HARDWOODS DISTRIBUTION INC.
2014
Annual Report
To Shareholders
Profile
Hardwoods Distribution Inc. (“Hardwoods” or “the Company”) is listed on the Toronto Stock
Exchange and trades under the symbol HWD. We are one of North America’s largest wholesale
distributors of hardwood lumber and related sheet good and specialty wood products. In addition to
our core distribution business, we create custom moulding and millwork packages for customers and
produce and export high-quality lumber products.
Our Customers: Our business serves over 10,000 customers in North America, primarily
manufacturers of cabinets, mouldings, custom finishing, home furniture, home renovations, finishing
millwork for office buildings, restaurant and bar interiors, hotel lobbies, retail point-of-purchase
displays, schools, hospitals, custom motor coaches, yacht interiors and other specialty areas.
Our End-Markets: We estimate that approximately 60% of the products we sell to our manufacturing
customers end up in new residential construction, 20% in the commercial/institutional construction
sector, and 20% in renovation/remodeling and other markets.
Our Products and Services: In 2014 our sales mix was 51% sheet good products, 38% hardwood
lumber products, and 11% other specialty goods. We provide custom milling services to our customers
from five of our locations in Chicago, Cincinnati, Denver, Kansas City, and San Antonio. We also
produce and export high-quality hardwood lumber to customers in North America, Europe and Asia.
Our People: We employ over 450 dedicated employees and maintain a pronounced professional and
entrepreneurial sales and service culture.
Our Strategy: We are focused on capturing the benefit from a steadily recovering US residential
housing market. In addition to capturing market growth, our strategy is to (i) continue to leverage our
established expertise in import products, which account for approximately 25% of our sales mix
measured by product source; and (ii) grow our sales into commercial markets, which represent a
significant demand opportunity but comprises just 20% of our total revenue. We will also pursue
acquisitions that complement our strategies. We have added seven new locations and over $100
million in new annual sales from acquisitions made in the past three and a half years.
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Our Network: Approximately 75% of our sales are in the United States and 25% in Canada. We
operate from 33 locations as follows:
Table of Contents
Message to Shareholders
Management’s Discussion and Analysis
Consolidated Financial Statements
Page
3
6
35
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To Our Shareholders
Hardwoods achieved record revenue and EBITDA results in 2014 as we capitalized on improving
market conditions and implemented our business strategy. I would be remiss if I did not mention that
these results were realized in a year when I was recovering from a serious accident and on medical
leave for an extended period. Hardwoods did not skip a beat, a fact that speaks volumes about the
talent and commitment of our people, and the strength and resiliency of our business model.
Capitalizing on US Market Growth
Our record results were supported by continued improvement in the US residential construction
market. According to the US Census Bureau, housing starts rose by 8.2% to 1.0 million in 2014. With
our growing US sales capability, established supply lines and a strong geographic network, we were
well positioned to capitalize on this growth. Our US operations increased sales by 18.6% year-over-
year. Product prices also increased on average, with higher prices for hardwood lumber offsetting a
decline in panel product prices. The significant decline in the value of the Canadian dollar was also a
benefit to the Company.
HMI Acquisition
One of the highlights of 2014 was our April acquisition of Hardwoods of Michigan Inc. (“HMI”), a
fully integrated producer and exporter of high quality hardwood lumber. This is the third acquisition
we have completed since late 2011, and consistent with the acquisitions of Olam Wood Products and
Frank Paxton Lumber Company before it, HMI has integrated seamlessly and proved well timed to
the recovery in the US housing market. During 2014, the HMI business contributed US$21.8 million
to our sales while also broadening our customer base and expanding our value-added manufacturing
capabilities.
Implementing our Strategy
Our 2014 results were further bolstered by our “leverage imports” and “strengthen commercial”
strategies, which have helped differentiate Hardwoods from its competitors, increase our market share
and drive organic growth in our business.
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During the year, we grew our line of high-quality, proprietary import products and expanded our
supply lines in Africa, Southeast Asia, Russia and parts of Europe. Sales of import products represent
approximately 25% of our total sales. We also strengthened our sales to the commercial and
institutional market. Currently accounting for about 20% of our sales, this large North American
market provides significant opportunities for growth and diversification. During 2014, we
strengthened our supply of the core products typically used by commercial accounts and increased our
sales capabilities with training and other initiatives. In 2015, we will continue to build on this
foundation by actively pursuing key commercial accounts and continuing to leverage our import
capabilities to bring proprietary products to market.
Well Positioned for Growth
Moving into 2015, our outlook remains positive. US housing starts remain well below the 1.5 million
level that many in the industry consider to be a sustainable level. Accordingly, forecasters continue to
predict a multi-year strengthening trend for the residential market providing a platform for continued
organic growth. We also see significant growth potential in the large US commercial market and will
continue to pursue that opportunity through our “leverage imports” and “strengthen commercial”
strategies.
Given the fragmented market we operate in, our track record of successful acquisitions and our strong
balance sheet, acquisition-based growth is also on our radar. The Company is in excellent shape
financially. Thanks to strong cash generation in 2014, we were able to finance the US$15.0 million
HMI acquisition and support our internal growth while limiting our increase in debt. We also amended
and increased our US bank line to US$79.1 million at the time of the HMI acquisition. We are well
positioned to pursue a wide range of growth avenues, including well-priced acquisition opportunities.
I am pleased to note that the market rewarded our 2014 successes with further share price appreciation
during the year. Together with dividends of $0.17 per share paid during the year, we delivered
excellent value to shareholders with a total return of 20%.
In closing, I thank the Hardwoods team for a year of many successes. I also want to acknowledge the
significant contribution of Rob Brown who so ably led the company as Acting CEO during my
absence, while also maintaining full responsibility for his duties as CFO. On March 18, 2015, Rob
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was appointed to the newly created position of Chief Operating Officer, creating additional executive
capacity as we solidify the more than doubling of sales we have achieved since 2010 and position
Hardwoods for the next phase of market expansion. Faiz Karmally, formerly our Corporate Controller,
has been appointed as Chief Financial Officer. It is a pleasure and a privilege to work with this team,
and I am delighted to be back and doing just that.
Lance R. Blanco
President and Chief Executive Officer
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Management’s Discussion and Analysis
March 26, 2015
This management’s discussion and analysis (“MD&A”) has been prepared by Hardwoods Distribution
Inc. (“HDI” or the “Company”) as of March 26, 2015. This MD&A should be read in conjunction
with the audited consolidated financial statements and accompanying notes (“Audited Financial
Statements”) of the Company for the years ended December 31, 2014 and 2013. Results are reported
in Canadian dollars unless otherwise stated. For additional information, readers should also refer to
our Annual Information Form and other information filed on www.sedar.com.
In this MD&A, references to “EBITDA” are to earnings before interest, income taxes, depreciation
and amortization, where interest is defined as net finance costs as per the consolidated statement of
comprehensive income. In addition to profit, we consider EBITDA and comparisons of EBITDA to
other measures to be useful supplemental measures of the Company’s ability to meet debt service and
capital expenditure requirements, and we interpret trends in EBITDA as an indicator of relative
operating performance.
EBITDA is not an earnings measure recognized by International Financial Reporting Standards
(“IFRS”) and does not have a standardized meaning prescribed by IFRS. Investors are cautioned that
EBITDA should not replace profit or cash flows (as determined in accordance with IFRS) as an
indicator of our performance. Our method of calculating EBITDA may differ from the methods used
by other issuers. Therefore, our EBITDA may not be comparable to similar measures presented by
other issuers. For reconciliation between EBITDA and profit as determined in accordance with IFRS,
please refer to the discussion of Results of Operations described in section 3.0 of this report.
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This MD&A includes the following sections:
1.0 Executive Summary
1.1 Overview
1.2 Strategy
1.3 Outlook
2.0 Background
2.1 Company Overview
2.2 Business and Industry Overview
3.0 Results of Operations
3.1 Years Ended December 31, 2014 and December 31, 2013
3.2 Three Month Periods Ended December 31, 2014 and December 31, 2013
4.0
Selected Financial Information and Seasonality
4.1 Quarterly Financial Information
4.2 Annual Financial Information
5.0 Liquidity and Capital Resources
5.1 Cash Flows from Operating, Investing and Financing Activities
5.2 Working Capital
5.3 Revolving Credit Facilities and Debt Management Strategy
5.4 Contractual Obligations
5.5 Off-Balance Sheet Arrangements
5.6 Financial Instruments
5.7 Share Data
5.8 Dividends
6.0 Related Party Transactions
7.0 Critical Accounting Estimates and Adoption of Changes in Accounting Policies
7.1 Critical Accounting Estimates
7.2 Adoption of New Accounting Standards
8.0 Risks and Uncertainties
9.0 Disclosure Controls and Procedures and Internal Control over Financial Reporting
10.0 Note Regarding Forward Looking Information
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1.0 Executive Summary
1.1 Overview
We achieved record financial performance in 2014 as we successfully executed our business strategy
and capitalized on improving US market demand. For the year ended December 31, 2014, sales
increased 22.8% to $455.7 million, EBITDA climbed 19.2% to $25.5 million and profit increased
7.3% year-over-year to $14.0 million.
12 Months Ended December 31
Sales (C$ millions)
455.7
371.2
306.1
EBITDA (C$ millions)
25.5
21.4
12.3
Profit (C$ millions)
13.1
14.0
6.2
2012
2013
2014
2012
2013
2014
2012
2013
2014
Organic and Acquisition-Based Growth
Our sales performance reflects $59.3 million of growth related to increased residential and
commercial market sales, higher sales of import products, stronger product pricing and favourable
foreign exchange influences. The HMI acquisition accounted for the balance of our sales growth,
with HMI contributing US$21.8 million of revenue during the eight months we operated this business
in 2014.
Market Conditions
The US residential construction market continued to strengthen in 2014, supporting the 18.6%
increase in our US sales. According to the US Census Bureau, US housing starts increased 8.2% to
1,003,000, after increasing 18.5% in 2013. Given that hardwood products are typically applied at the
final stages of house construction (approximately nine-to-twelve months after house construction
starts), we were in a strong demand growth phase through all of 2014 and expect to remain in an
expanding market through 2015.
According to the Canada Mortgage and Housing Corporation, Canadian housing starts declined to
180,000 in 2014, from 188,000 in 2013. Despite this decline, our Canadian operations increased sales
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by 9.9% in 2014, primarily due to higher product prices as well as the benefit from a weakening
Canadian dollar relative to the US dollar.
Product pricing was generally stronger in 2014 than in 2013. Average hardwood lumber prices, as
measured by the Hardwood Review Kiln Dried Lumber Price Index, increased approximately 5.8%,
largely reflecting demand-driven price escalation in the first half of the year. Domestic panel prices
remained stable during the year, and import panel prices decreased year over year, reflecting the
discontinuation of 22% preliminary duties on Chinese plywood imports in late 2013.
Our business continued to benefit from a stronger US dollar relative to the Canadian dollar as the US
dollar strengthened from $1.06 at the start of the year to $1.16 at year end. A stronger US dollar
benefits us by: i) increasing the value of sales and profits earned in our US operations when translated
into Canadian dollars for financial reporting purposes; ii) increasing the selling price of US dollar-
denominated products sold to our Canadian customers; and iii) improving the export competitiveness
of our Canadian industrial customers, many of whom have the capability to sell their manufactured
products in the US.
Profitability and Efficient Operations
As anticipated, 2014 gross profit margin did not match the unusually high results achieved in 2013
during a period of rapid product price escalation. At 17.3%, our gross margin reflects more stable
product pricing, increased competition, and our strategic efforts to increase market share. In addition,
revenue from our new HMI business carries lower gross profit margins than other parts of our business.
Operating expenses increased year-over-year as we supported growth in our business, but as a
percentage of sales, declined to 12.2% from 12.8% in 2013, reflecting the efficiency of our business
model. EBITDA as a percentage of sales was 5.6% in 2014, compared to 5.8% in the prior year.
Balance Sheet
Cash from operating activities increased by $7.9 million year over year, primarily due to higher
EBITDA and more efficient management of working capital. The increased cash flow enabled us to
internally finance much of our 2014 growth, including a portion of the HMI acquisition, while
maintaining a strong balance sheet to support future growth initiatives. As at December 31, 2014,
Hardwoods’ net debt-to-EBITDA ratio was a conservative 1.5 times, our debt-to-capital ratio was just
26.3% and we had $36.9 million of unused borrowing capacity.
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1.2 Strategy
Our strategy continues to be focused in two areas.
Leverage Imports
Import products have been a major growth engine for Hardwoods. We have built a strong competitive
advantage by working directly with overseas manufacturers to create high-quality, proprietary products
that provide a strong value offering to our customers.
During 2014, we continued to leverage this program, increasing our product offering and expanding
our supply lines in Africa, Southeast Asia, Russia and parts of Europe. Sales of import products
represent approximately 25% of our total sales.
Strengthen Commercial
Our “strengthen commercial” strategy focuses on expanding our base of customers in the commercial
and institutional sectors as we work to balance our exposure to residential construction. Currently
comprising about 20% of our sales, we view the commercial and institutional market as a significant
growth opportunity for Hardwoods and we intend to become a more significant participant. During
2014 we continued to grow our supply of first-tier quality product supply for commercial customers
and capitalized on our import capabilities to offer both domestic and off-shore product solutions to the
commercial sector. We also continued to expand our sales capabilities with training and other
initiatives focused on the commercial market.
1.3 Outlook
Economic forecasters continue to predict a multi-year strengthening of the US residential construction
market. With approximately 75% of our business in the US, and approximately 60% of our products
going into the residential construction market, we are well positioned to capitalize on the market
recovery underway.
The outlook for the US repair and remodeling market, as provided by Harvard’s Joint Center for
Housing Studies, anticipates modest growth in 2015. The US commercial market, meanwhile, is
expected to achieve steady mid-single digit growth.
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The outlook for the Canadian market remains neutral, with 2015 housing starts expected to remain
unchanged from 2014 levels. Growth in the Canadian renovation and commercial construction
markets is expected to be in line with inflation.
Our focus in 2015 will be on continuing to expand our US market share. Our priorities will be to
implement our “leverage imports” and “strengthen commercial” strategies, while pursuing well-
priced, acquisition opportunities that support our objectives.
The Board will continue to review our financial performance and assess distribution levels on a
regular basis. However in terms of cash utilization our primary focus in 2015 will remain on retaining
the financial flexibility to finance the market growth opportunity in the US and to keep our balance
sheet strong to support strategic acquisitions.
2.0 Background
2.1 Company Overview
Hardwoods Distribution Inc. is a publicly traded company that holds, indirectly, a 100% ownership
interest in Hardwoods Specialty Products LP and Hardwoods Specialty Products US LP (collectively,
“Hardwoods” or the “Business”). Hardwoods Distribution Inc. is listed on the Toronto Stock
Exchange and trades under the symbol HWD.
2.2 Business and Industry Overview
Serving customers for over 50 years, Hardwoods is one of North America’s largest distributors of
high-grade hardwood lumber and specialty sheet goods to the cabinet, moulding, millwork, furniture
and specialty wood products industries. At December 31, 2014 we operated 33 facilities located in
17 states and 5 provinces throughout North America. Five of these facilities include light
manufacturing capabilities to create customer moulding and millwork packages for our customers,
and one facility (HMI) is a fully integrated producer and exporter of high-quality, value-added
hardwood lumber. To maximize inventory management, we utilize a hub and spoke distribution
system, with major hub distribution centres holding the bulk of our inventory and making regular
truck transfers to replenish stock in satellite distribution centres that are located in smaller markets.
Approximately 51% of our product mix is made up of hardwood plywood and non-structural sheet
goods such as medium-density fiberboard, particleboard and melamine-coated stock. Approximately
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38% of our sales are of high-grade hardwood lumber. Our sheet goods and lumber are
complementary product lines that are key products used by our customers in the manufacture of their
end-use products. The balance of our product sales, about 11%, is made up of other specialty products.
Our role in the industry is to provide the critical link between mills that manufacture large volumes
of hardwood lumber and sheet goods, and industrial customers that require smaller quantities of many
different hardwood products for their own manufacturing processes. We provide a means for
hundreds of hardwood mills to get their product to thousands of small-to-mid-sized industrial
manufacturers. We add value to our suppliers by buying their product in volume and paying them
promptly, effectively acting as their third-party sales force. We add value for our customers by
providing them with the materials they need on a just-in-time basis, remanufacturing materials to
customer specifications when required, selling in smaller quantities and offering a wider range of
product selection than the customer would be able to purchase directly from an individual mill. We
also provide an important source of financing for our customers by allowing them to buy material
from us on approved credit.
Our customer base manufactures a range of end-use products, such as cabinetry, furniture and custom
millwork. These products in turn are sold into multiple sectors of the economy, including new home
construction, renovation, non-residential construction and institutional markets. As a result of this
diversity, it is difficult to determine with certainty what proportion of our products end up in each
sector of the economy. We estimate about 60% of our products are used in new residential
construction, in the form of cabinets, mouldings, custom finishing, and home furniture. We believe
the balance of our products end up in other sectors of the economy not associated with new residential
construction, such as home renovations, finishing millwork for office buildings, restaurant and bar
interiors, hotel lobbies, retail point-of-purchase displays, schools, hospitals, custom motor coaches,
yacht interiors and other specialty areas.
The majority of the hardwood lumber distributed in North America is harvested from North American
hardwood forests, located principally in the Eastern United States, and is milled by hundreds of small
mills. Imported hardwood lumber is largely limited to specialty species that generally do not compete
with domestic hardwood lumber. Sheet goods are generally produced in North America by large
manufacturers using domestic hardwoods and other materials, although imported hardwood plywood
volumes have been increasing.
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Both domestic and imported hardwood lumber and plywood are distributed principally by third
parties such as us.
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3.0 Results of Operations
3.1 Years Ended December 31, 2014 and December 31, 2013
Selected Unaudited Consolidated Financial Information (in thousands of Canadian dollars)
For the year
For the year
ended December 31
ended December 31
2014
2013
$ Increase
( Decrease)
% Increase
(Decrease)
$
$
Total sales
Sales in the US (US$)
Sales in Canada
Gross profit
Gross profit %
Operating expenses
Profit from operating activities
Add: Depreciation and amortization
Earnings before interest, taxes, depreciation and
amortization (“EBITDA”)
Add (deduct):
Depreciation and amortization
Net finance cost
Income tax expense
Profit for the period
Basic profit per share
Fully diluted profit per share
Average Canadian dollar exchange rate for one US dollar
Sales
455,694
318,089
104,334
78,767
17.3%
(55,427)
23,340
2,138
25,478
$
$
(2,138)
(381)
(8,944)
14,015
0.85
0.84
1.10
$
$
$
$
(1,442)
(178)
(6,681)
13,067
0.80
0.79
1.03
371,215
268,307
94,912
67,616
18.2%
(47,690)
19,926
1,442
21,368
$
84,479
49,782
9,422
11,151
7,737
3,414
696
4,110
$
696
203
2,263
948
$
22.8%
18.6%
9.9%
16.5%
16.2%
17.1%
48.3%
19.2%
48.3%
114.0%
33.9%
7.3%
For the year ended December 31, 2014, we increased total sales to $455.7 million, up $84.5 million,
or 22.8%, from $371.2 million in 2013. Of the $84.5 million year-over-year increase, $62.2 million
was due to stronger underlying sales activity and product prices and $22.3 million reflects the positive
impact of a stronger US dollar.
Sales from our US operations, which comprise approximately three quarters of our revenues,
increased by US$49.8 million, or 18.6%, to US$318.1 million, from US$268.3 million in 2013.
Organic growth accounted for US$28.0 million, or 10.4% of the percentage increase as we increased
sales volumes in response to higher demand and yielded sales gains from our efforts to leverage
import products and strengthen our sales into commercial construction accounts. Product prices were
also higher for some product lines. HMI, acquired on April 28, 2014, contributed US$21.8 million or
8.1% to the percentage increase in US sales.
Sales in Canada increased by $9.4 million, or 9.9%, in 2014 compared to 2013. This improvement
reflects higher product pricing, partially offset by weaker volume demand in Canada. As the majority
of the products we sell originate in the United States, conditions that cause hardwood prices to
increase in the US generally also result in higher selling prices in Canada.
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Gross Profit
Gross profit for the year ended December 31, 2014 increased 16.5% to $78.8 million, from $67.6
million in 2013. This $11.2 million improvement reflects the higher sales for the period, partially
offset by a lower gross profit margin. As a percentage of sales, gross profit margin was 17.3%,
compared to 18.2% in 2013. Gross profit margin in 2013 was unusually strong, aided by a rapid
increase in Chinese import panel prices as the result of a trade action against the product in the US at
that time. The trade action was later dismissed resulting in decreased panel pricing in 2014. Gross
profit margin in 2014 was lower than in 2013, reflecting competitive conditions, the acquisition of
HMI (which has lower margins than our traditional distribution business), and lower margins on
newly won commercial account business.
Operating Expenses
Operating expenses increased to $55.4 million in 2014, compared to $47.7 million in 2013. The $7.7
million increase primarily reflects $1.9 million in incremental costs from the acquired HMI business,
$2.7 million of higher expense due to the impact of a stronger US dollar on translation of US operating
expenses, and higher costs to support growth of $3.1 million. As a percentage of sales, operating
expenses decreased to 12.2% of sales in 2014, from 12.8% in 2013.
EBITDA
For the year ended December 31, 2014, we increased EBITDA to $25.5 million, an increase of $4.1
million, or 19.2%, from $21.4 million in 2013. The increase primarily reflects the $11.2 million
increase in gross profit, partially offset by the $7.1 million increase in operating expenses before
depreciation and amortization.
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Net Finance Cost
(in thousands of Canadian dollars)
Year
ended
Year
ended
Finance expense:
Interest on bank indebtedness
Accretion of finance lease obligation
Total finance expense
Finance income:
Interest on trade receivables
customer notes, and employee loans
Foreign exchange gain
Total finance income
December 31
December 31
2014
2013
$ Increase
( Decrease)
$
(1,189)
(110)
(1,299)
$
(1,016)
(96)
(1,112)
$
173
14
187
389
529
918
375
559
934
14
(30)
(16)
Net finance cost
$
(381)
$
(178)
$
203
Net finance cost increased to $0.4 million in 2014, from $0.2 million in 2013, primarily reflecting
higher interest on bank indebtedness. Interest costs increased by $0.2 million in 2014 reflecting
higher average borrowings on our credit facilities as we supported higher sales with increases in
working capital, primarily accounts receivable and inventory.
Income Tax Expense
Income tax expense increased to $8.9 million in 2014, from $6.7 million in 2013. This increase
primarily reflects higher taxable income.
Profit for the Year
Full-year profit increased to $14.0 million in 2014, from $13.1 million in 2013. The $0.9 million
increase reflects the $4.1 million increase in EBITDA, partially offset by the $2.3 million increase in
income tax expense, $0.7 million increase in depreciation and amortization and $0.2 million increase
in net finance cost.
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3.2 Three Months Ended December 31, 2014 and December 31, 2013
Selected Unaudited Consolidated Financial Information (in thousands of Canadian dollars)
For the three months
For the three months
ended December 31
ended December 31
$ Increase
( Decrease)
% Increase
(Decrease)
Total sales
Sales in the US (US$)
Sales in Canada
Gross profit
Gross profit %
Operating expenses
Profit from operating activities
Add: Depreciation and amortization
Earnings before interest, taxes, depreciation and
amortization (“EBITDA”)
Add (deduct):
Depreciation and amortization
Net finance cost
Income tax expense
Profit for the period
Basic and fully diluted profit per share
Average Canadian dollar exchange rate for one US dollar
Sales
$
$
$
$
2014
114,324
78,872
24,716
19,087
16.7%
(14,452)
4,635
603
5,238
(603)
(39)
(1,788)
2,808
0.17
1.14
$
$
$
$
2013
91,069
64,779
23,056
15,988
17.6%
(12,168)
3,820
396
$
23,255
14,093
1,660
3,099
2,284
815
207
4,216
$
1,022
207
(36)
418
433
$
(396)
(75)
(1,370)
2,375
0.14
1.05
25.5%
21.8%
7.2%
19.4%
18.8%
21.3%
52.3%
24.2%
52.3%
48.0%
30.5%
18.2%
Sales for the three months ended December 31, 2014 increased 25.5% to $114.3 million, from $91.1
million during the same period in 2013. Of this $23.3 million year-over-year increase, $16.2 million
was due to stronger underlying sales and $7.1 million reflects the positive impact of a stronger US
dollar when translating our US sales to Canadian dollars for reporting purposes.
Sales from our US operations, which comprise approximately three quarters of our revenues, increased
by US$14.1 million, or 21.8%, to US$78.9 million, from US$64.8 million in the same period in 2013.
Organic growth accounted for US$6.6 million, or 10.2% of the percentage increase as a result of
stronger underlying sales activity and higher pricing on some product lines. HMI, acquired on April
28, 2014, contributed US$7.5 million or 11.6% to the percentage increase in US sales.
Sales in Canada, which comprise approximately one quarter of our revenues, increased by $1.7 million,
or 7.2%, year-over-year. The increase reflects successes in winning new business, as well as overall
stronger product prices and the positive impact of a stronger US dollar as described in Section 1.1.
Gross Profit
Gross profit for the three months ended December 31, 2014 increased 19.4% to $19.1 million, from
$16.0 million during the same period in 2013. This $3.1 million improvement reflects the higher sales
for the period, partially offset by a lower gross profit margin. As a percentage of sales, fourth quarter
gross profit margin was 16.7%, compared to 17.6% in the comparative period. The reduction in gross
profit margin reflects competitive conditions and the impact of the acquired HMI manufacturing
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business, which generates a slightly lower gross profit percentage than does Hardwoods’ traditional
distribution business. The lower margin also reflects initial entry at lower margins into some
commercial construction market accounts as we work to increase our presence in this market.
Operating Expenses
Operating expenses increased to $14.5 million in the fourth quarter of 2014, from $12.2 million during
the same period last year. The $2.3 million increase primarily reflects $0.9 million in incremental costs
from the acquired HMI business, $0.8 million of higher expense due to the impact of a stronger US
dollar on translation of US operating expenses and higher costs to support growth of $0.6 million. As
a percentage of sales, operating expenses were 12.6% of sales in the three months ended December 31,
2014, compared to 13.4% during the same period in 2013.
EBITDA
For the three months ended December 31, 2014, EBITDA increased to $5.2 million, from $4.2 million
during the same period in 2013. The $1.0 million increase reflects the $3.1 million increase in gross
profit, partially offset by the $2.1 million increase in operating expenses before depreciation and
amortization.
Profit for the Period
Profit for the three months ended December 31, 2014 increased to $2.8 million, from $2.4 million in
2013. The $0.4 million increase primarily reflects the $1.0 million increase in EBITDA, partially offset
by a $0.4 million increase in income tax expense and a $0.2 million increase in depreciation and
amortization.
Hardwoods Distribution Inc. | 2014 | Annual Report
18
4.0 Selected Financial Information and Seasonality
4.1 Quarterly Financial Information
(in thousands of dollars)
Total sales
Profit
Basic profit per share or unit
Fully diluted profit per share or unit
EBITDA
Q4
2014
Q3
2014
Q2
2014
Q1
2014
Q4
2013
Q3
2013
Q2
2013
Q1
2013
$
114,324
$
121,398
$
119,038
$
100,934
$
91,069
$
97,546
$
95,617
$
86,983
2,808
0.17
0.17
5,238
4,246
0.26
0.25
7,594
3,996
0.24
0.24
7,543
2,965
0.18
0.18
5,103
2,375
0.14
0.14
4,216
3,109
0.19
0.19
5,269
4,403
0.27
0.27
6,740
3,180
0.19
0.19
5,143
The preceding table provides selected quarterly financial information for our eight most recently
completed fiscal quarters. This information is unaudited, but reflects all adjustments of a normal,
recurring nature which are, in our opinion, necessary to present a fair statement of the results of
operations for the periods presented. Quarter-to-quarter comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of future performance.
Historically, the first and fourth quarters have been seasonally slower periods for our business. Net
earnings reported in each quarter may be impacted by changes to the foreign exchange rate of the
Canadian and US dollar (including changes in foreign exchange gains/losses arising on translation of
intercompany debt), as well as by acquisitions, such as our second quarter 2014 acquisition of HMI.
4.2 Annual Financial Information
(in thousands of dollars except per unit amounts)
Total sales
Profit
Basic profit per share/unit
Fully diluted profit per share/unit
Total assets
Total long-term financial liabilities
EBITDA
Dividends/distributions per share/unit relating to the period:
Year ended
Year ended
Year ended
December 31,
December 31, December 31,
2014
2013
2012
$
$
$
455,694
14,015
0.85
0.84
160,813
4,120
25,478
0.18
371,215
13,067
0.80
0.79
128,264
828
21,368
0.14
306,087
6,179
0.38
0.38
109,335
567
12,347
0.11
$
$
$
Hardwoods Distribution Inc. | 2014 | Annual Report
19
5.0 Liquidity and Capital Resources
5.1 Cash Flows from Operating, Investing and Financing Activities
Selected Unaudited Consolidated Financial
Information (in thousands of Canadian dollars)
Cash provided by operating activities before changes
in non-cash working capital
Changes in non-cash working capital
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Increase (decrease) in cash
Cash, beginning of period
Cash, end of period
Year ended December 31
Three months ended December 31
2014
2013
$ Change
2014
2013
$ Change
$
$
$
$
$
19,687
(7,232)
12,455
(17,175)
4,655
(65)
78
13
15,767
(11,254)
4,513
(3,311)
(1,218)
(16)
94
78
3,920
4,022
7,942
(13,864)
5,873
(49)
(16)
(65)
3,624
5,460
9,084
(264)
(8,823)
(3)
16
13
2,697
13,671
16,368
6
(16,312)
62
16
78
$
927
(8,211)
(7,284)
(270)
7,489
(65)
-
$
(65)
$
$
$
$
$
For the year ended December 31, 2014, cash provided by operating activities increased by $7.9
million, from $4.5 million in 2013 to $12.5 million in 2014. Cash provided by operating activities,
before changes in non-cash working capital, increased by $3.9 million. This primarily reflects the $4.1
million increase in 2014 EBITDA. Investment in non-cash working capital was $4.0 million lower in
2014 than in 2013. An analysis of changes in working capital is provided in section 5.2 of this report.
For the three months ended December 31, 2014, cash provided by operating activities was $9.1
million, compared to $16.4 million during the same period in 2013. Cash provided by operating
activities, before changes in non-cash working capital, increased by $0.9 million. This primarily
reflects the $1.0 million increase in EBITDA for the three months ended December 31, 2014. Cash
provided by investment in non-cash working capital for the three months ended December 31, 2014
decreased by $8.2 million compared to the same period in 2013. An analysis of changes in working
capital is provided in section 5.2 of this report.
Net cash provided by (used in) investing activities
Net cash used in investing activities increased by $13.9 million to $17.2 million in 2014, from $3.3
million in 2013. The increase primarily relates to the $16.5 million paid in the acquisition of HMI,
partially offset by the $3.0 million incurred for the Olam acquisition in 2013, and an additional
investment in property, plant and equipment of $0.6 million. Net cash provided by (used in) investing
activities comprises cash collections on long-term receivables and proceeds from disposal of property,
plant and equipment, less expenditures made on business acquisitions and the acquisition of additional
property, plant and equipment.
Hardwoods Distribution Inc. | 2014 | Annual Report
20
Capital expenditures in our traditional distribution business have historically been low as we lease our
buildings and contract out all freight delivery services. Capital expenditures in this part of our business
are principally for the replacement of forklifts, furniture and fixtures, leasehold improvements and
computer equipment.
Our Paxton business, which includes five branches, requires some additional ongoing investment in
moulders and other light remanufacturing equipment. Paxton also buys trailers and leases tractor units
for use in delivery of product to customers, whereas other Hardwoods operations contract out this
freight delivery service to third-party carriers.
We believe we have made sufficient expenditures to sustain productive capacity of our business as it
relates to our needs for property, plant and equipment.
The addition of HMI has increased our future capital expenditure needs, with the business requiring
ongoing investment in machinery and equipment. We anticipate that additional annual capital
expenditure requirements of approximately $0.6 million will be required to maintain the productive
capacity of the HMI business.
For the three months ended December 31, 2014 cash used in investing activities increased by $0.3
million. The increase primarily relates to additional capital expenditures made in fourth quarter of
2014.
Net cash provided by financing activities
Although our utilization of cash to make acquisitions increased by $13.5 million in 2014, this was
substantially offset by an increase in the amount of net cash we generated from operating activities.
As a result, net cash provided by financing activities increased by just $5.9 million in 2014 despite
completing the HMI acquisition and continuing to invest in organic sales growth during the year.
The $5.9 million increase in cash provided by financing activities in 2014 reflects a $6.6 million
increase in bank indebtedness, partially offset by a $0.6 million increase in dividends paid and a $0.1
million increase in automobile leasing costs.
For the three months ended December 31, 2014 reductions in bank indebtedness of $7.8 million and
dividend payments of $0.7 million comprised the majority of the cash used in financing activities.
Hardwoods Distribution Inc. | 2014 | Annual Report
21
5.2 Working Capital
Our business requires an ongoing investment in working capital, which we consider to be comprised
of accounts receivable, inventory, and prepaid expenses, partially offset by provisions and short-term
credit provided by suppliers in the form of accounts payable and accrued liabilities. Working capital
is not a measure prescribed by IFRS and our definition may differ from what other companies may
consider to be their working capital. We had working capital of $123.8 million at December 31, 2014,
compared to $98.4 million of working capital at December 31, 2013. Most of the increase in working
capital is attributable to increased investment in accounts receivable ($3.8 million) to support our
growth in sales, and inventory ($23.1 million). The increase in inventory is comprised of inventory
related to the HMI business ($8.0 million) which we did not have in the previous year, increase in
foreign exchange ($5.4 million), and increase in inventory to support our organic growth.
Our investment in working capital fluctuates from quarter-to-quarter based on factors such as seasonal
sales demand, strategic purchasing decisions made by management, and the timing of collections from
customers and payments made to our suppliers. Historically the first and fourth quarters are seasonally
slower periods for construction activity and therefore demand for hardwood products decreases. As a
result, sales and working capital requirements are typically lower in these quarters. The fourth quarter
of 2014 was an exception as we increased working capital investment in inventory to meet anticipated
increases in product demand. A summary of changes in our non-cash operating working capital during
the twelve months and three months ended December 31, 2014 and 2013 is provided in the following
table.
(in thousands of Canadian dollars)
Source (use) of funds
Year ended
December 31,
2014
Year ended
December 31, 2013
Three months
ended December
31, 2014
Three months
ended December
31, 2013
Accounts receivable
Inventory
Prepaid expenses
Accounts payable and accrued liabilities
(Decrease) increase in non-cash operating working capital
$ 3,257 $ (6,198) $ 7,784 $ 4,874
(1,780) 9,292
(11,783)
(255)
322
332
(873) (817)
1,549
$ (7,232) $ (11,254) $ 5,463 $ 13,671
(5,366)
(134)
444
Continued compliance with financial covenants under our credit facilities is important to ensure that
we have adequate financing available to meet our working capital requirements. The terms of our
revolving credit facilities are addressed in section 5.3 of this report.
Hardwoods Distribution Inc. | 2014 | Annual Report
22
5.3 Revolving Credit Facilities and Debt Management Strategy
Selected Unaudited Consolidated Financial Information (in thousands of dollars)
As at
As at
December 31, 2014
December 31, 2013
Cash
Bank indebtedness
Net Debt
Shareholders' equity
Total Capitalization
$
$
(13)
38,742
38,729
108,489
147,218
(78)
27,881
27,803
90,683
118,486
$
$
Net debt to total capitalization
26.3%
23.5%
Previous 12 months EBITDA
$
25,478
$
21,368
Net debt to previous 12 months EBITDA
1.5
1.3
The Company considers its capital to be bank indebtedness (net of cash) and shareholders’ equity. As
shown above, our net debt balance increased by $10.9 million to $38.7 million at December 31, 2014,
from $27.8 million at December 31, 2013. This increase in net debt primarily reflects the use of our
bank lines, together with retained cash generated by operations, to increase investment in working
capital and to finance the acquisition of HMI in 2014.
Overall net debt compared to total capitalization stood at 26.3% as of December 31, 2014, compared
to 23.5% at December 31, 2013. At December 31, 2014 our ratio of net debt-to-EBITDA for the
previous 12 months was 1.5 times, compared to 1.3 times at December 31, 2013. Net debt-to-EBITDA
and net debt-to-total capitalization serve as indicators of our financial leverage, however they are not
measures prescribed by IFRS and our method of calculating these measures may differ from methods
used by other issuers.
We have independent credit facilities in both Canada and the U.S. These facilities may be drawn down
to meet short-term financing requirements such as fluctuations in non-cash working capital, and in the
case of the Canadian credit facility, to also make capital contributions to our US operating subsidiary.
The amount made available under our Canadian and US revolving credit facilities is, from time-to-
time, limited to the extent of the value of certain accounts receivable and inventories held by
subsidiaries of the Company. Credit facilities also require ongoing compliance with certain credit
ratios. A summary of our credit facilities at December 31, 2014 is provided in the following table. In
the second quarter of 2014 we amended our US credit facility to extend its term to April 27, 2017 and
to increase the maximum borrowings available under the credit facility from US$50.0 million to
US$79.1 million. The revised credit facility is comprised of US$75.0 million available under revolving
Hardwoods Distribution Inc. | 2014 | Annual Report
23
credit facilities and US$4.1 million under a term loan that matures April 27, 2017, with monthly
payments based on a five-year amortization. The US credit facility was increased to provide us with
additional flexibility to borrow against the value of collateral arising from the HMI acquisition. At
December 31, 2014 we had total borrowing capacity of $36.9 million available for future use and to
cover checks issued in excess of funds on deposit of $1.4 million at December 31, 2014.
Selected Unaudited Consolidated Financial Information (in thousands of dollars)
Maximum borrowings under credit facility
Credit facility expiry date
Available to borrow
Credit facility borrowings
Unused credit facility available
Financial covenants:
Canadian Credit
Facility
$15.0 million
August 7, 2016
$ 13.5 million
$ 5.3 million
$ 8.2 million
US Credit
Facility
$ 91.2 million (US$78.6 million)
April 27, 2017
$ 60.7 million (US$ 52.4 million)
$ 32.0 million (US$ 27.6 million)
$ 28.7 million (US$ 24.8 million)
Covenant does not apply when
the unused credit facility available
exceeds $2.0 million, which it
did at December 31, 2014
Covenant does not apply when
the unused credit facility available
exceeds US$9.4 million, which it
did at December 31, 2014
The terms of the agreements with our lenders provide that dividends cannot be paid to our shareholders
in the event that our subsidiaries are not compliant with their financial covenants. Our operating
subsidiaries were compliant with all required credit ratios as at December 31, 2014. Accordingly there
were no restrictions on dividends arising from non-compliance with financial covenants.
Our debt management strategy is to roll and renew (as opposed to repay and retire) our revolving credit
facilities in Canada and the US when they expire in August 2016 and April 2017, respectively. We
do not intend to restrict future dividends in order to fully extinguish our bank debt obligations upon
their maturity. The amount of bank debt that will actually be drawn on our available revolving credit
facilities will depend upon the seasonal and cyclical needs of the business and on our cash generating
capacity going forward. When making future dividend decisions, we will consider the amount of
financial leverage, and therefore bank debt, we believe is appropriate given existing and expected
market conditions and available business opportunities. We do not target a specific financial leverage
amount. We believe our current credit facilities are sufficient to finance our working capital needs
and market expansion strategy.
Hardwoods Distribution Inc. | 2014 | Annual Report
24
5.4 Contractual Obligations
The table below sets forth our contractual obligations as at December 31, 2014. These obligations
relate to leases on various premises and automobiles and become due in the fiscal years indicated.
`
Total
2015
2016
2017
2018
2019
2020
thereafter
$ 30,700 $ 7,329
$ 5,534
$ 3,821 $ 3,262 $ 2,537
$ 1,862
$ 6,355
5.5 Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
5.6 Financial Instruments
Financial assets include cash and current and long-term receivables, which are measured at amortized
cost. Financial liabilities include bank indebtedness, accounts payable and accrued liabilities, income
taxes payable and finance lease obligations which are measured at amortized cost. The carrying values
of our cash, accounts receivable, income taxes payable, accounts payable and accrued liabilities
approximate their fair values due to the relatively short period to maturity of the instruments. The fair
value of long-term receivables and finance lease obligations are not expected to differ materially from
carrying value given the interest rates being charged and term to maturity. The carrying values of the
credit facilities approximate their fair values due to the existence of floating market based interest
rates.
5.7 Share Data
As at March 26, 2015 we had 16,651,414 common shares issued and outstanding. In addition at March
26, 2015 we had 20,952 performance share grants and 98,913 restricted share grants outstanding under
the terms of our long-term incentive plan. The performance and restricted shares can be settled in
common shares of the Company issued from treasury, shares purchased by us in the market, or in an
amount of cash equal to the fair value of our common shares, or any combination of the foregoing.
The restricted and performance shares vest over periods of up to three years and we intend to issue
common shares from treasury to settle these obligations as they vest. The number of common shares
to be issued to settle the performance share grants will be dependent upon our financial performance
over the vesting period.
Hardwoods Distribution Inc. | 2014 | Annual Report
25
5.8 Dividends
We declared a quarterly dividend of $0.045 per share in the fourth quarter of 2014, which was paid on
January 30, 2015 to shareholders of record as at January 20, 2015. On March 26, 2015 we declared a
quarterly dividend of $0.045 per share, payable on April 30, 2015 to shareholders of record as at April
20, 2015.
6.0 Related Party Transactions
There were no material related party transactions in the three and twelve months ended December 31,
2014 and 2013.
7.0 Critical Accounting Estimates & Adoption of Changes in Accounting
Policies
7.1 Critical Accounting Estimates
The preparation of financial statements in accordance with IFRS requires that we make estimates and
assumptions that can have a material impact on our results of operations as reported on a periodic
basis. We base our estimates and assumptions on past experience and other factors that are deemed
reasonable under the circumstances. Actual results could differ from these estimates. The critical
estimates used in preparing our financial statements are:
Accounts Receivable Provision: Due to the nature of our business and the credit terms we provide to
our customers, we anticipate that a certain portion of required customer payments will not be made,
and we maintain an allowance for these doubtful accounts. The allowance is based on our estimate of
the potential of recovering our accounts receivable, and incorporates current and expected collection
trends.
Deferred income Taxes: We are required to make estimates and assumptions regarding future business
results, as well as the amount and timing of certain future discretionary tax deductions available to us.
These estimates and assumptions can have a material impact upon the amount of deferred income tax
assets and liabilities that we recognize.
Fair values associated with business acquisitions: Business combinations require us to make estimates
and assumptions regarding the fair value of assets acquired and liabilities assumed. The estimates and
assumptions have a material impact on the values at which we recognize assets acquired and liabilities
assumed in a business combination.
Hardwoods Distribution Inc. | 2014 | Annual Report
26
Valuation of inventory: We are required to make estimates and assumptions regarding the net
realizable value of our inventory. The estimates and assumptions have a material impact on the values
at which we recognize inventory.
7.2 Adoption of New Accounting Policies
There were no new standards effective January 1, 2014 that had an impact on the Company’s
consolidated financial statements.
A number of new standards, amendments to standards and interpretations, are not yet effective for the
year ended December 31, 2014, and have not been applied in preparing these consolidated financial
statements. The following pronouncements are considered by the Company to be the most significant
of several pronouncements that may affect the consolidated financial statements in future periods.
IFRS 9, Financial Instruments (“IFRS 9”)
IFRS 9 will replace IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS
9 will replace the multiple classification and measurement models in IAS 39 with a single model that
has only two classification categories: amortized cost and fair value. The new standard also requires a
single impairment method to be used, provides additional guidance on the classification and
measurement of financial liabilities, and provides a new general hedge accounting standard.
The mandatory effective date has been set for January 1, 2018, however early adoption of the new
standard is permitted. The Company does not intend to early adopt IFRS 9 in its consolidated financial
statements for the annual period beginning on January 1, 2015. The adoption of IFRS 9 is currently
not expected to have a material impact on the consolidated financial statements given the nature of the
Company’s operations and the types of financial instruments that it currently holds; however, the
Company will continue to assess the extent of impact as the mandatory adoption date approaches.
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)
IFRS 15 is effective for fiscal years commencing on or after January 1, 2017 and will replace IAS 18,
Revenue and a number of revenue related standards and interpretations. IFRS 15 contains a single
model that applies to contracts with customers and two approaches to recognizing revenue: at a point
in time or over time. The model features a contract-based five-step analysis of transactions to
determine whether, how much and when revenue is recognized. New estimates and judgmental
thresholds have also been introduced, which may affect the amount and/or timing of revenue
recognized.
Hardwoods Distribution Inc. | 2014 | Annual Report
27
The Company intends to adopt IFRS 15 in its consolidated financial statements for the annual period
beginning on January 1, 2017. The Company is assessing the impact of this new standard, but does
not expect the amendments to have a material impact on the consolidated financial statements
Amendments to IAS 1, Presentation of Financial Statements (“IAS 1”)
On December 18, 2014, the IASB issued amendments to IAS 1 as part of its major initiative to
improve presentation and disclosure in financial reports. The amendments are effective for annual
periods beginning on or after January 1, 2016 with early adoption permitted. The Company intends
to adopt these amendments in its consolidated financial statements for the annual period beginning
on January 1, 2016. The extent of the impact of adoption of the amendments has not yet been
determined.
8.0 Risks and Uncertainties
We are exposed to a number of risks and uncertainties in the normal course of business that could have
a negative effect on our financial condition or results of operations. We identify significant risks that
we were aware of in our Annual Information Form which is available to readers along with other
disclosure information at www.sedar.com.
9.0 Disclosure Controls and Procedures and Internal Control over
Financial Reporting
Our management, under the supervision of our Chief Executive Officer (“CEO”) and Chief Financial
Officer (“CFO”), is responsible for establishing and maintaining adequate disclosure controls and
procedures (“DC&P”) and internal control over financial reporting (“ICFR”). Any systems of DC&P
and ICFR, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to information required
to be disclosed and financial statement preparation and presentation.
As required by Multilateral Instrument 52-109 issued by the Canadian Securities Administrators, we
carried out an evaluation of the effectiveness of our DC&P as of December 31, 2014. The evaluation
was carried out under the supervision of, and with the participation of, the CEO and CFO. Based on
this evaluation, our CEO and CFO concluded that our DC&P were effective as of December 31, 2014.
As required by Multilateral Instrument 52-109 issued by the Canadian Securities Administrators, we
carried out an evaluation of the effectiveness of our ICFR as of December 31, 2014. The evaluation
Hardwoods Distribution Inc. | 2014 | Annual Report
28
was carried out within the 1992 COSO framework and under the supervision of, and with the
participation of, the CEO and the CFO. Based on this evaluation, the CEO and CFO concluded that
our ICFR were effective as of December 31, 2014.
There have not been any changes in our ICFR during the quarter ended December 31, 2014 that have
materially affected, or are reasonably likely to materially affect, our ICFR.
10.0 Note Regarding Forward Looking Information
Certain statements in this MD&A contain forward-looking information within the meaning of
applicable securities laws in Canada (“forward-looking information”). The words “anticipates”,
“believes”, “budgets”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “might”,
“plans”, “projects”, “schedule”, “should”, “will”, “would” and similar expressions are often intended
to identify forward-looking information, although not all forward-looking information contains these
identifying words.
The forward-looking information in this MD&A includes, but is not limited to: we were in a strong
demand growth phase through all of 2014 and expect to remain in an expanding market through 2015;
a stronger US dollar benefits us by: i) increasing the value of sales and profits earned in our US
operations when translated into Canadian dollars for financial reporting purposes; ii) increasing the
selling price of US dollar-denominated products sold to our Canadian customers; and iii) improving
the export competitiveness of our Canadian industrial customers, many of whom have the capability
to sell their manufactured products in the US; our strategy continues to be focused in two areas, being
leverage imports and strengthen commercial; our “strengthen commercial” strategy focuses on
expanding our base of customers in the commercial and institutional sectors as we work to balance
our exposure to residential construction; we view the commercial and institutional market as a
significant growth opportunity for Hardwoods and we intend to become a more significant participant;
economic forecasters continue to predict a multi-year strengthening of the US residential construction
market; approximately 75% of our business in the US, and approximately 60% of our products going
into the residential construction market, we are well positioned to capitalize on the market recovery
underway; the outlook for the US repair and remodeling market anticipates modest growth in 2015;
the US commercial market is expected to achieve steady mid-single digit growth; the outlook for the
Canadian market remains neutral, with 2015 housing starts expected to remain unchanged from 2014
levels; growth in the Canadian renovation and commercial construction markets is expected to be in
line with inflation; our focus in 2015 will be on continuing to expand our US market share; our
Hardwoods Distribution Inc. | 2014 | Annual Report
29
priorities will be to implement our “leverage imports” and “strengthen commercial” strategies, while
pursuing well-priced, acquisition opportunities that support our objectives; our primary focus in 2015
will remain on retaining the financial flexibility to finance the market growth opportunity in the US
and to keep our balance sheet strong to support strategic acquisitions; we estimate about 60% of our
products are used in new residential construction and the balance of our products end up in other
sectors of the economy not associated with new residential construction; sheet goods are generally
produced in North America by large manufacturers using domestic hardwoods and other materials,
although imported hardwood plywood volumes have been increasing; net earnings reported in each
quarter may be impacted by changes to the foreign exchange rate of the Canadian and US dollar
(including changes in foreign exchange gains/losses arising on translation of intercompany debt); we
believe we have made sufficient expenditures to sustain productive capacity of our business as it
relates to our needs for property, plant and equipment; we anticipate that additional annual capital
expenditure requirements of approximately $0.6 million will be required to maintain the productive
capacity of the HMI business; our debt management strategy is to roll and renew (as opposed to repay
and retire) our revolving credit facilities in Canada and the US when they expire in August 2016 and
April 2017, respectively; We do not intend to restrict future dividends in order to fully extinguish our
bank debt obligations upon their maturity; the amount of bank debt that will actually be drawn on our
available revolving credit facilities will depend upon the seasonal and cyclical needs of the business
and on our cash generating capacity going forward; the number of common shares to be issued to settle
the performance share grants will be dependent upon our financial performance over the vesting
period; We reported a full-year gross profit margin of 17.3%, a level viewed as sustainable based on
current market conditions and business mix, while recognizing that results may fluctuate up or down
based upon short-term market conditions; we do not anticipate a significant impact on our financial
statements from the eventual adoption of IFRS 9, IFRS 15 and amendments to IAS 1
The forecasts and projections that make up the forward-looking information are based on assumptions
which include, but are not limited to: there are no material exchange rate fluctuations between the
Canadian and US dollar that affect our performance; the general state of the economy does not worsen;
we do not lose any key personnel; there are no decreases in the supply of, demand for, or market values
of hardwood lumber or sheet goods that harm our business; we do not incur material losses related to
credit provided to our customers; our products are not subjected to negative trade outcomes; we are
able to sustain our level of sales and EBITDA margins; we are able to grow our business long term
and to manage our growth; there is no new competition in our markets that leads to reduced revenues
Hardwoods Distribution Inc. | 2014 | Annual Report
30
and profitability; we do not become subject to more stringent regulations; importation of products
manufactured with hardwood lumber or sheet goods does not increase and replace products
manufactured in North America; our management information systems upon which we are dependent
are not impaired; our insurance is sufficient to cover losses that may occur as a result of our operations;
and, the financial condition and results of operations of our business upon which we are dependent is
not impaired.
The forward-looking information is subject to risks, uncertainties and other factors that could cause
actual results to differ materially from historical results or results anticipated by the forward-looking
information. The factors which could cause results to differ from current expectations include, but are
not limited to: exchange rate fluctuations between the Canadian and US dollar could affect our
performance; our results are dependent upon the general state of the economy; we depend on key
personnel, the loss of which could harm our business; decreases in the supply of, demand for, or market
values of hardwood lumber or sheet goods could harm our business; we may incur losses related to
credit provided to our customers; our products may be subject to negative trade outcomes; we may not
be able to sustain our level of sales or EBITDA margins; we may be unable to grow our business long
term to manage any growth; competition in our markets may lead to reduced revenues and
profitability; we may become subject to more stringent regulations; importation of products
manufactured with hardwood lumber or sheet goods may increase, and replace products manufactured
in North America; we are dependent upon our management information systems; our insurance may
be insufficient to cover losses that may occur as a result of our operations; we are dependent upon the
financial condition and results of operations of our business; our credit facilities affect our liquidity,
contain restrictions on our ability to borrow funds, and impose restrictions on distributions that can be
made by our operating limited partnerships; our future growth may be restricted by the payout of
substantially all of our operating cash flow; and, other risks described in our Annual Information Form
and this MD&A.
All forward-looking information in this MD&A is qualified in its entirety by this cautionary statement
and, except as may be required by law, we undertake no obligation to revise or update any forward-
looking information as a result of new information, future events or otherwise after the date hereof.
Hardwoods Distribution Inc. | 2014 | Annual Report
31
Management’s Statement of Responsibilities
The accompanying consolidated financial statements are the responsibility of management and have
been reviewed and approved by the Boards of Directors. The consolidated financial statements have
been prepared by management, in accordance with International Financial Reporting Standards and,
where appropriate, reflect management’s best estimates and judgments. Management has also prepared
financial and all other information in the annual report and has ensured that this information is
consistent with the consolidated financial statements.
The Company maintains appropriate systems of internal control, policies and procedure, which provide
management with reasonable assurance that assets are safeguarded and the financial records are reliable
and form a proper basis for preparation of financial statements.
The Boards of Directors ensure that management fulfills its responsibilities for financial reporting and
internal control through an Audit Committee. This committee reviews the consolidated financial
statements and is comprised of independent Directors. The auditors have full and direct access to the
Audit Committee.
The consolidated financial statements have been independently audited by KPMG LLP, in accordance
with Canadian generally accepted auditing standards. Their report herewith expresses their opinion on
the consolidated financial statements of the Company.
Lance R. Blanco
President and Chief Executive Officer
Hardwoods Distribution Inc. | 2014 | Annual Report
32
Independent Auditor’s Report
To the Shareholders of Hardwoods Distribution Inc.
We have audited the accompanying consolidated financial statements of Hardwoods Distribution Inc.,
which comprise the consolidated statements of financial position as at December 31, 2014 and 2013,
the consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows
for the years then ended, and notes, comprising a summary of significant accounting policies and other
explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on our judgment, including
the assessment of the risks of material misstatement of the consolidated financial statements, whether
due to fraud or error. In making those risk assessments, we consider internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements 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 entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of Hardwoods Distribution Inc. as at December 31, 2014 and 2013, and
its consolidated financial performance and its consolidated cash flows for the years then ended in
accordance with International Financial Reporting Standards.
Chartered Accountants
March 26, 2015
Vancouver, Canada
Hardwoods Distribution Inc. | 2014 | Annual Report
33
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
Assets
Current assets:
Cash
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Non-current assets:
Long-term receivables
Property, plant and equipment
Deferred income taxes
Intangible asset
Total non-current assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Bank indebtedness
Accounts payable and accrued
liabilities
Income taxes payable
Finance lease obligation
Dividend payable
Total current liabilities
Non-current liabilities:
Bank indebtedness
Finance lease obligation
Total non-current liabilities
Total liabilities
Shareholders’ equity:
Share capital
Contributed surplus
Deficit
Accumulated other comprehensive income
Shareholders’ equity
Note
December 31,
2014
December 31,
2013
7
8
7
9
13
$
$
13
46,127
85,401
1,951
78
42,382
62,288
1,205
133,492
105,953
1,253
13,764
12,277
27
27,321
1,363
7,492
13,443
13
22,311
$
160,813
$
128,264
10
$
35,371
$
27,881
11(a)
5
10
11(a)
12(a)
9,682
1,383
1,024
744
48,204
3,371
749
4,120
52,324
45,830
105,154
(49,999)
7,504
108,489
7,426
-
872
574
36,753
-
828
828
37,581
45,298
104,911
(61,031)
1,505
90,683
Total shareholders’ equity and liabilities
$
160,813
$
128,264
Subsequent events (note 5)
The accompanying notes are an integral part of these consolidated financial statements.
Approved on behalf of the board of directors:
(Signed) GRAHAM M. WILSON Director
(Signed) TERRY M. HOLLAND Director
Hardwoods Distribution Inc. | 2014 | Annual Report
35
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
Sales
Cost of sales
Gross profit
Operating expenses:
Selling and distribution
Administration
Profit from operating activities
Finance expense
Finance income
Net finance costs
Profit before income taxes
Income tax expense:
Current
Deferred
Profit for the year
Note
15
8
14
14
13
13
Other comprehensive income:
Exchange differences translating foreign operations
Total comprehensive income for the year
Basic profit per share
Diluted profit per share
12(c)
12(c)
$
$
2014
2013
$
455,694
(376,927)
$
371,215
(303,599)
78,767
67,616
(43,441)
(11,986)
(55,427)
23,340
(1,299)
918
(381)
22,959
(7,188)
(1,756)
(8,944)
14,015
5,999
20,014
0.85
0.84
(38,757)
(8,933)
(47,690)
19,926
(1,112)
934
(178)
19,748
(5,002)
(1,679)
(6,681)
13,067
3,355
16,422
0.80
0.79
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Hardwoods Distribution Inc. | 2014 | Annual Report
36
HARDWOODS DISTRIBUTION INC.
Consolidated Statement of Changes in Shareholders’ Equity
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
Accumulated
other
comprehensive
income (loss) -
translation
reserve
Share Contributed
surplus
capital
Deficit
Total
$
44,762 $
104,903
$
(1,850) $
(71,803) $
76,012
-
-
536
-
-
-
436
108
(536)
-
-
-
-
-
-
-
-
3,355
-
436
-
-
13,067
(2,295)
-
108
-
13,067
(2,295)
3,355
Note
12(b)
12(a)
Balance at January 1, 2013
Share based compensation
expense
Share based compensation
tax adjustment
Shares issued pursuant to LTIP
Profit for the year
Dividends declared
Translation of foreign operations
Balance at December 31, 2013
45,298
104,911
1,505
(61,031)
90,683
Share based compensation
expense
Share-based compensation
tax adjustment
Shares issued pursuant to LTIP
Profit for the year
Dividends declared
Translation of foreign operations
12(b)
12(a)
-
-
532
-
-
-
694
81
(532)
-
-
-
-
-
-
-
-
5,999
-
694
-
-
14,015
(2,983)
-
81
-
14,015
(2,983)
5,999
Balance at December 31, 2014
$
45,830 $
105,154
$
7,504 $
(49,999) $
108,489
The accompanying notes are an integral part of these consolidated financial statements.
Hardwoods Distribution Inc. | 2014 | Annual Report
37
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
Cash flows from operating activities:
Profit for the year
Adjustments for:
Note
2014
2013
$
14,015
$
13,067
Depreciation and amortization
Loss (gain) on sale of property, plant and equipment
Non-cash employee share based compensation
Income tax expense
Net finance costs
9
12(b)
Interest received
Interest paid
Income taxes paid
Changes in non-cash working capital:
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Net cash provided by operating activities
Cash flow from financing activities:
Increase in bank indebtedness
Principal payments on finance lease obligation
Dividends paid to shareholders
Net cash provided by (used in) financing activities
Cash flow from investing activities:
Additions to property, plant and equipment
Proceeds on disposal of property, plant and equipment
Business acquisition
Payments received on long-term receivables
Net cash used in investing activities
5
4
Decrease in cash
Cash, beginning of year
Cash, end of year
Supplementary information:
Property, plant and equipment acquired
under finance leases, net of disposals
2,138
126
694
8,944
381
386
(1,299)
(5,698)
19,687
3,257
(11,783)
(255)
1,549
(7,232)
12,455
8,348
(881)
(2,812)
4,655
(1,507)
100
(16,467)
699
(17,175)
(65)
78
13
1,442
(79)
436
6,681
178
362
(1,117)
(5,203)
15,767
(6,198)
(5,366)
(134)
444
(11,254)
4,513
1,776
(781)
(2,213)
(1,218)
(944)
212
(2,984)
405
(3,311)
(16)
94
78
$
$
$
859
$
1,159
Accounts receivable transferred to long-term notes receivable
99
869
The accompanying notes are an integral part of these consolidated financial statements.
Hardwoods Distribution Inc. | 2014 | Annual Report
38
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
1. Nature of operations:
Hardwoods Distribution Inc. (the “Company”) is incorporated under the Canada Business Corporations Act
trading on the Toronto Stock Exchange under the symbol “HWD.” Subsidiaries of the Company operate a
network of 33 distribution centers in Canada and the US engaged in the wholesale distribution of hardwood
lumber and related sheet goods and specialty products. The Company’s newly acquired operation in Clinton,
Michigan includes a sawmill and kiln drying operations (note 4(a)).
The Company’s principal office is located at #306, 9440 202nd Street, Langley, British Columbia V1M 4A6.
2. Basis of preparation:
(a) Statement of compliance:
These consolidated financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards
Board. The consolidated financial statements were authorized for issue by the Board of Directors on
March 26, 2015.
(b) Basis of measurement:
The consolidated financial statements have been prepared on a historical cost basis.
(c) 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 the financial statements, with the exception of
per share/unit amounts, has been rounded to the nearest thousand.
(d) Use of estimates and judgment:
The preparation of financial statements in accordance with IFRS requires management to make
judgments, estimates and assumptions that affect the application of accounting policies and the reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting year. Actual amounts may differ from the estimates applied
in the preparation of these financial statements.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognized in the year in which the estimates are revised and in any future years affected.
Information about significant areas of estimation uncertainty in applying policies that have the most
significant effect on the amounts recognized in the consolidated financial statements is included in the
following notes:
Note 4 – the estimate of fair values and pro forma sales and profitability associated with the
Hardwoods of Michigan Inc (“HMI”) and Olam Wood Products business combinations;
Note 7 – the collectability of accounts receivable and the determination of the allowance for credit
loss;
Note 8 – the valuation of inventories;
Hardwoods Distribution Inc. | 2014 | Annual Report
39
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
2. Basis of preparation (continued):
(d) Use of estimates and judgment (continued):
Note 12(b) – the measurement of long term incentive plan compensation; and
Note 18 – the determination and measurement of provisions and contingencies.
Critical judgments in applying policies that have the most significant effect on the amounts recognized in
the consolidated financial statements are included in the following notes:
Note 11 – the classification of lease obligations; and
Note 13 – the valuation of deferred income taxes and utilization of tax loss carry forwards.
In assessing the Company’s vehicle leases judgment is required in determining whether substantially all
of the risks and rewards are transferred to the Company. This involves assessing the term of each lease,
the risk associated with the residual value of leased vehicles and assessing the present value of the
minimum lease payments in relation to the fair value of the vehicle at the inception of the lease. For
deferred income taxes judgment is required in determining whether it is probable that the Company’s net
deferred tax assets will be realized. In making such a determination, the Company considers the carry
forward periods of losses and the Company’s projected future taxable income.
3. Significant accounting policies:
The significant accounting policies that have been used in the preparation of these consolidated financial
statements are summarized below. These accounting policies have been applied consistently by the
Company and its subsidiaries to all years presented in these consolidated financial statements.
(a) Principles of consolidation:
These consolidated financial statements include the accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have been eliminated on consolidation.
Wholly owned subsidiaries of the Company are Hardwoods Specialty Products LP, Hardwoods Specialty
Products GP, Hardwoods Specialty Products USLP, Hardwoods Specialty Products USGP, Paxton
Hardwoods LLC, Hardwoods Specialty Products (Washington) Corp, and HMI Hardwoods LLC.
(b) Foreign currencies:
Foreign currency transactions
Foreign currency transactions are translated into the respective functional currencies of the Company
and its subsidiaries, using the exchange rates prevailing at the dates of the transactions. Monetary assets
and liabilities denominated in foreign currencies at the reporting date are translated to the functional
currency at the exchange rate in effect at the financial statement date. The foreign currency gain or loss
on monetary items is the difference between the amortized cost in the functional currency at the beginning
of the year, adjusted for effective interest and payments during the year, and the amortized cost in the
foreign currency translated at the exchange rate at the end of the year. Such exchange gains or losses
arising from translation are recognized in profit and loss for the reporting year in net finance costs.
Hardwoods Distribution Inc. | 2014 | Annual Report
40
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
3. Significant accounting policies (continued):
(b) Foreign currencies (continued):
Translation of foreign operations for consolidation
For purposes of consolidation, the assets and liabilities of foreign operations with functional currencies
other than the Canadian dollar are translated to Canadian dollars using the rate of exchange in effect at
the financial statement date. Revenue and expenses of the foreign operations are translated to Canadian
dollars at exchange rates at the date of the transactions with the average exchange rate for the year being
used. Foreign currency differences resulting from translation of the accounts of foreign operations are
recognized directly in other comprehensive income and are accumulated in the translation reserve as a
separate component of shareholders equity.
Gains or losses arising from a monetary item receivable from or payable to a foreign operation, the
settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of
the net investment in a foreign operation and are recognized directly in other comprehensive income in
the cumulative amount of foreign currency translation differences.
When a foreign operation is disposed of the amount of the associated translation reserve is fully
transferred to profit or loss.
(c) Segment reporting:
Operating segments are based on the information about the components of the business that
management uses to make decisions about operating matters. The subsidiaries of the Company engage
in one main business activity being the sourcing and distribution of hardwood lumber and related sheet
goods and specialty products, hence operating segment information is not provided. Geographical
segment information is provided by country of operations in note 15.
(d) Revenue recognition:
Revenue from the sale of hardwood lumber, sheet goods and specialty products is measured by reference
to the fair value of consideration received or receivable by the operating subsidiaries of the Company,
excluding taxes, rebates, and trade discounts. Revenue is recognized when persuasive evidence exists
that the Company has transferred to the buyer the significant risks and rewards of ownership of the goods
supplied, collection of the consideration is probable and the revenue and associated costs can be
measured reliably. Significant risks and rewards are generally considered to be transferred when the
customer has taken undisputed delivery of the goods.
Hardwoods Distribution Inc. | 2014 | Annual Report
41
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
3. Significant accounting policies (continued):
(e) Finance expense and income:
Finance expense is primarily comprised of interest on the Company’s operating lines of credit and the
unwinding of the discount on the Company’s finance lease obligations. Interest on bank indebtedness
and accretion of the lease obligation is expensed using the effective interest method.
Finance income is comprised of interest earned on cash balances, imputed interest income on employee
loans receivable, and interest charged and received or receivable on trade accounts receivable and notes
receivable from customers. Finance income is recognized as it accrues using the effective interest
method.
Foreign exchange gains and losses are reported on a net basis as either finance income or finance
expense.
(f)
Inventories:
Finished goods are measured at the lower of cost and net realizable value. Raw materials are measured
at the lower of cost and replacement cost. Work-in-process and goods-in-transit are measured at cost.
For purchased wood products, cost is determined using the weighted average cost method and includes
invoice cost, duties, freight, and other directly attributable costs of acquiring the inventory. For
manufactured wood products, cost is defined as all costs that relate to bringing the inventory to its present
condition and location under normal operating conditions and includes manufacturing costs, such as raw
materials, labor and production overhead, and depreciation and amortization costs.
Net realizable value is the estimated selling price in the ordinary course of business less any applicable
selling expenses.
Volume rebates and other supplier discounts are included in income when earned. Volume rebates and
supplier trade discounts are accounted for as a reduction of the cost of the related inventory and are
earned when inventory is sold.
(g) Property, plant and equipment:
Items of property, plant and equipment are carried at acquisition cost less accumulated depreciation and
accumulated impairment losses. Cost includes expenditures that are directly attributable to the
acquisition of the asset. Depreciation is provided at straight-line rates sufficient to depreciate the cost of
the assets over their estimated useful lives less estimated residual values as follows:
Assets
Buildings, machinery and equipment
Leased vehicles
Leasehold improvements
Estimated useful life
3 to 30 years
Over the term of the lease
Over the term of the lease
Leased assets are depreciated over the lease term unless the useful life is shorter than the lease term.
If a significant component of an asset has a useful life that is different from the remainder of the asset,
then that component is depreciated separately.
Hardwoods Distribution Inc. | 2014 | Annual Report
42
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
3. Significant accounting policies (continued):
(g) Property, plant and equipment (continued):
Depreciation methods, material residual value estimates and estimates of useful lives are reviewed at
each financial year end and updated as required.
Gains or losses arising on the disposal of property, plant and equipment are determined as the difference
between the disposal proceeds and the carrying amount of the assets and are recognized in profit or loss
at the time of the disposal.
(h) Impairment:
Non-financial assets
The carrying values of the Company’s non-financial assets are reviewed at each reporting date to assess
whether there is any indication of impairment. If any such indication is present, then the recoverable
amount of the assets is estimated.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use or 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. For the purposes of impairment testing, assets are grouped at
lowest levels that generate cash inflows from continuing use that are largely independent of the cash
inflows of other assets or groups of assets (the “cash-generating unit”).
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 profit and loss. Impairment
losses recognized in prior years are assessed at each reporting date for any indications that the loss has
decreased or no longer exists. An impairment charge 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.
Financial assets
A financial asset is assessed at each reporting date to determine whether there is any objective evidence
that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one
or more events have had a negative effect on the estimated future cash flows of that asset.
Objective evidence that financial assets are impaired can include default or delinquency by a debtor,
restructuring of an amount due to the Company on terms that the Company would not consider otherwise,
or indications that a debtor or issuer will enter bankruptcy.
The Company considers evidence of impairment for financial assets, and in particular receivables, at both
a specific asset and account balance level.
Hardwoods Distribution Inc. | 2014 | Annual Report
43
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
3. Significant accounting policies (continued):
(h) Impairment (continued)
Financial assets (continued)
All individually significant receivables are assessed for specific impairment. Receivables that are not
individually significant are collectively assessed for impairment by grouping together receivables with
similar risk characteristics. In assessing collective impairment of receivables, management considers the
aging of receivables, the nature and extent of security held, historical trends of default, and current
economic and credit conditions to estimate impairments.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the
difference between its carrying amount and the present value of the estimated future cash flows,
discounted at the original effective interest rate.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the
impairment loss is recognized. For financial assets measured at amortized cost, this reversal is
recognized in profit or loss.
(i) Financial instruments:
Financial assets and financial liabilities are recognized when the Company becomes a party to the
contractual provisions of the financial instrument. Financial assets are derecognized when the contractual
rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks
and rewards are transferred. A financial liability is derecognized when it is extinguished, discharged,
cancelled or expires.
Financial assets and financial liabilities are measured initially at fair value plus transactions cost, except
for financial assets and financial liabilities carried at fair value through profit or loss, which are measured
initially at fair value.
The classification and measurement of the Company’s financial instruments is disclosed in note 6 of these
consolidated financial statements.
Financial assets
Cash and cash equivalents
The Company considers deposits in banks, certificates of deposit and short-term investments with original
maturities of three months or less when acquired as cash and cash equivalents.
Hardwoods Distribution Inc. | 2014 | Annual Report
44
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
3. Significant accounting policies (continued):
(i) Financial instruments (continued):
Receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are
not quoted in an active market. After initial recognition these are measured at amortized cost using the
effective interest method, less provisions for impairment, if any. Discounting is omitted where the effect
of discounting is immaterial.
Individual receivables are considered for impairment when they are past due or when other objective
evidence exists that a specific counterparty will default. Impairment of trade receivables is presented
within selling and distribution expenses.
Loans receivable consist of notes from customers and loans to employees for relocation costs, discounted
using the effective interest method. Interest revenue on these loans is recognized within finance income.
Financial liabilities
Loans and payables are non-derivative financial liabilities with fixed or determinable payments that are
not quoted in an active market. After initial recognition these liabilities are measured at amortized cost
using the effective interest method, less provisions for impairment, if any. Discounting is omitted where
the effect of discounting is immaterial. The revolving bank line of credit is not discounted; rather, actual
interest accrued based on the daily balances is recorded each month.
(j)
Income taxes:
Income tax expense comprises current and deferred tax and is recognized in profit and loss except to the
extent that it relates to items recognized directly in equity or in other comprehensive income. Current
income 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 the previous
years.
Deferred tax is recognized by the Company and its subsidiaries in respect of temporary differences
between the carrying amount of assets and liabilities for financial reporting purposes and the amounts
used for taxation purposes. Deferred tax is not recognized for the initial recognition of assets or liabilities
in a transaction that is not a business combination and that affects neither accounting nor taxable profit
or loss; differences relating to investments in subsidiaries to the extent that it is probable that they will not
reverse in the foreseeable future; and taxable differences arising on 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.
Deferred tax assets and liabilities are offset only when the Company has a legally enforceable right and
intention to set off current tax assets and liabilities from the same taxation authority.
Hardwoods Distribution Inc. | 2014 | Annual Report
45
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
3. Significant accounting policies (continued):
(j)
Income taxes: (continued)
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences,
to the extent that it is probable that future taxable profits will be available against which they can be
utilized. 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.
(k) Leases:
Automobile leases for which the Company assumes substantially all the risks and rewards of ownership
are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal
to the lower of its fair value and the present value of the minimum lease payments and a lease obligation
is recorded equal to the present value of the minimum lease payments.
Subsequent to initial recognition, the leased asset is accounted for in accordance with the accounting
policies applicable to property, plant and equipment. Minimum lease payments made under finance
leases are apportioned between finance expense and the reduction of the outstanding liability. The
finance expense is allocated to each period during the lease term so as to produce a constant periodic
rate of interest on the remaining balance of the liability.
Other leases are operating leases and as such the leased assets are not recognized in the Company’s
statement of financial position. Payments made under operating leases are recognized in profit or loss
on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral
part of the total lease expense, over the term of the lease.
(l) Provisions and contingent liabilities:
Provisions are recognized in the statement of financial position when the Company has a present legal
or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits
will be required to settle the obligation, and a reliable estimate can be made of the amount of the
obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that
reflects current market assessments of the time value of money and the risks specific to the liability.
(m) Basic and diluted profit per share:
The Company presents basic and diluted profit per share data for its outstanding common shares. Basic
profit per share attributable to shareholders is calculated by dividing profit by the weighted average
number of common shares outstanding during the reporting year. Diluted profit per share is determined
by adjusting the profit attributable to common shareholders and the weighted average number of common
shares outstanding for the effects of all dilutive potential common shares.
Hardwoods Distribution Inc. | 2014 | Annual Report
46
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
3. Significant accounting policies (continued):
(n) Share based compensation:
The Company has a share based long-term incentive plan as described in note 12(b). The Company is
accounting for the Restricted Shares and Performance Shares as employee equity settled awards
whereby the compensation cost is determined based on the grant date fair value and is recognized as an
expense with a corresponding increase to contributed surplus in equity over the period that the employees
unconditionally become entitled to payment. The amount recognized as an expense is adjusted to reflect
the number of awards for which the related service and non-market vesting conditions are expected to be
met.
(o) New accounting policies:
(i) Change in accounting policy:
There were no new standards effective January 1, 2014 that had an impact on the
Company’s consolidated financial statements.
(ii) New standards and interpretations not yet adopted:
A number of new standards, amendments to standards and interpretations, are not yet
effective for the year ended December 31, 2014, and have not been applied in preparing
these consolidated financial statements. The following pronouncements are considered by
the Company to be the most significant of several pronouncements that may affect the
consolidated financial statements in future periods.
IFRS 9, Financial Instruments (“IFRS 9”)
IFRS 9 will replace IAS 39, Financial Instruments: Recognition and Measurement (“IAS
39”). IFRS 9 will replace the multiple classification and measurement models in IAS 39
with a single model that has only two classification categories: amortized cost and fair
value. The new standard also requires a single impairment method to be used, provides
additional guidance on the classification and measurement of financial liabilities, and
provides a new general hedge accounting standard.
The mandatory effective date has been set for January 1, 2018, however early adoption of
the new standard is permitted. The Company does not intend to early adopt IFRS 9 in its
consolidated financial statements for the annual period beginning on January 1, 2015. The
adoption of IFRS 9 is currently not expected to have a material impact on the consolidated
financial statements given the nature of the Company’s operations and the types of
financial instruments that it currently holds; however, the Company will continue to assess
the extent of impact as the mandatory adoption date approaches.
Hardwoods Distribution Inc. | 2014 | Annual Report
47
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
3. Significant accounting policies (continued):
(o) New accounting policies (continued):
(ii) New standards and interpretations not yet adopted (continued):
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)
IFRS 15 is effective for fiscal years commencing on or after January 1, 2017 and will
replace IAS 18, Revenue and a number of revenue related standards and interpretations.
IFRS 15 contains a single model that applies to contracts with customers and two
approaches to recognizing revenue: at a point in time or over time. The model features a
contract-based five-step analysis of transactions to determine whether, how much and
when revenue is recognized. New estimates and judgmental thresholds have also been
introduced, which may affect the amount and/or timing of revenue recognized.
The Company intends to adopt IFRS 15 in its consolidated financial statements for the
annual period beginning on January 1, 2017. The Company is assessing the impact of this
new standard, but does not expect the amendments to have a material impact on the
consolidated financial statements
Amendments to IAS 1, Presentation of Financial Statements (“IAS 1”)
On December 18, 2014, the IASB issued amendments to IAS 1 as part of its major initiative
to improve presentation and disclosure in financial reports. The amendments are effective
for annual periods beginning on or after January 1, 2016 with early adoption permitted.
The Company intends to adopt these amendments in its consolidated financial statements
for the annual period beginning on January 1, 2016. The extent of the impact of adoption
of the amendments has not yet been determined.
4. Business acquisition:
(a) Hardwoods of Michigan Acquisition
On April 28, 2014 a subsidiary of the Company purchased the business operations of HMI with
the intention to continue operations of the business. HMI is a fully integrated producer and
distributor of high quality hardwood lumber from its sawmill and kiln drying operations located
on 23 acres in Clinton, Michigan. HMI has been in business for over 40 years and has a broad
and diverse customer base throughout North America as well as in Europe and Asia. HMI sells
hardwood lumber to customers that manufacture cabinets, flooring, furniture, mouldings, doors,
windows and other custom millwork products. The Company’s subsidiary purchased the
accounts receivable, inventory, prepaid expenses, and property, plant and equipment of HMI
for cash consideration of $16.5 million (US$15.0 million) and hired HMI’s employees to continue
operating the business.
The acquisition has been accounted for as a business combination using the acquisition
method of accounting. HMI’s results of operations and fair value of assets acquired have been
included in the consolidated financial statements from the date of acquisition.
Hardwoods Distribution Inc. | 2014 | Annual Report
48
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
4. Business acquisition (continued):
(a) Hardwoods of Michigan Acquisition (continued)
The allocation of the purchase price to identified assets acquired and liabilities assumed is as
follows:
Accounts receivable
Inventories
Prepaid expenses
Property, plant and equipment
Accrued liabilities
Cash paid
$
4,679
6,175
392
5,386
(165)
$ 16,467
The purchase price was satisfied with cash consideration, funded by the drawdown of the
amended Hardwoods USLP Credit Facility (note 10).
Had the acquisition occurred on January 1, 2014 management estimates that the Company’s
consolidated sales would have been approximately $471.6 million and profit would have been
approximately $14.8 million for the year ended December 31, 2014. Included in these
consolidated financial statements for the year ended December 31, 2014 are sales of $24.1
million (US$21.8 million) and profit before tax of $1.1 million (US$1.0 million).
(b) Olam Wood Products Acquisition
On May 31, 2013, a subsidiary of the Company purchased certain assets of Olam Wood
Products (“OWP”) located in Leland, North Carolina (the “Leland business”). The Leland
business imports high quality tropical lumber and decking material from Africa and South
America for resale to industrial customers and wholesale distributors located in North America.
The Company purchased the inventory and property, plant and equipment of OWP for cash
consideration of $3.0 million (US$2.9 million) and hired OWP’s employees to continue
operating the Leland business.
The acquisition has been accounted for as a business combination. The allocation of purchase
price to identified assets acquired is as follows:
Inventory
Property, plant and equipment
Cash paid
$
2,911
73
$
2,984
As part of the acquisition, the building has been leased from the previous landlord at market
rates. Liabilities were not assumed.
Hardwoods Distribution Inc. | 2014 | Annual Report
49
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
5. Capital management:
The Company’s policy is to maintain a strong capital base so as to maintain investor, creditor and market
confidence and to sustain future development of the business. The Company considers its capital to be bank
indebtedness (net of cash) and shareholders’ equity. The Company’s capitalization is as follows:
Cash
Bank indebtedness
Shareholders’ equity
Total capitalization
December 31,
2014
December 31,
2013
$
(13)
38,742
108,489
$
(78)
27,881
90,683
$
147,218
$ 118,486
The terms of the Company’s US and Canadian credit facilities are described in note 10. The terms of the
agreements with the Company’s lenders provide that distributions cannot be made by its subsidiaries in the
event that its subsidiaries do not meet certain credit ratios. The Company’s operating subsidiaries were
compliant with all required credit ratios under the US and Canadian credit facilities as at December 31, 2014
and December 31, 2013 and accordingly there were no restrictions on distributions arising from compliance
with financial covenants.
Dividends are one way the Company manages its capital. Dividends are declared having given consideration
to a variety of factors including the outlook for the business and financial leverage. There were no changes
to the Company’s approach to capital management during the year ended December 31, 2014.
On November 7, 2014 Hardwoods Distribution Inc. declared a cash dividend of $0.045 per common share to
shareholders of record as of January 20, 2015. The dividend was paid to shareholders on January 30, 2015.
On March 26, 2015, the Company declared a cash dividend of $0.045 per common share to shareholders of
record as of April 20, 2015 to be paid on April 30, 2015.
6. Financial instruments:
Financial instrument assets include cash and current and long-term receivables, which are designated as
loans and receivables and measured at amortized cost. Non-derivative financial instrument liabilities include
bank indebtedness, accounts payable, income taxes payable, dividend payable and finance lease obligation.
All financial liabilities are designated as other liabilities and are measured at amortized cost. There are no
financial instruments classified as available-for-sale or held-to-maturity.
Hardwoods Distribution Inc. | 2014 | Annual Report
50
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
6. Financial instruments (continued):
Fair value hierarchy
IFRS 13 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
The three levels of the fair value hierarchy are as follows:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset
or liability, either directly or indirectly, for substantially the full contractual term.
Level 3 - Inputs for the asset or liability are not based on observable market data.
The Company has no financial assets or financial liabilities measured in the statement of financial position at
fair value or included in Level 3 of the fair value hierarchy.
Fair values of financial instruments
The carrying values of cash, accounts receivable, income tax payable, dividend payable and accounts payable
approximate their fair values due to the relatively short period to maturity of the instruments. The fair value of
long-term receivables and finance lease obligations are not expected to differ materially from their respective
carrying values, given the interest rates being charged. The carrying values of the credit facilities approximate
their fair values due to the existence of floating market based interest rates. The fair value of these non-
derivative financial assets and liabilities has been estimated based on the present value of future cash flows,
discounted at a market rate of interest at the reporting date, being level 2 of the fair value hierarchy.
Financial risk management
The Board of Directors of the Company and its subsidiaries has the overall responsibility for the establishment
and oversight of the Company’s risk management framework. The Company’s risk management policies are
established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls,
and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly
to reflect changes in market conditions and in response to the Company’s activities. Through its standards
and procedures management has developed a disciplined and constructive control environment in which all
employees understand their roles and obligations. Management regularly monitors compliance with the
Company’s risk management policies and procedures and reviews the adequacy of the risk management
framework in relation to the risks faced by the Company.
The Company has exposure to credit, liquidity and market risks from its use of financial instruments.
(i) Credit risk:
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument
fails to meet its contractual obligations. Credit risk arises principally from the Company’s current and
long-term receivables from its customers. Cash held at banks, employee housing loans and security
deposits also present credit risk to the Company. The carrying value of these financial assets, which total
$47.4 million at December 31, 2014 (2013 - $43.7 million), represents the Company’s maximum exposure
to credit risk.
Hardwoods Distribution Inc. | 2014 | Annual Report
51
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
6. Financial instruments (continued):
(i) Credit risk (continued):
Trade accounts receivable
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each
customer. The Company is exposed to credit risk in the event it is unable to collect in full amounts
receivable from its customers. The Company employs established credit approval practices and engages
credit attorneys when appropriate to mitigate credit risk. The Company attempts to secure credit
advanced to customers whenever possible by registering security interests in the assets of the customer
and by obtaining personal guarantees. Credit limits are established for each customer and are regularly
reviewed. In some instances the Company may choose to transact with a customer on a cash-on-delivery
basis. The Company’s largest individual customer balance amounted to 3.9% (2013 – 5.3%) of trade
accounts receivable and customer notes receivable at December 31, 2014. No one customer represents
more than 2.0% of sales.
More detailed information regarding management of trade accounts receivable is found in note
7 to these consolidated financial statements.
Employee housing loans:
Employee loans are non-interest bearing and are granted to employees who are relocated.
Employee loans are secured by a deed of trust or mortgage depending upon the jurisdiction.
Employee loans are repaid in accordance with the loan agreement. These loans are measured
at their fair market value upon granting the loan and subsequently measured at amortized cost.
Customer notes:
Customer notes are issued to certain customers to provide fixed repayment schedules for
amounts owing that have been agreed will be repaid over longer periods of time. The terms of
each note are negotiated with the customer. For notes issued the Company requires a fixed
payment amount, personal guarantees, general security agreements, and security over specific
property or assets. Customer notes bear market interest rates ranging from 5%-10%.
Security deposits:
Security deposits are recoverable on leased premises at the end of the related lease term. The
Company does not believe there is any material credit risk associated with its security deposits.
Hardwoods Distribution Inc. | 2014 | Annual Report
52
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
6. Financial instruments (continued):
(ii) Liquidity risk:
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as
they fall due. The Company’s approach to managing liquidity is to ensure that it will have
sufficient cash available to meet its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage to the Company’s
reputation. At December 31, 2014, in Canada, a subsidiary of the Company had a revolving
credit facility of up to $15.0 million, and, in the US, a subsidiary of the Company had a revolving
credit facility of up to $91.2 million (US$78.6 million). These credit facilities can be drawn down
to meet short-term financing requirements, including fluctuations in non-cash working capital.
The amount made available under the revolving credit facilities from time to time is limited to
the extent of the value of certain accounts receivable and inventories held by subsidiaries of
the Company, as well as by continued compliance with credit ratios and certain other terms
under the credit facilities. See note 10 for further information regarding the Company’s credit
facilities and borrowing capacity.
The Company’s accounts payable and accrued liabilities are subject to normal trade terms and
have contracted maturities that will result in payment in the following quarter. The undiscounted
contractual maturities of finance lease obligations are presented in note 11 to these
consolidated financial statements.
(iii) Market risk:
Market risk is the risk that changes in market prices, such as interest rates, foreign exchange
rates, and commodity prices will affect the Company’s net earnings or value of its holdings of
financial instruments.
Interest rate risk
The Company is exposed to interest rate risk on its credit facilities which bear interest at floating
market rates.
Based upon the December 31, 2014 bank indebtedness balance of $38.7 million, a 1%
increase or decrease in the interest rates charged would result in a decrease or increase to
profit after tax by approximately $0.2 million.
Hardwoods Distribution Inc. | 2014 | Annual Report
53
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
6. Financial instruments (continued):
(iii) Market risk (continued):
Currency risk
As the Company conducts business in both Canada and the United States it is exposed to
currency risk. Most of the hardwood lumber sold by the Company in Canada is purchased in
U.S. dollars from suppliers in the United States. Although the Company reports its financial
results in Canadian dollars, approximately three-quarters of its sales are generated in the
United States. Changes in the currency exchange rates of the Canadian dollar against the
U.S. dollar will affect the results presented in the Company’s financial statements and cause
its earnings to fluctuate. Changes in the costs of hardwood lumber purchased by the Company
in the United States as a result of the changing value of the Canadian dollar against the U.S.
dollar are usually absorbed by the Canadian market. When the hardwood lumber is resold in
Canada it is generally sold at a Canadian dollar equivalent selling price, and accordingly
revenues in Canada are effectively increased by decreases in value of the Canadian dollar and
vice versa. Fluctuations in the value of the Canadian dollar against the U.S. dollar will affect
the amount of cash available to the Company for distribution to its Shareholders.
At December 31, 2014, the primary exposure to foreign denominated financial instruments was
in the Company’s Canadian subsidiaries and relates to US dollar cash balances, accounts
receivable from U.S. customers (2014 - US$0.3 million, 2013 - US$0.4 million) and accounts
payable to U.S. suppliers (2014 - $0.9 million, 2013 - US$0.4 million).
Based on the Company's Canadian subsidiaries exposure to foreign denominated financial
instruments, the Company estimates a $0.05 weakening or strengthening in the Canadian
dollar as compared to the U.S. dollar would not have a material effect on net income for the
years ended December 31, 2014 or December 31, 2013.
This foreign currency sensitivity is focused solely on the currency risk associated with the
Company’s Canadian subsidiaries exposure to foreign denominated financial instruments as
at December 31, 2014 and does not take into account the effect of a change in currency rates
will have on the translation of the balance sheet and operations of the Company’s U.S.
subsidiaries nor is it intended to estimate the potential impact changes in currency rates would
have on the Company’s sales and purchases.
Commodity price risk:
The Company does not enter in to any commodity contracts. Inventory purchases are
transacted at current market rates based on expected usage and sale requirements and
increases or decreases in prices are reflected in the Company’s selling prices to customers.
Hardwoods Distribution Inc. | 2014 | Annual Report
54
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
7. Accounts receivable:
The following is a breakdown of the Company’s current and long term receivables and represents the
Company’s principal exposure to credit risk.
Trade accounts receivable - Canada
Trade accounts receivable - United States
Sundry receivable
Income taxes receivable
Current portion of long-term receivables
Less:
Allowance for credit loss
Long-term receivables:
Employee housing loans
Customer notes
Security deposits
Less:
Current portion, included in accounts receivable
The aging of trade receivables was:
Current
Past due 31 - 60 days
Past due 61 - 90 days
Past due 90+ days
December 31,
2014
December 31,
2013
$
10,490
37,960
786
-
369
49,605
$
11,642
31,138
1,807
90
693
45,370
3,478
2,988
$
46,127
$
42,382
$
429
679
514
1,622
369
$
378
1,268
410
2,056
693
$
1,253
$
1,363
December 31,
2014
December 31,
2013
$
35,428
8,041
2,752
2,229
$
30,822
7,143
2,524
2,291
$
48,450
$
42,780
The Company determines its allowance for credit loss based on its best estimate of the net recoverable
amount by customer account. Accounts that are considered uncollectable are written off. The total allowance
at December 31, 2014 was $3.5 million (December 31, 2013 - $3.0 million). The amount of the allowance is
considered sufficient based on the past experience of the business, current and expected collection trends,
the security the Company has in place for past due accounts and management’s regular review and
assessment of customer accounts and credit risk.
Hardwoods Distribution Inc. | 2014 | Annual Report
55
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
7. Accounts receivable (continued):
The change in the allowance for credit loss can be reconciled as follows:
Balance as at January 1
Additions during the year
Use during the year
Changes due to currency rate fluctuations
$
2014
2,988
1,178
(967)
279
2013
$
3,078
2,344
(2,686)
252
Balance as at December 31
$
3,478
$
2,988
Bad debt expense, net of recoveries, for the year ended December 31, 2014 was $1.0 million which equates
to 0.2% of sales (year ended December 31, 2013 - $1.9 million, being 0.5% of sales).
8.
Inventories:
Raw materials
Work in process
Good in transit
Finished goods:
Lumber
Sheet goods
Specialty
December 31,
2014
December 31,
2013
$
1,624
5,044
9,594
31,059
31,127
6,953
$
-
-
7,074
18,189
29,802
7,223
$
85,401
$
62,288
The Company regularly reviews and assesses the condition and value of its inventories and records write-
downs to net realizable value as necessary.
Inventory related expenses are included in the consolidated statement of comprehensive income as follows:
Inventory write-downs
Cost of inventory sold
Other cost of sales
Total cost of sales
Year ended
December 31,
2014
Year ended
December 31,
2013
$
$
1,149
$
1,103
363,275
13,652
$ 293,394
10,205
$ 376,927
$ 303,599
Hardwoods Distribution Inc. | 2014 | Annual Report
56
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
9. Property, plant and equipment:
Buildings,
Leased machinery and
equipment
vehicles
Leasehold
improvements
Land
Cost
Balance at January 1, 2013
Additions
Disposals
Adjustments:
Foreign currency translation
$
Balance at December 31, 2013
Additions
Disposals
Adjustments:
Foreign currency translation
-
-
-
-
-
548
-
32
$
$
2,459
1,408
(1,172)
112
2,807
1,070
(902)
$
9,740
1,009
(203)
539
11,085
6,288
(357)
174
1,140
$
754
8
(13)
25
774
29
(2)
23
Total
12,953
2,425
(1,388)
676
14,666
7,935
(1,261)
1,369
Balance at December 31, 2014
$
580
$
3,149
$
18,156
$
824
$
22,709
Accumulated depreciation
Balance at January 1, 2013
Depreciation during year
Disposals
Adjustments:
Foreign currency translation
$
Balance at December 31, 2013
Depreciation during year
Disposals
Adjustments:
Foreign currency translation
Balance at December 31, 2014
$
-
-
-
-
-
-
-
-
-
Net book value:
December 31, 2013
December 31, 2014
$
-
580
$
$
$
$
1,063
713
(838)
43
981
811
(621)
64
$
4,758
670
(155)
227
5,500
1,268
(205)
387
640
55
(13)
11
693
50
(2)
19
$
6,461
1,438
(1,006)
281
7,174
2,129
(828)
470
1,235
$
6,950
$
760
$
8,945
1,826
1,914
$
5,585
11,206
$
$
81
64
7,492
13,764
Depreciation of property, plant and equipment for the year ended December 31, 2014 was $2.1 million (2013
- $1.4 million) and is included in the statement of comprehensive income as follows:
Selling and distribution
Cost of sales
Administration
$
2014
1,211
866
52
$
2013
1,033
364
41
$
2,129
$
1,438
Gains and losses on disposal of property, plant and equipment for the year ended December 31, 2014 was a
net loss of $126,415 (2013 - net gain of $79,225) and is included in selling and distribution expense in the
statement of comprehensive income.
Hardwoods Distribution Inc. | 2014 | Annual Report
57
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
10. Bank indebtedness:
Checks issued in excess of funds on deposit
Credit facility, Hardwoods LP
Credit facility, Hardwoods USLP
(December 31, 2014 - US$24,004;
December 31, 2013 - US$22,039)
Term loan, Hardwoods USLP (US$3,625)
Less: non-current portion of term loan
December 31,
2014
December 31,
2013
$
1,368
5,318
$
440
4,000
27,851
4,205
38,742
3,371
23,441
-
27,881
-
$ 35,371
$
27,881
Bank indebtedness consists of checks issued in excess of funds on deposit and advances under operating lines
of credit (the “Credit Facilities”) available to subsidiaries of the Company, Hardwoods Specialty Products LP
(“Hardwoods LP”) and Hardwoods Specialty Product USLP (“Hardwoods USLP”), which in the case of Hardwoods
USLP also includes a term loan.
Each of the Credit Facilities is separate, is not guaranteed by the other partnership, and does not contain cross
default provisions to the other Credit Facility. The Credit Facility made available to Hardwoods LP is secured by
a first security interest in all of the present and after acquired property of Hardwoods LP and the Hardwoods LP
partnership units held directly and indirectly by the Company. The Credit Facility made available to Hardwoods
USLP is secured by a first security interest in all of the present and after acquired property of Hardwoods USLP,
Paxton Hardwoods LLC and HMI Hardwoods LLC, and the Hardwoods USLP partnership units held indirectly by
the Company.
The Hardwoods LP Credit Facility, which has a maturity date of August 7, 2016, provides financing up to
$15.0 million. On April 28, 2014, the Company amended the Credit Facility of Hardwoods USLP concurrently with
completing the acquisition of HMI (note 4(a)). The term of the Hardwoods USLP Credit Facility was extended to
April 27, 2017, and the maximum available borrowing under the Credit Facility increased from US$50.0 million to
US$79.1 million, comprised of US$75.0 million available under a revolving credit facility, and US$4.1 million under
a term loan that matures on April 27, 2017, with monthly payments based on a five year amortization. Monthly
payments on the term loan reduce the total Credit Facility and so the Credit Facility at December 31, 2014 is
comprised of US$75.0 million available under revolving credit facilities and US$3.6 million under the term loan.
The Credit Facilities are payable in full at maturity. The Credit Facilities are revolving credit facilities which the
Company may terminate at any time without prepayment penalty. The Credit Facilities and term loan bear interest
at a floating rate based on the Canadian or US prime rate (as the case may be), LIBOR or bankers’ acceptance
rates plus, in each case, an applicable margin. Letters of credit are also available under the Credit Facilities on
customary terms for facilities of this nature. Commitment fees and standby charges typical for borrowings on this
nature were and are payable.
Hardwoods Distribution Inc. | 2014 | Annual Report
58
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
10. Bank indebtedness (continued):
The amount made available under the Credit Facility to Hardwoods LP from time to time is limited to the extent of
85% of the book value of accounts receivable and the lesser of 60% of the book value or 85% of appraised value
of inventories with the amount based on inventories not to exceed 60% of the total amount to be available. Certain
identified accounts receivable and inventories are excluded from the calculation of the amount available under the
Credit Facility. Hardwoods LP is required to maintain a fixed charge coverage ratio (calculated as the ratio of
earnings before interest, tax, depreciation and amortization (“EBITDA”) less cash taxes less capital expenditures
less distributions, divided by interest plus principal payments on capital lease obligations) of not less than 1.1 to 1.
However, this covenant does not apply so long as the unused availability under the credit line is in excess of $2.0
million. At December 31, 2014, the Hardwoods LP Credit Facility has unused availability of $8.2 million, before
checks issued in excess of funds on deposit of $nil (December 31, 2013 - $10.3 million, checks issued in excess
of funds on deposit - nil), and thus the fixed charge covenant was not applicable at December 31, 2014.
As part of the amendment on April 28, 2014, the amount made available under the Credit Facility to Hardwoods
USLP from time to time was increased to 90% of the book value of accounts receivable and 65% of the book value
of inventories (with certain accounts receivable and inventory being excluded). This increase to the advance rates
will be reduced over a three year period back to the advance rates previously available to Hardwoods USLP of
85% of the book value of accounts receivable, and 55% of the book value of inventories. Hardwoods USLP is
required to maintain a fixed charge coverage ratio (calculated as EBITDA less cash taxes less capital expenditures,
divided by interest plus capital lease obligations plus distributions) of 1.0 to 1. This covenant of the Hardwoods
USLP Credit Facility does not need to be met, however, when the unused availability under the Credit Facility is in
excess of certain thresholds. The minimum unused availability that must be maintained for the fixed charge
coverage ratio not to apply was increased to US$7.5 million when advance rates for accounts receivable and
inventories are calculated at 85% and 55%, respectively, and to US$9.4 million in periods when advance rates in
excess of these amounts are utilized.
At December 31, 2014, the Hardwoods USLP Credit Facility has unused availability of $28.7 million
(US$24.8 million), before checks issued in excess of funds on deposit of $1.3 million (US$1.1 million). (December
31, 2013 - $19.5 million (US$18.3 million), before checks issued in excess of funds on deposit of $0.4 million
(US$0.4 million)), and thus the fixed charge covenant was not applicable at December 31, 2014.
The average annual interest rates paid in respect of bank indebtedness for the year ended December 31, 2014
were 3.3% and 2.7% (2013 - 3.4% and 2.3%) for the Hardwoods LP and Hardwoods USLP credit facilities
respectively.
Hardwoods Distribution Inc. | 2014 | Annual Report
59
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
11. Leases:
(a) Finance leases as lessee:
Subsidiaries of the Company lease vehicles with terms ranging from 18 to 36 months. Hardwoods LP
guarantees a residual value under the terms of the leases in Canada, and any difference between the amount
realized and the guaranteed residual value is either paid to or paid by Hardwoods LP. In the US the lease
payments cover the full capitalized cost over the term of the lease, and any proceeds from the sale of the
vehicle are paid to Hardwoods USLP. The Company and its subsidiaries have determined that these vehicle
leases are considered finance leases and are recorded on the statement of financial position.
Finance lease liabilities are payable as follows:
Minimum lease payments due
December 31, 2014:
Future minimum lease payments
Interest
Present value of minimum payments
December 31, 2013:
Future minimum lease payments
Interest
Present value of minimum payments
Within
one year
One to
three years
$
$
$
$
1,100
76
1,024
949
77
872
$
$
$
$
777
28
749
862
34
828
Total
1,877
104
$
$
1,773
$
1,811
111
$
1,700
The present value of the lease payments is calculated using the interest rate implicit in the lease, which range
from 2.1% - 6.9%.
(b) Operating leases as lessee:
The Company’s subsidiaries are obligated under various operating leases, including building and trucking
equipment leases that require future minimum rental payments as follows:
Minimum lease payments due
Minimum lease payments due:
December 31, 2014
Within
one year
One to
five years
After
five years
Total
$
6,229
$ 16,239
$ 6,355
$
28,823
Hardwoods Distribution Inc. | 2014 | Annual Report
60
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
11. Leases (continued):
(b) Operating leases as lessee (continued):
Minimum lease payments recognized as an expense during the year ended December 31, 2014 amount to
$6.5 million (2013 - $5.8 million).
The Company’s warehouse leases are combined leases of the land and building; however both the land and
building elements are considered operating leases as the risk and reward of ownership remains with the
landlord. The Company’s operating lease agreements do not contain any contingent rent clauses. Some
operating warehouse lease agreements contain renewal options. Renewal options are reviewed regularly by
management. The operating lease agreements do not contain any restrictions regarding distributions, further
leasing or additional debt.
12. Share capital:
(a) Share Capital
At December 31, 2014, the authorized share capital of the Company comprised an unlimited number of
common shares without par value (“Shares”).
A continuity of share capital is as follows:
Balance at December 31, 2012
Issued pursuant to long term incentive plan
Shares
16,394,490
144,888
$
Balance at December 31, 2013
Issued pursuant to long term incentive plan
16,539,378
112,036
Balance at December 31, 2014
16,651,414
$
Total
44,762
536
45,298
532
45,830
(b) Long Term Incentive Plan:
At the Annual General Meeting held on May 20, 2010, the Unitholders approved a long term incentive plan
(“LTIP”) which authorized the issuance of a maximum of 850,000 Units to qualified trustees, directors, officers,
employees and consultants to align the interests of such persons with the interests of Unitholders. Upon
conversion to a corporation on July 1, 2011 the LTIP plan was continued with references to Units being
replaced by common shares.
At the Annual General Meeting held on May 22, 2013, shareholders approved to increase the number of
common shares issuable under the LTIP by 800,000 common shares.
Hardwoods Distribution Inc. | 2014 | Annual Report
61
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
12. Share capital (continued):
(b) Long Term Incentive Plan (continued):
The LTIP is comprised of Restricted Shares and Performance Shares. Each Restricted Share will entitle the
holder to be issued the number of Shares of the Company designated in the grant agreement for that
Restricted Share. Shares issuable pursuant to Restricted Share grants will vest and be issued on the date or
dates determined by the Company’s Compensation Committee and set out in the grant agreement, provided
such date or dates are not later than December 31st following the third anniversary of the date the Restricted
Share was granted. Each Performance Share will entitle the holder to be issued the number of Shares
designated in the grant agreement for the Performance Share multiplied by a payout multiplier which may
range from a minimum of zero to a maximum of two depending on the achievement of the defined performance
criteria. Shares issuable pursuant to Performance Shares will be issued on the date set out in the grant
agreement if the performance criteria are satisfied, provided such date is not later than December 31st
following the third anniversary of the date the Performance Share was granted.
The Shares to which a grantee is entitled under a Restricted Share or Performance Share may, at the
discretion of the Board of Directors, be settled by the Company in Shares issued from treasury, Shares
purchased by the Company in the secondary market, in an amount of cash equal to the fair market value of
such Shares, or any combination of the foregoing.
If any Restricted Shares or Performance Shares granted under LTIP expire, terminate or are cancelled for any
reason without the Shares issuable under the Restricted Share or Performance Share having been issued in
full, those Shares will become available for the purposes of granting further Restricted Shares or Performance
Shares under the LTIP. To the extent any Shares issuable pursuant to Restricted Shares or Performance
Shares are settled in cash or with Shares purchased in the market, those Shares will become available for the
purposes of granting further Restricted Shares or Performance Shares.
The LTIP provides for cumulative adjustments to the number of Shares to be issued pursuant to Restricted
Shares or Performance Shares on each date that distributions are paid on the Shares by an amount equal to
a fraction having as its numerator the amount of the distribution per Share and having as its denominator the
fair market value of the Shares on the trading day immediately preceding the dividend payment date. Fair
market value is the weighted average price that the Shares traded on the Toronto Stock Exchange for the five
trading days on which the Shares traded immediately preceding that date.
The LTIP provides that the number of Shares issued to insiders pursuant to the plan and other Share
compensation arrangements of the Company within a one year period, or at any one time, may not exceed
10% of the issued and outstanding Shares.
Hardwoods Distribution Inc. | 2014 | Annual Report
62
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
12. Share capital (continued):
(b) Long Term Incentive Plan (continued):
A continuity of the LTIP Shares outstanding is as follows:
Performance Shares
Restricted Shares
Balance at December 31, 2012
41,680
LTIP shares issued during the year
LTIP shares settled by exchange for free-trading Common shares(24,631)
13,569
Balance at December 31, 2013
30,618
LTIP shares issued during the year
LTIP shares settled by exchange for free-trading Common shares(17,049)
7,383
Balance at December 31, 2014
20,952
149,145
48,182
(88,608)
108,719
63,356
(73,162)
98,913
On December 31, 2014, 17,049 (2013 - 24,631) Performance Shares and 73,162 (2013 - 88,608) Restricted
Shares became fully vested and were settled by the issuance of 112,036 (2013 - 144,888) Shares with a value
of $0.5 million (2013 - $0.4 million).
Non-cash LTIP compensation expense amount of $693,627 was recorded for the year ended December 31,
2014 (2013 - $435,607). The key estimate in determining the compensation in any period is whether the
performance criteria have been met and the amount of the payout multiplier on the Performance Shares. The
payout multiplier is reviewed and approved by the Company’s compensation committee on an annual basis.
(c) Weighted average shares:
The calculation of basic and fully diluted profit per share is based on the profit for the year of $14.1 million
(2013 - $13.1 million). The weighted average number of common shares outstanding in each of the reporting
years was as follows:
Issued ordinary shares/units at January 1
Effect of shares issued during the year:
Pursuant to long-term incentive plan
Weighted average common shares (basic)
Effect of dilutive securities:
Long term incentive plan
2014
2013
16,539,378
16,394,490
307
397
16,539,685
16,394,887
85,182
232,411
Weighted average common shares (diluted)
16,624,867
16,627,298
Hardwoods Distribution Inc. | 2014 | Annual Report
63
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
13. Income taxes:
Current tax expense
Deferred tax expense
2014
$
(7,188)
(1,756)
$
(8,944)
2013
(5,002)
(1,679)
(6,681)
$
$
Under current income tax regulations, subsidiaries of the Company are subject to income taxes in Canada and the
United States. The applicable statutory rate in Canada for the year ending December 31, 2014 is 26.0% (2013 -
26.0%) and in the United States is 39.4% (2013 - 39.4%). The majority of the Company’s tax expense is generated
from its US subsidiaries, and as such the Company reconciles its consolidated income tax expense to the statutory
rate applicable in the United States.
Income tax expense differs from that calculated by applying U.S. federal and state income tax rates to earnings
before income taxes for the following reasons:
2014
2013
Profit before income tax
$ 22,959
$
19,748
Statutory rate
Computed tax expense at statutory rate
Effect of lower tax rates in Canada and other rate changes
Non-deductible expenses
State tax
Other
39.4%
(9,046)
278
(200)
(227)
251
39.4%
(7,781)
731
(190)
(8)
567
Income tax expense
$
(8,944)
$
(6,681)
Hardwoods Distribution Inc. | 2014 | Annual Report
64
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
13. Income taxes (continued):
The tax effect of temporary differences that give rise to significant portions of the deferred income tax
assets and liabilities is as follows:
December 31,
2014
December 31,
2013
Deferred tax assets:
Accounts receivable
Accounts payable and provisions
Inventory
Finance lease obligations
Goodwill
Tax loss carry forwards and future interest deductions
Other
$
Deferred tax liabilities:
Prepaid expenses
Property, plant and equipment
Employee housing loans
1,349
534
1,230
624
8,427
2,109
51
14,324
(195)
(1,846)
(6)
(2,047)
$
1,145
263
866
579
9,350
2,649
107
14,959
(169)
(1,342)
(5)
(1,516)
Deferred tax asset
$
12,277
$
13,443
Deferred tax assets and liabilities are measured at the substantively enacted rates expected to apply at the time
such temporary differences are forecast to reverse.
At December 31, 2014, the Company and its subsidiaries have operating loss carry forwards for income tax
purposes of approximately $7.8 million in Canada that may be utilized to offset future taxable income
(December 31, 2013 - $9.9 million). These losses, if not utilized, expire between 2015 and 2031. The Company’s
US subsidiaries have no operating loss carry forwards.
At December 31, 2014, the Company and its Canadian subsidiaries have capital losses of
approximately $24.1 million (2013 - $24.1 million), and suspended capital losses of approximately $44.7
million (2013 - $44.7 million) available to offset future Canadian taxable capital gains. These capital
losses arose as a result of internal restructuring and inter-entity transactions during the year ended
December 31, 2009. The deferred income tax asset of $8.9 million (2013 - $8.9 million) associated
with these capital losses has not been recorded because it is not probable that future taxable capital
gains will be generated to utilize the benefit.
Hardwoods Distribution Inc. | 2014 | Annual Report
65
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
14. Finance income and expense:
Year ended
Note December 31, 2014
Year ended
December 31, 2013
Finance expense:
Interest on bank indebtedness
Accretion of finance lease obligation
10
11(a)
$
Total finance expense
Finance income:
Interest on trade receivables, customer notes,
and employee loans receivable
Foreign exchange gains
7
Total finance income
Net finance costs
15. Segment reporting:
Information about geographic areas is as follows:
Revenue from external customers:
Canada
United States
Non-current assets (1):
Canada
United States
(1) Excludes financial instruments and deferred income taxes.
$
1,189
110
1,299
389
529
918
$
381
$
1,016
96
1,112
375
559
934
178
Year ended
December 31,
2014
Year ended
December 31,
2013
$
$
104,334
351,360
455,694
December 31,
2014
$
$
991
12,800
13,791
$
$
$
$
94,911
276,304
371,215
December 31,
2013
1,118
6,387
7,505
Hardwoods Distribution Inc. | 2014 | Annual Report
66
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
16. Employee remuneration:
(a) Employee benefits expense:
Expenses recognized for employee benefits are summarized below.
Wages, salaries, and benefits
Pensions - defined contribution plans
LTIP Share based compensation
Year ended
December 31,
2014
Year ended
December 31,
2013
$
36,832
703
694
$
$
38,229
$
28,954
620
436
30,010
Employee benefit expenses are included in the consolidated statement of comprehensive income as follows:
Cost of sales
Selling and distribution
Administration
(b) Pensions:
Year ended
December 31,
2014
Year ended
December 31,
2013
$
4,908
26,576
6,745
$
$
38,229
$
1,964
22,957
5,089
30,010
Hardwoods USLP, Paxton Hardwoods LLC and HMI Hardwoods LLC maintain defined contribution 401(k)
retirement savings plans (the “USLP Plan”, the “Paxton Plan” and the “HMI Hardwoods Plan”). The assets of
the USLP Plan are held and related investment transactions are executed by the Plan’s Trustee, ING National
Trust, and, accordingly, are not reflected in these consolidated financial statements. During the year ended
December 31, 2014, Hardwoods USLP contributed and expensed $329,766 (US$298,538) (year ended
December 31, 2013 - $274,879 (US$267,036)) in relation to the USLP Plan. The assets of the Paxton Plan
are held and related investment transactions are executed by the Plan’s Trustee, PNC Bank, and, accordingly,
are not reflected in these consolidated financial statements. During the year ended December 31, 2014,
Hardwoods USLP contributed and expensed $97,716 (US$88,462) (year ended December 31, 2013 $90,655
(US$88,047)) in relation to the Paxton Plan. The assets of the HMI Hardwoods Plan are held and related
investment transactions are executed by the Plan’s Trustee, Voya Financial (Voya Institutional Trust
Company) and, accordingly, are not reflected in these consolidated financial statements. There is no
requirement for an employer contribution to this plan and accordingly HMI Hardwoods LLC did not make any
contributions to this plan.
Hardwoods Distribution Inc. | 2014 | Annual Report
67
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
16. Employee remuneration (continued):
(b) Pensions (continued):
Hardwoods LP does not maintain a pension plan. Hardwoods LP does, however, administer a group
registered retirement savings plan (“LP Plan”) that has a matching component whereby Hardwoods LP makes
contributions to the LP Plan which match contributions made by employees up to a certain level. The assets
of the LP Plan are held and related investment transactions are executed by LP Plan’s Trustee, Sun Life
Financial Trust Inc., and, accordingly, are not reflected in these consolidated financial statements. During the
year ended December 31, 2014, Hardwoods LP contributed and expensed $275,135 (2013 - $254,286) in
relation to the LP Plan.
17. Related party transactions:
The Company’s related parties include key management personnel and post-employment benefit plans for the
employees of the Company’s subsidiaries.
(a) Transactions with key management personnel:
Key management of the Company includes members of the Board of Directors, the Executive Officers, and
regional Vice Presidents. Key management personnel remuneration includes the following expenses:
Short-term employee benefits:
Salaries and benefits including bonuses
Company car
LTIP Share compensation
Total remuneration
Year ended
December 31,
2014
Year ended
December 31,
2013
$
$
2,255
38
244
$
2,537
$
2,126
37
240
2,403
The Company offers housing loans to employees required to relocate. Key management had no loans
outstanding at either December 31, 2014 or December 31, 2013.
(b) Transactions with post-employment benefit plans:
The defined contribution plans referred to in note 16(b) are related parties of the Company. The Company’s
transactions with the pension plans include contributions paid to the plans, which are disclosed in note 16(b).
The Company has not entered into other transactions with the pension plans, nor has it any outstanding
balances at December 31, 2014 or 2013.
Hardwoods Distribution Inc. | 2014 | Annual Report
68
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
18. Contingencies:
Legal
The Company and its subsidiaries are subject to legal proceedings that arise in the ordinary course of its business.
Management is of the opinion, based upon information presently available, that it is unlikely that any liability, to the
extent not provided for or insured, would be material in relation to the Company’s consolidated financial statements.
The Company has no material legal contingency provisions at either December 31, 2014 or 2013.
Trade Investigation
On September 27, 2012, an unfair trade petition was filed in the United States seeking the imposition of
countervailing duties (“CVD”) and antidumping duties (“AD”) against Chinese hardwood plywood. The trade petition
was brought by a coalition of United States plywood manufacturers (the “Petitioners”), alleging that Chinese imports
were sold in the United States at prices below cost and were subsidized by the Government of China. During
2013, the US Department of Commerce (“Commerce”) completed preliminary stage investigations and assessed
a preliminary CVD duty of 22.63% and a preliminary AD duty of 22.14%. On September 18, 2013, Commerce
announced its decision with respect to final CVD/AD rates, determining a combined CVD/AD rate of 73.04%, which
was scheduled to go into effect in November 2013. However, on November 5, 2013, the United States International
Trade Commission (“ITC”) made a unanimous negative injury determination in the final phase of the investigation,
and the trade case was immediately dismissed.
On January 17, 2014, the Petitioners filed an appeal against the ITC determination that had dismissed the trade
case and on January 14, 2015, the Petitioners filed with the Court of International Trade (the “Court”) their latest
brief in the trade case against Chinese hardwood plywood. The Court will decide the next step, which could include
upholding the ITC’s previous decision or remanding the case to the ITC for further proceedings. There is no
mandatory time frame for the Court to issue its opinion.
Decommissioning
The Company and its subsidiaries are not obligated in any material way for decommissioning or site restoration.
Hardwoods Distribution Inc. | 2014 | Annual Report
69
Corporate Information
Directors
Officers
Lance R. Blanco
Director
Lance R. Blanco
President & Chief Executive Officer
Terry M. Holland
President, Krystal Financial Corp.
Robert J. Brown
Chief Operating Officer
Graham M. Wilson
President, Grawil Consultants Inc.
Faiz Karmally
Chief Financial Officer
E. Lawrence Sauder
Chair & CEO, Sauder Industries
Garry W. Warner
Vice President, Canada
William Sauder
President, Cantu Bathrooms and Hardware
Peter M. Bull
President, Blenheim Realty Ltd.
Head Office
Auditors
Investor Relations
#306 – 9440 202nd Street
Langley, BC Canada V1M 4A6
Telephone: 604-881-1988
Facsimile: 604-881-1995
KPMG LLP
Vancouver, British Columbia
Faiz Karmally
Chief Financial Officer
Telephone:604-881-1982
Email: fkarmally@hardwoods-inc.com
Listings
The Toronto Stock Exchange
Trading under HWD
Transfer Agent
Computershare Trust
Company of Canada