Profile
Hardwoods Distribution Inc. (“Hardwoods” or “the Company”) is listed on the Toronto Stock
Exchange and trades under the symbol HWD. We are North America’s largest wholesale
distributor of non-structural architectural grade building products to the residential and
commercial construction markets. We sell high-grade hardwood lumber, sheet goods,
architectural millwork and create custom moulding and millwork packages for customers. We
also own a sawmill and kiln drying operation in Michigan.
Our Customers: Our business serves over 35,000 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 52% of the products we sell to our
manufacturing customers end up in new residential construction, 30% in the commercial/
institutional construction sector, and 18% in other markets.
Our Products and Services: Our sales mix is comprised of approximately 51% sheet good
products, 30% hardwood lumber products, and 19% architectural and other specialty products.
We provide custom milling services to our customers from twenty three of our locations.
Our People: We employ over 1,000 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 and growing commercial and related construction markets. In addition to
capturing market growth, our strategy is to i) leverage our established global expertise in product
sourcing to secure high-quality, differentiated products for our customers; ii) grow our sales
into commercial markets, which represent a significant demand opportunity; and, iii) pursue
acquisitions that complement our strategies. Since 2011, we have added 37 new locations, which
together have added over $500 million (pro forma) in new annual sales from acquisitions.
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Our Network: With the addition of the Rugby operations, approximately 85% of our pro-forma
annual sales are expected to be generated in the United States and 15% in Canada. We operate
four brands from 59 locations as follows:
Table of Contents
Message to Shareholders
Management’s Discussion and Analysis
Consolidated Financial Statements
Page
3
6
43
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To our Shareholders
2016 was a year of growth and achievement for Hardwoods as we completed a major acquisition,
established new records for top and bottom-line results, and continued to pursue our successful
business strategies.
The Accretive Rugby Acquisition
Our US$107 million acquisition of Rugby in July 2016 was a transformative transaction for
Hardwoods and the highlight of our year. Rugby is a large and successful US wholesale
distributor of architectural-grade building products, with a focus on customers that manufacture
end-products for the commercial market. With the addition of Rugby’s 28 distribution facilities,
Hardwoods has emerged as the number one North American distributor in our sector, with a
total of 58 distribution facilities, more than 35,000 customers and pro-forma annual sales of
approximately $1 billion dollars.
Rugby has significantly increased our footprint in the US, including in the Eastern US where
we did not previously have a presence. It has also expanded our access to the commercial
market, helping to balance our exposure to the more cyclical residential construction market.
On a full-year basis, approximately 85% of our sales will now be transacted in the US, compared
to 75% previously, while going forward approximately 35% of our sales will be focused on the
commercial market, up from 20% previously. Our product mix has also expanded with the
addition of Rugby’s product offerings.
The strategic fit of our two organizations is excellent. Other than combining our Boise and Salt
Lake City facilities with Rugby's facilities in the same locations, there has been minimal overlap
in targeted customer base between our networks. The integration is also going smoothly and it
has been a pleasure to welcome Rugby’s talented employees. Rugby’s full team of managers
and employees joined Hardwoods following the acquisition and has increased our bench strength
considerably. We continue to work on realizing synergies of the deal including those related to
increased purchasing power, operational efficiencies, and tax structuring.
As we anticipated, the transaction has also proved accretive to our annual results. In the five-
and-a-half months that we operated this business in 2016, Rugby contributed revenues of $175.1
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million. Adjusted diluted profit per share also grew by 10.8% to $1.33 in 2016, even after
increasing our share base to finance the acquisition.
Executing our Strategies to Achieve Growth
In addition to the significant growth provided by Rugby, our 2016 results were supported by
organic growth, although the pace of growth reflected unevenness in the US residential
construction market and some economic uncertainty in the US in the midst of an election year.
Organic growth accounted for $20.4 million of our year-over-year sales growth as we continued
to execute our “leverage imports” and “strengthen commercial” strategies. Foreign exchange
was also a positive influence on full-year results, accounting for $22.2 million of our sales
growth.
As we move forward, we are focused on ensuring that our business strategies remain well aligned
with market opportunities and challenges. As discussed in section 1.3 of our Management’s
Discussion & Analysis, the recent launch of a US trade case against imported Chinese hardwood
plywood, together with the potential for broader changes to US trade policy, could impact our
import program in the US. Conversely, proposed changes to US economic policy, such as a
lowering of corporate taxes and investment in infrastructure, could prove beneficial to our
business. We are keeping a close eye on the evolving US macro environment and will adapt our
strategies accordingly.
On the whole, we believe market conditions will continue to provide us with opportunities for
profitable growth. At 1.2 million, US housing starts remain well below the 1.5-to-1.6 million
level considered to be normal and sustainable for the industry. Accordingly most forecasters
predict a continued gradual strengthening trend for the US residential construction market. In
addition, the commercial construction market is enjoying solid growth as the US economy
strengthens and key segments like retail, office and hospitality-related construction projects
benefit. With our increased access to the commercial market, we are better positioned than ever
to take advantage of this opportunity.
The highly fragmented US architectural building products distribution industry also provides
us with numerous growth opportunities. With our larger size and scale, and our strong balance
sheet, Hardwoods is well positioned to pursue smaller single or multi-site distributors that take
us into new markets, expand our presence in current markets in which we operate, and provide
accretive growth for our shareholders. The acquisition on March 13, 2017 of Eagle Plywood
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and Lumber ("Eagle") is an example of our ability to expand our presence in an existing market.
Having completed five successful acquisitions in the past five and a half years, we have
demonstrated our ability to achieve profitable growth in this way.
Overall, Hardwoods has emerged from 2016 as the North American industry market leader,
with a strong, well-balanced distribution platform and a compelling future. We will pursue the
broad range of opportunities we see before us, and we thank you, our shareholders, for
participating in our continued growth. We look forward to rewarding your trust in us again in
2017.
Sincerely,
Rob Brown
President and Chief Executive Officer
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Management’s Discussion and Analysis
March 17, 2017
This management’s discussion and analysis (“MD&A”) has been prepared by Hardwoods
Distribution Inc. (“Hardwoods” or the “Company”) as of March 17, 2017. 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, 2016
and 2015. 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. Furthermore, we discuss certain EBITDA
Ratios, such as EBITDA margin (being EBITDA as a percentage of sales), net debt-to-EBITDA
(net debt as described in section 5.3 as compared to EBITDA), and certain Liquidity Ratios
such as working capital (as defined in section 5.2 of this report) and net debt-to-total
capitalization (net debt as compared to total capitalization as described in section 5.3). In
addition to profit, we consider EBITDA, EBITDA Ratios, and Liquidity Ratios to be useful
supplemental measures of our ability to meet debt service and capital expenditure requirements,
and we interpret trends in EBITDA and EBITDA Ratios (such as EBITDA margin) as an indicator
of relative operating performance.
In this MD&A, references to "Adjusted EBITDA" are EBITDA as defined above, before certain
items related to business acquisition activities. "Adjusted EBITDA margin" and "Adjusted net
debt-to-EBITDA" (together the "Adjusted EBITDA Ratios") are as defined above, before certain
items related to business acquisition activities. References to "Adjusted profit", "Adjusted basic
profit per share", and "Adjusted diluted profit per share" are profit for the period, basic profit
per share, and diluted profit per share, before certain items related to business acquisition
activities. "Adjusted cash flow per share" is cash provided by operating activities before changes
in non-cash working capital and certain items related to business acquisition activities, divided
by diluted weighted average common shares outstanding. The aforementioned adjusted
measures are collectively referenced as "the Adjusted Measures". We consider the Adjusted
Measures to be useful supplemental measures of our profitability, our ability to meet debt service
and capital expenditure requirements, our ability to generate cash flow from operations, and as
Hardwoods Distribution Inc. | 2016 | Annual Report
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an indicator of relative operating performance, before considering the impact of business
acquisition activities.
EBITDA, EBITDA Ratios, Liquidity Ratios and the Adjusted Measures (collectively "the Non-
GAAP Measures") are not measures recognized by International Financial Reporting Standards
(“IFRS”) and do not have a standardized meaning prescribed by IFRS. Investors are cautioned
that the Non-GAAP Measures should not replace profit, earnings per share or cash flows (as
determined in accordance with IFRS) as an indicator of our performance. Our method of
calculating the Non-GAAP Measures may differ from the methods used by other issuers.
Therefore, our Non-GAAP Measures may not be comparable to similar measures presented by
other issuers. For a reconciliation between Non-GAAP Measures and measures as determined
in accordance with IFRS, please refer to the discussion of Results of Operations described in
section 3.0, Cash Flows from Operating, Investing and Financing Activities in section 5.1,
Working Capital in section 5.2, and Revolving Credit Facilities and Debt Management Strategy
in section 5.3 of this report.
Furthermore, in discussing the acquisition of Rugby we refer to pro-forma annual sales of
approximately $1 billion. This represents management's estimate of what the Company's sales
for 2016 would have been had the acquisition of Rugby Architectural Building Products
("Rugby") occurred on January 1, 2016 instead of July 15, 2016.
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Contents
1.0
Executive Summary
1.1
1.2
1.3
Overview
Business Strategy
Outlook
2.0
Background
2.1
2.2
2.3
Company Overview
Rugby Acquisition
Business and Industry Overview
3.0
Results of Operations
3.1
3.2
Years Ended December 31, 2016 and December 31, 2015
Three-Month Periods Ended December 31, 2016 and December 31, 2015
4.0
Selected Financial Information and Seasonality
4.1
4.2
Quarterly Financial Information
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
5.4
5.5
5.6
5.7
5.8
Revolving Credit Facilities and Debt Management Strategy
Contractual Obligations
Off-Balance Sheet Arrangements
Financial Instruments
Share Data
Dividends
6.0
7.0
8.0
9.0
Related Party Transactions
Critical Accounting Estimates and Adoption of Changes in Accounting Policies
7.1
7.2
Critical Accounting Estimates
Adoption of New Accounting Policies
Risks and Uncertainties
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 set new sales, Adjusted EBITDA, profit and Adjusted profit records in 2016, driven by our
accretive acquisition of Rugby Architectural Building Products (“Rugby”), continued execution
of our business strategies, and the foreign exchange benefits of a stronger US dollar. For the
year ended December 31, 2016, sales increased 38.1% to $789.3 million and profit increased
18.4% to $23.9 million compared to 2015. After adjusting for expenses associated with the
Rugby acquisition, Adjusted EBITDA grew 32.6% to $46.1 million and Adjusted profit climbed
26.0% to $25.4 million.
During the third quarter of 2016, we issued 4.0 million common shares of Hardwoods in
connection with the bought deal financing and 0.6 million common shares were purchased by
sellers of Rugby. Even with the increase in our share base, our diluted profit per share grew
4.2% to $1.25 per share. After adjusting for expenses associated with the Rugby acquisition,
Adjusted diluted profit per share grew 10.8% to $1.33 in 2016, from $1.20 in 2015. The $0.13
per share improvement reflects accretion related to the Rugby acquisition and our 2016 operating
performance.
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Acquisition-Based and Organic Growth
Our 2016 results include approximately five-and-a-half-months of financial contribution from
Rugby, which expanded our US distribution network with 28 new distribution facilities and
contributed $175.1 million to sales. Organic growth accounted for $20.4 million of our sales
growth, with the balance driven by favorable foreign exchange influences resulting from a
stronger US dollar. 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.
Improved Profitability
Gross profit margin grew to 18.2%, from 17.4% in 2015. Our improved gross profit margin
performance reflects our ability to capitalize on product pricing opportunities and the positive
impact of Rugby’s product lines, which carry a higher gross profit margin.
As anticipated, operating expenses were higher year-over-year. This reflects the addition of the
Rugby operations, as well as one-time transaction-related costs of $2.4 million. Operating
expenses as a percentage of revenue were also higher at 13.3% in 2016 compared to 11.8% in
2015. This increase reflects the one-time transaction expenses, as well as Rugby’s sales model,
which involves supplying more orders to more customers, but with smaller average order sizes.
Bad debt expense represented just 0.1% of sales, below our long-term historical average of
approximately 0.4% of sales.
Balance Sheet
In response to trade uncertainties (see section 1.3) we also increased our inventory balances to
ensure product supply availability for our customers. Even with this increase in inventory, our
balance sheet remains strong. As at December 31, 2016, our net debt-to-Adjusted EBITDA ratio
was 2.1 times, our debt-to-capital ratio was just 30.1%, and we had $57.8 million of unused
borrowing capacity.
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1.2 Business Strategy
Our strategy in 2016 focused on three key areas: i) leveraging our import program, ii)
strengthening access to commercial markets, and iii) pursuing accretive acquisitions.
Leveraging Imports
Hardwoods has created 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 2016, 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 represented approximately 25% of our 2016 sales. Going forward, we
will continue to leverage our product sourcing capabilities to secure a steady supply of high-
quality, well-priced product solutions for our customers, drawing on the most advantageous
combination of imported and domestic supply.
Strengthening Commercial
Our “strengthen commercial” strategy focuses on expanding our base of customers in the
commercial and institutional sectors as we work to diversify our end markets served. In 2016,
our acquisition of Rugby significantly increased our focus on the commercial market with
commercial sales expected to represent approximately 35% of our total sales going forward,
compared to 20% previously. We also continued to grow our supply of first-tier quality products
for commercial customers and capitalized on our import capabilities to offer both domestic and
off-shore product solutions to the commercial sector. In addition, we further expanded our sales
capabilities with training and other initiatives focused on the commercial market. In 2017, we
will continue to focus on growing both our commercial customer base and the line-up of attractive
and differentiated products we supply to this market.
Pursuing Accretive Acquisitions
We have completed five successful acquisitions in the past five and a half years which have
increased our sales by approximately $500 million annually on a pro-forma basis, added 37
locations to our network, and provided us with a national footprint and reach into almost every
region in North America. Our 2016 acquisition of Rugby was the largest of these transactions
Hardwoods Distribution Inc. | 2016 | Annual Report
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and provided us with access to new markets, strengthened our access in existing markets, and
provided immediate accretion for shareholders.
Going forward, we now have the size, scale, and strong balance sheet position to continue
pursuing growth by acquisition, and the highly fragmented nature of the US architectural
building products industry provides numerous opportunities. We plan to continue pursuing
opportunities that take us into new markets, expand our presence in existing markets, and that
can be added on an accretive basis for shareholders. The acquisition on March 13, 2017 of Eagle
Plywood and Lumber ("Eagle") is an example of our ability to expand our presence in an existing
market.
1.3 Outlook
The recent change in US government administration is expected to usher in new approaches to
trade and economic growth in the US. While it is still too early to identify what specific policies
will be implemented or how they will impact the US economy, proposals for a large infrastructure
spending program, a reduction in the corporate tax rate, and a more protectionist approach to
trade, including the potential for a border adjustment tax (BAT), have been discussed.
With a strong majority of our operations now domiciled in the US, Hardwoods is positioned to
benefit from policies that stimulate the US economy or prove generally positive for US-based
businesses. However we could also be negatively impacted, at least in the near term, by trade
decisions that affect our import program. As we discussed in our press release of November 21,
2016, a trade case has been initiated in the US with respect to imported hardwood plywood from
China. Although we sell more domestically sourced hardwood plywood than imported,
approximately 11% of our total sales could be affected by this case. In the event that trade duties
are levied against hardwood plywood, this would impact the market for hardwood plywood in
the US with the potential for significant changes in selling prices, margins, and/or product supply
availability. Should the US government move to impose a BAT, we could see similar effects
on a wider range of our import products, and not just those from China. We are watching both
the current trade case and broader US trade policy decisions closely, and have worked to secure
a range of alternative supply solutions. Furthermore, we have increased our inventory balances
and positioned ourselves to respond in the event significant changes occur.
Notwithstanding the uncertainty around US trade and economic policy, our outlook for 2017 is
positive. We expect that our gross profit margin as a percentage of sales will remain above the
Hardwoods Distribution Inc. | 2016 | Annual Report
12
levels Hardwoods has traditionally achieved, reflecting Rugby’s higher-margin product mix.
Operating expenses are also expected to be moderately higher due to Rugby’s sales model.
While EBITDA on a dollar basis is expected to benefit from increased sales, EBITDA as a
percentage of revenue is expected to be moderately lower due to the increased operating
expenses.
In terms of market outlook, the unevenness and relatively slow growth experienced in the US
residential construction market in 2016 is expected to continue into 2017. As a result, we expect
organic growth to remain modest in the near term. Market fundamentals remain sound however,
with US job growth and income levels gaining momentum. Harvard's Joint Center for Housing
Studies June 2016 report on "state of the nation’s housing" concluded that housing construction
should average at least 1.6 million units a year over the next decade in order to replace older
units and meet demand. With average housing starts at 1.2 million in 2016, there is considerable
room for growth in this market, although we expect it will take time to reach the 1.6 million
level.
In the non-residential construction market, the American Institute of Architects predicts growth
of 6.7% in 2017, with the strongest gains anticipated for the commercial sectors that we focus
on.
Strategically, we will continue to implement our strategies, including leveraging our product
sourcing capabilities, capitalizing on significant opportunities in the commercial market and
pursuing strategic acquisitions, such as our acquisition on March 13, 2017 of Eagle.
Our Board will continue to review our financial performance and assess dividend levels on a
regular basis. However, our primary focus will be to retain the cash necessary to finance the
significant market growth opportunity in the US and to keep our balance sheet strong, reduce
debt and support future strategic acquisitions.
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Hardwoods Distribution Inc. | 2016 | Annual Report
14
2.0 Background
2.1 Company Overview
Hardwoods Distribution Inc. is a publicly traded company listed on the Toronto Stock Exchange
and trades under the symbol HWD.
2.2 Rugby acquisition
On July 15, 2016, we acquired Rugby for a base purchase price of $138.8 million (US $107.0
million), plus up to another $16.9 million (US $13.0 million) of purchase consideration and
bonuses based on future performance. Rugby is a leading US wholesale distributor of
architectural grade building products to customers that supply end-products to the commercial
market. It also serves industrial, retail, residential and institutional construction end-markets.
Rugby has a strong national US footprint, operating 28 strategically located distribution facilities
that serve over 22,000 customers across 48 US states.
The transaction was financed using approximately $55.7 million (US$43.0 million) of net
proceeds from a bought deal share offering, $74.1 million (US$57.0 million) of draw-down of
our amended US credit facility, and the issuance of 563,542 common shares of Hardwoods for
proceeds of $9.0 million (US$7.0 million).
2.3 Business and Industry Overview
Serving customers for over 50 years, Hardwoods is North America’s largest distributor of non-
structural architectural grade building products to the cabinet, moulding, millwork, furniture
and specialty wood products industries. As at March 17, 2017 we operated 58 distribution
facilities located in 25 US states and 5 Canadian provinces. Certain of these facilities include
light manufacturing capabilities which enable us to create custom moulding and millwork
packages for our customers. An additional facility, HMI, is a fully integrated producer and
exporter of high-quality, value-added hardwood lumber.
Approximately 51% of our 2016 sales were made up of hardwood plywood and non-structural
sheet goods such as medium-density fiberboard, particleboard and thermally fused laminate.
Approximately 30% of our sales were of high-grade hardwood lumber. Our sheet goods and
lumber are complementary product lines; customers typically use both of these key products in
Hardwoods Distribution Inc. | 2016 | Annual Report
15
the manufacture of their own end-use products. The balance of our product sales, about 19%,
was made up of architectural and other products.
Our primary role in the industry is to provide the critical link between mills that manufacture
large volumes of hardwood lumber, sheet goods and specialty products, and industrial customers
that require smaller quantities of many different architectural products for their own
manufacturing processes. We provide a means for hundreds of 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 that 52% 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 ends up in other sectors of the
economy not associated with new residential construction, such as home renovations, finishing
millwork for office buildings, recreational vehicles, 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, as
well as by overseas hardwood plywood manufacturers. 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, 2016 and December 31, 2015
Selected Unaudited Consolidated Financial Information (in thousands of Canadian dollars)
For the year
For the year
ended December 31
ended December 31
$ Increase % Increase
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 income (expense)
Income tax expense
Profit for the period
Basic profit per share
Diluted profit per share
$
$
$
$
$
Average Canadian dollar exchange rate for one US dollar $
$
2016
789,321
498,198
129,935
143,778
18.2%
(104,871)
38,907
4,806
2015
(Decrease)
(Decrease)
571,598
355,724
116,805
99,633
17.4%
(67,422)
32,211
2,593
$ 217,723
142,474
13,130
44,145
37,449
6,696
2,213
38.1 %
40.1 %
11.2 %
44.3 %
55.5 %
20.8 %
85.3 %
43,713
$
34,804
$
8,909
25.6 %
(4,806)
(1,465)
(13,580)
23,862
1.27
1.25
1.32
$
$
$
$
(2,593)
143
(12,208)
20,146
1.21
1.20
1.28
(2,213)
(1,608)
(1,372)
$
3,716
18.4 %
Analysis of Specific Items Affecting Comparability (in thousands of Canadian dollars)
For the year
For the year
ended December 31
ended December 31
$ Increase % Increase
2016
2015
(Decrease)
(Decrease)
Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), per the table above
Transaction expenses
Adjusted EBITDA
Adjusted EBITDA as a % of revenue
Profit for the period, as reported
Transaction expenses, net of tax
Adjusted Profit
Basic profit per share, as reported
Net impact of above items per share
Adjusted basic profit per share
Diluted profit per share, as reported
Net impact of above items per share
Adjusted diluted profit per share
$
$
$
$
$
$
$
$
43,713
2,436
46,149
5.8%
23,862
1,516
25,378
1.27
0.08
1.35
1.25
0.08
1.33
$
$
$
$
$
$
$
$
34,804
$
8,909
2,436
25.6 %
11,345
32.6 %
—
34,804
6.1%
20,146
—
20,146
1.21
—
1.21
1.20
—
1.20
3,716
1,516
5,232
0.06
0.08
0.14
0.05
0.08
0.13
$
$
$
$
18.4 %
26.0 %
5.0 %
11.6 %
4.2 %
10.8 %
Hardwoods Distribution Inc. | 2016 | Annual Report
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Sales
For the year ended December 31, 2016, total sales increased 38.1% to $789.3 million, from
$571.6 million in 2015. Of the $217.7 million year-over-year increase, $175.1 million,
representing a 30.6% increase in sales, was due to the addition of Rugby’s operations and $20.4
million, representing a 3.6% increase in sales, was due to organic growth. Sales results also
benefited from a $22.2 million positive impact of a stronger US dollar when translating our US
sales to Canadian dollars for reporting purposes.
Sales from our US operations increased by US$142.5 million, or 40.1%, to US$498.2 million,
from US$355.7 million in 2015. Rugby, which was acquired on July 15, 2017, contributed sales
of US$132.6 million. Organic growth accounted for US$9.9 million of the US sales uplift as
we increased sales volumes in response to higher demand.
Sales in Canada increased by $13.1 million, or 11.2%, year-over-year. The increase in Canadian
sales reflects our success in winning new business, as well as the positive impacts of a stronger
US dollar as described in Section 1.1.
Gross Profit
Gross profit for the year ended December 31, 2016 increased 44.3% to $143.8 million, from
$99.6 million in 2015. This $44.1 million improvement reflects higher gross profit margin from
both the Rugby and Hardwoods businesses, together with higher sales for the year. As a
percentage of sales, gross profit margin increased to 18.2% in 2016, from 17.4% in 2015.
Operating Expenses
For the year ended December 31, 2016, operating expenses increased to $104.9 million, from
$67.4 million in 2015. The $37.4 million increase includes Rugby operating expenses of $29.3
million, $2.4 million of transaction expenses related to the Rugby acquisition, a $3.0 million
increase in expenses due to the impact of a stronger US dollar on translation of US operating
expenses, and $2.7 million of added costs to support our organic growth. As a percentage of
sales, operating expenses increased to 13.3% from 11.8% year-over-year, primarily reflecting
Rugby’s higher ratio of operating expenses as a percentage of sales.
Hardwoods Distribution Inc. | 2016 | Annual Report
18
Depreciation and Amortization
For the year ended December 31, 2016, amortization expense increased to $4.8 million, from
$2.6 million in 2015. The $2.2 million increase primarily relates to amortization of Rugby
property, plant and equipment of $0.9 million, a $0.9 million increase to amortization of
intangible assets related to customer relationships acquired in connection with the Rugby
acquisition, and a $0.4 million increase from the Hardwoods business.
Adjusted EBITDA
For the year ended December 31, 2016 Adjusted EBITDA grew 32.6% to $46.1 million, an
increase of $11.3 million from $34.8 million in 2015. The growth in Adjusted EBITDA primarily
reflects the $44.1 million increase in gross profit, partially offset by the $32.8 million increase
in operating expenses (before expenses related to the Rugby acquisition and before an increase
in depreciation and amortization).
Net Finance Income (Cost)
(in thousands of Canadian dollars)
Finance expense:
Interest on bank indebtedness
Accretion of finance lease obligation
Foreign exchange loss
Total finance expense
Finance income:
Interest on trade receivables, customer
notes, and employee loans
Foreign exchange gain
Total finance income
For the year
ended
December 31
2016
For the year
ended
December 31
2015
$ Change
$
(1,675) $
(137)
(11)
(1,823)
(1,217) $
(116)
—
(1,333)
358
—
358
421
1,055
1,476
(458)
(21)
(11)
(490)
(63)
(1,055)
(1,118)
Net finance income (expense)
$
(1,465) $
143
$
(1,608)
We recorded a net finance expense of $1.5 million in 2016 as compared to net finance income
of $0.1 million in 2015. The $1.6 million year-over-year increase reflects the impact of changes
in the value of the US dollar on US dollar denominated intercompany debt between the two
years. On June 21, 2016 we settled the intercompany debt in full. The increase in net finance
expense also reflects higher interest expense related to increased borrowings to finance part of
the purchase price of Rugby.
Hardwoods Distribution Inc. | 2016 | Annual Report
19
Income Tax Expense
Income tax expense increased to $13.6 million for the year ended December 31, 2016, from
$12.2 million in 2015. This increase primarily reflects higher taxable income.
Profit for the Period
Profit for the year ended December 31, 2016 increased 18.4% to $23.9 million, from $20.1
million in 2015. The $3.7 million improvement reflects the $8.9 million year-over-year increase
in EBITDA, partially offset by the $1.4 million increase in income tax expense, the $1.6 million
increase in net finance cost, and a $2.2 million increase in depreciation and amortization.
Adjusted profit, which excludes the $1.5 million in expenses related to the Rugby acquisition,
net of tax, increased to $25.4 million in 2016. This was $5.2 million or 26.0% higher than 2015.
Hardwoods Distribution Inc. | 2016 | Annual Report
20
3.2 Three-Month Periods Ended December 31, 2016 and December 31, 2015
Selected Unaudited Consolidated Financial Information (in thousands of Canadian dollars)
Three months
Three months
ended December 31
ended December 31
$ Increase % Increase
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 income (expense)
Income tax expense
Profit for the period
Basic profit per share
Diluted profit per share
$
$
$
$
$
Average Canadian dollar exchange rate for one US dollar $
2016
239,449
155,661
31,676
43,523
18.2%
(34,785)
8,738
2,125
2015
(Decrease)
(Decrease)
$
141,017
$
98,432
84,384
28,058
24,988
17.7%
(18,039)
6,949
702
71,277
3,618
18,535
16,746
1,789
1,423
69.8 %
84.5 %
12.9 %
74.2 %
92.8 %
25.7 %
202.7 %
10,863
$
7,651
$
3,212
42.0 %
(2,125)
(668)
(1,493)
6,577
0.31
0.29
1.33
$
$
$
$
(702)
83
(2,571)
4,461
0.27
0.27
1.34
(1,423)
(751)
1,078
2,116
$
47.4 %
Analysis of Specific Items Affecting Comparability (in thousands of Canadian dollars)
Three months
Three months
ended December 31
ended December 31
$ Increase % Increase
2016
2015
(Decrease)
(Decrease)
Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), per the table above
Transaction expenses
Adjusted EBITDA
Adjusted EBITDA as a % of revenue
Profit for the period, as reported
Transaction expenses, net of tax
Adjusted Profit
Basic profit per share, as reported
Net impact of above items per share
Adjusted basic profit per share
Diluted profit per share, as reported
Net impact of above items per share
Adjusted diluted profit per share
$
$
$
$
$
$
$
$
10,863
50
10,913
4.6%
6,577
31
6,608
0.31
—
0.31
0.29
—
0.29
$
$
$
$
$
$
$
$
7,651
—
7,651
5.4%
4,461
—
4,461
0.27
—
0.27
0.27
—
0.27
$
$
$
$
$
$
$
$
3,212
50
3,262
2,116
31
2,147
0.04
—
0.04
0.02
—
0.02
42.0 %
42.6 %
47.4 %
48.1 %
14.8 %
14.8 %
7.4 %
7.4 %
Hardwoods Distribution Inc. | 2016 | Annual Report
21
Sales
For the three months ended December 31, 2016, total sales increased 69.8% to $239.4 million,
from $141.0 million during the same period in 2015. Of the $98.4 million year-over-year
increase, $93.5 million, representing a 66.3% increase in sales, was due to the addition of Rugby’s
operations and $5.8 million, representing a 4.1% increase in sales, was due to organic growth.
The sales gain was partially offset by a $0.9 million negative foreign exchange impact resulting
from a stronger Canadian dollar when translating our US sales to Canadian dollars for reporting
purposes.
Sales from our US operations increased by US$71.3 million, or 84.5%, to US$155.7 million,
from US$84.4 million in the same period in 2015. Rugby, which was acquired on July 15, 2016,
contributed US$70.1 million of this increase, with the remaining increase relating to organic
growth. Sales in Canada increased by $3.6 million, or 12.9%, year-over-year. The increase in
Canadian sales reflects our success in winning new business.
Gross Profit
Gross profit for the three months ended December 31, 2016 increased 74.2% to $43.5 million,
from $25.0 million in the fourth quarter of 2015. This $18.5 million improvement reflects higher
gross profit margin from both the Rugby and Hardwoods operations. As a percentage of sales,
gross profit margin increased to 18.2% in the fourth quarter of 2016, from 17.7% in the fourth
quarter 2015.
Operating Expenses
Operating expenses increased to $34.8 million in the fourth quarter of 2016, from $18.0 million
during the same period in 2015. The $16.7 million increase includes Rugby operating expenses
of $16.3 million, $0.1 million of transaction expenses related to the Rugby acquisition, and $0.5
million of added costs to support organic growth. These increases were partially offset by a
$0.1 million decrease in expenses due to the impact of a stronger Canadian dollar on translation
of US operating expenses. As a percentage of sales, operating expenses increased to 14.5% from
12.8% year-over-year, primarily reflecting Rugby’s higher ratio of operating expenses as a
percentage of sales.
Hardwoods Distribution Inc. | 2016 | Annual Report
22
Depreciation and Amortization
For the three months ended December 31, 2016, amortization expense increased to $2.1 million,
from $0.7 million in 2015. The $1.4 million increase primarily relates to amortization of Rugby
property, plant and equipment of $0.5 million, and a $0.9 million increase to amortization of
intangible assets related to customer relationships acquired in connection with the Rugby
acquisition.
Adjusted EBITDA
For the three months ended December 31, 2016 Adjusted EBITDA grew 42.6% to $10.9 million,
from $7.7 million in the same period in 2015. The $3.3 million growth in Adjusted EBITDA
primarily reflects the $18.5 million increase in gross profit, partially offset by the $15.2 million
increase in operating expenses (before expenses related to the Rugby acquisition and before an
increase in depreciation and amortization).
Net Finance Income (expense)
(in thousands of Canadian dollars)
Three months
ended
December 31
2016
Three months
ended
December 31
2015
$ Change
Finance expense:
Interest on bank indebtedness
Accretion of finance lease obligation
Foreign exchange losses
Total finance expense
Finance income:
Interest on trade receivables, customer
notes, and employee loans
Foreign exchange gain
Total finance income
$
$
(607)
(38)
(86)
(731)
$
(234)
(30)
—
(264)
63
—
63
123
224
347
Net finance income (expense)
$
(668)
$
83
$
(373)
(8)
(86)
(467)
(60)
(224)
(284)
(751)
For the three months ended December 31, 2016, we recorded a net finance expense of $0.7
million as compared to net finance income of $0.1 million during the same period in 2015. The
$0.8 million increase in net finance expense is primarily comprised of a foreign exchange loss
and an increase in interest expense as a result of higher bank indebtedness.
Hardwoods Distribution Inc. | 2016 | Annual Report
23
Income Tax Expense
Income tax expense decreased to $1.5 million in the fourth quarter of 2016, from $2.6 million
in the same period in 2015. The $1.1 million decrease primarily reflects adjustments to our tax
estimates in the fourth quarter of 2016 to reflect the impact of certain corporate restructuring
activities during the second half of 2016.
Profit for the Period
Profit for the three months ended December 31, 2016 increased 47.4% to $6.6 million, from
$4.5 million during the same period in 2015. The $2.1 million improvement reflects the $3.2
million increase in EBITDA and the $1.1 million decrease in income tax expense, partially
offset by the $0.8 million increase in net finance cost, and a $1.4 million increase in depreciation
and amortization.
Hardwoods Distribution Inc. | 2016 | Annual Report
24
4.0 Selected Financial Information and Seasonality
4.1 Quarterly Financial Information
(in thousands of dollars)
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Q4
2015
Q3
2015
Q2
2015
Q1
2015
Total sales
Profit
Basic profit per share
Diluted profit per share
$ 239,449 $ 235,428 $ 157,031 $ 157,413 $ 141,017 $ 152,114 $ 143,351 $ 135,116
6,577
7,296
5,367
4,622
4,461
5,963
5,009
4,713
0.31
0.29
0.35
0.35
0.32
0.32
0.28
0.27
0.27
0.27
0.36
0.35
0.30
0.30
0.28
0.28
EBITDA
10,863
13,186
10,231
9,433
7,651
10,227
9,280
7,646
Adjusted profit
6,608
8,084
6,200
4,622
4,461
5,963
5,009
4,713
Adjusted basic profit per share
Adjusted diluted profit per share
0.31
0.29
0.39
0.39
0.37
0.37
Adjusted EBITDA
10,913
14,280
11,523
Adjusted cash flow per share
0.31
0.55
0.48
0.28
0.27
9,433
0.29
0.27
0.27
0.36
0.35
7,651
10,227
0.40
0.53
0.30
0.30
9,280
0.39
0.28
0.28
7,646
0.27
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.
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. In
addition, net earnings reported in each quarter may be impacted by acquisitions, such as the impact
of our acquisition of Rugby on Q3 and Q4 2016, and by changes in the foreign exchange rate of the
Canadian and US dollars.
4.2 Annual Financial Information
(in thousands of dollars except per unit amounts)
For the year
For the year
For the year
Total sales
Profit
Basic profit per share
Fully diluted profit per share
Total assets
Total non-current financial liabilities
EBITDA
ended December
31
ended December
31
ended December
31
2016
2015
$
789,321 $
571,598
23,862
20,146
1.27
1.25
1.21
1.20
2014
455,694
14,015
0.85
0.84
371,076
190,004
160,813
1,877
43,713
696
34,804
4,120
25,478
Hardwoods Distribution Inc. | 2016 | Annual Report
25
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)
Years ended December 31
Three months ended December 31
2016
2015
$ change
2016
2015
$ change
Cash provided by operating activities before
changes in non-cash working capital
$
28,844 $
26,788 $
2,056
$
6,692 $
6,706 $
(14)
Changes in non-cash working capital
Net cash provided by operating activities
(14,172)
(6,044)
14,672
20,744
(8,128)
(6,072)
Net cash provided by (used in) investing activities
(138,814)
(1,352)
(137,462)
(2,172)
4,520
292
10,689
17,395
(12,861)
(12,875)
(389)
681
Net cash provided by (used in) financing activities
124,908
(19,405)
144,313
(4,721)
(17,006)
12,285
Increase (decrease) in cash
Cash, beginning of period
Cash, end of the period
766
—
(13)
13
779
(13)
91
675
—
—
$
766 $
— $
766
$
766 $
— $
91
675
766
Calculation of Adjusted Cash Flow per Share (in thousands, except per share amounts)
Years ended December 31
Three months ended December 31
2016
2015
$ change
2016
2015
$ change
Cash provided by operating activities before changes
in non-cash working capital
$
28,844 $
26,788 $
2,056
$
6,692 $
6,706 $
Transaction expenses
2,436
—
2,436
50
—
(14)
50
Adjusted Cash provided by operating activities before
changes in non-cash working capital
Weighted average common shares - diluted
Adjusted cash flow per share
$
$
31,280 $
26,788 $
19,018
16,781
1.64 $
1.60 $
4,492
2,237
0.04
$
$
6,742 $
6,706 $
36
21,498
16,810
4,688
0.31 $
0.40 $
(0.09)
Net cash used in operating activities
For the year ended December 31, 2016, net cash provided by operating activities was $14.7
million, compared to $20.7 million in 2015. Cash provided by operating activities before changes
in non-cash working capital increased by $2.1 million primarily reflecting the $8.9 million
increase in EBITDA, partially offset by a $6.2 million increase in income taxes paid and an
increase in interest paid of $0.3 million. Investment in non-cash working capital increased by
$8.1 million in 2016 compared to 2015. An analysis of changes in working capital is provided
in section 5.2 of this report.
For the three months ended December 31, 2016, net cash provided by operating activities
decreased to $4.5 million, from $17.4 million in the same period in 2015, a reduction of $12.9
million. There was no change in fourth quarter cash provided by operating activities before
changes in non-cash working capital. Investment in non-cash working capital increased by
Hardwoods Distribution Inc. | 2016 | Annual Report
26
$12.9 million in the fourth quarter of 2016, compared to the fourth quarter of 2015. An analysis
of changes in working capital is provided in section 5.2 of this report.
For the year ended December 31, 2016, adjusted cash flow per share increased by $0.04 to
$1.64, as compared to 2015. For the three months ended December 31, 2016 adjusted cash flow
per share was $0.31 compared to $0.40 in the same period in the prior year. The decrease of
$0.09 primarily relates to an increase in taxes paid of $2.7 million in the quarter, relating to
timing of these payments. Adjusted cash flow per share is one of the measures we review to
assess the operating performance of the business and the cash flow available to finance
investments in non-cash working capital, and financing and investing activities.
Net cash used in investing activities
Net cash used in investing activities increased by $137.5 million to $138.8 million in 2016,
from $1.4 million in 2015. The increase primarily relates to the $136.9 million paid on
acquisition of Rugby on July 15, 2016.
Capital expenditures in our distribution business have historically been low as we generally
lease our buildings and typically contract out delivery equipment. Capital expenditures in this
part of our business are principally for the replacement of forklifts, furniture and fixtures,
leasehold improvements and computer equipment.
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.
For the three months ended December 31, 2016 cash used in investing activities decreased by
$0.7 million. This decrease primarily relates to fewer purchases of property, plant and equipment
in the quarter as compared to the same quarter in 2015.
Net cash provided by financing activities
For the year ended December 31, 2016 net cash provided by financing activities increased by
$144.3 million as compared to 2015. The increase primarily relates to an increase in our credit
facilities and the issuance of common shares to finance the purchase of Rugby.
For three months ended December 31, 2016 net cash used in financing activities decreased $12.3
million as compared to the same period in 2015. There were no significant changes in the
Hardwoods Distribution Inc. | 2016 | Annual Report
27
composition of cash provided by and used in financing activities, with changes in our credit
facilities and dividends paid to shareholders being the main financing activities during the period.
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. We had working capital of $220.8 million as at December 31, 2016, compared to
$149.4 million at December 31, 2015. The increase is attributable to the acquisition of Rugby,
increased investment in accounts receivable and inventory to support sales growth, and the
impact of a strengthening US dollar when translating the working capital of our US operations.
Our investment in working capital fluctuates from quarter-to-quarter based on factors such as
seasonal sales demand, strategic purchasing decisions taken 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, as a result, sales and working
capital requirements may be lower in these quarters. In the fourth quarter of 2016 however we
made additional investments in inventory in response to trade uncertainties (see section 1.3)
and this increased our investment in working capital. A summary of changes in our non-cash
operating working capital during the twelve and three month periods ended December 31, 2016
and 2015 is provided below.
(in thousands of Canadian dollars)
Source (use) of funds
2016
2015
2016
2015
Years ended
ended
December 31
Years ended
ended
December 31
Three months
ended
December 31
Three months
ended
December 31
Accounts receivable
Inventory
Prepaid expenses
Accounts payable, accrued liabilities and provisions
$
(956)
$
(2,930)
$
10,350
$
(15,723)
187
2,320
(4,499)
39
1,346
(8,224)
1,350
(5,648)
9,242
3,775
284
(2,612)
Increase in non-cash operating working capital
$
(14,172)
$
(6,044)
$
(2,172)
$
10,689
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. | 2016 | Annual Report
28
5.3 Revolving Credit Facilities and Debt Management Strategy
Selected Unaudited Consolidated Financial Information (in thousands of dollars)
Cash
Bank indebtedness
Net Debt
Shareholders' equity
Total Capitalization
Net debt to total capitalization
Previous 12 months Adjusted EBITDA
Net debt to previous 12 months Adjusted EBITDA
As at
As at
December 31, 2016
December 31, 2015
$
$
$
766
97,886
97,120
225,999
323,119
30.1%
46,149
2.1
$
$
$
—
28,894
28,894
142,948
171,842
16.8%
34,804
0.8
We consider our capital to be bank indebtedness (net of cash) and shareholders’ equity. As
shown above, our net debt balance increased by $68.2 million to $97.1 million at December 31,
2016, from $28.9 million at December 31, 2015. Overall net debt compared to total capitalization
stood at 30.1% as at December 31, 2016, compared to 16.8% at December 31, 2015. At
December 31, 2016 our ratio of net debt-to-Adjusted EBITDA for the previous 12 months was
2.1 times, compared to 0.8 times at December 31, 2015. The net debt-to-Adjusted EBITDA for
the previous 12 months includes approximately 5.5 months of Rugby's results and we expect
the net debt-to-Adjusted EBITDA ratio to decrease from its current levels once a full 12 month
of Rugby's results are included. Net debt-to-Adjusted 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 limited to the extent of the value of certain accounts receivable and inventories
held by our subsidiaries. Credit facilities also require ongoing compliance with certain credit
ratios. A summary of our credit facilities as at December 31, 2016 is provided in the following
table.
Hardwoods Distribution Inc. | 2016 | Annual Report
29
Selected unaudited consolidated financial information (in thousands of dollars)
Maximum borrowings under the credit
facility
Credit facility expiry date
Available to borrow
Credit facility borrowings
Unused credit facility
Financial covenants:
Canadian Credit
Facility
US Credit
Facility
$
$
$
$
20.0 million
August 5, 2021
19.4 million
12.5 million
6.9 million
$
$
$
$
167.4 million (US$125.0 million)
July 14, 2021
135.8 million (US$101.3 million)
84.9 million (US$63.4 million)
50.9 million (US$37.9 million)
Covenant does not apply
when the unused credit
facility available exceeds
$2.0 million, which it did at
December 31, 2016
Covenant does not apply when the unused
credit facility available exceeds 10% of the
maximum borrowings under
the credit
facility or US$12.5 million, which it did at
December 31, 2016
The terms of the agreements with our lenders provide that dividends cannot be made 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,
2016. Accordingly, there were no restrictions on dividends arising from non-compliance with
financial covenants.
In connection with the closing of the Rugby acquisition on July 15, 2016, we entered into a new
US credit facility with our lender ("the USLP Credit Facility"). The USLP Credit Facility replaces
the existing US credit facility and consists of a revolving credit line of US$125.0 million. The
amounts made available under the USLP Credit Facility are limited based on a borrowing base
determined by reference to the value of certain eligible accounts receivable and inventories held
by certain of our subsidiaries.
The financial covenants under the USLP Credit Facility include, among others, a springing fixed
charge coverage ratio of 1.0x, triggered if excess availability under the USLP Credit Facility
falls below 10% of the USLP Credit Facility at any time.
In addition to the financial covenants, the ability of our subsidiaries to pay distributions and
dividends, complete acquisitions, make additional investments, take on additional indebtedness,
allow assets to become subject to liens, complete affiliate transactions and make capital
expenditures are limited and subject to the satisfaction of certain conditions. The USLP Credit
Facility has a five-year term and can be prepaid at any time with no prepayment penalty.
Hardwoods Distribution Inc. | 2016 | Annual Report
30
On August 5, 2016 we renewed our Canadian credit facility with our existing lender ("the LP
Credit Facility"). The LP Credit Facility replaces the existing Canadian credit facility and
consists of a revolving credit line of $20.0 million. The amounts made available under the LP
Credit Facility are limited based on a borrowing base determined by reference to the value of
certain eligible accounts receivable and inventories held by our Canadian subsidiary. The
covenants under the LP Credit Facility relate to our Canadian subsidiary and include, among
others: (i) a springing fixed charge covenant ratio of 1.0x, triggered if excess availability under
the LP Credit Facility falls below $2.0 million, and (ii) restrictions on our ability to pay
distributions and dividends, complete acquisitions, make additional investments, take on
additional indebtedness, allow our assets to become subject to liens, complete affiliate
transactions and make capital expenditures. We were in compliance with these covenants as at
December 31, 2016. The new Canadian credit facility has a five-year term and can be prepaid
at any time with no prepayment penalty.
On February 24, 2017 we amended the LP Credit Facility such that the credit line was increased
from $20.0 million to $25.0 million.
Our debt management strategy is to roll and renew (as opposed to repay and retire) our credit
facilities as they expire. 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 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.
5.4 Contractual Obligations
The table below sets forth our contractual obligations as at December 31, 2016. These obligations
relate to leases on various premises and automobiles and become due in the fiscal years indicated.
(in thousands of dollars)
2017
2018
2019
$19,218
$13,685
$11,238
2020
$8,503
2021
$5,763
thereafter
Total
$8,118
$66,525
Hardwoods Distribution Inc. | 2016 | Annual Report
31
5.5 Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
5.6 Financial Instruments
Financial assets include cash and current and non-current receivables, which are measured at
amortized cost. Financial liabilities include bank indebtedness, accounts payable and accrued
liabilities, income taxes payable, dividend payable, notes payable and finance lease obligations
which are measured at amortized cost. The carrying values of our cash, current accounts
receivable, income taxes payable, accounts payable and accrued liabilities, and dividend payable
approximate their fair values due to the relatively short period to maturity of the instruments.
The fair value of non-current receivables, notes payable 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 17, 2017, the date of this MD&A, we had 21,350,572 common shares issued and
outstanding. In addition, at March 17, 2017, we had outstanding 58,601 performance shares
and 73,661 restricted shares 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,
common 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 employees have the option, when the restricted
and performance share vest, to receive up to half the fair value in cash and the remainder in
common shares. We intend to issue common shares from treasury to settle the portion of the
obligation not paid to employees in cash.
Hardwoods Distribution Inc. | 2016 | Annual Report
32
5.8 Dividends
In the fourth quarter of 2016, we declared a quarterly dividend of $0.0625 per share, which was
paid on January 31, 2017 to shareholders of record as at January 20, 2017. On March 17, 2017
we declared a quarterly dividend of $0.0625 per share, payable on April 28, 2017 to shareholders
of record as at April 17, 2017. The Board regularly assesses our dividend strategy, giving due
consideration to anticipated cash needs for additional working capital to support growing the
business, appropriate debt levels, acquisition opportunities which may be available, expected
market conditions, demand for our products, and other factors.
6.0 Related Party Transactions
There were no material related party transactions in the three and twelve months ended
December 31, 2016 or in the comparative periods in the prior year.
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.
Hardwoods Distribution Inc. | 2016 | Annual Report
33
Valuation of inventory: We are required to make estimates and assumptions regarding the net
realizable value of our inventory. The estimates and assumptions may have a material impact
on the values at which we recognize inventory.
Rugby acquisition: We are required to make estimates and assumptions related to the Rugby
acquisition, including the net asset value acquired, the amounts payable under the earn-out, the
fair values of identifiable assets acquired and liabilities assumed, and the value of goodwill and
intangible assets assumed.
7.2 Adoption of New Accounting Policies
There were no new standards effective January 1, 2016 that have an impact on our consolidated
financial statements.
A number of new standards, amendments to standards and interpretations, are not yet effective
for the year ended December 31, 2016, and have not been applied in preparing these consolidated
financial statements. We consider the following pronouncements 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 the multiple classification and measurement models in IAS 39 Financial
Instruments: Recognition and Measurement, 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. We do not intend to early adopt IFRS 9. The adoption of IFRS 9 is
currently not expected to have a material impact on our consolidated financial statements given
the nature of our operations and the types of financial instruments that we currently hold;
however, we 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, 2018 and will replace
IAS 18, Revenue and a number of revenue related standards and interpretations. IFRS 15
Hardwoods Distribution Inc. | 2016 | Annual Report
34
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.
We intend to adopt IFRS 15 in our consolidated financial statements for the annual period
beginning on January 1, 2018. We are assessing the impact of this new standard, but do not
expect the amendments to have a material impact on our consolidated financial statements
IFRS 16, Leases ("IAS 16")
On January 13, 2016, the IASB published a new standard, IFRS 16, Leases, eliminating the
current dual accounting model for lessees, which distinguishes between on-balance sheet finance
leases and off-balance sheet operating leases. Under the new standard, a lease becomes an on-
balance sheet liability that attracts interest, together with a new right-of-use asset. In addition,
lessees will recognize a front-loaded pattern of expense for most leases, even when cash rentals
are constant. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with
earlier adoption permitted. Upon adoption of IFRS 16, the Company's operating leases, which
are principally comprised of its warehouse facilities and automobiles, will be recorded in the
statement of financial position with a corresponding lease obligation. We are assessing the
impact of this new standard and the impact of adopting this standard has not yet been determined.
IAS 12, Income Taxes (Amendments)
On January 19, 2016, the IASB issued Recognition of Deferred Tax Assets for Unrealized Losses
as an amendment to IAS 12. The amendments clarify that the existence of a deductible temporary
difference depends solely on a comparison of the carrying amount of an asset and its tax base
at the end of the reporting period, and is not affected by possible future changes in the carrying
amount or expected manner of recovery of the asset. The amendments apply retrospectively
for annual periods beginning on or after January 1, 2017 with early adoption permitted. We
intend to adopt the amendments to IAS 12 in our consolidated financial statements for the annual
period beginning on January 1, 2017. We do not expect the amendments to have a material
impact on the consolidated financial statements.
Hardwoods Distribution Inc. | 2016 | Annual Report
35
IFRS 2, Share-Based Payment (Amendments)
On June 20, 2016, the IASB issued amendments to IFRS 2 clarifying how to account for certain
types of share-based payment transactions. The amendments provide requirements on the
accounting for: the effects of vesting and non-vesting conditions on the measurement of cash-
settled share-based payments; share-based payment transactions with a net settlement feature
for withholding tax obligations; and a modification to the terms and conditions of a share-based
payment that changes the classification of the transaction from cash-settled to equity-settled.
The amendments apply for annual periods beginning on or after January 1, 2018. As a practical
simplification, the amendments can be applied prospectively. Retrospective, or early, application
is permitted if information is available without the use of hindsight. We intend to adopt the
amendments to IFRS 2 in our consolidated financial statements for the annual period beginning
on January 1, 2018. The extent of the impact of adoption of the standard 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 documents at www.sedar.com.
Hardwoods Distribution Inc. | 2016 | Annual Report
36
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, 2016. 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, 2016.
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, 2016. The
evaluation was carried out within the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated
Framework (2013) (the "2013 COSO framework") and under the supervision of, and with the
participation of, our CEO and the CFO. Based on this evaluation, our CEO and CFO concluded
that our ICFR were effective as of December 31, 2016.
There have not been any changes in our ICFR during the quarter ended December 31, 2016 that
have materially affected, or are reasonably likely to materially affect, our ICFR.
The CEO and CFO have limited the scope of their design of disclosure controls and procedures
and internal control over financial reporting to exclude controls, policies and procedures of the
Rugby business unit, which we acquired on July 15, 2016. Summary financial information
about the acquired Rugby business can be found in section 3.0.
Hardwoods Distribution Inc. | 2016 | Annual Report
37
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: Going forward,
we will continue to leverage our product sourcing capabilities to secure a steady supply of high-
quality, well-priced product solutions for our customers, drawing on the most advantageous
combination of imported and domestic supply; in 2017, we will continue to focus on growing
both our commercial customer base and the line-up of attractive and differentiated products we
supply to this market; we plan to continue pursuing opportunities that take us into new markets,
expand our presence in existing markets, and that can be added on an accretive basis for
shareholders; Hardwoods is positioned to benefit from policies that stimulate the US economy
or prove generally positive for US-based businesses; Hardwoods could also be negatively
impacted, at least in the near term, by trade decisions that affect our import program;
approximately 11% of our total sales could be affected by the trade case; in the event that trade
duties are levied against hardwood plywood, this would impact the market for hardwood
plywood in the US with the potential for significant changes in selling prices, margins, and/or
product supply availability; should the US government move to impose a BAT, we could see
similar effects on a wider range of our import products, and not just those from China; our
outlook for 2017 is positive; we expect that our gross profit margin as a percentage of sales will
remain above the levels Hardwoods has traditionally achieved, reflecting Rugby’s higher-margin
product mix; operating expenses are also expected to be moderately higher due to Rugby’s sales
model; EBITDA on a dollar basis is expected to benefit from increased sales; EBITDA as a
percentage of revenue is expected to be moderately lower due to the increased operating
expenses; in terms of market outlook, the unevenness and relatively slow growth experienced
in the US residential construction market in 2016 is expected to continue into 2017; we expect
organic growth to remain modest in the near term; market fundamentals remain sound however,
with US job growth and income levels gaining momentum; Harvard's Joint Center for Housing
Studies June 2016 report on "state of the nation’s housing" concluded that housing construction
should average at least 1.6 million units a year over the next decade in order to replace older
Hardwoods Distribution Inc. | 2016 | Annual Report
38
units and meet demand, and with average housing starts at 1.2 million in 2016, there is
considerable room for growth in this market, although we expect it will take time to reach the
1.6 million level; historically, the first and fourth quarters have been seasonally slower periods
for our business; 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 do not intend to
restrict future dividends in order to fully extinguish our bank debt obligations upon their maturity;
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 believe our current credit facilities are sufficient to
finance our working capital needs and market expansion strategy, we intend to issue common
shares from treasury to settle the portion of the LTIP obligation not paid to employees in cash.
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 and profitability; we do not become
subject to more stringent regulations; we do not become subject to product liability claims that
could adversely affect our revenues, profitability and reputation; 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
Hardwoods Distribution Inc. | 2016 | Annual Report
39
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; we may be subject to product liability claims that could adversely affect
our revenues, profitability and reputation; 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 our Information Circular and in 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. | 2016 | Annual Report
40
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.
Robert J. Brown
President and Chief Executive Officer
Hardwoods Distribution Inc. | 2016 | Annual Report
41
Independent Auditors’ 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, 2016 and 2015,
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, 2016 and 2015, and
its consolidated financial performance and its consolidated cash flows for the years then ended in
accordance with International Financial Reporting Standards.
KPMG LLP (signed)
Chartered Professional Accountants
March 17, 2017
Vancouver, Canada
Hardwoods Distribution Inc. | 2016 | Annual Report
42
Consolidated Financial Statements
(Expressed in Canadian dollars)
HARDWOODS DISTRIBUTION INC.
Years ended December 31, 2016 and 2015
43
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
Note
December 31,
2016
December 31,
2015
Assets
Current assets:
Cash
Accounts and other receivables
Inventories
Prepaid expenses
Total current assets
Non-current assets:
Non-current receivables
Property, plant and equipment
Intangible assets
Deferred income taxes
Goodwill
Total non-current assets
Total assets
Liabilities
Current liabilities:
Bank indebtedness
Accounts payable and accrued liabilities
Income taxes payable
Finance lease obligation
Dividend payable
Total current liabilities
Non-current liabilities:
Finance lease obligation
Other liabilities
Total non-current liabilities
Total liabilities
Shareholders’ equity
Share capital
Contributed surplus
Deficit
Accumulated other comprehensive income
Shareholders’ equity
7
8
7
9
10
14
4
11
12(a)
5
12(a)
13(b)
13(a)
$
$
$
$
766
94,534
164,547
2,689
262,536
1,378
20,710
20,114
11,631
54,707
108,540
—
56,156
103,476
2,193
161,825
969
16,200
36
10,974
—
28,179
371,076
$
190,004
$
97,886
40,978
1,949
1,055
1,332
143,200
905
972
1,877
28,894
12,438
2,987
1,119
922
46,360
696
—
696
145,077
47,056
112,362
104,333
(14,258)
23,562
225,999
46,859
105,547
(33,361)
23,903
142,948
Total liabilities and shareholders’ equity
$
371,076
$
190,004
Subsequent event (note 5 and note 11)
Commitments (note 12)
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) WILLIAM R. SAUDER Director
44
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
Note
16
8
$
2016
789,321
(645,543)
$
2015
571,598
(471,965)
143,778
99,633
Sales
Cost of goods sold
Gross profit
Operating expenses:
Selling and distribution
Administration
Profit from operations
Finance expense
Finance income
Net finance income (expense)
Profit before income taxes
Income tax expense:
Current
Deferred
Net profit
17
17
15
15
14
14
(77,070)
(27,801)
(104,871)
38,907
(1,823)
358
(1,465)
(52,965)
(14,457)
(67,422)
32,211
(1,333)
1,476
143
37,442
32,354
(13,600)
20
(13,580)
23,862
(341)
23,521
1.27
1.25
$
$
$
(9,732)
(2,476)
(12,208)
20,146
16,399
36,545
1.21
1.20
Other comprehensive income:
Exchange differences translating foreign operations
Total comprehensive income
Basic net profit per share
Diluted net profit per share
13(c)
13(c)
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
45
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
Note
Share
capital
Contributed
surplus
Accumulated
other
comprehensive
income -
translation
reserve
Deficit
Total
Balance at January 1, 2015
Share based compensation
expense
$ 45,830
$ 105,154
$
7,504
$ (49,999) $ 108,489
13 (b)
—
1,299
—
—
1,299
Share based compensation tax
adjustment
Shares issued pursuant to LTIP 13 (b)
Profit for the year
Dividends declared
Translation of foreign operations
—
1,029
—
—
—
123
(1,029)
—
—
—
—
—
—
—
16,399
—
—
20,146
(3,508)
—
123
—
20,146
(3,508)
16,399
Balance at December 31, 2015
46,859
105,547
23,903
(33,361)
142,948
Share based compensation
expense
Shares issued in connection
with the bought deal financing,
net of share issue costs
13 (b)
—
1,130
13 (a)
54,434
—
Shares issued concurrent with
the Rugby acquisition
13 (a)
Shares issued pursuant to LTIP 13 (b)
Share reclassified to liabilities
13 (b)
Deferred tax recovery on share
issue costs
Profit for the year
Dividends declared
Translation of foreign operations
9,091
1,162
—
816
—
—
—
—
(1,162)
(1,182)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(341)
—
23,862
(4,759)
—
1,130
54,434
9,091
—
(1,182)
816
23,862
(4,759)
(341)
Balance at December 31, 2016
$ 112,362
$ 104,333
$
23,562
$ (14,258) $ 225,999
The accompanying notes are an integral part of these consolidated financial statements.
46
Note
2016
2015
$
23,862
$
20,146
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
Cash flow from operating activities:
Profit for the year
Adjustments for:
Depreciation and amortization
Gain on sale of property, plant and equipment
Share-based compensation expense
Income tax expense
Net finance expense (income)
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 (decrease) in bank indebtedness
Principle payments on finance lease obligation
Note repayment
Issue of common shares, net of share issue costs
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 non-current receivables
Net cash used in investing activities
Increase (decrease) in cash
Cash, beginning of year
Cash, end of year
Supplementary information:
Property, plant and equipment acquired
under finance leases, net of disposals
9,10
9
13(b)
14
15
11
13(a)
5
4
$
$
Deferred income tax on share issue costs in share capital
Future cash settlement of LTIP's in accrued liabilities and
non-current liabilities
Property, plant and equipment purchases in accrued
liabilities and non-current liabilities
Transfer of accounts receivable to non-current customer
notes receivable
13(b)
The accompanying notes are an integral part of these consolidated financial statements.
47
4,806
(171)
1,130
13,580
1,465
358
(1,651)
(14,535)
28,844
(956)
(15,723)
187
2,320
(14,172)
14,672
67,343
(1,204)
(407)
63,525
(4,349)
124,908
(2,785)
421
(136,875)
425
(138,814)
766
—
766
$
$
1,404
816
1,182
596
199
2,593
(29)
1,299
12,208
(143)
421
(1,333)
(8,374)
26,788
(2,930)
(4,499)
39
1,346
(6,044)
20,744
(15,030)
(1,045)
—
—
(3,330)
(19,405)
(1,850)
140
—
358
(1,352)
(13)
13
—
860
—
—
—
192
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
1. Nature of operations:
Hardwoods Distribution Inc. (the “Company”) is incorporated under the Canada Business Corporations Act and trades on the
Toronto Stock Exchange under the symbol “HWD.” The Company operates a network of 58 distribution centers in Canada and
the US engaged in the wholesale distribution of hardwood lumber, sheet goods, specialty products and non-structural
architectural grade building products to customers that supply end-products to the residential and commercial construction
markets. The Company also has a sawmill and kiln drying operation in Clinton, Michigan. The Company's principal office is
located at #306, 9440 202nd Street, Langley, British Columbia V1M 4A6.
On July 15, 2016 (the "Acquisition date"), the Company acquired through one of its wholly owned subsidiaries substantially all
the assets used in the business of Rugby Acquisition, LLC and its subsidiaries ("Rugby") and assumed certain of Rugby's
liabilities (the "Acquisition") for a base purchase price of $138.8 million (US$107.0 million) (the “Purchase Price”) plus up to
another $16.9 million (US$13.0 million) in earn-outs based on future performance (note 4). Rugby operates a network of 28
distribution centers in the US and is engaged in the wholesale distribution of non-structural architectural grade building products
to customers that supply end-products to the commercial construction market. Rugby also serves industrial, retail, residential
and institutional construction end-markets.
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 17, 2017.
(b) Basis of measurement:
These consolidated financial statements have been prepared on the historical cost basis.
(c) Functional and presentation currency:
These consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency.
The Company's subsidiaries operating in the United States have a US dollar functional currency. All financial information
presented in the financial statements, with the exception of per share amounts, has been rounded to the nearest thousand
dollar.
(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 value of assets acquired and liabilities assumed and proforma sales and profitability
associated with the Acquisition of Rugby;
• Notes 6 and 7 - the collectability of accounts receivable and the determination of the allowance for credit loss; and
• Note 8 - the valuation of inventories.
48
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
2. Basis of preparation (continued):
(d) Use of estimates and judgment (continued):
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 12 - the classification of lease obligations; and
• Note 14 - 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 of ownership 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 prior to their expiry. 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 and business acquisitions:
These consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-
company 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 GP Inc. II, Hardwoods Specialty Products USLP, Hardwoods Specialty Products USGP,
Hardwoods Specialty Products (Washington) Corp., Hardwoods USLP II, LP, Hardwoods US LLC, Hardwoods Finance
LLC, Hardwoods Finance Company Inc., Paxton Hardwoods LLC, HMI Hardwoods LLC and Rugby Holdings LLC.
The Company accounts for business combinations using the acquisition method when control is transferred to the Company.
The consideration transferred in the acquisition is measured at fair value, as are the identifiable net assets acquired. The
Company measures goodwill in business acquisitions as the fair value of the consideration transferred less the fair value
of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date.
Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent
consideration that meets the definition of a financial instrument is classified as equity, then it is not re-measured and
settlement is accounted for within equity. Otherwise, other contingent consideration is re-measured at fair value at each
reporting date and subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.
Transaction costs, other than those associated with the issuance of debt or equity securities, are expensed as incurred.
(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.
49
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
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. 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 16.
(d) Revenue recognition:
Revenue from the sale of hardwood lumber, sheet goods, specialty products and non-structural architectural grade building
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.
(e) Finance expense and income:
Finance expense is primarily comprised of interest on the Company’s operating lines of credit, notes payable and the
unwinding of the discount on the Company’s finance lease obligations. Interest on these liabilities 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 and labor and production overhead.
50
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(f)
Inventories (continued):
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.
Depreciation methods, material residual value estimates and estimates of useful lives are reviewed at each financial year
end and updated as considered necessary.
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) Intangible assets:
Intangible assets with finite lives consist of acquired customer relationships. These customer relationships are amortized
on a straight-line basis over their estimated useful life of 10 years and are measured at cost less accumulated amortization.
Amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
After initial measurement in a business combination (note 3(a)), goodwill is recorded at cost less accumulated impairment
losses.
(i)
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.
Goodwill is tested annually regardless of whether there is any indication of impairment.
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”).
51
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(i)
Impairment (continued):
Non-financial assets (continued)
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. An impairment loss
for goodwill is not reversed.
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.
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.
(j) 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 transaction costs, 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
The Company considers deposits in banks as cash.
52
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(j) 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.
Discounting is omitted when the effect of discounting is immaterial. The revolving bank line of credit is not discounted;
rather, actual interest accrued is based on the daily balances and is recorded each month.
(k)
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.
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.
(l) 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.
53
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(l) Leases (continued):
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.
(m) Provisions:
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.
(n) 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.
(o) Share based compensation:
The Company has a share based long-term incentive plan as described in note 13(b). At the discretion of the Board of
Directors, the Restricted Shares and Performance Shares to which a grantee is entitled may be settled by the Company
in Shares or in an amount of cash equal to the fair market value of such Shares, or a combination of the foregoing.
The Company is accounting for half of 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. For the remaining 50% of Restricted and Performance
Shares that can be settled in either cash or common shares at the employees option, the Company accounts for the award
as cash-settled share based compensation. Compensation expense is recorded over the vesting period based on the
estimated fair value at the date of grant. The fair value of this 50% portion of the Restricted and Performance Shares is
subsequently re-measured at each reporting date with any change in fair value reflected in share based compensation
expense in the statement of comprehensive income. The liability associated with cash-settled awards is recorded in
accounts payable and accrued liabilities, for amounts expected to be settled within one year, and in non-current liabilities
for amounts to be settled in excess of one year.
(p) New accounting policy:
Amendments to IAS 1, Presentation of Financial Statements
Effective January 1, 2016, the Company adopted the amendments to IAS 1, Presentation of Financial Statements that
improved the presentation and disclosure in financial reports. The adoption of these amendments did not impact the
Company's consolidated financial statements.
(q) Future accounting pronouncements:
A number of new standards, amendments to standards and interpretations, are not yet effective for the year ended December
31, 2016, 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.
54
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(q) Future accounting pronouncements (continued):
IFRS 9, Financial Instruments (“IFRS 9”)
IFRS 9 will replace the multiple classification and measurement models in IAS 39 Financial Instruments: Recognition and
Measurement, 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. 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, 2018 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.
IFRS 15 permits two methods of adoption: (i) the retrospective method, under which comparative periods would be restated,
and the cumulative impact of applying the standard would be recognized as at January 1, 2017, the earliest period presented;
and (ii) the cumulative effect method, under which comparative periods would not be restated and the cumulative impact
of applying the standard would be recognized at the date of initial adoption January 1, 2018. The Company expects to use
the cumulative effect method, however it continues to monitor industry developments. Any significant industry developments
could change the Company's expected method of adoption.
The majority of the Company's revenue is generated from the sale of hardwood lumber, sheet goods, specialty products
and non-structural architectural grade building products to customers. The Company does not expect the adoption of this
standard will have a material impact on the measurement of revenue generated from the sale of its products to customers.
IFRS 16, Leases ("IFRS 16")
On January 13, 2016, the IASB published a new standard, IFRS 16, eliminating the current dual accounting model for
lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. The main
provision of IFRS 16 is the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases
that were previously classified as operating leases. Under IFRS 16, a lessee is required to do the following: (i) recognize
a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, on the balance
sheet; and (ii) recognize a front-loaded pattern of expense for most leases, even when cash rentals are constant, as the
right-of-use asset is depreciated and the lease liability is accreted using the effective interest method. The new standard
also requires qualitative disclosures along with specific quantitative disclosures. IFRS 16 is effective for annual periods
beginning on or after January 1, 2019, with earlier adoption permitted. Upon adoption of IFRS 16, the Company's operating
leases, which are principally comprised of its warehouse facilities and automobiles, will be recorded in the statement of
financial position with a corresponding lease obligation. The Company continues to assess the impact of adopting this
standard on its consolidated financial statements.
55
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(q) Future accounting pronouncements (continued):
IAS 12, Income Taxes (Amendments)
On January 19, 2016, the IASB issued Recognition of Deferred Tax Assets for Unrealized Losses as an amendment to
IAS 12. The amendments clarify that the existence of a deductible temporary difference depends solely on a comparison
of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future
changes in the carrying amount or expected manner of recovery of the asset. The amendments apply retrospectively for
annual periods beginning on or after January 1, 2017 with early adoption permitted.
The Company intends to adopt the amendments to IAS 12 in its consolidated financial statements for the annual period
beginning on January 1, 2017. The Company does not expect the amendments to have a material impact on the consolidated
financial statements.
IFRS 2, Share-Based Payment (Amendments)
On June 20, 2016, the IASB issued amendments to IFRS 2 clarifying how to account for certain types of share-based
payment transactions. The amendments provide requirements on the accounting for: the effects of vesting and non-vesting
conditions on the measurement of cash-settled share-based payments; share-based payment transactions with a net
settlement feature for withholding tax obligations; and a modification to the terms and conditions of a share-based payment
that changes the classification of the transaction from cash-settled to equity-settled.
The amendments apply for annual periods beginning on or after January 1, 2018. As a practical simplification, the
amendments can be applied prospectively. Retrospective, or early, application is permitted if information is available without
the use of hindsight. The Company intends to adopt the amendments to IFRS 2 in its consolidated financial statements
for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been
determined.
4. Rugby acquisition:
On July 15, 2016, a subsidiary of the Company completed the Acquisition of Rugby (note 1). The base purchase price was
comprised of (i) $129.8 million (US$100.0 million) in cash consideration and the assumption of notes payable, and (ii) $9.0
million (US$7.0 million) in cash that was immediately used by the sellers to acquire 563,542 common shares of the Company
from treasury. The base purchase price paid in cash was adjusted downwards by $0.9 million (US$0.7 million) for the value of
notes payable assumed by the Company.
The base purchase price was determined on the basis that the sellers would deliver working capital, as defined in the asset
purchase agreement as net asset value ("NAV"), on closing of the acquisition of between US$47.5 million and US$48.5 million
and, to the extent that the NAV is outside this range at closing of the Acquisition, the purchase price will be adjusted on a dollar
for dollar basis. As security for the NAV adjustment, the Company retained $1.0 million (US$0.8 million) of the base purchase
price as a holdback. The holdback, which is accrued in accounts payable and accrued liabilities, is expected to be paid to the
sellers in tranches over the next 12 months. As of the date of these financial statements, the NAV delivered by the sellers has
not been finalized.
As disclosed in note 1, in addition to the base purchase price, the parties agreed to an earn-out which is intended to pay future
consideration, to be determined at the two-year anniversary of closing of the Acquisition based on achievement of certain gross
profit thresholds during such two-year period (the "Earn-Out Period"), of up to US$4.8 million (the "Earn-Out Consideration")
to one of the principals of the sellers (the "former owner"). In addition, the earn-out is also intended to pay certain management
of Rugby, who will be employed by the Company after closing of the Acquisition ("Rugby Management"), remuneration of up
to US$8.2 million (the "Earn-Out Bonuses") for the achievement of the same gross profit thresholds during the Earn-Out Period.
The earn-out is payable in either cash or common shares at the Company's option. The Earn-Out Consideration is accounted
for as purchase price consideration, while the Earn-Out Bonuses are accounted for as compensation expense over the next
two years. The Company estimates that neither the Earn-Out Consideration nor the Earn-Out Bonuses will result in further
56
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
4. Rugby acquisition (continued):
payments by the Company and no value was attributed to the Earn-Out Consideration in the purchase price allocation and, as
at the date of these financial statements, no accrual has been made in respect of either the Earn-Out Consideration or the
Earn-Out Bonuses.
The Acquisition has been accounted for as a business combination using the acquisition method, with the Company being the
acquirer and Rugby being the acquiree, and where the assets acquired and liabilities assumed are recorded at their fair values
at the Acquisition date.
In connection with the Acquisition, the Company incurred, $2.4 million in transaction costs which are included in administration
expense in the consolidated statement of comprehensive income. In addition to transaction costs, the Company incurred to
December 31, 2016, additional fees of $3.3 million related to the financing of the Acquisition, which are described in notes 11
and 13(a).
Fair value of assets acquired and liabilities assumed
The estimated fair value of Rugby's identified assets and liabilities assumed in accordance with the acquisition method are as
follows:
Cash consideration
Notes payable assumed
Consideration
Assets acquired and liabilities assumed:
Accounts and other receivables
Inventories
Prepaid expenses
Non-current receivables
Property plant and equipment
Intangible assets - customer relationships
Accounts payable and accrued liabilities
Estimated identifiable net assets acquired
Goodwill
Estimated net assets acquired
US$
106,291
709
107,000
28,931
35,546
549
577
3,166
15,700
(18,213)
66,256
40,744
107,000
$
$
$
$
$
$
$
$
CDN$
137,913
920
138,833
37,538
46,121
712
749
4,108
20,371
(23,631)
85,968
52,865
138,833
The above is the fair values of the assets acquired and liabilities assumed of Rugby as of the Acquisition date. The estimate
will remain preliminary until the Company is able to finalize the NAV acquired. During the fourth quarter of 2016, the Company
completed its valuation of intangible assets acquired, resulting in a reduction in the value of goodwill, and an increase in
intangible assets of $20.4 million (US$15.7 million) from the purchase price allocation presented at September 30, 2016.
The goodwill of $52.9 million (US$40.7 million) is attributable primarily to the skills and talent of Rugby's workforce, and synergies
expected to be achieved in respect of purchasing power with vendors, increases in market share, and operational efficiencies
related to the combined operations. The goodwill is deductible for tax purposes.
The intangible asset of $20.4 million (US$15.7 million) represents the value of customer relationships acquired and is being
amortized over 10 years, which is the period the Company expects to benefit from these relationships. Amortization related to
intangible assets from the Acquisition date to December 31, 2016 was $0.9 million and this expense was recorded in the fourth
quarter. The intangible asset is deductible for tax purposes.
The Company financed the Acquisition through a combination of an equity offering (the "Bought Deal Financing") (note 13(a))
and a renegotiated Hardwoods USLP Credit Facility (note 11).
57
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
4. Rugby acquisition (continued):
Had the Acquisition occurred on January 1, 2016 management estimates that the Company’s consolidated sales would have
been approximately $989.3 million and profit before tax would have been approximately $42.6 million for the year ended
December 31, 2016. Included in these consolidated financial statements for the year ended December 31, 2016 are sales of
$175.1 million (US$132.6 million) and profit before tax of $4.0 million (US$3.1 million) relating to Rugby.
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 growth 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
Shareholder’s equity
Total capitalization
December 31,
2016
December 31,
2015
$
$
(766) $
97,886
225,999
—
28,894
142,948
323,119
$
171,842
The terms of the Company’s US and Canadian credit facilities are described in note 11. The terms of the agreements with the
Company’s lenders provide that distributions cannot be paid 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, 2016 and December 31, 2015, and accordingly there were no restrictions on
distributions arising from non-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, 2016.
On November 8, 2016, the Company declared a cash dividend of $0.0625 per common share to shareholders of record as of
January 20, 2017. The dividend was paid to shareholders on January 31, 2017. On March 17, 2017, the Company declared
a cash dividend of $0.0625 per common share to shareholders of record as of April 17, 2017, to be paid on April 28, 2017.
6. Financial instruments:
Financial instrument assets include cash and current and non-current receivables, which are designated as loans and
receivables and measured at amortized cost. Non-derivative financial instrument liabilities include bank indebtedness, accounts
payable and accrued liabilities, income taxes payable, dividend payable, notes 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.
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.
58
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
6. Financial instruments (continued):
Fair value hierarchy (continued):
The Company has no financial assets or financial liabilities included in Level 3 of the fair value hierarchy.
Fair values of financial instruments
The carrying values of cash, accounts and other receivables, income tax payable, dividend payable and accounts payable and
accrued liabilities approximate their fair values due to the relatively short period to maturity of the instruments. The fair value
of non-current receivables, notes payable 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.
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 non-current 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 $96.7 million at December 31, 2016 (December 31, 2015 - $57.1
million), represents the Company’s maximum exposure to credit risk.
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 2.5% (December 31, 2015 - 3.9%) of trade accounts
receivable and customer notes receivable at December 31, 2016. No one customer represents more than 1.4% 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.
59
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
6. Financial instruments (continued):
(i) Credit risk (continued):
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.
Cash:
Cash balances are maintained with high credit quality financial institutions. The Company does not believe there is any
material credit risk associated with cash.
(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, 2016, in Canada, a subsidiary of the Company had a revolving credit facility of up to $20.0 million, and,
in the US, a subsidiary of the Company had a revolving credit facility of up to $167.8 million (US$125.0 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 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 11 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 12 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, 2016 bank indebtedness balance of $97.9 million, a 1% increase or decrease in the interest
rates charged would result in a decrease or increase to profit after tax by approximately $0.6 million.
Currency risk
As the Company conducts business in both Canada and the United States it is exposed to currency risk. Most of the
products sold by the Company in Canada are purchased in U.S. dollars from suppliers in the United States. Although the
Company reports its financial results in Canadian dollars, approximately 85% 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 products
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 products are resold in Canada it is generally sold at a
60
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
6. Financial instruments (continued):
Financial risk management (continued):
(iii) Market risk (continued):
Currency risk (continued)
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, 2016, 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 (2016 - US$0.2 million,
2015 - US$0.1 million) and accounts payable to U.S. suppliers (2016 - US$0.4 million, 2015 - US$0.3 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, 2016 or December 31, 2015.
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, 2016 and December 31, 2015 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.
61
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
7. Accounts and other receivables:
The following is a breakdown of the Company’s current and non-current receivables and represents the Company’s principal
exposure to credit risk.
Trade accounts receivable - Canada
Trade accounts receivable - United States
Sundry receivable
Current portion of non-current receivables
Less:
Allowance for credit loss
Non-current receivables:
Employee housing loans
Customer notes
Security deposits
Less:
Current portion, included in accounts receivable
The aging of trade receivables is:
Current
1 - 30 days past due
31 - 60 days past due
60+ days past due
December 31,
2016
December 31,
2015
$
14,246
81,776
2,417
1,133
99,572
11,937
47,586
726
751
61,000
5,038
4,844
94,534
$
56,156
$
424
758
1,329
2,511
1,133
1,378
$
546
631
543
1,720
751
969
December 31,
2016
December 31,
2015
$
70,936
17,467
4,957
2,662
96,022
$
44,377
9,142
3,122
2,882
59,523
$
$
$
$
$
$
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, 2016 was $5.0
million (December 31, 2015 - $4.8 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.
62
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
7. Accounts and other receivables (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
Balance as at December 31
2016
4,844 $
1,764
(1,426)
(144)
2015
3,478
1,922
(1,217)
661
5,038 $
4,844
$
$
Bad debt expense, net of recoveries, for the year ended December 31, 2016 was $0.8 million which equates to 0.1% of sales
(year ended December 31, 2015 - $1.5 million, being 0.3% of sales).
8.
Inventories:
Raw materials
Work in process
Goods in-transit
Finished goods:
Lumber
Sheet goods
Architectural and other
December 31,
2016
December 31,
2015
$
$
1,779
5,021
10,927
43,279
76,224
27,317
1,265
5,054
7,611
38,649
42,102
8,795
$
164,547
$
103,476
After the acquisition of Rugby, architectural and other now includes specialty products, solid surface countertops, post-form
countertops, high-pressure laminate, interior and exterior doors and millwork, cabinets and casework, mouldings, and industrial
wood coatings. 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, included in cost of goods sold
Cost of inventory sold
Other cost of goods sold
Total cost of goods sold
2016
1,972
$
620,115
25,428
645,543
$
2015
1,530
455,544
16,421
471,965
$
$
63
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
9. Property, plant and equipment:
Cost
Balance at January 1, 2015
Additions
Disposals
Adjustments:
Foreign currency
transaction
Balance at December 31, 2015
Additions
Acquisition of Rugby (note 4)
Disposals
Adjustments:
Foreign currency
transaction
Balance at December 31, 2016
Accumulated depreciation
Balance at January 1, 2015
Depreciation
Disposals
Adjustments:
Foreign currency
transaction
Balance at December 31, 2015
Depreciation
Disposals
Adjustments:
Foreign currency
transaction
Balance at December 31, 2016
Net book value:
December 31, 2015
December 31, 2016
Leased
vehicles
(note 12(a))
Land
Buildings,
machinery
and
equipment
Leasehold
improvements
Total
580 $
—
—
3,149 $
1,200
(1,088)
18,156 $
1,695
(277)
824 $
155
(119)
22,709
3,050
(1,484)
112
692
151
—
—
432
3,151
3,693
1,656
—
(1,452)
22,725
3,124
3,861
(482)
49
909
113
247
—
3,744
28,019
5,044
4,108
(1,934)
(19)
(82)
(432)
3
(530)
824 $
3,815 $
28,796 $
1,272 $
34,707
— $
—
—
1,235 $
962
(747)
6,950 $
1,584
(173)
760 $
47
(113)
8,945
2,593
(1,033)
—
—
—
—
—
176
1,097
1,626
1,077
(1,059)
9,458
2,620
(357)
41
735
125
—
1,314
11,819
3,822
(1,416)
(30)
(194)
(4)
(228)
— $
1,614 $
11,527 $
856 $
13,997
692 $
824 $
2,067 $
2,201 $
13,267 $
17,269 $
174 $
416 $
16,200
20,710
$
$
$
$
$
$
64
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
9. Property, plant and equipment (continued):
Depreciation of property, plant and equipment for the year ended December 31, 2016 was $3.8 million (2015 - $2.6 million)
and is included in the statement of comprehensive income as follows:
Cost of sales
Selling and distribution
Administration
2016
1,477 $
2,195
150
3,822 $
2015
1,080
1,447
66
2,593
$
$
Gains and losses on disposal of property, plant and equipment for the year ended December 31, 2016 was a net gain of
$171,000 (2015 - net gain of $28,566) and is included in selling and distribution in the statement of comprehensive income.
10. Intangible assets:
Cost
Balance at December 31, 2015
Acquisition of Rugby (note 4)
Eliminate fully amortized intangibles
Adjustments:
Foreign currency transaction
Balance at December 31, 2016
Accumulated amortization
Balance at December 31, 2015
Amortization
Eliminate fully amortized intangibles
Adjustments:
Foreign currency transaction
Balance at December 31, 2016
Net book value:
December 31, 2015
December 31, 2016
Customer
relationships
57
20,371
(57)
709
21,080
21
984
(57)
18
966
36
20,114
$
$
$
$
$
$
Amortization of intangible assets for the year ended December 31, 2016 was $0.9 million (2015 - nil) and is included in
selling and distribution expenses in the statement of comprehensive income.
65
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
11. Bank indebtedness:
Cheques issued in excess of funds on deposit
Credit facility, Hardwoods LP
Credit facility, Hardwoods USLP
(December 31, 2016 - US$63,398
December 31, 2015 - US$14,835)
December 31,
2016
December 31,
2015
$
$
480
12,546
84,860
97,886
$
$
3,049
5,314
20,531
28,894
Bank indebtedness consists of cheques 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”).
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, Rugby Holdings LLC, Paxton Hardwoods LLC and HMI Hardwoods
LLC, and the Hardwoods USLP partnership units held indirectly by the Company.
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 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 usual for borrowings of this nature were and are payable.
Hardwoods LP Credit Facility ("LP Credit Facility")
In August 2016, a subsidiary of the Company renewed the LP Credit Facility for a period of five years. As part of the renewal,
the LP Credit Facility was increased to $20.0 million from $15.0 million. The amount made available under the LP Credit Facility
is limited to the extent of 90% of the net book value of eligible accounts receivable and the lesser of 60% of the book value or
85% of appraised value of eligible 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 LP Credit Facility. Hardwoods LP is required to maintain a fixed charge coverage ratio of not less than 1.0 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, 2016, the LP Credit Facility has unused availability of $6.9 million, before cheques issued in excess of funds on
deposit of $0.5 million (December 31, 2015 - $9.7 million, cheques issued in excess of funds on deposit - $0.9 million).
In February 2017 the LP Credit Facility was amended to increase the amount made available under the facility from $20.0
million to $25.0 million.
66
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
11. Bank indebtedness (continued):
Hardwoods USLP Credit Facility ("USLP Credit Facility")
In connection with the closing of the Acquisition, a subsidiary of the Company entered into a new USLP Credit Facility with its
lender, and has made the funds available to Hardwoods USLP. The USLP Credit Facility has a five year term and can be prepaid
at any time with no prepayment penalty. The USLP Credit Facility is guaranteed by certain of the Company's subsidiaries and
replaces the previous credit facility. The USLP Credit Facility consists of a revolving credit facility of up to US$125.0 million
with the amount made available limited to the extent of 85% of the value of eligible accounts receivable, and 60% of the value
of eligible inventory plus the lesser of (i) 55% of the book value of eligible in-transit inventory or (ii) $2.0 million.
The financial covenants under the USLP Credit Facility include, among others, a springing fixed charge coverage ratio of 1.0
to 1, triggered if excess availability under the USLP Credit Facility falls below 10% of the USLP Credit Facility at any time.
In addition to the financial covenants, the ability of the Company's US subsidiaries to pay distributions and dividends, complete
acquisitions, make additional investments, take on additional indebtedness, allow its assets to become subject to liens, complete
affiliate transactions and make capital expenditures are limited and subject to the satisfaction of certain conditions.
In connection with the USLP Credit Facility, the Company incurred for the year ended December 31, 2016, $0.3 million,
respectively, in fees, which are netted against bank indebtedness in the consolidated statement of financial position. These
fees will be amortized over the term of the USLP Credit Facility.
At December 31, 2016, the USLP Credit Facility has unused availability of $50.9 million (US$37.9 million), before cheques
issued in excess of funds on deposit of nil. At December 31, 2015, the USLP Credit Facility had unused availability of $51.1
million (US$36.9 million), before cheques issued in excess of funds on deposit of $2.1 million (US$1.5 million).
The Company has a letter of credit outstanding at December 31, 2016 totaling $0.8 million (US$0.6 million) (2015 - nil) against
the USLP Credit Facility to support self-insured benefit claims.
The average annual interest rates paid in respect of bank indebtedness for the year ended December 31, 2016 were 3.2% and
2.8% (2015 - 3.4% and 2.7%) for the LP and USLP credit facilities, respectively.
12. 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.
67
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
12. Leases (continued):
(a) Finance leases as lessee (continued):
Finance lease liabilities are payable as follows:
Minimum lease payments due
December 31, 2016:
Future minimum lease payments
Interest
Present value of minimum payments
December 31, 2015:
Future minimum lease payments
Interest
Present value of minimum payments
$
$
$
$
Within one year
One to three
years
1,137 $
82
1,055 $
1,190 $
71
1,119 $
938 $
33
905 $
719 $
23
696 $
Total
2,075
115
1,960
1,909
94
1,815
The present value of the lease payments is calculated using the interest rate implicit in the lease, which range from 4.1%
- 7.1%.
(b) Operating leases as lessee:
The Company’s subsidiaries are obligated under various operating leases, including building and automobile leases that
require future minimum rental payments as follows:
With
one year
One to
five years
After
five years
Total
Minimum lease payments due:
December 31, 2016
$
18,081 $
41,422 $
4,947 $
64,450
Minimum lease payments recognized as an expense during the year ended December 31, 2016 amounted to $13.5 million
(2015 - $7.3 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.
13. Share capital:
(a) Share capital
At December 31, 2016, the authorized share capital of the Company comprised an unlimited number of common shares
without par value (“Shares”).
68
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
13. Share capital (continued):
(a) Share capital (continued)
A continuity of share capital is as follows:
Balance at December 31, 2014
Issued pursuant to long term incentive plan
Balance at December 31, 2015
Bought deal financing - conversion of subscription receipts, net of share issue
costs of $3.1 million
Issued concurrent with the Rugby acquisition (note 4)
Issued pursuant to long term incentive plan
Deferred income tax on share issue costs
Share adjustment
Shares
Total
16,651,414
110,657
$
16,762,071
3,966,350
563,542
58,607
—
2
45,830
1,029
46,859
54,434
9,091
1,162
816
—
Balance at December 31, 2016
21,350,572
$
112,362
In July 2016, the Company issued 563,542 common shares for cash consideration to the sellers of Rugby in accordance
with the terms of the Acquisition (note 4) and issued 3,966,350 common shares as part of the financing arrangement related
to the Acquisition, as described below.
Bought Deal Financing
In connection with the Rugby Acquisition, the Company entered into an agreement with a syndicate of investment dealers
pursuant to which the underwriters agreed to purchase for resale to the public on a bought deal basis 3,449,000 subscription
receipts of the Company, at a price of $14.50 per receipt with an over-allotment option for an additional 517,350 subscription
receipts for gross overall proceeds of $57.5 million ($54.4 million net of fees associated with the offering).
On June 30, 2016, the Bought Deal Financing closed and $50.0 million, representing 3,449,000 subscription receipts, was
received by the Company and was held in escrow pending the closing of the Acquisition. Each subscription receipt was
converted to one common share of the Company on the Acquisition date for no additional consideration in accordance
with the terms of the subscription agreement. The over-allotment option, representing 517,350 subscription receipts, was
fully exercised by the underwriters in July 2016 and these subscription receipts were also converted on the basis of one
subscription receipt to one common share of the Company on the Acquisition date.
In connection with the Bought Deal Financing, the Company incurred $3.1 million in share issue costs. These amounts
were recorded in equity on closing of the Acquisition as share issue costs, along with the associated deferred income tax
impact of $0.8 million.
(b) Long Term Incentive Plan (“LTIP”):
The Company has an approved long term incentive plan which authorizes the issuance of a maximum of 1,650,000 Shares
to qualified trustees, directors, officers, employees and consultants to align the interests of such persons with the interests
of shareholders.
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
69
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
13. Share capital (continued):
(b) Long Term Incentive Plan (“LTIP”) (continued):
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.
In December 2016, the Board of Directors provided grantees with the option to settle up to 50% of the Restricted Shares
and Performance Shares in cash. The Company has made an estimate of the amount it expects to settle in cash related
to future vestings of Restricted Shares and Performance Shares. As at December 31, 2016 the fair value of the Restricted
Shares and Performance Shares estimated to be settled in the future in cash is $1.2 million (December 31, 2015 - nil) and
this value has been removed from contributed surplus and classified within accounts payable and accrued liabilities and
non-current liabilities.
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 dividends are paid on the Shares by an amount equal to a fraction having as its
numerator the amount of the dividends 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.
A continuity of the LTIP Shares outstanding is as follows:
Balance at December 31, 2014
LTIP shares issued during the year
LTIP shares settled by exchange for free-trading Shares
Balance at December 31, 2015
LTIP shares issued during the year
LTIP shares forfeited during the year
LTIP shares settled
Balance at December 31, 2016
Performance
Shares
Restricted
Shares
20,952
43,005
(14,748)
49,209
20,502
(2,763)
(8,347)
58,601
98,913
70,588
(82,674)
86,827
53,166
(8,292)
(58,040)
73,661
On December 31, 2016, 8,347 (December 31, 2015 - 14,748) Performance Shares and 58,040 (December 31, 2015 -
82,674) Restricted Shares became fully vested and were settled by the issuance of 58,607 (December 31, 2015 - 110,657)
Shares and $0.3 million in cash (December 31, 2015 - nil). On issuance of the Shares, the accumulated share-based
compensation expense of $1.2 million (December 31, 2015 - $1.0 million) associated with the settled Performance Shares
and Restricted Shares was transferred from contributed surplus to share capital.
70
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
13. Share capital (continued):
(b) Long Term Incentive Plan (“LTIP”) (continued):
Non-cash LTIP compensation expense of $1.1 million was recognized in the consolidated statement of comprehensive
income for the year ended December 31, 2016 (2015 - $1.3 million). 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 net profit per share is based on the net profit for the year ended December 31,
2016 of $23.9 million (December 31, 2015 - $20.1 million). The weighted average number of common shares outstanding
in each of the reporting years was as follows:
Issued ordinary shares at
beginning of year
Effect of shares issued during the year
Pursuant to long-term incentive plan
Pursuant to Bought Deal Financing
Pursuant to Rugby acquisition
Weighted average common shares - basic
Effect of dilutive securities:
Long-term incentive plan
December 31,
2016
December 31,
2015
16,762,071
16,651,414
13,322
1,817,910
258,290
815
—
—
18,851,593
16,652,229
166,377
128,649
Weighted average common shares - diluted
19,017,970
16,780,878
14. Income taxes:
Current tax expense
Deferred tax expense
2016
(13,600) $
20
2015
(9,732)
(2,476)
(13,580) $
(12,208)
$
$
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 ended December 31, 2016 is 26.4% (2015 - 26.3%) and in the
United States is 39.4% (2015 - 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 tax rate applicable to the United States.
71
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
14. Income taxes (continued):
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:
Profit before income tax
Statutory rate
Computed tax expense at statutory rate
Effect of lower tax rates in Canada, other rate changes and restructuring
Non-deductible expenses
Change in unrecognized deferred tax assets
Other
2016
2015
$
37,442
$
32,354
39.4%
39.4%
(14,752)
1,798
(73)
(363)
(190)
(12,747)
697
(484)
(43)
369
Income tax expense
$
(13,580) $
(12,208)
Certain comparative period figures in the table above have been changed to adhere to the current period presentation.
The tax effect of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities is
as follows:
Deferred tax assets:
Accounts receivable
Accounts payable and provisions
Inventory
Finance lease obligations
Goodwill and intangibles
Tax loss carry forwards and future interest deductions
Share and debt issuance costs
Other
Deferred tax liabilities:
Prepaid expenses
Property, plant and equipment
Other
Deferred tax asset
December 31,
2016
December 31,
2015
$
$
2,838 $
1,629
1,985
681
5,711
810
1,122
—
14,776
(325)
(2,725)
(95)
(3,145)
11,631 $
1,902
556
1,539
654
7,797
1,209
—
224
13,881
(248)
(2,659)
—
(2,907)
10,974
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, 2016, the Company and its subsidiaries have operating loss carry forwards for income tax purposes of
approximately $3.1 million in Canada that may be utilized to offset future taxable income (December 31, 2015 - $4.3 million).
These losses, if not utilized, expire between 2026 and 2031. The Company’s US subsidiaries have no operating loss carry
forwards.
72
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
14. Income taxes (continued):
At December 31, 2016, the Company and its Canadian subsidiaries have capital losses of approximately $23.1 million
(December 31, 2015 - $24.1 million), and suspended capital losses of approximately $44.7 million (December 31, 2015 - $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
(December 31, 2015 - $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.
15. Finance income and expense:
Finance expense:
Interest on bank indebtedness
Accretion of finance lease obligation
Foreign exchange losses
Total finance expense
Finance income:
Interest on trade receivables, customer
notes, and employee loans
Foreign exchange gain
Total finance income
Net finance (expense) income
16. 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.
73
Note
11
12(a)
7
2016
2015
$
(1,675) $
(137)
(11)
(1,823)
358
—
358
$
(1,465) $
(1,217)
(116)
—
(1,333)
421
1,055
1,476
143
2016
2015
129,935
659,386
$
116,805
454,793
789,321
$
571,598
December 31,
2016
December 31,
2015
$
1,552
93,979
1,347
14,889
95,531
$
16,236
$
$
$
$
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
17. 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
2016
72,528 $
1,078
1,130
2015
45,116
831
1,300
74,736 $
47,247
$
$
Employee benefit expenses are included in the consolidated statement of comprehensive income as follows:
Cost of sales
Selling and distribution
Administration
(b) Pensions:
2016
14,967 $
43,936
15,833
2015
8,996
29,636
8,615
74,736 $
47,247
$
$
Hardwoods USLP, Rugby Holdings LLC, Paxton Hardwoods LLC and HMI Hardwoods LLC maintain defined contribution
401(k) retirement savings plans (the “USLP Plan”, the "Rugby 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,
2016, Hardwoods USLP contributed and expensed $0.5 million (US$0.4 million) (2015 - $0.4 million (US $0.3 million)) in
relation to the USLP Plan.
The assets of the Rugby Plan are held and related investment transactions are executed by the Plan’s Trustee, Fidelity
Management Trust Company and, accordingly, are not reflected in these consolidated financial statements. During the
year ended December 31, 2016, Rugby Holdings LLC contributed and expensed $0.1 million (US $0.1 million) in relation
to the Rugby 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,
2016, Hardwoods USLP contributed and expensed $0.1 million (US $0.1 million) (2015 - $0.1 million (US $0.1 million)) 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 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 Trust Inc., and, accordingly, are not reflected in these consolidated
financial statements. During the year ended December 31, 2016, Hardwoods LP contributed and expensed $0.3 million
(2015 - $0.3 million) in relation to the LP plan.
74
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
18. 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 President and Chief Executive Officer,
Chief Financial Officer, Senior Vice President and Vice Presidents. Key management personnel remuneration includes
the following expenses:
Short-term employee benefits:
Salaries and benefits including bonuses
Automobile benefit
LTIP Share compensation
Total remuneration
(b) Transactions with post-employment benefit plans:
2016
2015
$
$
4,260 $
38
896
5,194 $
2,915
39
932
3,886
The defined contribution plans referred to in note 17(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 17(b). The Company has not
entered into other transactions with the pension plans, nor has it any outstanding balances at December 31, 2016 or
December 31, 2015.
19. Provisions:
Legal
The Company and its subsidiaries are subject to legal proceedings from time to time 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 as at
December 31, 2016.
Decommissioning
The Company and its subsidiaries are not obligated in a material way for decommissioning or site restoration.
75
Corporate Information
Directors
Robert J. Brown
Director
Officers
Robert J. Brown
President & Chief Executive Officer
Graham M. Wilson
President, Grawil Consultants Inc.
Lance R. Blanco
Senior Vice President, Corporate Development
E. Lawrence Sauder
Chair, Interfor Corporation
Faiz H. Karmally
Vice President and Chief Financial Officer
William Sauder
President, Emax Investments Ltd.
Jason West
Vice President, Canada
Peter M. Bull
President, Blenheim Realty Ltd.
Dan A. Besen
Vice President, United States
Jim C. Macaulay
Chief Financial Officer, Marvin Companies
Dan Figgins
Vice President, Imports
John Griffin
Vice President, Paxton
Dave Hughes
President, Rugby
Head Office
Auditors
Investor Relations
#306 - 9440 202nd Street
Langley, BC Canada V1M 4A6 Vancouver, British Columbia
Telephone: 604-881-1988
Facsimile: 604-881-1995
KPMG LLP
Faiz H. Karmally
Chief Financial Officer
Telephone:604-881-1982
fkarmally@hardwoods-inc.com
Listings
The Toronto Stock Exchange
Trades under HWD
Transfer Agent
Computershare Trust
Hardwoods Distribution Inc. | 2016 | Annual Report
76