:
($ and shares millions, per share in dollars)
31 - Dec 30 - Sep
30 - Jun 31 - Mar 31 - Dec 30 - Sep
30 - Jun 31 - Mar
2018
2017
Sales
EBITDA
Adjusted EBITDA(1)
Adjusted EBITDA % of sales (1)
(Loss) Earnings before income taxes
14
Net earnings
Net earnings before non-recurring items(2)
Net earnings per share (3)
Net earnings per share, before non-recurring items(2)(3)
Dividends declared per share
Outstanding shares(3)
264.0
350.2
382.1
295.0
276.2
316.8
320.0
222.8
8.1
8.9
3.4
(0.1)
0.4
0.9
0.00
0.01
0.14
77.7
20.1
20.1
5.7
12.5
8.5
8.5
0.11
0.11
0.14
77.7
27.5
27.5
7.2
19.9
14.7
14.7
0.19
0.19
0.14
77.7
15.6
15.6
5.3
8.8
6.5
6.5
0.08
0.08
0.14
77.7
10.5
13.4
4.8
3.5
5.8
7.8
0.07
0.09
0.14
77.4
21.3
21.7
6.9
16.0
11.6
12.0
0.17
0.17
0.14
67.8
18.9
20.4
6.4
13.8
9.8
11.0
0.15
0.17
0.14
66.5
8.2
8.2
3.7
2.4
1.7
1.7
0.03
0.03
0.14
61.2
1. Adjusted EBITDA refers to EBITDA before the following non-recurring items: restructuring costs, directly attributable acquisition related costs
and impairment loss on property, plant and equipment.
2. Net earnings before restructuring costs, directly attributable acquisition related costs and impairment loss on property, plant and equipment.
3. Weighted average basic shares outstanding in the period.
Reconciliation of Net Earnings to Earnings before Interest, Tax,
Depreciation and Amortization (EBITDA) and Adjusted EBITDA:
(in thousands of dollars)
Net earnings
(Recovery of) Provision for income taxes
Finance costs
Depreciation of property, plant and equipment
Amortization of intangible assets
EBITDA
Acquisition costs
Restructuring costs
Impairment loss on property, plant and equipment
Adjusted EBITDA
Three months ended
December 31,
2017
$
2018
$
370
(439)
3,134
3,340
1,700
8,105
753
-
-
8,858
5,757
(2,248)
2,358
3,010
1,633
10,510
1,806
-
1,039
13,355
Year ended
December 31,
2017
$
28,805
6,977
8,270
10,909
3,849
58,810
2,964
834
1,039
63,647
2018
$
30,015
11,131
11,672
11,709
6,713
71,240
753
-
-
71,993
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
EBITDA and Adjusted EBITDA
EBITDA for the three month period ended December 31, 2018 was $8.1 million versus $10.5 million in the comparative
quarter of 2017, a decrease of $2.4 million or 22.9% largely due to the impact of a significant fall in construction
materials pricing, on both sales and gross margin. EBITDA for the fourth quarter of 2018 was impacted by acquisition
costs of $753,000, compared to $1.8 million in acquisition costs and $1.0 million in impairment loses for the
comparative period of 2017. Adjusted EBITDA before these non-recurring items was $8.9 million compared to
$13.4 million in the same quarter of 2017, a decrease of $4.5 million or 33.7% compared to the same quarter in 2017.
EBITDA for the year ended December 31, 2018 was $71.2 million compared to $58.8 million in 2017, an increase of
$12.4 million or 21.1%, largely due to the inclusion of the results from the Honsador operations for the full year.
Adjusted EBITDA for 2018 was also impacted by acquisition costs of $753,000, compared to $3.0 million,
restructuring costs of $834,000 and impairment losses of $1.0 million in 2017. Adjusted EBITDA before these non-
recurring items was $72.0 million compared to $63.6 million in 2017, an increase of $8.4 million or 13.1%.
Financial Condition
Liquidity and Capital Resources
15
During the year ended December 31, 2018, the Company consumed $6.6 million in cash, versus generating
$2.7 million in 2017. The following activities during the year were responsible for the change in cash.
Operating activities generated $51.4 million in cash, before non-cash working capital, versus $34.5 million in 2017.
This increase in cash generated is primarily a result of the inclusion of the Honsador operations and the positive
impact of higher construction materials pricing earlier in the year.
During the year ended December 31, 2018, changes in non-cash working capital items consumed $55.5 million in
cash, versus $3.7 million in 2017. The increase in the changes in non-cash working capital is primarily driven by a
significant increase in inventory levels, built up to address a strong order backlog with treated lumber customers and
to take advantage of favorable buying conditions in the fourth quarter of 2018. The change in working capital in the
year was comprised of a decrease in trade and other receivables of $5.3 million, an increase in inventory of
$54.9 million, a decrease in prepaid expenses of $1.8 million, a decrease in trade and other payables and income
taxes payable of $5.9 million and a decrease in performance bond obligations (Honsador) of $1.7 million.
During the year ended December 31, 2018, financing activities generated $25.4 million of cash, versus $75.9 million
in 2017. The issuance of the aforementioned Unsecured Notes resulted in gross proceeds $60.0 million of cash,
which were applied against the revolving loan facility. Shares issued during the year generated $490,000 of cash,
compared to $98.2 million (net of issuance costs of $6.3 million) in 2017 due to the 2017 Private Placement and 2017
Public Offering. Scheduled repayments related to the non-revolving term loan consumed $2.7 million, consistent with
2017. Payment of finance lease liabilities consumed $1.7 million of cash in the current year versus $654,000 in 2017.
Net repayments on the equipment term loan and equipment line amounted to $1.5 million compared to $3.5 million
in 2017, including scheduled repayments, which were partially offset by funds drawn to purchase certain
equipment. Scheduled repayments of promissory notes consumed $3.7 million of cash in the year, compared to
$2.7 million in 2017.
The Company incurred $3.6 million in financing costs in respect to the issuance of the Unsecured Notes, compared
to $1.2 million in financing costs on borrowings in 2017.
Dividends paid to shareholders amounted to $43.5 million, versus $36.1 million in 2017. The increase in dividends
paid reflects the greater number of shares outstanding in during 2018 resulting from the 2017 Private Placement and
2017 Public Offering. The dividends declared and paid on a per share basis were unchanged from 2017.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
The revolving loan facility increased by $21.5 million, versus $31.0 million in 2017 due to the increased working
capital needs of the Company. The Company was not in breach of any of its covenants during the year ended
December 31, 2018.
Investing activities in the year ended December 31, 2018 consumed $27.9 million of cash, compared to $103.9 million
in 2017. Cash purchases of property, plant and equipment relating to the Distribution segment were $4.5 million,
versus $2.4 million in 2017. Cash purchases of property, plant and equipment relating to the Forestry segment were
$5.7 million, versus $4.1 million in 2017. Proceeds from disposition of property, plant and equipment were $502,000,
versus $3.7 million in 2017. Investing activities in 2018 included the 2018 Acquisitions, whereas 2017 included the
Honsador Acquisition and the related bank indebtedness acquired.
The Company’s cash flows from operations and credit facilities are expected to be sufficient to meet operating
requirements, capital expenditures and anticipated dividends. The Company’s lease obligations generally require
monthly installments and these payments are all current.
16
Total Assets
Total assets of the Company were $803.8 million as at December 31, 2018, versus $722.8 million as at December
31, 2017, an increase of $81.0 million. Current assets increased by $54.5 million, mainly due to significantly higher
inventory balances, built up to address the aforementioned strong order backlog with treated lumber customers and
to take advantage of favorable buying conditions in the fourth quarter of 2018.
Long-term assets within the Distribution segment were $274.8 million as at December 31, 2018, compared to
$248.0 million as at December 31, 2017, an increase of $26.8 million mainly due to the 2018 Acquisitions and
purchases of property, plant and equipment in the normal course of operations, partially offset by depreciation. Long-
term assets within the Forestry segment were consistent with prior year, at $131.7 million in 2018 versus $132.0
million in 2017.
Total Liabilities
Total liabilities were $440.6 million as at December 31, 2018, versus $362.6 million at December 31, 2017, an
increase of $78.0 million. This increase was mainly as a result of increases in the loan facilities of $78.6 million which
was used to finance the working capital requirements of the Company, and mainly reflecting the aforementioned
higher inventory balances at December 31, 2018.
Outstanding Share Data
As at March 5, 2019, there were 77,686,260 common shares issued and outstanding.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Dividends
The following dividends were declared and paid by the Company:
Declared
Declared
2018
2017
Record date
Per
share
Amount
Paid
Record date
Per
share
Amount
Paid
March 29,
0.14
10,877
2018
June 29,
0.14
10,878
2018
April 13,
2018
July 13,
2018
March 31,
0.14
8,566
April 14,
2017
June 30,
0.14
9,490
2017
2017
July 14,
2017
September 28,
0.14
10,884
October 15,
September 29,
0.14
9,496
October 13,
2018
2018
2017
2017
December 31,
0.14
10,884
January 15,
December 29,
0.14
10,872
January 15,
2018
2019
2017
2018
17
0.56
43,523
0.56
38,424
Quarter 1
dividend
Quarter 2
dividend
Quarter 3
dividend
Quarter 4
dividend
Dividend Policy
The Board of Directors reviews the Company’s dividend policy periodically in the context of the Company’s overall
profitability, free cash flow, capital requirements and other business needs.
Looking forward, the Company is continually assessing its dividend policy based on the considerations outlined
above as well as other possible factors that may become relevant in the future and, accordingly, there can be no
assurance that the current quarterly dividend of $0.14 per share will be maintained. Furthermore, the Company may
not choose to use future growth in its profitability or free cash flow, if any, to increase its dividend in the near or
medium term, but may focus on reducing the ratio of its dividends paid to its net earnings or free cash flow and
using any additional cash to pay down debt, fund business acquisitions, capital projects or such other uses as
determined by the Board of Directors.
Hedging
The Company undertakes sale and purchase transactions in foreign currency as part of its Canadian operations and
therefore, is subject to gains and losses due to fluctuations in foreign exchange rates.
The Company at times uses derivative financial instruments for economic hedging purposes in managing lumber
price risk and foreign currency risk through the use of futures contracts and options. These derivative financial
instruments are designated as fair value through profit and loss, with changes in fair value being recorded in Other
income (loss) in net earnings.
At December 31, 2018, the Company held various outstanding foreign exchange contracts to purchase an aggregate
of US$9.0 million at exchange rates ranging between 1.3175 and 1.3225 (2017 - $1.9 million) for economic hedging
purposes, and unrealized gains totaling $400,000 (2017 - $27,000) were recorded in Other income.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Related Party Transactions
The Company has transactions with related parties in the normal course of operations at agreed amounts between
the related parties.
Certain distribution facilities used by the Company to store and process inventory are leased from a company in
which Amar Doman, a director and officer, and Rob Doman, an officer of the Company, have a minority interest
and the land and buildings of certain of the treatment plants are leased from entities solely controlled by Amar
Doman. All lease rates were market tested in advance of the signing of the lease agreements and were determined
to be at market rates. Lease payments to such related parties were $3.3 million in the year ended December 31,
2018, versus $3.2 million in 2017. The minimum payments under the terms of these leases are as follows:
$3.3 million in 2019, $2.3 million in 2020, $1.9 million in 2021, $1.6 million in 2022, $1.6 million in 2023 and $14.1
million for years thereafter.
During the year ended December 31, 2018, the Company was charged professional fees in relation to regulatory,
corporate finance and compliance consulting services of $645,000 (2017 - $559,000) by a company owned by
Rob Doman. As at December 31, 2018, payables to this related party were $282,000 (December 31, 2017 -
$133,000). Additionally, fees of $1.1 million (2017 - $1.2 million) were paid for services related to strategic and
financial advice to a company solely controlled by Amar Doman. As at December 31, 2018, payables to this related
party were $59,000 (December 31, 2017 - $55,000).
18
During the year ended December 31, 2018, the Company purchased $3.6 million (2017 - $2.6 million) of product from
a public company in which Amar Doman has an ownership interest and is also a director and officer. These purchases
were in the normal course of operations and are recorded at exchange amounts. As at December 31, 2018, payables
to this related party were $38,000 (December 31, 2017 - $99,000).
During the year ended December 31, 2018, the Company purchased $1.0 million (December 31, 2017 - $nil) of product
from a company controlled by Siegfried Thoma, a director of the Company. These purchases were made in the normal
course of operations and are recorded at exchange amounts.
In the comparative 2017 fiscal year, subscriptions were received from certain insiders of the Company for proceeds
of $5.6 million, including $5.0 million in subscription receipts from Amar Doman and $472,000, in aggregate, from
several members of key management personnel, directors and officers of the Company(1). The balance of
subscriptions were received from other non-management insiders. There were no subscriptions received from
insiders of the Company during the year ended December 31, 2018.
Additional information regarding these related party transactions is contained in Note 26 of the 2018 Consolidated
Financial Statements.
In addition to the aforementioned related party transactions, certain subsidiaries of the Company had entered into
leases for various facilities and equipment, with entities affiliated with individuals who are directors and officers of
such subsidiaries, in connection with prior acquisitions. During the year ended December 31, 2018, such lease
payments totaled $nil (2017 - $1.2 million), and trucking services and other related party services paid totaled $nil
(2017 - $70,000). These arrangements were terminated during the second quarter of 2017.
1. For further details, see www.sedi.ca.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Commitments and Contingencies
Future and Contractual Obligations
In addition to various debt facilities, an earn-out commitment and finance leases covering certain transportation
equipment, the Company has operating lease commitments for the rental of most of its distribution centres and
treatment plant properties in Canada and the United States, and for vehicles, warehouse equipment, and a computer
hosting contract.
The following table shows, as at December 31, 2018, the Company’s contractual obligations inclusive of estimated
interest within the periods indicated:
Contractual Obligations
(in thousands of dollars)
Revolving loan facility(1)
Non-revolving term loan(2)
Unsecured notes(3)
Promissory notes(4)
Equipment term loan and line(5)
Earn-out commitment(6)
Finance leases(7)
Operating leases(7)
Total contractual obligations
Total
207,755
38,154
79,145
6,032
13,157
2,065
5,392
142,910
494,610
2019
8,642
4,386
3,835
2,669
4,121
-
1,718
22,250
47,621
2020-2021
199,113
33,768
7,660
3,363
9,036
2,065
2,408
33,157
2022-2023
-
-
67,650
-
-
-
1,200
24,382
Thereafter
-
-
-
-
-
-
66
63,121
290,570
93,232
63,187
19
1.
Interest has been calculated based on the average borrowing under the facility for the year ended December 31, 2018 utilizing the
interest rate payable under the terms of the facility at December 31, 2018. This facility matures on July 10, 2021.
Interest has been calculated at 6.375%, payable semi-annually. The notes mature on October 9, 2023.
2. Annual principal payments are amortized over 15 years, with interest payable quarterly.
3.
4. Additional information is contained in Note 16 of the 218 Consolidated Financial Statements.
5. Monthly principal repayments amortize over 5 years, interest is payable monthly. Equipment line principal repayments commence on
August 1, 2019, with maturity on December 1, 2021.
6. Additional information is contained in Note 27 of the 2018 Consolidated Financial Statements.
7. Additional information is contained in Note 27 of the 2018 Consolidated Financial Statements.
Claims
During the normal course of business, certain product liability and other claims have been brought against the Company
and, where applicable, its suppliers. While there is inherent difficulty in predicting the outcome of such matters,
management has vigorously contested the validity of these claims, where applicable, and, based on current knowledge,
believes that they are without merit and does not expect that the outcome of any of these matters, in consideration of
insurance coverage maintained, or the nature of the claims, individually or in the aggregate, would have a material
adverse effect on the consolidated financial position, results of operations or future earnings of the Company.
Guarantees
The Company has issued letters of credit totaling $1.4 million as at December 31, 2018 (December 31, 2017 -
$1.5 million) in respect of historical obligations, pre-dating 1999, for a non-registered executive pension plan for former
executives.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Significant Accounting Judgments and Estimates
The preparation of these financial statements requires management to make judgments and estimates and form
assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management
evaluates its judgments and estimates in relation to assets, liabilities, revenue and expenses. Management uses
historical experience and various other factors it believes to be reasonable under the given circumstances as the
basis for its judgments and estimates. Actual outcomes may differ from these estimates under different assumptions
and conditions. Significant areas requiring estimates are goodwill and related impairment testing, inventory valuation
and obsolescence, deferred tax assets and liabilities valuation, recoverability of trade and other receivables, certain
actuarial and economic assumptions used in the determination for the cost and accrued benefit obligations of
employee future benefits, classification of lease agreements, valuation of timber, determination of reforestation
provision and judgments regarding aggregation of reportable segments.
Goodwill
20
Management uses judgment in determining the fair value of the acquired net identifiable tangible and intangible
assets at the date of a business combination. Any resulting goodwill is an asset representing the future economic
benefits arising from other assets acquired in a business combination that are not individually identified and
separately recognized. Goodwill at December 31, 2018 relates to the Company’s acquisitions of various businesses.
Goodwill is not amortized, but is tested for impairment annually or more frequently if changes in circumstances
indicate a potential impairment. Goodwill impairment is assessed based on a comparison of the value in-use of a
cash-generating unit to the underlying carrying value of that cash-generating unit’s net assets, including goodwill.
Significant estimates are required in determining the fair value of each cash-generating unit, including a discount
rate, a growth rate and after tax cash flows. When the carrying amount of the cash-generating unit exceeds its value
in-use, the value in-use of goodwill related to the cash-generating unit is reduced by the excess of this carrying value
and recognized as an impairment loss.
Timber
At each reporting date, timber is valued at fair value less costs to sell with any change therein, including the impact
of growth and harvest, recognized in net earnings for the period. Significant judgment is used in determining the fair
value with reference to independent third party valuators and recent comparatives of standing timber sales, costs of
sustainable forest management, log pricing and harvest volume assumptions, the discount rate used and the resulting
net present value of future cash flows for standing timber.
Reforestation Provision
Management uses judgment in determining the value of the reforestation provision. Due to the general long-term
nature of the liability, the most significant areas of uncertainty in estimating the provision are the future costs that will
be incurred, the inflation rate, and the risk-adjusted discount rate.
Employee Future Benefits
The cost of defined benefit pension plans and other post-employment medical benefits and the present value of the
pension obligation are determined using actuarial valuations. An actuarial valuation involves making various
assumptions that may differ from actual developments in the future.
i.
Discount rate
The present value of the defined benefit obligation is determined by discounting the estimated future cash
outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the
benefits will be paid and that have maturity profiles that are similar to the underlying cash flows of the defined
benefit obligation.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
ii.
Other assumptions
The mortality rate is based on publicly available mortality tables. Future salary increases are based on
expected future inflation rates.
Inventory Valuation
Under IFRS, inventories must be recognized at the lower of cost or their Net Realizable Value (“NRV”), which is the
estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs
necessary to make the sale. IFRS requires that the estimated NRV be based on the most reliable evidence available
at the time the estimates are made of the amounts that inventories are expected to realize. The measurement of an
inventory write-down to NRV is based on the Company’s best estimate of the NRV and of the Company’s expected
future sale or consumption of the Company’s inventories. Due to the economic environment and continued volatility
in the homebuilding market, there is uncertainty as to whether the NRV of the inventories will remain consistent with
those used in the Company’s assessment of NRV at period end. As a result there is the risk that a write-down of on
hand and unconsumed inventories could occur in future periods. Also, a certain portion of inventory may become
damaged or obsolete. A slow moving reserve is recorded, as required, based on an analysis of the length of time
product has been in inventory and historical rates of damage and obsolescence.
Inventory includes harvested timber, the cost of which is based on its fair value less costs to sell, and forms a
component of the carrying value of log inventory. Harvested timber is subsequently processed into logs and carried
at the lower of cost or NRV. Significant judgment is used in determining the fair value of timber with reference to
independent third party valuators and recent comparatives of standing timber sales.
Allowance for Doubtful Accounts
It is possible that certain trade receivables may become uncollectible, and as such an allowance for these doubtful
accounts is maintained. The allowance is based on the estimated recovery of trade receivables and incorporates
current and expected collection trends. These estimates will change, as necessary, to reflect market or specific
industry risks, as well as known or expected changes in the customers’ financial position.
Income Taxes
At each reporting date, a deferred income tax asset may be recognized for all tax deductible temporary differences,
unused tax losses and income tax reductions, to the extent that their realization is probable. The determination of
this requires significant judgment. This evaluation includes review of the ability to carry-back operating losses to offset
taxes paid in prior years; the carry-forward periods of the losses; and an assessment of the excess of fair value over
the tax basis of the Company’s net assets. If based on this review, it is not probable such assets will be realized then
no deferred income tax asset is recognized.
Management believes the estimates utilized in preparing its financial statements are reasonable and prudent. Actual
results may differ from these estimates.
Leases
When assessing the classification of a lease agreement between finance and operating, certain estimates and
assumptions need to be made and applied, which include, but are not limited to, the determination of the expected
lease term and minimum lease payments, the assessment of the likelihood of exercising options and estimation of
the fair value of the lease property.
21
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating
decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing
performance of operations, has been identified as the Chief Executive Officer.
The Company is managed as two reportable business segments which offer different products, require different
production processes, and are based on how financial information is produced internally for the purposes of making
operating decisions. The following summary describes the operations of each of the Company’s reportable segments:
a) Distribution – wholesale distribution of building materials and home renovation products, including value-
added services such as lumber pressure treating; and
b) Forestry – timber ownership and management of private timberlands and Crown forest licenses, logging and
trucking operations, and value-added services such as post-peeling and post and pole pressure treating
operations.
22
Changes in Accounting Standards
The significant accounting policies as disclosed in Note 3 of the 2018 Consolidated Financial Statements have been
applied consistently in the preparation of these financial statements, except as stated below.
IFRS 9 – Financial Instruments
Effective January 1, 2018, the Company adopted IFRS 9, Financial Instruments (“IFRS 9”) replacing IAS 39, Financial
Instruments: Recognition and Measurement. The adoption of IFRS 9 was applied retrospectively and did not have a
material impact on the 2018 Consolidated Financial Statements and did not result in any adjustments.
IFRS 15 - Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted IFRS 15, Revenue from Contracts with Customers (“IFRS 15”),
replacing IAS 11, Construction Contracts, IAS 18, Revenue, as well as several revenue-related interpretations. The
adoption of IFRS 15 did not have a material impact on the 2018 Consolidated Financial Statements and did not result
in any adjustments. The adoption of this standard did; however, result in more detailed disclosure in the Company’s
financial statements related to the nature, amount, timing and uncertainty of revenue and cash flows arising from
contracts with customers.
Further information about changes to the Company’s accounting policies resulting from the adoption of these new
standards can be found in Note 5 to the 2018 Consolidated Financial Statements.
New Accounting Pronouncements Issued but not yet Applied
The following is an overview of accounting changes the Company will be required to adopt in future periods.
IFRS 16 – Leases
In January 2016, the International Accounting Standards Board issued IFRS 16, Leases (“IFRS 16”), replacing IAS
17, Leases, and related interpretations. IFRS 16 sets out principles of recognition, measurement, presentation and
disclosure of leases for both parties to a contract, the lessee and the lessor. IFRS 16 is effective January 1, 2019
and the Company does not intend to early adopt this standard. The Company expects that it will use the modified
retrospective approach which recognizes the cumulative effect of applying IFRS 16 as an adjustment to the opening
balance of retained earnings (or other components of equity, as appropriate) at the date of initial application.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
The Company has completed the scoping and review of its outstanding lease agreements and continues
to evaluate the impact that this new standard will have, but expects that IFRS 16 will have a material
impact on the Company’s Consolidated Statement of Financial Position, stemming from the recognition
of new right-of-use assets and lease liabilities for leases with lease terms that are greater than twelve
months, which are currently accounted for as operating leases.
The Company expects to utilize certain practical expedients available under IFRS 16, including:
a)
recognition exemptions under IFRS 16 (5a) and (5b) for short-term and low-value leases;
b) an election under IFRS 16 (C11), which allows a Company the choice to not reassess contracts which were
previously identified as leases under IAS 17; and
c) an option under IFRS 16 (B1) to apply a single discount rate to a portfolio of leases with reasonably similar
characteristics.
The Company estimates that effective January 1, 2019, it will recognize right-of-use assets and corresponding lease
liabilities in the range of $115 million to $130 million in its Consolidated Statement of Financial Position, with no
restatement of comparative periods’ results. The Company is in the process of finalizing its IFRS 16 transition impact
calculations, lease accounting procedures and policies, expecting to be complete during the first quarter of 2019.
The Company leases (rents) distribution and wood treatment facilities, along with equipment used in the operation of
the business. Upon adoption of this new accounting standard, these lease (rental) payments will be presented as
interest and depreciation expenses on the Company’s Consolidated Statement of Earnings rather than distribution,
selling and administration expenses. Financial statement users that calculate EBITDA for the Company will observe
a resulting increase in EBITDA due to the required presentation change under IFRS 16.
23
Application of the new standard is not anticipated to impact compliance with any of the Company’s debt covenants.
Disclosure Controls and Internal Controls over Financial Reporting
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to: (a) provide reasonable
assurance that material information required to be disclosed by the Company is accumulated and communicated to
management to allow timely decisions regarding required disclosure; and (b) ensure that information required to be
disclosed by the Company is recorded, processed, summarized, and reported within the time periods specified in
applicable securities legislation. The Company’s management, with the participation of the Chief Executive Officer
and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures
as of December 31, 2018. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures, as defined by National Instrument 52-109, Certification of
Disclosure in the Issuer’s Annual and Interim Filings are effective for the purposes set out above. The Company’s
management, including the Chief Executive Officer and Chief Financial Officer, acknowledges responsibility for the
design and operation of disclosure controls and procedures and internal control over financial reporting, and the
requirement to evaluate the effectiveness of these controls on an annual basis.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
Internal Control over Financial Reporting
Management is responsible for designing, establishing and maintaining an adequate system of internal control over
financial reporting. The Company’s internal control system was designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance
with IFRS.
Management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has conducted an
evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018
based on the provisions of Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on that evaluation, management concluded that its
internal control over financial reporting, as defined by National Instrument 52-109, is effective and provides
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in
accordance with IFRS.
Changes in Internal Control over Financial Reporting
There were no material changes in the design of the Company’s internal controls over financial reporting during the
year ended December 31, 2018 that have affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
24
Risks and Uncertainties
The Company is subject to normal business risks associated with similar firms operating within the building materials
industry in Canada, which are described in greater detail in the Company’s AIF dated March 29, 2018, and the
Company’s public filings on www.sedar.com, which the reader is encouraged to review, and which are or may be,
updated from time to time, after the date therein. Except as required by applicable law, the Company undertakes
no obligation to publicly update or otherwise revise any forward-looking statement, whether as a result of new
information, future events, or otherwise.
Outlook
Pricing for lumber, plywood and OSB experienced significant declines from June 2018 through to the end of 2018.
Management will continue to employ mitigation strategies to minimize the potential impacts of future commodity price
volatility. These strategies include the use of vendor managed inventories, direct shipments from the manufacturer
to the customer, and the Company`s internal policy of matching inventory levels to maintain its high standard of
customer service levels, minimalizing excess inventory otherwise exposed to market fluctuations. The Company is
also continuing to execute on its strategy to increase the proportion of value added products, such as pressure treated
wood, in its overall sales.
The Canadian economy is forecast to grow by 1.7% in 2019, before increasing to 2.0% in 2020, according to the
most recent revised estimates published by the Bank of Canada (“BoC”). The BoC also reported that recent indicators
have bolstered their confidence in their economic outlook, with inflation close to target and the economy operating
close to capacity. Based on this improving outlook, the BoC raised its key short-term lending rate by 0.25% on
October 24, 2018 to 1.75%, which is the fifth such increase since July 2017. On September 26, 2018, the US Federal
Reserve raised its benchmark interest rate to 2.25%, which was the third rate increase in 2018. This may signal that
both economies are returning to a more solid footing, with unemployment rates falling and economies performing in
line with expectations. However, there remains uncertainty stemming from international relations, trade disputes and
geo-political uncertainty, potentially impacting economic activity and growth, interest rates and foreign exchange.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
ManageMent’s Discussion anD analysis
According to the Canada Mortgage and Housing Corporation (the “CMHC”), the seasonally adjusted annualized rate
for Canadian housing starts was 212,843 in 2018 compared to 219,763 in 2017. CMHC forecasts annual housing
starts for the years 2019 and 2020 to be in the range from 193,700 units to 204,500 units. Historically, strong housing
starts have positively impacted the Company’s business and the volume of building materials that it sells. The recent
introduction of stricter federal mortgage rules, the introduction of British Columbia and Ontario foreign buyers’ and
speculation taxes, increased lending rates, foreign exchange fluctuations and overall affordability issues, may affect
the housing market, although any potential impact is unpredictable.
According to the US Census Bureau, seasonally-adjusted housing starts reached 1,256,000 units in the fourth quarter
of 2018 compared to 1,303,000 units in the same period last year. According to the Federal Home Mortgage
Corporation (Freddie Mac) Economic & Housing Research Group, housing starts are estimated to reach 1,290,000
units for 2019 and 1,360,000 for 2020. The US economy has been expanding at a robust pace, and according to the
BoC, is expected to average about 2.0% growth over the 2019-2020 period.
A tentative new trilateral trade deal was announced in the second half of 2018 between the United States, Mexico
and Canada to replace NAFTA. The new trade agreement, once ratified, is expected to add a measure of certainty
to trade between the countries, which in turn should have a positive impact on consumer confidence. That said, there
is still no visibility on the timing of such ratification, nor any agreement on the ongoing softwood lumber dispute. The
Softwood Lumber Agreement with the US expired in October 2015 and as anticipated, the US Department of
Commerce introduced both countervailing and anti-dumping duties on Canadian softwood lumber imports. The
Company will continue to carefully manage its business to minimize any potential impacts of these trade dispute
duties. The Company does not export softwood lumber from Canada to the US and the Company’s US distribution
operations sell wood products sourced in the US. Despite ongoing talks, there is no visibility as to the resolution of
this trade dispute.
The Company’s focus in the near term remains to grow sales with its target customer base while continuing to
optimize gross margins, integrate recent acquisitions and maintain tight controls over expenses, including those
relating to the 2018 Acquisitions. The Company is committed to enhancing its offering of specialty and allied products
to the Canadian and Unites States markets. Management’s focus on cash flow, primarily consisting of the
management of inventory and trade receivables, remains paramount.
The proceeds from the Company’s offering of the Unsecured Notes in the fourth quarter were applied against the
revolving loan facility, providing greater financial flexibility for the Company and readily available growth capital at an
attractive locked-in cost by freeing up credit availability in a rising interest rate environment.
Sawlog prices have experienced an upward trend in pricing largely attributable to ongoing log supply constraints,
particularly in British Columbia, where the situation has been further impacted by the 2018 wildfire activity. Regional
sawlog prices in the East Kootenay’s of British Columbia, the Company’s primary base of forestry operations, are
expected to remain strong due to ongoing local log supply shortfalls and expected continuing growth in US demand.
There can be no assurance, however, these pricing trends will be sustainable, which may result in potential adverse
impacts on the Company’s forestry segment.
Management will continue to closely monitor the Company’s operations, legacy customers, and potential seasonal
weather impacts, so that the Company will be appropriately positioned to participate in a continuing economic
recovery and be ready to work hard to translate revenue gains into higher earnings for the Company and its
shareholders.
25
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
CanWel Building Materials Group Ltd.
Consolidated Financial Statements
December 31, 2018 and 2017
(in thousands of Canadian dollars)
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
KPMG LLP
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
Fax (604) 691-3031
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of CanWel Building Materials Group Ltd.
Opinion
We have audited the consolidated financial statements of CanWel Building Materials Group Ltd. (the
“Company”), which comprise:
the consolidated statement of financial position as at December 31, 2018;
the consolidated statement of earnings and comprehensive earnings for the year then ended;
the consolidated statement of changes in equity for the year then ended;
the consolidated statement of cash flows for the year then ended; and
notes to the consolidated financial statements, including a summary of significant accounting policies.
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the
consolidated financial position of the Company as at December 31, 2018, and its consolidated financial
performance and its consolidated cash flows for the year then ended in accordance with International
Financial Reporting Standards.
Other Matter - Comparative Information
The financial statements for the year ended December 31, 2018, excluding the adjustments of $ Nil as
described in Note 5, were audited by another auditor who expressed an unmodified opinion on those financial
statements on March 8, 2018.
As part of our audit of the financial statements for the year ended December 31, 2018, we also audited the
adjustments of $ Nil described in Note 5. In our opinion, such adjustments are appropriate and have been
properly applied.
Other than with respect to the adjustments of $ Nil described in Note 5, we were not engaged to audit, review
or apply any procedures to the financial statements as at and for the year ended December 31, 2017.
Accordingly, we do not express an opinion or any other form of assurance on those financial statements taken
as a whole.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. KPMG Canada provides services to KPMG LLP.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the “Auditors’ Responsibilities for the Audit
of the Financial Statements” section of our auditors’ report.
We are independent of the Company in accordance with the ethical requirements that are relevant to or audit
of the financial statements in Canada and we have fulfilled our other responsibilities in accordance with these
requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Other Information
Management is responsible for the other information. Other information comprises:
the information included in Management’s Discussion and Analysis filed with the relevant Canadian
Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon, included in a document
likely to be entitled “Annual Report”.
Our opinion on the financial statements does not cover the other information and we do not and will not express
any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis and the Annual Report filed with the relevant Canadian
Securities Commissions as at the date of this auditors’ report. If, based on the work we have performed on this
other information, we conclude that there is a material misstatement of this other information, we are required
to report that fact in the auditors’ report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance
with International Financial Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
In preparing the financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate the Company or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our
opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material misstatement
when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic decisions of users taken on the basis of the financial
statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit.
We also:
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company's internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions
that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that
a material uncertainty exists, we are required to draw attention in our auditors’ report to the related
disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future
events or conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events in a
manner that achieves fair presentation.
Communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that
we identify during our audit.
Provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and communicate with them all relationships and other matters that
may reasonably be thought to bear on our independence, and where applicable, related safeguards.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the group Company to express an opinion on the financial statements. We are responsible
for the direction, supervision and performance of the group audit. We remain solely responsible for our
audit opinion.
Chartered Professional Accountants
The engagement partner on the audit resulting in this auditors’ report is Andrew James.
Vancouver, Canada
March 5, 2019
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
consoliDateD stateMents of financial Position as at DeceMber 31
(in thousands of Canadian dollars)
Assets
Current assets
Cash
Trade and other receivables
Income taxes receivable
Inventories
Prepaid expenses and deposits
Non-current assets
Property, plant and equipment
Timber
Deferred income tax assets
Intangible assets
Goodwill
Other assets
Total assets
Liabilities
Current liabilities
Cheques issued in excess of cash on hand
Trade and other payables
Performance bond obligations
Dividends payable
Income taxes payable
Current portion of non-current liabilities
Non-current liabilities
Loans and borrowings
Finance lease liabilities
Reforestation and environmental
Other liabilities
Deferred income tax liabilities
Retirement benefit obligations
Total liabilities
Equity
Common shares
Contributed surplus
Foreign currency translation
Deficit
Total liabilities and equity
Commitments and contingencies
Approved by the Board of Directors
(signed) “Amar S. Doman” Director
Notes
16
14
8
24
9
10
11
24
12
13
14
15
21
24
16-18
16
17
18
19
24
20
21
27
2018
$
488
101,797
4,796
284,388
5,774
397,243
108,242
62,659
2,641
47,263
181,157
4,564
406,526
803,769
9,701
80,808
13,507
10,884
169
11,063
126,132
283,471
4,140
1,724
2,578
19,307
3,290
314,510
440,642
499,154
10,769
15,654
(162,450)
363,127
803,769
31
2017
(Note 7)
$
6,744
104,505
2,605
221,495
7,387
342,736
93,586
64,249
4,429
50,195
164,129
3,496
380,084
722,820
9,755
83,620
14,101
10,872
-
11,438
129,786
204,923
2,524
1,057
2,650
17,937
3,708
232,799
362,585
498,639
10,769
(49)
(149,124)
360,235
722,820
(signed) “Sam Fleiser” Director
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
consoliDateD stateMents of earnings anD coMPrehensive earnings for the years enDeD DeceMber 31
(in thousands of Canadian dollars,
except per share amounts)
Revenue
Cost of sales
Gross margin from operations
Expenses
Distribution, selling and administration
Depreciation of property, plant and equipment
Amortization of intangible assets
Restructuring costs
32
Operating earnings
Finance costs
Acquisition costs
Other income
Earnings before income taxes
Provision for income taxes
Net earnings
Other comprehensive income (loss)
Exchange differences on translation of foreign operations(1)
Actuarial gain from pension and other benefit plans,
net of tax of $64 (2017 - $707)(2)
20,24
Comprehensive earnings
Net earnings per share
Basic and diluted
Weighted average number of shares
Basic and diluted
1.
2.
Item that may be reclassified to earnings in subsequent periods.
Item will not be reclassified to earnings.
Notes
2018
$
2017
(Note 7)
$
31,32
1,291,295
1,135,950
22
1,098,365
23
10
12
25
7
24
192,930
120,937
11,709
6,713
-
139,359
53,571
(11,672)
(753)
-
41,146
11,131
30,015
15,703
182
45,900
983,777
152,173
90,198
10,909
3,849
834
105,790
46,383
(8,270)
(2,964)
633
35,782
6,977
28,805
(4,384)
1,926
26,347
0.39
0.42
77,713,148
68,271,808
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
consoliDateD stateMents of changes in equity for the years enDeD DeceMber 31
(in thousands of Canadian dollars,
except share amounts)
As at December 31, 2016
Shares issued pursuant to:
Contributed
Foreign
currency
Common shares
surplus translation Deficit
Total
#
$
$
$
$
$
61,152,898
405,048
10,769
4,335 (141,431) 278,721
Public offering
Private placement
Restricted Equity Common Share Plan
Employee Common Share Purchase
Plan
6,598,470
9,832,500
4,832
40,251
57,520
29
70,955
384
-
-
(29)
-
-
29
-
-
-
-
-
-
-
-
-
-
-
-
40,251
57,520
-
384
(4,593)
-
-
(4,384)
-
(38,424)
30,731
29
(38,424)
26,347
33
(4,593)
-
-
-
Transaction costs on issue of shares,
net of deferred income tax
Share-based compensation charged to
operations
Dividends
Comprehensive earnings for the year
As at December 31, 2017
Shares issued pursuant to:
Restricted Equity Common Share Plan
Employee Common Share Purchase
Plan
Share-based compensation charged to
operations
Dividends
Comprehensive earnings for the year
77,659,655
498,639
10,769
(49) (149,124) 360,235
3,726
81,217
25
490
-
-
-
(25)
-
25
-
-
-
-
-
-
-
490
-
-
15,703
-
(43,523)
30,197
25
(43,523)
45,900
As at December 31, 2018
77,744,598
499,154
10,769
15,654 (162,450) 363,127
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
consoliDateD stateMents of c ash flows for the years enDeD DeceMber 31
(in thousands of Canadian dollars)
Operating activities
Net earnings
Items not affecting cash
Provision for income taxes
Depreciation and amortization of:
Property, plant and equipment
Intangible assets
Leasehold inducements
Fair value adjustments
Timber harvested
Other
Income taxes paid
Interest paid on loans and borrowings and other
Payment of reforestation and environmental
Finance costs
Settlement of onerous operating leases
Cash flows from operating activities before changes in non-cash working
34
capital
Changes in non-cash working capital
Net cash flows (used in) provided by operating activities
Financing activities
Shares issued
Transaction costs on issue of shares
Dividends paid
Repayment of promissory notes
Payment of finance lease liabilities
Repayment of non-revolving term loan
Net repayment of equipment term loan and equipment line
Financing costs on borrowings
Increase in revolving loan facility
Issuance of unsecured notes
Net cash flows provided by financing activities
Investing activities
Business acquisitions
Purchase of property, plant and equipment
Proceeds from disposition of property, plant and equipment
Bank indebtedness acquired
Funds received from other investment activities
Net cash flows used in investing activities
Net (decrease) increase in cash and cash equivalents
Foreign exchange difference
Cash and cash equivalents - Beginning of year
Cash and cash equivalents - End of year
Notes
2018
$
2017
$
24
10
12
11
11
25
18
25
30
21
21
21
16
16
16
16
16
7
10
7
14
30,015
11,131
11,709
6,713
(315)
(2,393)
4,851
(827)
(10,579)
(9,119)
(1,421)
11,672
-
28,805
6,977
10,909
3,849
(301)
(7,925)
3,243
556
(10,660)
(6,861)
(1,247)
8,270
(1,153)
51,437
(55,467)
34,462
(3,716)
(4,030)
30,746
490
-
(43,511)
(3,699)
(1,689)
(2,667)
(1,540)
(3,557)
21,543
60,000
98,155
(6,293)
(36,113)
(2,702)
(654)
(2,666)
(3,546)
(1,249)
30,959
-
25,370
75,891
(18,224)
(10,212)
502
-
-
(101,685)
(6,471)
3,537
(1,306)
2,022
(27,934)
(103,903)
(6,594)
392
(3,011)
(9,213)
2,734
532
(6,277)
(3,011)
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
1. NATURE OF OPERATIONS
CanWel Building Materials Group Ltd. (the “Company”) was incorporated in 2009 under the Business
Corporations Act (British Columbia). On May 11, 2010, the Company was continued under the laws of
Canada pursuant to section 187 of the Canada Business Corporations Act with its current name. The
Company has limited liability, with its shares publicly listed on the Toronto Stock Exchange (“TSX”). The
Company’s head office is located at Suite 1100 – 1055 West Georgia Street, Vancouver, BC. The
Company’s Canadian operations commenced in 1989.
The Company operates through its wholly owned subsidiaries as a distributor of building materials and
home renovation products and as a provider of wood pressure treating services in Canada nationally and
regionally in the Western United States and Hawaii. Additionally, the Company has operations in timber
ownership and management of private timberlands and Crown forest licenses, full service logging and
trucking, and post peeling and pressure treating in British Columbia and Saskatchewan for the North
American agricultural market.
2. BASIS OF PRESENTATION
a) Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”).
These consolidated financial statements were authorized for issuance on March 5, 2019 by the Board of
Directors of the Company.
b) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the Company’s
functional currency. All financial information presented in Canadian dollars has been rounded to the
nearest thousand, except per share amounts.
c) Basis of measurement
These consolidated financial statements have been prepared under the historical cost convention, except
for the following items in the Consolidated Statements of Financial Position:
(i) Standing timber on privately held forest land is characterized as a biological asset and is
measured at fair value less costs to sell;
(ii) Derivative financial instruments are measured at fair value; and
(iii) Employee benefit plan assets and liabilities, are recognized as the net of the fair value of the
plan assets and the present value of the defined benefit obligations on a plan by plan basis.
35
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
d) Principles of consolidation
The consolidated financial statements of the Company include the financial statements of the Company
and its subsidiaries. Subsidiaries are those entities which the Company controls by having the power to
govern the financial and operational policies of the entity. All intercompany transactions and balances
have been eliminated.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these consolidated financial statements are
set out below. These policies have been consistently applied to all the periods presented, unless otherwise
stated.
a) Business combinations and goodwill
36
Business combinations are accounted for by applying the acquisition method, whereby assets obtained,
liabilities incurred or assumed, and equity instruments issued by the Company in exchange for control of
the acquired business are measured at fair value at the date of acquisition. The acquired business’
identifiable assets, liabilities and contingent liabilities that meet the recognition criteria under IFRS 3,
Business Combinations are recognized at their fair values at the acquisition date, except for non-current
assets which are classified as held-for-sale in accordance with IFRS 5, Non-Current Assets Held for Sale
and Discontinued Operations, and are recognized and measured at fair value, less costs to sell.
To the extent the fair value of consideration paid exceeds the fair value of the net identifiable tangible and
intangible assets, goodwill is recognized. To the extent the fair value of consideration paid is less than the
fair value of net identifiable tangible and intangible assets, the difference is recognized in income
immediately as a gain on bargain purchase. Goodwill is subsequently measured at cost less accumulated
impairment losses.
Acquisition costs associated with business combination activities are expensed in the period incurred.
b) Foreign currency translation
Foreign currency transactions are translated into the functional currency using the spot rate prevailing at
the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in
foreign currencies are translated at the functional currency spot rate at the reporting date. Foreign
exchange gains and losses that relate to the Company’s loans and borrowings are recognized in earnings
within finance costs. All other foreign exchange gains and losses relate to product purchases and are
accordingly presented within cost of sales.
For each foreign operation, the Company determines the functional currency, and items included in the
financial statements of each entity are measured using that functional currency. The Company’s foreign
operations are in the Western United States and Hawaii, and have the US dollar as the functional currency.
The Company uses direct method of consolidation and on disposal of a foreign operation.
On consolidation, the assets and liabilities of foreign operations are translated into Canadian dollars using
the rate of exchange in effect at the reporting date, and their statements of earnings and comprehensive
earnings are translated using exchange rates in effect at the dates of the transactions. The exchange
differences arising on translation for consolidation are recognized in other comprehensive income (“OCI”).
On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is
recognized in net earnings.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
c) Property, plant and equipment
Property, plant and equipment (“PPE”) are stated at cost less accumulated depreciation and accumulated
impairment losses. The cost of an item of PPE consists of the purchase price, any costs directly
attributable to bringing the asset to the location and condition necessary for its intended use and an initial
estimate of the costs of dismantling and removing the item and restoring the site on which it is located.
Repairs and maintenance costs are expensed as incurred.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:
Buildings
Leasehold improvements
Machinery and equipment
Automotive equipment
Computer equipment and systems development
3%
based on lease term
10% to 33%
30%
20% to 33%
Depreciation begins when an asset is placed in use. Land is not depreciated.
An item of PPE is derecognized upon disposal when no future economic benefits are expected to arise
from the continued use of the asset. Any gain or loss arising on disposal of the asset, determined as the
difference between the net disposal proceeds and the carrying amount of the asset, is recognized in
earnings.
The Company conducts an annual assessment of the residual balances, useful lives, depreciation
methods being used for PPE and impairment losses (as applicable), and any changes arising from the
assessment are applied by the Company prospectively.
d) Timber
Standing timber on privately held forest land that is managed for timber production is characterized as a
biological asset. At each reporting date, the biological asset is valued at its fair value less costs to sell with
any change therein, including the impact of growth and harvest, recognized in cost of sales for the period.
Costs to sell include all costs that would be necessary to sell the assets. The valuation model is performed
with reference to independent third party valuators and recent comparatives of standing timber sales,
costs of sustainable forest management, log pricing and harvest volume assumptions, and the resulting
net present value of future cash flows for standing timber. Harvested timber is transferred to inventory at
its fair value less costs to sell at the date the timber is harvested.
Land under the standing timber is measured at cost and included in property, plant and equipment.
e) Reforestation
The Company has voluntarily opted into the Private Managed Forest Land Act (British Columbia) in
relation to operations on its private timberlands which requires reforestation to occur within five years of
harvest. Accordingly, the Company records a provision for the costs of reforestation in the period in which
the timber is harvested. In periods subsequent to the initial measurement, changes in the provision
resulting from the passage of time and revisions to management’s estimates are recognized in net
earnings as they occur. Reforestation provisions are discounted using a risk-adjusted rate that reflects
current market assessments of the time value of money and the risks specific to the liability.
37
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
f) Leases
Finance leases that transfer substantially all of the risks and benefits of ownership to the Company are
capitalized at the commencement of the lease at the fair value of the leased property or, if lower, at the
present value of the minimum lease payments. Lease payments are apportioned between finance charges
and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of
the liability. Finance charges are recognized in earnings within finance costs.
A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty
that the Company will obtain ownership by the end of the lease term, the asset is depreciated over the
shorter of the estimated useful life of the asset and the lease term.
Operating lease payments are recognized as an operating expense on a straight-line basis over the lease
term.
Leasehold inducements arising from rent-free inducements and tenant improvement allowances received
from a landlord are being amortized over the term of the lease on a straight-line basis.
g) Intangible assets
All intangible assets acquired by the Company through business acquisitions are recorded at fair value on
the date of acquisition. Intangible assets that have indefinite lives are measured at cost less accumulated
impairment losses. Intangible assets that have finite useful lives are subsequently measured at cost less
accumulated amortization and accumulated impairment losses. Intangible assets comprise of brand
recognition and customer relationships, which are amortized on a straight-line basis over 10 years.
Amortization rates are reviewed annually to ensure they are aligned with estimates of remaining economic
useful lives of the associated intangible assets.
h) Pension and other post-employment benefits
For defined benefit pension plans and other post-retirement benefits, the net periodic pension expense is
actuarially determined on an annual basis by independent actuaries using the projected unit credit method.
The determination of benefit expense requires assumptions such as the discount rate to measure
obligations, the projected age of employees upon retirement, the expected rate of future compensation
and the expected health care cost trend rate. For the purpose of calculating the expected return on plan
assets, the assets are valued at fair value. Actual results will differ from results that are estimated based
on assumptions. All past service costs arising from plan amendments are recognized immediately in
earnings when the plan amendment occurs or when related restructuring costs are recognized, if earlier.
38
The asset or liability recognized in the statement of financial position is the present value of the defined
benefit obligation at the statement of financial position date less the fair value of plan assets, together
with adjustments for asset ceiling impairment or additional liabilities due to onerous minimum funding
requirement under International Financial Reporting Interpretations Committee (“IFRIC”) 14, The Limit
on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, International
Accounting Standard (“IAS”) 19, The Limit on a Defined Benefit Asset. The present value of the defined
benefit obligation is determined by discounting the estimated future cash outflows using interest rates
of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid
and that have terms to maturity approximating the value of the defined benefit obligation. The
remeasurement of
together with
remeasurements on plan obligations from assumption changes or experience adjustments are
recognized immediately in OCI. For funded plans, surpluses are recognized only to the extent that the
fair value of plan assets compared
to expected values,
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
surplus is considered recoverable. Recoverability is primarily based on the extent to which the Company
can unilaterally reduce future contributions to the plan.
Payments to defined contribution plans are expensed as incurred.
i) Share-based payments
Certain employees (including directors and senior executives) of the Company may receive a portion of
their remuneration in the form of share-based payment transactions, whereby employees render services
as consideration for equity instruments (“equity-settled transactions”).
The costs of equity-settled transactions with employees are measured by reference to the fair value at
the date on which they are granted. The costs of equity-settled transactions are recognized, together
with a corresponding increase in equity, over the period in which the performance and/or service
conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the
shares (“the vesting date”). The cumulative expense is recognized for equity-settled transactions at each
reporting date until the vesting date and reflects the Company’s best estimate, at such time, of the
number of equity instruments that will ultimately vest. The profit or loss charge or credit for the period
represents the movement in cumulative expense recognized as at the beginning and end of that period
and is recognized in net earnings as share-based compensation and the corresponding amount is
recognized in contributed surplus.
39
No expense is recognized for awards that do not ultimately vest, except for awards where vesting is
conditional upon a market condition, which are treated as vesting irrespective of whether or not the market
condition is satisfied provided that all other performance and/or service conditions are satisfied.
Where the terms of an equity-settled award are modified, the minimum expense recognized is the expense
as if the terms had not been modified. An additional expense is recognized for any modification that
increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the
employee as measured at the date of modification.
j) Financing costs
The Company’s borrowings are recorded net of financing costs, which are deferred at inception and
subsequently amortized over the term of the debt. Interest expense is calculated using the effective
interest rate method.
k) Inventories
Inventories are stated at the lower of cost and net realizable value (“NRV”). Cost is determined using the
weighted average cost method, net of vendor rebates, and includes materials, freight and, where
applicable, treatment and processing costs, chemicals, direct labour and overhead. NRV is the estimated
selling price in the ordinary course of business less the estimated costs of completion and estimated costs
necessary to make the sale.
The cost of logs transferred from standing timber to inventory is its fair value less costs to sell at the date
of harvest.
l) Vendor rebates
The Company records cash consideration received from vendors as a reduction in the price of vendors’
products and reflects it as a reduction to inventory and related cost of sales.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
m) Performance bonds
Certain subsidiaries of the Company issue bonds to guarantee performance and payment by certain
contractors to whom the Company may supply materials. The bonds require cash to be periodically
remitted to the Company from project owners or their lenders, upon satisfaction that the bonded contractor
has met certain conditions of the related construction contract. The funds are disbursed to the project’s
contractor subject to the Company’s satisfaction as to the progression and completion of the contracted
work. Proceeds received by the Company in excess of funds disbursed are recorded in liabilities until such
time as the related project is completed.
n) Income tax
Income tax expense is comprised of current and deferred tax. Income tax expense is recognized in net
earnings for the year. Deferred tax relating to items recognized outside of net earnings is recognized in
correlation to the underlying transaction, either in OCI or directly in equity.
40
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous
years.
Deferred tax is recognized using the asset and liability method, providing for temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for taxation purposes. Deferred tax is not recognized for the temporary differences from the initial
recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when
they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
At each reporting period, temporary differences are evaluated. A deferred tax asset is recognized to the
extent that it is probable that future taxable income will be available against which the temporary difference
can be utilized. The recognized deferred tax assets are reviewed at each reporting date and are reduced
to the extent that it is no longer probable that the related tax benefit will be realized.
o) Earnings per share
Basic earnings per share are computed by dividing the net earnings for the year by the weighted average
number of common shares outstanding during the year. Diluted earnings per share reflects the potential
dilution of common share equivalents, such as outstanding stock options and restricted equity common
shares, in the weighted average number of common shares outstanding during the year, if dilutive. The
“treasury stock method” is used for the assumed proceeds upon the exercise of the options that are used
to purchase common shares at the average market price during the year.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
p) Financial instruments
(i) Non-derivative financial instruments
The Company’s non-derivative financial instruments are comprised of trade and other
receivables, trade and other payables, performance bonds, dividends payable, senior unsecured
notes, revolving loan facility, non-revolving term loan, promissory notes, finance lease liabilities,
equipment term loan and earn-out commitment.
Financial instruments are initially recognized at fair value plus, for instruments not measured at
fair value on an ongoing basis, any directly attributable transaction costs. Subsequent to the
initial recognition, financial instruments are measured at fair value or amortized cost.
The Company has classified or designated its financial instruments as follows:
Trade and other receivables are subsequently measured at amortized cost.
Trade and other payables, performance bonds, dividends payable, senior unsecured
notes, revolving loan facility, non-revolving term loan, promissory notes, finance lease
liabilities, equipment term loan and equipment line and earn-out commitment are
subsequently measured at amortized cost.
41
(ii) Derivative financial instruments
The Company at times uses derivative financial instruments for economic hedging purposes in
managing lumber price risk and foreign exchange risk through the use of futures contracts and
options. These derivative financial instruments are designated as fair value through profit and
loss, with changes in fair value being recorded in other income (loss) in net earnings.
q) Fair value measurement
The Company measures derivative financial instruments at fair value at each statement of financial position
date. Also, fair values of financial instruments measured at amortized cost are disclosed in Note 29.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value measurement is based
on the presumption that the transaction to sell the asset or transfer the liability takes place either:
(i)
(ii)
In the principal market for the asset or liability, or
In the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Company. The fair value of an
asset or a liability is measured using the assumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their economic best interest.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient
data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing
the use of unobservable inputs.
r) Equity
Share capital represents the amount received for shares issued. When shares are issued on a business
acquisition, the amount recognized is the fair value at the acquisition date.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
Contributed surplus includes the compensation cost relating to the Company’s share-based payment
transactions. It also includes the difference between the cost of repurchased shares and the average
book value.
Dividends on common shares attributable to shareholders are presented in current liabilities when
approved prior to the reporting date.
s) Revenue recognition
The Company recognizes revenue from the sale of building products from its network of distribution centers
across Canada nationally and regionally in the Western United States and Hawaii, as well as, from the sale
of timber products harvested in British Columbia and Saskatchewan as products in the sales category. The
Company owns wood treatment and processing facilities that produce specialty products for sale through its
distribution network that also generate revenue through the provision of these services to external
customers. Provisions of services from the Company’s facilities to external customers are presented as
services in the sales category.
42
Revenue from the sale of products and services is recognized, net of discounts and customer rebates, at
the point in time the transfer of control of the related products has taken place (based on shipping or delivery
terms as specified in the sales contract), and collectability is reasonably assured.
t) Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) that has
arisen as a result of a past event and it is probable that a future outflow of resources will be required to
settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.
A provision for an onerous contract is recognized when the economic benefits to be received under the
contract are less than the unavoidable costs of meeting the obligations under the contract. The provision
is measured at the present value of the lower of the expected cost of terminating or performing the
contract. Before establishing a provision, the Company recognizes any impairment loss that has occurred
on the assets dedicated to that contract.
Provisions are measured at the present value of the expenditures expected to be required to settle the
obligation using a pre-tax rate that reflects current market assessments of the time value of money and
the risk specific to the obligation. The increase in the provision due to passage of time is recognized as
finance costs.
Provisions are reviewed at the end of each reporting period and are adjusted to reflect the best estimates
at that date.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
u) Impairment
Financial assets
The Company assesses at each statement of financial position date whether a financial asset is impaired.
If there is objective evidence that an impairment loss on assets carried at amortized cost has been
incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and
the present value of estimated future cash flows discounted at the financial asset’s original effective
interest rate. The carrying amount of the asset is then reduced by the amount of the impairment. The
amount of the loss is recognized in net earnings.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related
objectively to an event occurring after the impairment was recognized, the previously recognized
impairment loss is reversed to the extent that the carrying value of the asset does not exceed what the
amortized cost would have been had the impairment not been recognized. For financial assets measured
at amortized cost, any subsequent reversal of an impairment loss is recognized in net earnings.
In relation to trade receivables, a provision for impairment is made and an impairment loss is recognized
in earnings when there is objective evidence (such as the probability of insolvency or significant financial
difficulties of the debtor) that the Company will not be able to collect all of the amounts due under the
original terms of the invoice. For all other trade receivables, the Company records an allowance using
expected credit loss model based on historical bad debts. The carrying amount of the receivable is
reduced through use of an allowance account. Impaired debts are written off against the allowance
account when they are assessed as uncollectible.
43
Non-financial assets
The carrying amounts of the Company’s property, plant and equipment and intangible assets that have a
finite life are reviewed at each reporting date to determine whether there is any indication of impairment.
Goodwill is reviewed for impairment annually or more frequently if certain impairment indicators arise. The
Company’s annual impairment testing date for goodwill is December 31.
If any such indication exists or when annual impairment testing for an asset is required, then the asset’s
recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit (the lowest
level of identifiable cash inflows) is the greater of its value in use and its fair value less costs to sell. In
assessing value in use, the estimated future cash flows are discounted to their present value using a pre-
tax discount rate that reflects current market assessments of the time value of money and the risks specific
to the asset group or cash-generating unit. In determining fair value less costs to sell, recent market
transactions are taken into account, if available. If no such transactions can be identified, an appropriate
valuation model is used. These calculations are corroborated by valuation multiples or other available fair
value indicators.
An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds
its estimated recoverable amount. Impairment losses are recognized in net earnings for the year.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses
recognized in prior periods are assessed at each reporting date for any indications that the loss has
decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates
used to determine the recoverable amount. An impairment loss is reversed only to the extent that the
asset’s carrying amount does not exceed the carrying amount that would have been determined, net of
depreciation or amortization, if no impairment loss had been recognized.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
v) Related party transactions
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other
party or exercise significant influence over the other party in making financial and operating decisions.
Parties are also considered to be related if they are subject to common control or common significant
influence. Related parties may be individuals or corporate entities. A transaction is considered to be a
related party transaction when there is a transfer of resources or obligations between related parties.
4. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
The preparation of these financial statements requires management to make judgments and estimates
and form assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting period. On an ongoing
basis, management evaluates its judgments and estimates in relation to assets, liabilities, revenue and
expenses. Management uses historical experience and various other factors it believes to be reasonable
under the given circumstances as the basis for its judgments and estimates. Actual outcomes may differ
from these estimates under different assumptions and conditions. Significant areas requiring estimates
are goodwill and related impairment testing, valuation of timber, determination of reforestation provision,
certain actuarial and economic assumptions used in the determination for the cost and accrued benefit
obligations of employee future benefits, inventory valuation and obsolescence, recoverability of trade
receivables, deferred tax assets and liabilities valuation, classification of lease agreements and judgments
regarding the determination of reportable segments.
44
a) Goodwill
Management uses judgment in determining the fair value of the acquired net identifiable tangible and
intangible assets at the date of a business combination. Any resulting goodwill is an asset representing
the future economic benefits arising from other assets acquired in a business combination that are not
individually identified and separately recognized. Goodwill at December 31, 2018 relates to the Company’s
acquisitions of various businesses. Goodwill is not amortized, but is tested for impairment annually or
more frequently if changes in circumstances indicate a potential impairment. Goodwill impairment is
assessed based on a comparison of the value in-use of a cash-generating unit to the underlying carrying
value of that cash-generating unit’s net assets, including goodwill. Significant estimates are required in
determining the fair value of each cash-generating unit, including a discount rate, a growth rate and
revenue projections. When the carrying amount of the cash-generating unit exceeds its value in-use, the
value in-use of goodwill related to the cash-generating unit is compared to its carrying value and excess
of carrying value is recognized as an impairment loss (Note 13).
b) Timber
At each reporting date, timber is valued at fair value less costs to sell with any change therein, including
the impact of growth and harvest, recognized in net earnings for the period. Significant judgment is used
in determining the fair value with reference to independent third party valuators and recent comparatives
of standing timber sales, costs of sustainable forest management, log pricing and harvest volume
assumption, the discount rate used, and the resulting net present value of future cash flows for standing
timber.
c) Reforestation provision
Management uses judgment in determining the value of the reforestation provision. Due to the general
long-term nature of the liability, the most significant areas of uncertainty in estimating the provision are
the future costs that will be incurred, the inflation rate, and the risk-adjusted discount rate.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
d) Employee future benefits
The cost of defined benefit pension plans and other post-employment medical benefits and the present
value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves
making various assumptions that may differ from actual developments in the future (Note 20).
i.
ii.
Discount rate
The present value of the defined benefit obligation is determined by discounting the estimated
future cash outflows using interest rates of high-quality corporate bonds that are denominated
in the currency in which the benefits will be paid and that have maturity profiles that are similar
to the underlying cash flows of the defined benefit obligation.
Other assumptions
The mortality rate is based on publicly available mortality tables. Future salary increases are
based on expected future inflation rates.
e) Inventory valuation
Under IFRS, inventories must be recognized at the lower of cost or their NRV, which is the estimated
selling price in the ordinary course of business less the estimated costs of completion and estimated costs
necessary to make the sale. IFRS requires that the estimated NRV be based on the most reliable evidence
available at the time the estimates are made of the amounts that inventories are expected to realize. The
measurement of an inventory write
down to NRV is based on the Company’s best estimate of the NRV
and expected future sale or consumption of inventories. Due to the economic environment and continued
volatility in the home-building market, there is uncertainty as to whether the NRV of the inventories will
remain consistent with those used in the Company’s assessment of NRV at period end. As a result there
hand and unconsumed inventories could occur in future periods. Also,
is the risk that a write
a certain portion of inventory may become damaged or obsolete. A slow moving reserve is recorded, as
required, based on an analysis of the length of time product has been in inventory and historical rates of
damage and obsolescence (Note 22).
down of on
‐
‐
‐
Inventory includes harvested timber, the cost of which is based on its fair value less costs to sell, and
forms a component of the carrying value of log inventory. Harvested timber is subsequently processed
into logs and carried at the lower of cost or NRV. Significant judgment is used in determining the fair value
of timber with reference to independent third party valuators and recent comparatives of standing timber
sales.
f) Allowance for doubtful accounts
It is possible that certain trade receivables may become uncollectible, and as such, an allowance for these
doubtful accounts is maintained. The allowance is based on the estimated recovery of trade receivables
and incorporates current and expected collection trends. These estimates will change, as necessary, to
reflect market or specific industry risks, as well as known or expected changes in the customers’ financial
position (Note 8).
g) Income taxes
At each statement of financial position date, a deferred income tax asset may be recognized for all
deductible temporary differences, unused tax losses and income tax reductions, to the extent that their
realization is probable. The determination of this requires significant judgment. This evaluation includes
review of the ability to carryback operating losses to offset taxes paid in prior years; the carryforward
periods of the losses; and an assessment of the excess of fair value over the tax basis of the Company’s
45
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
net assets. If based on this review it is not probable such assets will be realized, then no deferred
income tax asset is recognized (Note 24).
h) Leases
When assessing the classification of a lease agreement, certain estimates and assumptions need to be
made and applied, which include, but are not limited to, the determination of the expected lease term and
minimum lease payments, the assessment of the likelihood of exercising options and estimation of the fair
value of the lease property (Note 27).
i) Revenue recognition
Areas of significant judgement and estimation related to point in time revenue recognition include the
estimation of the expected value of consideration to be received from customers, who may be subsequently
impacted by volume discounts, manufacturer rebates and other incentives offered. The Company applies
judgement in using weight scale readings and the application of conversion factors to determine the volume
of forestry products sold. The Company also applies judgements in identifying performance obligations and
determining the costs associated with the acquisition of contracts, which are recognized as they occur,
unless the contract has a performance obligation that extends beyond one year.
46
j) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief
operating decision maker. The chief operating decision maker, who is responsible for allocating resources
and assessing performance of operations, has been identified as the Chief Executive Officer.
The Company is managed as two reportable business segments which offer different products, require
different production processes, and are based on how financial information is produced internally for the
purposes of making operating decisions. The following summary describes the operations of each of the
Company’s reportable segments:
a) Building Materials Distribution – wholesale distribution of building materials and home renovation
products, including value-added services such as lumber pressure treating; and
b) Forestry – timber ownership and management of private timberlands and Crown forest licenses,
logging and trucking operations, and value-added services such as post-peeling and post and pole
pressure treating operations.
5. CHANGES IN ACCOUNTING STANDARDS
Effective January 1, 2018, the Company adopted IFRS 9 Financial Instruments (“IFRS 9”) and IFRS 15
Revenue from Contracts with Customers (“IFRS 15”).
a) IFRS 9 – Financial Instruments
IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of
financial assets and financial liabilities, de-recognition of financial instruments, impairment of financial
assets and hedge accounting. The adoption of IFRS 9 was applied retrospectively and did not have an
impact on these audited Annual Consolidated Financial Statements.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
b) IFRS 15 – Revenue from Contracts with Customers
IFRS 15 replaces IAS 11 Construction Contracts and IAS 18 Revenue and it applies to all revenue arising
from contracts with customers, unless those contracts are in the scope of other standards. The new
standard establishes a five-step model to account for revenue arising from contracts with customers.
Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity
expects to be entitled in exchange for transferring goods or services to a customer.
The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and
circumstances when applying each step of the model to contracts with their customers. The standard also
specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to
fulfilling a contract. In accordance with the transition provisions in IFRS 15, the Company has adopted the
new rules retrospectively and has presented comparatives for the year ended December 31, 2017. The
new standard did not result in any change to the timing of revenue recognition for the Company for
previously reported periods and did not have a significant impact on the financial results of the Company
but did, however, result in more extensive disclosures on the Company’s revenue transactions (Note 31).
The Company applied the following practical expedient upon adoption of the new revenue standard: IFRS
15(94) Costs of obtaining a contract. The application of this practical expedient did not have a material
impact on the financial results of the Company.
47
The Company incurs costs related to obtaining of certain contracts that would not have been incurred if
the contract had not been obtained. Upon adoption of IFRS 15, the Company has applied the practical
expedient in IFRS 15(94) and recognizes these costs as expenses when incurred, as the contract asset
that would otherwise be recognized have amortization periods of one year or less.
6. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
The following is an overview of accounting changes the Company will be required to adopt in future years.
IFRS 16 - Leases
In January 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), replacing IAS 17, Leases (“IAS 17”), and
related interpretations. IFRS 16 sets out principles of recognition, measurement, presentation and disclosure
of leases for both parties to a contract, the lessee and the lessor. IFRS 16 is effective January 1, 2019 and
the Company has not early adopted this standard. The Company expects to use the modified retrospective
approach which recognizes the cumulative effect of applying IFRS 16 as an adjustment to the opening
balance of retained earnings (or other components of equity, as appropriate) at the date of initial application.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
The Company has completed the scoping and review of its outstanding lease agreements and continues to
evaluate the impact that this new standard will have, but expects that IFRS 16 will have a material impact
on the Company’s Consolidated Statement of Financial Position, stemming from the recognition of new right-
of-use assets and lease liabilities for leases with lease terms that are greater than twelve months, which are
currently accounted for as operating leases.
The Company expects to utilize certain practical expedients available under IFRS 16, including:
a) recognition exemptions under IFRS 16 (5a) and (5b) for short-term and low-value leases;
b) an election under IFRS 16 (C11), which allows a Company the choice to not reassess contracts
which were previously identified as leases under IAS 17; and
c) an option under IFRS 16 (B1) to apply a single discount rate to a portfolio of leases with reasonably
similar characteristics.
The Company estimates that effective January 1, 2019, it will recognize right-of-use assets and
corresponding lease liabilities in the range of $115,000 to $130,000 in its Consolidated Statement of
Financial Position, with no restatement of comparative periods’ results. The Company is in the process of
finalizing its IFRS 16 transition impact calculations, lease accounting procedures and policies, expecting
to be complete during the first quarter of 2019.
48
Application of the new standard is not anticipated to impact compliance with any of the Company’s debt
covenants.
7. BUSINESS ACQUISITIONS
2018 Acquisitions
On June 12, 2018, the Company acquired certain assets and the business of Superior Forest Products, Inc.
(now doing business as Oregon Cascade Building Materials “OCBM”) (the “OCBM Acquisition”). Based in
Junction City, Oregon, OCBM will provide lumber pressure treating services for customers predominantly
based in Oregon and Washington. The OCBM Acquisition is expected to complement the Company’s
existing treated lumber and specialty wood products business in the United States. The plant is currently
undergoing testing and completion of permitting, and is expected to commence customer shipments in 2019.
On December 3, 2018, the Company acquired certain assets and the business of Western Wood Treating,
Inc. (now doing business as Woodland Wood Preservers, Ltd. “Woodland”) (the “Woodland Acquisition”).
Based in Woodland, California, Woodland specializes in pressure treated wood products. The Woodland
Acquisition is expected to expand the Company’s presence in the United States treating markets.
The foreign exchange rates used to translate purchase price consideration and fair values of assets acquired
were based on the exchange rates published by the Bank of Canada as at the date of the above noted
acquisitions (collectively the OCBM and Woodland Acquisitions hereafter, the “2018 Acquisitions”).
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
Details of the allocation of the purchase price to the fair values of the identifiable assets acquired at the
date of the 2018 Acquisitions are as follows (in thousands of Canadian dollars):
Fair value of purchase consideration
Cash consideration
Promissory note
Consideration
Fair value of assets acquired(1)
Non-cash working capital
Property, plant and equipment
Total identifiable net assets at fair value
Goodwill arising on acquisitions
Consideration
Notes
16
10
2018
$
18,224
4,617
22,841
386
11,673
12,059
10,782
22,841
49
1. The purchase price allocation is preliminary and is subject to change up to a period of one year from the acquisition date upon
finalization of fair value determinations.
The goodwill recognized is primarily attributed to the expected synergies arising from the acquisitions and
the expertise and reputation of the assembled management and workforce. Goodwill is expected to be
deductible for income tax purposes.
During the year ended December 31, 2018, directly attributable acquisition costs of $753 have been
expensed and are included in net earnings on the Consolidated Statement of Earnings.
The acquirees’ gross revenues and net earnings during the year ended December 31, 2018 were nominal.
2017 Acquisition
On October 2, 2017, the Company completed the acquisition of all issued and outstanding shares of
Honsador Acquisition Corp., the parent company of Honsador Building Products group of companies
(“Honsador”) (the “Honsador Acquisition”), a leading distributor of building products and electrical supplies,
and the largest producer of pressure-treated wood in Hawaii. The Honsador Acquisition is expected to
expand the Company’s presence in the United States building distribution and treating markets, and provide
an incumbent position in the State of Hawaii.
Total purchase consideration comprised of US$81,315, including certain post-closing adjustments. The
foreign exchange rate used to translate cash purchase consideration and fair value of assets acquired and
liabilities assumed was based on the exchange rate published by the Bank of Canada as at the date of the
Honsador Acquisition.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
Details of allocation of the purchase price to the fair value of the identifiable assets and liabilities acquired at
the date of the above noted acquisition were as follows (in thousands of Canadian dollars):
50
Fair value of purchase consideration
Cash
Fair value of assets acquired and liabilities
assumed
Non-cash working capital
Property, plant and equipment
Intangible assets (customer lists and brand)
Other assets
Bank indebtedness
Leasehold inducements
Performance bond obligations
Finance lease liabilities
Deferred income tax liabilities
Total identifiable net assets at fair value
Goodwill arising on acquisition
Consideration
2017.
Provisional(1)
$
Revision
$
2017.
Revised(1)
$
101,685
-
101,685
47,185
3,785
35,014
1,544
(1,306 )
(1,733 )
(12,409 )
(311 )
(10,236 )
61,533
40,152
101,685
-
-
-
-
-
-
-
-
678
678
(678 )
47,185
3,785
35,014
1,544
(1,306 )
(1,733 )
(12,409 )
(311 )
(9,558 )
62,211
39,474
-
101,685
1. The provisional purchase price allocation determined at the Honsador Acquisition date was preliminary and subject to change up to a
period of one year from October 2, 2017, upon finalization of fair value determinations, which were finalized during the year ended
December 31, 2018.
The fair value of the identifiable assets and liabilities acquired in the Honsador acquisition were revised, with
Goodwill and Deferred income tax liabilities, each reduced by $678, reflecting the deferred income tax impact
of an inventory reserve which was not previously recognized. The goodwill recognized was primarily
attributed to the expected synergies arising from the Honsador acquisition and the expertise and reputation
of the assembled management and workforce. Goodwill is not expected to be deductible for U.S. income
tax purposes. The 2017 comparative statement of financial position herein has been revised to reflect the
adjustments to the provisional amounts.
From the date of the Honsador acquisition until December 31, 2018, the acquired business contributed
$225,619 of revenue and $6,554 of net earnings. If the Honsador acquisition had taken place at the
beginning of 2017, unaudited consolidated revenue for the year ended December 31, 2017 would have
been $1,276,605 and unaudited net earnings of the Company would have been $35,700.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
8. TRADE AND OTHER RECEIVABLES
The Company’s trade and other receivables arise primarily from sales of building materials to customers.
These are broken down as follows:
Trade receivables
Allowance for doubtful accounts
Net trade receivables
Other receivables
2018
$
92,398
(871)
91,527
10,270
2017
$
96,553
(896)
95,657
8,848
Total trade and other receivables
101,797
104,505
The aging analysis of trade and other receivables is as follows:
Neither past due nor impaired
Past due but not impaired:
Less than 1 month
1 to 3 months
3 to 6 months
51
2018
$
85,607
7,232
6,967
1,991
2017
$
89,802
8,336
4,171
2,196
Total trade and other receivables
101,797
104,505
Activity in the Company’s provision for doubtful accounts was as follows:
Balance at January 1, 2017
Reversals during the year
Additions arising on acquisition
Accounts written off
Foreign exchange difference
Balance at December 31, 2017
Accruals during the year
Accounts written off
Foreign exchange difference
Balance at December 31, 2018
$
644
(55)
855
(539)
(9)
896
61
(137)
51
871
The Company holds no collateral for any receivable amounts outstanding as at December 31, 2018.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
9. INVENTORIES
Inventories held for resale
Inventories held for processing
2018
$
223,109
61,279
2017
$
173,680
47,815
284,388
221,495
The expenses related to the sale of inventories are recorded in cost of sales, as described in Note 22.
10. PROPERTY, PLANT AND EQUIPMENT
52
Cost
Cost at
January 1, 2017
Additions
Additions arising on acquisition
(Note 7)
Disposals
Impairment losses
Foreign exchange difference
Cost at December 31, 2017
Additions
Additions arising on acquisitions
(Note 7)
Disposals
Foreign exchange difference
Land
$
36,758
-
-
(75)
(1,039)
-
35,644
-
-
-
-
Cost at December 31, 2018
35,644
18,666
Accumulated depreciation
Accumulated depreciation at
January 1, 2017
Depreciation
Disposals
Foreign exchange difference
Accumulated depreciation at
December 31, 2017
Depreciation
Disposals
Foreign exchange difference
Accumulated depreciation at
December 31, 2018
Net book value at
December 31, 2017
Net book value at
December 31, 2018
-
-
-
-
-
-
-
-
-
Buildings,
leasehold
improvements
and roads
$
Machinery,
automotive
and other
equipment
$
Computer
equipment
and systems
development
$
Equipment
under
finance
leases
$
Total
$
14,862
1,776
-
(380)
-
(23)
16,235
2,353
-
-
78
2,626
815
(187)
(2)
3,252
989
-
14
67,259
7,385
3,424
(6,603)
-
(306)
71,159
7,348
11,673
(946)
1,413
90,647
25,282
8,619
(2,109)
(61)
31,731
9,162
(471)
211
4,592
174
2,242 125,713
11,988
2,653
-
(74)
-
(8)
361
(543)
-
(177)
3,785
(7,675)
(1,039)
(514)
4,684
511
4,536 132,258
13,756
3,544
-
(5)
15
-
(400)
378
11,673
(1,351)
1,884
5,205
8,058 158,220
1,888
810
(70)
(1)
2,627
870
(2)
5
581
665
(129)
(55)
30,377
10,909
(2,495)
(119)
1,062
688
(257)
97
38,672
11,709
(730)
327
4,255
40,633
3,500
1,590
49,978
35,644
12,983
39,428
2,057
3,474
93,586
35,644
14,411
50,014
1,705
6,468 108,242
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
11. TIMBER
Balance at January 1
Reforestation provision on harvested land
Harvested timber transferred to inventory in the year
Change in fair value resulting from growth and pricing
Balance at December 31
2018
$
64,249
868
(4,851)
2,393
62,659
2017
$
58,905
662
(3,243)
7,925
64,249
The Company’s private timberlands comprised an area of approximately 53,525 hectares (“ha”) of land
as at December 31, 2018, with standing timber consisting of mixed-species softwood forests.
During the year ended December 31, 2018, the Company harvested approximately 409,917 cubic metres
(“m3”) from its private timberlands (2017 - 319,563 m3). (1)
Measurement of fair values
The table above reconciles the opening balances to the closing balances for Level 3 fair values (as defined
in Note 29). For the years ended December 31, 2018 and 2017, the fair value measurement for the
Company’s standing timber, as disclosed above, has been categorized as Level 3 fair value, and was
based on the inputs to the valuation technique discussed below.
Valuation
Technique
Discounted cash flow analysis: The valuation model considers the present value of the
net cash flows expected to be generated by the private timberlands over a period of
20 years. The expected net cash flows are discounted using a risk-adjusted discount rate.
53
Significant
Unobservable
Inputs in future
periods
Inter-relationship
between key
unobservable
inputs and
fair value
measurement
Estimated log prices of $36(1) per m3 (weighted average sawlog and pulpwood prices)
plus harvest and delivery charges of $50(1) (where applicable)
Estimated total costs, including harvest, delivery (where applicable) and stewardship
cost, of $53(1) per m3
Estimated harvest annual volume of 173,913 - 450,000 m3 (20-year rolling average
256,789 m3 (2017 - 271,732 m3))
Risk-adjusted discount rate of 9.50%
The estimated fair value would increase (decrease) if:
- the estimated log prices per m3 were higher (lower);
- the estimated harvest, delivery and stewardship costs per m3 were lower (higher);
- the estimated harvest volumes were higher (lower); and
- the risk-adjusted discount rate was lower (higher).
1.
In whole dollars, not thousands.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
12. INTANGIBLE ASSETS
Cost
Cost at January 1, 2017
Additions arising on acquisition (Note 7)
Foreign exchange difference
Cost at December 31, 2017
Foreign exchange difference
Canadian
operations
$
operations
$
US Value-added
services
$
Total
$
10,000
-
-
10,000
-
18,406
35,014
(1,001)
52,419
4,479
1,633
-
-
30,039
35,014
(1,001)
1,633
-
64,052
4,479
Cost at December 31, 2018
10,000
56,898
1,633
68,531
54
Accumulated amortization
Accumulated amortization at January 1, 2017
Amortization
Foreign exchange difference
Accumulated amortization at December 31, 2017
Amortization
Foreign exchange difference
6,917
1,000
-
7,917
1,000
-
2,759
2,686
(239)
5,206
5,549
698
571
163
-
734
164
-
10,247
3,849
(239)
13,857
6,713
698
Accumulated amortization at December 31, 2018
8,917
11,453
898
21,268
Net intangible assets at December 31, 2017
2,083
47,213
899
50,195
Net intangible assets at December 31, 2018
1,083
45,445
735
47,263
Intangible assets at December 31, 2018 relate to Building Materials Distribution business segment, as
described in Note 32, and include purchased customer lists and trade names.
13. GOODWILL
Canadian
operations operations(1)
$
$
US Value-added
services
$
Balance at January 1, 2017
Additions arising on acquisition (Note 7)
Foreign exchange difference
Balance at December 31, 2017
Additions arising on acquisition (Note 7)
Foreign exchange difference
62,624
-
-
62,624
-
-
28,246
39,474
(1,562)
66,158
10,782
6,246
35,347
-
-
35,347
-
-
Total
$
126,217
39,474
(1,562)
164,129
10,782
6,246
Balance at December 31, 2018
62,624
83,186
35,347
181,157
1. US operations Goodwill reflects the revision to the Honsador preliminary purchase price allocation (Note 7).
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
Goodwill at December 31, 2018 relates to the Company's Building Materials Distribution business
segment, as described in Note 32.
The Company performed its annual test for goodwill impairment as at December 31, 2018. The
recoverable amount of each of the cash-generating units has been determined using value in-use less
costs to sell. To determine the value in-use less costs to sell, the Company utilized five-year cash flow
forecasts using the annual budget approved by the Board of Directors as a basis for such forecasts. Cash
flow forecasts beyond that of the budget were prepared using a stable growth rate for future periods.
These forecasts were based on historical data and future trends expected by the Company. To adjust the
forecasts to consider selling costs, management estimated that disposition costs would be 1% of
enterprise value.
The Company’s valuation model also takes into account working capital and capital investments required
to maintain the condition of the assets.
Forecasted cash flows were discounted using after-tax rates of approximately 8% in all cash-generating
units for the purpose of the annual impairment test.
Based on the impairment tests, the value in-use of each of the cash-generating units exceeded their
carrying amounts. As a result, no provision for impairment of goodwill was provided.
55
14. CASH AND CASH EQUIVALENTS
Cash
Cheques issued in excess of cash on hand
2018
$
488
(9,701)
(9,213)
2017
$
6,744
(9,755)
(3,011)
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
15. PERFORMANCE BOND OBLIGATIONS
The Company assumes performance bond obligations related to certain construction projects. Proceeds
temporarily received by the Company in excess of payments with respect to outstanding projects’
performance bonds are outlined below.
Funds received on bonding obligations(1)
Payments made on bonding obligations(1)
Receipts in excess of payments
Provision for loss on bonds
Performance bonding obligations
56
1. Funds received and payments made, from contract commencement to reporting date.
Activity in the Company’s performance bond obligations was as follows:
Balance at January 1
Additions arising on acquisition (Note 7)
Net (payments) receipts on bonding obligations during the year
Change in provision for loss on bonds
Foreign exchange difference
Balance at December 31
2018
$
95,488
(82,385)
13,103
404
13,507
2018
$
14,101
-
(1,698)
(40)
1,144
13,507
2017
$
79,329
(65,637)
13,692
409
14,101
2017
$
-
12,409
1,708
(65)
49
14,101
Total gross bonding contracts on all outstanding projects at December 31, 2018 were $149,462
(2017 - $137,124).
The Company manages risk associated with exposure to loss on these performance bonds through
rigorous underwriting practices which include reviewing construction estimates, evaluating contractors’
experience and financial condition, managing bond proceeds assigned to the Company, and obtaining
security or personal guarantees from contracted parties for certain performance bonds.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
16. LOANS AND BORROWINGS
Non-current portion of loans and borrowings(1)
Unsecured notes
Revolving loan facility
Non-revolving term loan
Promissory notes
Equipment term loan, equipment line and other loans
Total non-current portion of loans and borrowings
Current portion of loans and borrowings
Non-revolving term loan
Promissory notes
Equipment term loan, equipment line and other loans
Total current portion of loans and borrowings
Total loans and borrowings
1. Net of unamortized financing costs
2018
$
56,756
184,102
30,913
3,184
8,516
283,471
2,667
2,400
3,639
8,706
2017
$
-
159,468
33,554
802
11,099
204,923
2,667
3,680
3,432
9,779
292,177
214,702
57
On October 9, 2018, the Company completed an offering of senior unsecured notes (the “Unsecured
Notes”) denominated in principal amounts of one thousand dollars, resulting in gross proceeds of $60,000.
The offering was underwritten by a syndicate of underwriters led by National Bank Financial Inc., and
including GMP Securities L.P., Canaccord Genuity Corp., CIBC World Markets Inc., Raymond James Ltd.,
RBC Dominion Securities Inc., and Haywood Securities Inc. The Unsecured Notes trade on the Toronto
Stock Exchange under the symbol CWX.NT.A. The net proceeds of the Unsecured Notes were used for
repayment of bank debt and for general corporate purposes.
58
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
Terms and repayment schedule
The terms and conditions of the outstanding loans and borrowings are as follows:
Currency
Nominal
interest rate
%
Unsecured notes(1)
CDN
6.375
Revolving loan
facility(2)
Revolving loan
facility(2)
Non-revolving
term loan(3)
Based on
Canadian prime
rate or Canadian
Offered Rate
Based on US
prime rate or
London Interbank
Offered Rate
Based on
Canadian prime
rate or Canadian
Banker’s
Acceptance Rate
CDN
USD
CDN
Maturity
October 9,
2023
July 10,
2021
July 10,
2021
July 10,
2021
December 31, 2018
Carrying
amount
$
Face
value
$
December 31, 2017
Carrying
amount
$
Face
value
$
60,000
56,756
-
-
150,213
148,376
153,561
151,093
35,937
35,726
8,607
8,375
34,000
33,580
36,667
36,221
Promissory note(4)
USD
Based on US
Prime Rate
December 3,
2021
4,775
4,775
-
-
Promissory
notes(5)
CDN
2.100-3.000
July 2, 2018 -
August 31,
2019
Equipment term
loan(6)
CDN
Equipment line(6)
CDN
Based on Business
Development Bank
of Canada Floating
Base Rate
Based on Business
Development Bank
of Canada Floating
Base Rate
Other
CDN
5.000
Total loans and
borrowings
July 1,
2021
July 1,
2025
December
2020
809
809
4,482
4,482
8,128
8,007
12,117
11,950
4,063
4,063
2,461
2,461
85
85
120
120
298,010
292,177
218,015
214,702
Includes a non-call protection of three years with a declining call schedule thereafter; interest is payable semi-annually.
1.
2. Maximum credit available is $300,000, with an additional $25,000 accordion facility. Amount advanced under the facility at any time is
limited to a defined percentage of inventories and trade receivables, less certain reserves. The facility is secured by a first charge
over the Company’s assets and an assignment of trade receivables, and requires that certain covenants be met by the Company.
3. Principal is amortized over 15 years and is payable in quarterly instalments. The loan is secured by a first charge against the
Company’s timberlands and certain other assets, and a subordinated charge over the Company’s remaining assets, and requires that
certain covenants be met by the Company.
4. An unsecured note was issued as partial consideration for an acquisition (Note 7). Principal is payable in three equal annual
instalments, plus annual interest, starting December 3, 2019.
5. Various promissory notes in connection with prior business acquisitions.
6. The loans are secured by a first charge against the specific equipment being financed under this arrangement, and a subordinated
charge over the Company’s other assets.
The Company was not in breach of any of its covenants during the years ended December 31, 2018
and 2017.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
17. FINANCE LEASE LIABILITIES
Finance lease liabilities
Less: current portion
2018
$
5,760
(1,620)
4,140
2017
$
3,559
(1,035)
2,524
The Company leases certain transportation equipment, which has been classified as finance leases.
Future minimum lease payments with respect to these leases are disclosed in Note 27.
18. REFORESTATION AND ENVIRONMENTAL
Balance at January 1
Paid during the year
Reforestation provision on harvested land
Changes in fair value
Balance at December 31
Less: current portion
1. At December 31, 2017, $1,478 is included in trade and other payables.
19. OTHER LIABILITIES
Earn-out commitment
2018
$
3,159
(1,421)
963
(240)
2,461
(737)
1,724
59
2017(1)
$
3,623
(1,247)
662
121
3,159
(624)
2,535
Subject to certain minimum obligations, the Company has a liability to pay additional amounts (“Earn-out”)
from proceeds of sale of certain lands to third parties for a period of seven years beginning September 15,
2014. The total net remaining undiscounted minimum amount payable with respect to the Earn-out is
$2,065 (December 31, 2017 - $2,065), with an additional 25% of the gross proceeds on any amounts above
a certain price per hectare sold. The total discounted amount payable with respect to the Earn-out is $1,691
(December 31, 2017 - $1,448), and is included in other liabilities.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
20. PENSIONS AND OTHER POST-RETIREMENT BENEFITS
Defined benefit pension plans
The Company sponsors two non-contributory defined benefit pension plans: one a registered pension plan
for salaried employees and the other a non-registered historical pension plan for certain retired executives.
Both plans provide benefits based on years of service and historical highest average salary. The plans were
closed to new participants effective August 1, 2000. The Company amended the registered defined benefit
pension plan effective January 1, 2005 to reduce the benefit formula for future years of service and to allow
members of the defined benefit pension plan to participate in the defined contribution plan. In respect of the
non-registered historical executive pension plan, the Company has issued letters of credit amounting to
$1,405 (2017 - $1,485) based on annual actuarial estimates.
The most recent actuarial valuation of the registered pension plan for funding purposes was as of
December 31, 2016. The next actuarial valuation for the registered pension plan is required to be
performed as at December 31, 2019.
60
Annuity contract
During the comparative year ended December 31, 2017, the Company purchased an annuity buy-in for plan
retirees for $36,009 through its defined benefit pension plan, representing total annuities purchased to date.
Future cash flows from the annuity will match the amount and timing of benefits payable under the plan,
substantially mitigating the exposure to future volatility in the related pension obligation. Actuarial based
transaction costs of $4,380 relating to the purchase were recognized in other comprehensive income (loss),
reflecting the difference between the annuity buy-in rate (which is comparable to solvency rates) compared
to the discount rate used to value the obligations on a going concern basis.
At December 31, 2018, reflecting the buy-in annuity, 64% (2017 - 66%) of the defined benefit pension plan
obligation was fully hedged against changes in future discount rates and longevity risk (potential increases
in life expectancy of plan members).
Defined contribution plans
The Company sponsors defined contribution plans for eligible employees. Pension expense for the
defined contribution plans for the year ended December 31, 2018 amounted to $1,050 (2017 - $1,029)
and is included in distribution, selling and administration expenses.
Post-retirement benefits other than pensions
The Company provides extended health care benefits and pays provincial medical plan premiums on
behalf of qualifying employees. The Company also pays for the dental benefits of certain retirees who had
been employed at a predecessor company.
Total cash payments
Total cash payments for employee future benefits for 2018, consisting of cash contributed by the Company
to defined benefit plans, defined contribution plans, and other post-retirement benefits, were $1,794
(2017 - $1,788), with no solvency deficiency contributions.
Included in total cash payments, based on 2018 experience, the Company expects the 2019 contributions
for its defined benefit plans to be approximately $350, including solvency deficiency contributions of $49.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
The status of the defined benefit pension and post-retirement benefit plans is as follows:
Pension benefit plan
Other benefit plans
2018
$
2017
$
2018
$
2017
$
Net benefit expense
Current service cost
Non-investment expenses
Interest cost on benefit obligation
Interest on effect of asset ceiling impairment at
beginning of year
Expected return on plan assets
368
80
1,584
1
(1,540)
502
126
1,728
103
(1,792)
Net benefit expense
493
667
-
-
79
-
-
79
-
-
177
-
-
177
Defined benefit obligation
Defined benefit obligation at January 1
Current service cost
Interest cost on benefit obligation
Benefits paid
Actuarial (gains) losses on obligation
49,023
368
1,584
(2,838)
(2,476)
48,856
502
1,728
(2,805)
742
2,508
-
79
(222)
(167)
5,071
-
177
(240)
(2,500)
61
Defined benefit obligation at December 31
45,661
49,023
2,198
2,508
Plan assets
Fair value of plan assets at January 1
Expected return on plan assets
Employer contributions
Non-investment expenses
Benefits paid
Actuarial losses on plan assets
47,846
1,540
522
(80)
(2,838)
(1,529)
50,545
1,792
519
(126)
(2,805)
(2,079)
Fair value of plan assets at December 31
45,461
47,846
-
-
222
-
(222)
-
-
-
-
240
-
(240)
-
-
Net benefit liability
Fair value of plan assets at December 31
Accrued benefit obligation at December 31
Asset ceiling impairment
45,461
(45,661)
(200)
(892)
47,846
(49,023)
(1,177)
(23)
-
(2,198)
(2,198)
-
-
(2,508)
(2,508)
-
Net benefit liability
(1,092)
(1,200)
(2,198)
(2,508)
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
The Company has recorded net benefit expense and actuarial gains (losses) as follows:
Distribution, selling and administration
Current service cost
Non-investment expenses
Finance costs
Interest cost on benefit obligation
Interest on effect of asset ceiling impairment at
beginning of year
Expected return on plan assets
62
Other comprehensive income (loss)
Actuarial gains (losses) on obligation due to
changes in financial assumptions
Actuarial (losses) gains on obligation due to
changes in experience
Actuarial gains on obligation due to changes
in demographic assumptions
Actuarial losses on plan assets
Net change in effect of asset ceiling
Pension benefit plan
Other benefit plans
2018
$
368
80
448
2017
$
502
126
628
1,584
1
(1,540)
1,728
103
(1,792)
45
39
2,496
(1,494)
(20)
752
-
(1,529)
(868)
-
(2,079)
2,954
2018
$
2017
$
-
-
-
79
-
-
79
172
(5)
-
-
-
-
-
-
177
-
-
177
14
131
2,355
-
-
79
133
167
2,500
Assets
The weighted average asset allocation of the defined benefit plan consists of:
Equity securities
Debt securities
Annuity
Short-term securities
2018
%
1
31
64
4
100
2017
%
2
28
67
3
100
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
The major categories of plan assets of the fair value of the total plan assets are as follows:
Investments quoted in active markets
Unquoted investments (pooled funds)
Annuity
2018
%
1
35
64
100
2017
%
2
31
67
100
Significant assumptions
The significant weighted average assumptions used are as follows:
Pension benefit plan
Other benefit plans
Accrued benefit obligation as of December 31
Discount rate
Rate of compensation increase
Benefit costs for year ended December 31
Discount rate
Rate of compensation increase
2018
%
3.80
3.25
3.30
3.25
2017
%
3.30
3.25
3.60
3.25
Assumed health care cost trend rates at December 31 are as follows:
Health care initial cost trend rate
Heal care ultimate cost trend date
Year that the rate reaches the ultimate trend rate
63
2018
%
3.80
2017
%
3.30
3.30
3.60
2018
%
8.0
3.5
2027
2017
%
8.0
3.5
2027
The mortality assumptions are based on the 2014 Canadian Pensioners Mortality Private table with
generational projection using mortality improvement scale CPM-B and adjusted for size of pensions.
Sensitivity analysis
A one-percentage point change in the assumed rate of increase in health care costs would have the
following effects:
Other benefit plans
2018
2017
Increase
$
Decrease
$
Increase
$
Decrease
$
Effect on the defined benefit obligation
Effect on the aggregate current service cost and
interest cost
207
8
(184)
(7)
213
(188)
7
(7)
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
A one-percentage point change in the assumed discount rate would have the following effects:
Pension benefit plan
Other benefit plans
Increase
$
Decrease
$
Increase
$
Decrease
$
2018
Effect on the defined benefit obligation
Effect on the aggregate current service cost and
interest cost for the next year
(4,314)
5,213
(145)
184
(228)
14
2017
Effect on the defined benefit obligation
Effect on the aggregate current service cost and
interest cost for the next year
(4,911)
6,037
(179)
234
(228)
16
166
(16)
206
(20)
The average duration of the defined benefit plan obligation at December 31, 2018 is 10.1 years.
64
21. SHARE CAPITAL
The authorized capital of the Company consists of an unlimited number of common and preferred shares
with no par value.
Normal Course Issuer Bid
On November 22, 2018 the Company commenced a Normal Course Issuer Bid (“NCIB”) with respect to
its common shares. Under the terms of the NCIB, the Company may purchase for cancellation up to
6,085,605 of its common shares at market prices. At December 31, 2018 the Company had not
repurchased and cancelled any of its common shares.
2017 Private Placement
On October 2, 2017, and concurrent with the Honsador Acquisition (Note 4), the Company completed a
private placement of 9,832,500 subscription receipts at a price of $5.85 each, resulting in gross proceeds
of $57,520 (the “2017 Private Placement”), including subscription receipts to certain insiders for proceeds
of $5,618. The 2017 Private Placement is pursuant to a bought deal underwritten by a syndicate of
underwriters led by GMP Securities L.P., and included National Bank Financial Inc., Canaccord Genuity
Corp., Raymond James Ltd., Cormark Securities Inc. and Haywood Securities Inc.
Cash proceeds raised from the 2017 Private Placement, net of issuance costs, were used to partially
finance the Honsador Acquisition. Upon the closing of the Honsador Acquisition, the subscription receipts
issued were converted into a total of 9,832,500 common shares.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
2017 Public Offering
On April 18, 2017, the Company completed a public offering of 6,598,470 common shares, by way of
prospectus, at a price of $6.10 each, resulting in gross proceeds of $40,251 (the “2017 Public Offering”).
The 2017 Public Offering was pursuant to a bought deal underwritten by a syndicate of underwriters led
by GMP Securities L.P., and included National Bank Financial Inc., Canaccord Genuity Corp., Haywood
Securities Inc., Raymond James Ltd., and Cormark Securities Inc.
Cash proceeds raised from the 2017 Public Offering, net of issuance costs, were used for reducing the
Company’s existing revolving loan facility, which was re-drawn during the fourth quarter of 2017 to partially
fund the Honsador Acquisition, and for general corporate purposes.
Restricted Equity Common Share Plan (“RECSP”)
The Company’s Restricted Equity Common Share Plan provides for an allotment of Restricted Equity
Common Shares (“RSUs”) to designated directors, officers and employees of the Company (each a
“Member”) at the discretion of the compensation committee.
65
RSUs generally vest one-third on the date of grant and one-third on each of the first and second
anniversary of the date of the grant. However, vesting may be accelerated, or different vesting schedules
may be implemented, at the discretion of the compensation committee. RSUs shall, within 30 days of
vesting and, in any event, by no later than December 31 following the vesting date, be satisfied by the
Company issuing to the holder that number of shares equal to the number of vested RSUs then credited
to the holder. The RSUs earn additional RSUs for the dividends that would otherwise have been paid on
the RSUs as if they had been issued as of the date of the grant. The number of additional RSUs is
calculated using the average market price of the Company’s shares in the five days immediately preceding
each distribution.
RSUs granted are considered to be in respect of future services and are recognized in share-based
compensation costs over the vesting period. Compensation cost is measured based on the market price
of the Company’s shares on the date of granting of the RSUs.
The Company’s obligation to issue shares on the vesting of RSUs is an unfunded and unsecured
obligation of the Company.
The plan authorizes a maximum of 1,500,000 of the Company’s issued and outstanding common shares
to be reserved for issuance.
Outstanding Restricted Stock Units (“RSUs”) pursuant to the RECSP are as follows:
Balance at January 1
Granted
Vested and converted to common shares during the year
Balance at December 31
2018
#
-
3,726
(3,726)
-
2017
#
-
4,832
(4,832)
-
Compensation expense in respect of RSUs for the year ended December 31, 2018 was $25 (2017 - $29).
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
Employee Common Share Purchase Plan (“ECSPP”)
For the year ended December 31, 2018, the Company has issued 81,217 (2017 - 70,955) common shares
from treasury for gross proceeds of $490 (2017 - $384) from employees, pursuant to this plan.
The plan authorizes a maximum of 1,000,000 of the Company’s issued and outstanding common shares
to be reserved for issuance.
Dividends
The following dividends were declared and paid by the Company:
66
Quarter 1
dividend
Quarter 2
dividend
Quarter 3
dividend
Quarter 4
dividend
Declared
Declared
2018
2017
Record date
Per
Amount
Paid
Record date
Per
Amount
Paid
share
share
March 29,
0.14
10,877
2018
June 29,
0.14
10,878
2018
April 13,
2018
July 13,
2018
March 31,
0.14
8,566
April 14,
2017
2017
June 30,
0.14
9,490
July 14,
2017
2017
September 28,
0.14
10,884
October 15,
September 29,
0.14
9,496
October 13,
2018
2018
2017
2017
December 31,
0.14
10,884
January 15,
December 29,
0.14
10,872
January 15,
2018
2019
2017
2018
0.56
43,523
0.56
38,424
22. COST OF SALES
Cost of sales includes the following costs:
Purchased and treated building materials
Salaries and benefits
Logging, harvesting and hauling
Peeled and treated posts
Timber harvested and sold
Fair value adjustments
Inventory provisions
Other
2018
$
1,041,615
29,190
17,064
5,146
4,679
(2,393)
1,776
1,288
2017
$
925,972
29,092
23,911
7,170
3,504
(7,925)
1,155
898
1,098,365
983,777
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
23. DISTRIBUTION, SELLING AND ADMINISTRATION COSTS
Distribution, selling and administration costs include the following:
Salaries and benefits
Building rent and occupancy costs
Office and miscellaneous
Travel, promotion and entertainment
Professional and management fees
24. INCOME TAXES
Income tax for the Company consists of the following:
Consolidated Statements of Earnings
Current income tax expense
Deferred income tax expense (recovery)
Consolidated Statements of Comprehensive Earnings
Deferred tax related to items recorded in OCI during the year
Actuarial gains
67
2018
$
66,729
31,954
9,400
8,334
4,520
120,937
2018
$
8,632
2,499
11,131
2018
$
64
2017
$
51,782
23,043
7,216
5,636
2,521
90,198
2017
$
8,172
(1,195)
6,977
2017
$
707
The Company’s effective income tax rate differs from the statutory income tax rate. The difference arises
from the following items:
Earnings before income taxes
Income tax at statutory rates
Adjustment to deferred tax assets related to changes in tax rates
Amounts not deductible for tax and other
Income tax expense
2018
$
41,146
11,667
2
(538)
11,131
2017
$
35,782
10,986
(3,325)
(684)
6,977
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
Temporary differences that give rise to deferred income tax assets and liabilities are as follows:
Deferred income tax (liabilities) assets:
Property, plant and equipment
Timber
Pensions and other post-retirement benefits
Non-capital losses
Non-deductible reserves
Intangible assets and goodwill
2018
$
2017
$
(10,701)
(12,349)
892
9,089
4,108
(7,705)
(8,312)
(12,283)
960
9,483
3,258
(6,614)
(16,666)
(13,508)
68
At December 31, 2018, the Company has approximately $49,127 of Canadian non-capital losses that may
be available for deduction against taxable income in future years. These losses expire as follows:
2026
2027
2028
2029
2030
Thereafter
$
698
1,111
1,090
3,590
4,403
38,235
49,127
At December 31, 2018, approximately $15,000 of these non-capital losses have not been recognized as
deferred income tax assets.
25. FINANCE COSTS
Finance costs for the Company are broken down as follows:
Loans and borrowings
Finance lease liabilities
Other
Net cash interest
Amortization of financing costs
Accretion of earn-out commitment
Interest expense on net defined benefit liability
2018
$
9,898
193
158
10,249
1,056
243
124
11,672
2017
$
6,555
81
463
7,099
835
120
216
8,270
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
26. RELATED PARTY TRANSACTIONS
Transactions
The Company has transactions with related parties in the normal course of operations at amounts as
agreed between the related parties as follows:
Leased facilities: distribution(1) and treatment plants(2)
Purchase of product(3)(4)
Management fees and other(5)
Professional fees and other(6)
1.
2.
3.
Paid to a company in which a member of key management personnel who is a director and officer of the Company has an interest.
Paid to a company solely controlled by a director and officer of the Company.
Paid to a public company that a member of key management personnel who is a director and officer of the Company has an
ownership interest in: $3,627 (2017 - $2,620).
Paid to a company owned by a director of the Company: $1,037 (2017 - $nil).
Paid to a company controlled by a member of key management personnel who is also a director and officer of the Company.
Paid to a company controlled by an officer of the Company.
4.
5.
6.
69
2018
$
3,317
4,664
1,098
645
2017
$
3,223
2,620
1,208
559
Commitments with related parties
The minimum payments under the terms of the leases with companies, in which a member of key
management personnel who is also a director and officer of the Company has an interest in, are as follows:
Year ending December 31
2019
2020
2021
2022
2023
Thereafter
Payable to related parties
$
3,352
2,307
1,944
1,557
1,589
14,072
24,821
As at December 31, 2018, trade and other payables include amounts due to related parties as follows:
Purchase of product(1)
Management fees and other(2)
Professional fees and other(3)
1.
Owing to a public company that a member of key management personnel who is a director and officer of the Company has an
ownership interest in.
Owing to a company controlled by a member of key management personnel who is also a director and officer of the Company.
Owing to a company controlled by an officer of the Company.
2.
3.
2018
$
38
59
282
2017
$
99
55
133
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
Compensation of key management personnel
Compensation of key management is reported on the accrual basis of accounting consistent with the
amounts recognized on the Consolidated Statement of Earnings. Key management includes the
Company’s Board of Directors, the Chief Executive Officer, the President, and the Chief Financial Officer.
Compensation awarded to key management is summarized as follows:
Salaries and other benefits
Share-based compensation
70
27. COMMITMENTS AND CONTINGENCIES
Lease commitments
The Company has lease commitments as follows:
2018
$
3,397
25
3,422
2017
$
3,369
29
3,398
a.
real estate operating leases with third parties and related parties covering the head office, as well as
many of the distribution centre properties and treatment plant properties;
b. operating leases covering certain vehicles, computer equipment and warehouse equipment; and
c.
finance leases covering certain transportation equipment.
Future minimum payments due under the terms of these leases, including those amounts disclosed in
Note 26, are as follows:
Years ending December 31
2019
2020
2021
2022
2023
Thereafter
$
23,968
19,778
15,787
13,518
12,064
63,187
148,302
As at December 31, 2018 present value of minimum lease payments relating to the finance leases was
$5,242 (2017 - $3,140).
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
Claims
During the normal course of business, certain product liability and other claims have been brought against
the Company and, where applicable, its suppliers. While there is inherent difficulty in predicting the
outcome of such matters, management has vigorously contested the validity of these claims, where
applicable, and, based on current knowledge, believes that they are without merit and does not expect
that the outcome of any of these matters, in consideration of insurance coverage maintained, or the nature
of the claims, individually or in the aggregate, would have a material adverse effect on the consolidated
financial position, results of operations or future earnings of the Company.
28. FINANCIAL INSTRUMENTS
Non-derivative financial instruments
The carrying amounts and fair values of non-derivative financial instruments were as follows:
2018
2017
71
Carrying
amount
$
Fair
value
$
Carrying
amount
$
Fair
value
$
Cash
Trade and other receivables
Cheques issued in excess of cash on deposit
Trade and other payables
Performance bonds
Dividends payable
Unsecured notes
Revolving loan facility
Non-revolving term loan
Promissory notes
Finance lease liabilities
Equipment term loan, equipment line and other
Earn-out commitment
488
101,797
9,701
80,808
13,507
10,884
56,756
184,102
33,580
5,584
5,760
12,155
1,691
488
101,797
9,701
80,808
13,507
10,884
57,594
186,150
34,000
5,584
5,760
12,276
1,691
6,744
104,505
6,744
104,505
9,755
83,620
14,101
10,872
-
159,468
36,221
4,482
3,559
14,531
1,448
9,755
83,620
14,101
10,872
-
162,168
36,667
4,482
3,559
14,698
1,448
The following methods and assumptions were used to determine the estimated fair value of each class of
financial instrument:
The fair values of cash, trade and other receivables, cheques issued in excess of cash on deposit,
trade and other payables, performance bonds and dividends payable is comparable to their
carrying amount, given the short maturity periods.
The fair value of the Company’s unsecured notes was based on the quoted active market price at
December 31, 2018.
The fair values of the Company’s revolving loan facility, non-revolving term loan, and equipment
term loan, equipment line and other approximate their carrying values as they bear interest at
variable rates based on current market rates. The fair values have been estimated as the carrying
values excluding unamortized financing costs.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
The fair values of the Company’s promissory notes and finance lease liabilities approximate their
carrying values as they bear interest that approximates current market rates.
The fair value of the earn-out commitment is equal to the discounted amount of the Earn-out
Payment.
The expenses resulting from financial assets and liabilities recorded in net earnings were as disclosed in
Note 25.
Derivative financial instruments
The Company uses derivative financial instruments for economic hedging purposes in managing lumber
price risk and foreign exchange risk through the use of futures contracts and options. Derivative
instruments were designated as fair value through profit and loss, with changes in fair value recorded in
other income (loss).
72
At December 31, 2018, the Company held various outstanding foreign exchange contracts to purchase
an aggregate of US$9,020 at exchange rates ranging between 1.3175 and 1.3225 (2017 - $1,891) for
economic hedging purposes, and unrealized gains totaling $400 (2017 - $27) were recorded in Other
income.
When held by the Company, these derivative financial instruments are traded through well-established
financial services firms with a long history of providing trading, exchange and clearing services for
commodities and currencies. As trading activities are closely monitored and restricted by senior
management, including limits for a maximum number of outstanding contracts at any point in time, the risk
of credit loss on these financial instruments is considered low.
Financial risk management
The Company’s activities result in exposure to a variety of financial risks from its financial assets and
financial liabilities, including risks related to credit, interest rates, currency, liquidity and wood product
prices.
Financial assets include trade and other receivables, which are measured at amortized cost. Financial
liabilities include cheques issues in excess of cash on deposit, trade and other payables, performance
bond obligations, dividends payable, unsecured notes, revolving loan facility, non-revolving term loan,
promissory notes, finance lease liabilities, equipment term loan and equipment line, and earn-out
commitment. All financial liabilities are measured at amortized cost.
The Board of Directors has overall responsibility for establishment and oversight of the Company’s risk
management, which seeks to minimize any potential adverse effects on the Company’s financial
performance.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer fails to meet its contractual obligations,
and arises primarily from the Company’s trade and other receivables. The Company grants credit to its
customers in the normal course of operations. To limit its exposure to credit risk, the Company performs
ongoing evaluations of the credit quality of its customers and follows diligent credit granting and collection
procedures. Purchase limits are established for each customer and are reviewed regularly.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
The Company regularly reviews the collectability of its trade accounts receivable and establishes an
allowance for doubtful accounts based on its best estimate of any potentially uncollectible accounts.
As at December 31, 2018, trade accounts receivable, excluding other receivables, were as follows:
Current
Past due over 60 days
Trade receivables
Less: Allowance for doubtful accounts
$
89,206
3,192
92,398
(871)
91,527
As at December 31, 2018, the maximum exposure to credit risk is $101,797 (2017 - $104,505), which
represents the carrying value amount of financial instruments classified as trade and other receivables.
73
Interest rate risk
The Company is exposed to interest rate risk through its variable rate revolving loan facility, non-revolving
term loan, and equipment term loan and equipment line (Note 16). Based on the Company’s average
revolving loan facility, non-revolving term loan and equipment term loan balance during 2018, the
sensitivity of a 1% increase in interest rates would result in an approximate decrease of $2,051 in net
annual earnings.
Currency risk
Currency risk is the risk that changes in market prices of foreign exchange rates will affect the Company’s
earnings or the value of its holdings of financial instruments. The Company is exposed to currency risk on
the United States dollar components of its revolving loan facility, as well as sales and purchase
transactions that are denominated in United States dollars.
As at December 31, 2018, a $0.05 increase in the United States dollar versus the Canadian dollar would
have an insignificant impact on net earnings, and an increase in other comprehensive earnings of
approximately $9,700.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due
or at a reasonable cost. The Company manages liquidity risk by having appropriate credit facilities
available at all times. In addition, the Company continuously monitors and reviews both actual and
forecasted cash flows. The Company is exposed to refinancing risks as there can be no assurance that
the Company will be able to secure credit on the same terms or amount when the facility expires.
Other price risk
Other price risk is defined as the potential adverse impact on earnings and economic value due to price
movement and volatilities. The Company is exposed to other price risk with respect to certain wood
products. The Company closely monitors wood product prices.
74
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
29. FAIR VALUE MEASUREMENT
IFRS 13, Fair Value Measurement requires classification of financial instruments within a hierarchy that
prioritizes the inputs to fair value measurement.
The three levels of the fair value hierarchy are:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices that are observable for the asset and liability, either directly
or indirectly;
Level 3 – Inputs that are not based on observable market data.
The following table summarizes the fair value measurement hierarchy of the Company’s assets and
liabilities at December 31, 2018.
Non-financial assets measured at fair value
Timber
Financial assets measured at fair value
Derivative financial instruments
Financial assets for which fair values are disclosed
Trade and other receivables
Financial liabilities for which fair values are disclosed
Trade and other payables
Performance bonds
Dividends payable
Unsecured notes
Revolving loan facility
Non-revolving term loan
Promissory notes
Finance lease liabilities
Equipment term loan and equipment line
Earn-out commitment
Total
$
Level 1
$
Level 2
$
Level 3
$
62,659
400
101,797
80,808
13,507
10,884
57,594
186,150
34,000
5,584
5,760
12,276
1,691
-
-
-
-
62,659
400
-
-
101,797
-
-
-
57,594
-
-
-
-
-
-
-
-
10,884
-
-
-
-
-
-
-
80,808
13,507
-
-
186,150
34,000
5,584
5,760
12,276
1,691
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company
determines whether transfers have occurred between Levels in the hierarchy by re-assessing
categorization (based on the lowest level input that is significant to the fair value measurement as a whole)
at the end of each reporting period.
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
30. CHANGES IN NON-CASH WORKING CAPITAL
Trade and other receivables
Inventories
Prepaid expenses and deposits
Trade and other payables
Performance bond obligations
31. REVENUE
2018
$
5,314
(54,945)
1,791
(5,892)
(1,735)
(55,467)
2017
$
(3,505)
(9,322)
(186)
7,589
1,708
(3,716)
The following table presents disaggregated revenues from contracts for the Company in categories that
depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic
factors.
75
Primary geographic
markets
Canada
United States
Sales categories
Products
Services
2018
2017
Distribution
$
Forestry
$
Total
$
Distribution
$
Forestry
$
Total
$
903,895
336,870
1,240,765
42,338
8,192
50,530
946,233
345,062
1,291,295
893,765
186,524
1,080,289
936,098
42,333
13,328
199,852
55,661 1,135,950
1,236,428
4,337
1,240,765
50,530
-
50,530
1,286,958
4,337
1,291,295
1,075,871
4,418
1,080,289
53,662 1,129,533
1,999
6,417
55,661 1,135,950
Certain customers elect to prepay for goods and services, for which the Company has recorded a contract
liability of $2,924 as at December 31, 2018 (December 31, 2017 - $3,184), related to these unsatisfied
performance obligations (unearned revenues). These amounts are included in Trade and other payables
in the Consolidated Statement of Financial Position.
The Company has sold products to certain customers who comprise greater than 10% of its sales. During
the year ended December 31, 2018, two customers individually accounted for sales in excess of 10%,
purchasing an aggregate of $383,821 (2017 - $357,446, representing two customers).
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
32. SEGMENTED INFORMATION
The Company operates in two reportable business segments and two geographic areas.
The two reportable business segments offer different products, require different production processes,
and are based on how financial information is produced internally for the purposes of making operating
decisions. The following summary describes the operations of each of the Company’s reportable business
segments:
Distribution – wholesale distribution of building materials and home renovation products, including
value-added services such as lumber pressure treating; and
Forestry – timber ownership and management of private timberlands and Crown forest licenses,
logging and trucking operations, and value-added services such as post-peeling and post and pole
pressure treating operations.
76
Sales between segments are accounted for at prices that approximate fair value. No business segments
have been aggregated to form the above reportable business segments.
2018
Distribution
$
Forestry
$
Adjustments...
and...
eliminations(1)
$
Consolidated
$
Distribution
$
Forestry
$
2017
Adjustments...
and...
eliminations(1)
$
Consolidated
$
1,240,765
-
50,530
1,594
-
(1,594)
1,291,295
-
1,080,289
-
55,661
882
-
(882)
1,135,950
-
1,240,765
52,124
(1,594)
1,291,295
1,080,289
56,543
(882)
1,135,950
(13,411)
-
(9,160)
(5,011)
-
(2,512)
-
2,393
Net earnings
26,289
3,726
Purchase of
property, plant
and equipment
8,048
5,708
-
-
-
-
-
-
(18,422)
-
(11,672)
2,393
(9,039)
-
(5,876)
(5,719)
(834)
(2,394)
-
7,925
30,015
28,133
672
13,756
4,335
7,653
-
-
-
-
-
-
(14,758)
(834)
(8,270)
7,925
28,805
11,988
1.
Includes inter-segment eliminations and income and expenses that are not allocated to reportable business segments.
Revenue
External customers
Inter-segment
Specified income
(expenses)
Depreciation and
amortization
Restructuring costs
Finance costs
Fair value
adjustments
CanWel Building Materials Group Ltd.
2018 AnnuAL RepoR t
notes to the consoliDateD financial stateMents for the years enDeD DeceMber 31, 2018 anD 2017
December 31, 2018
Distribution
$
Forestry
$
Percent
%
Consolidated
$
Distribution
$
December 31, 2017
Forestry
$
Percent
%
Consolidated
$
Canada
United States
118,774
156,073
131,679
-
Long-term assets
274,847
131,679
62
38
100
250,453
156,073
123,173
124,870
132,041
-
67
33
255,214
124,870
406,526
248,043
132,041
100
380,084
The percentage of total revenue from external customers from product groups is as follows:
Construction materials
Specialty and allied
Forestry and other
33. CAPITAL DISCLOSURES
2018
%
58
34
8
100
2017
%
61
33
6
100
77
The Company’s objectives when managing capital are to safeguard its ability to continue as a going
concern, so that it can continue to provide dividends to shareholders and benefits for other stakeholders.
The Company includes debt and equity, comprising shareholders’ capital, contributed surplus, deficit and
cumulative dividends on shares, in the definition of capital.
The Company seeks to maintain a balance between the higher returns that might be possible with the
leverage afforded by higher borrowing levels and the security afforded by a sound capital structure. It does
this by maintaining appropriate debt levels in relation to its working capital and other assets in order to
provide the maximum dividends to shareholders commensurate with the level of risk. Also, the Company
utilizes its debt capabilities to buy back shares, where appropriate, in order to maximize cash distribution
rates for remaining shareholders.
The Company manages the capital structure and makes adjustments to it in light of changes in economic
conditions. In order to maintain or adjust the capital structure, the Company may adjust the amount of
dividends paid to shareholders, repurchase shares in the market, issue new shares, or sell assets to
reduce debt.
The Company’s policy is to dividend all available cash from operations to shareholders after provision for
cash required for maintenance of capital expenditures and other reserves considered advisable by the
Company’s directors. The Company has eliminated the impact of seasonal fluctuations by equalizing
quarterly dividends.
There are no externally imposed capital requirements and the Company’s loan agreements do not contain
any capital maintenance covenants.
There were no changes to the Company’s approach to capital management during the current year.
34. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the financial statement presentation
adopted in the current year.
CORPORATE INFORMATION
Directors
Ian M. Baskerville
Toronto, Ontario
Amar S. Doman
West Vancouver, British Columbia
Tom Donaldson
Saint John, New Brunswick
Kelvin Dushnisky
Johannesburg, South Africa
Sam Fleiser
Toronto, Ontario
Stephen W. Marshall
Vancouver, British Columbia
Harry Rosenfeld
Vancouver, British Columbia
Marc Seguin
Vancouver, British Columbia
Siegfried J. Thoma
Portland, Oregon
Auditors
KPMG LLP
Vancouver, British Columbia
Solicitors
Goodmans LLP
Toronto, Ontario
DLA Piper (Canada) LLP
Vancouver, British Columbia
Officers
Amar S. Doman
Chairman and CEO
James Code
Chief Financial Officer
R.S. (Rob) Doman
Corporate Secretary
CanWel Building Materials
National Office
1100 - 1055 West Georgia Street
P.O. Box 11135 STN Royal Centre
Vancouver BC V6E 3P3
Contact
Phone: (604) 432-1400
Internet: www.canwel.com
Transfer Agent
AST Trust Company (Canada)
Vancouver, British Columbia
Toronto, Ontario
Investor Relations
Contact
Ali Mahdavi
Phone: (416) 962-3300
Stock Exchange
Toronto Stock Exchange
Trading Symbols:
CWX, CWX.NT.A
CanWel Building Materials Group Ltd.
www.canwel.com