Hardwoods Distribution Inc. | 2017 | Annual Report
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Our Vision
Hardwoods Distribution Inc. (or "HDI") is a world-class distributor of architectural building products
operating under multiple brands across North America. We are uncompromising in our commitment
to be the preferred choice for our valued customers, the best partner for our vendors, and a great
place to work for our valued employees.
Our Values
Integrity, our organization and every employee within are accountable to the highest standard of
integrity in all decisions made and actions taken.
Fairness, we practice open and honest communication with our stakeholders, we treat everyone with
respect and dignity.
People, the source of our competitive advantage, we attract, train and retain the best people and offer
a career of opportunity to our employees.
Passion for success, we create, we innovate, constantly setting the bar higher for continuous
improvement.
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Profile
HDI (or "the Company") is listed on the Toronto Stock Exchange and trades under the symbol HDI. We
are North America’s largest wholesale distributor of architectural building products to the residential
and commercial construction sectors.
Our Products and Services: We sell decorative surfaces and composite panels, hardwood plywood, high-
grade hardwood lumber, and other architectural building products to industrial manufacturing customers
across North America. We also provide custom moulding and millwork services at 26 of our locations,
and own a sawmill and kiln drying operation in Michigan.
Our Customers: Our business serves over 35,000 customers, primarily small-to-mid-sized industrial
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 half of the products we sell to industrial manufacturers
end up in residential construction applications, approximately 30% in the commercial/institutional
construction sector, and the remainder in other markets.
Our People: We employ over 1,100 dedicated employees and maintain a pronounced professional and
entrepreneurial sales and service culture.
Our Network: We operate from 63 locations across North America, with approximately 85% of our
annual sales generated in the United States and 15% in Canada.
Our Strategy: As North America's largest distributor in our industry, with an unmatched network of
locations and annual sales of over $1 billion, we are focused on leveraging our size, capabilities, and
strong financial position to create a world class distribution company. Our objectives include: i) being
the market leader in our products; ii) developing and expanding our product offering with high-value
solutions; iii) supporting the success of our operations and our stakeholders with operational excellence;
and iv) continuing to pursue acquisitions that complement our strategies.
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To our Shareholders
Hardwoods Distribution Inc. ("HDI", or the "Company") has come a long way since 2010, when
we first embarked on our strategy of capturing the growth that followed the extended downturn
in residential and commercial construction markets, as well as in the broader economy. At that
time, our revenues were approximately $200 million and we had 26 locations serving
approximately 2,100 customers. Fast forward to 2017, and we have grown to become North
America’s largest distributor of architectural building products with 63 locations and more than
1,100 employees serving over 35,000 customers.
I am pleased to report that our growth is contributing directly to record top and bottom line
financial results. Our 2017 revenues exceeded the $1 billion sales mark for the first time in our
history and we generated Adjusted EBITDA of $56.3 million and Adjusted profit of $31.2
million, up 22.0% and 23.0% respectively compared to 2016. This in turn enabled investors to
benefit from our achievements with the distribution of $5.6 million in dividends, which
combined with share price appreciation, contributed to a total return of 14.6% to holders of HDI
shares in 2017.
Notably, we achieved our strong 2017 performance while dealing with the market challenges
of a US trade case against hardwood plywood imported from China and the negative foreign
exchange impact of a stronger Canadian dollar, both of which put downward pressure on our
results. HDI today is not just bigger, we’re stronger and more resilient than ever before, and
going forward, we have the opportunity to create a world class distribution company.
The Power of Acquisitions
Our new position has arisen from the successful execution of our growth strategy, which has
included the acquisitions of Frank Paxton Lumber Company in 2011, Leland in 2013, Hardwoods
of Michigan (“HMI”) in 2014, and our largest acquisition, Rugby Architectural Building
Products (“Rugby”), in mid-2016. The Rugby transaction brought us 28 distribution facilities
across 40 US states positioning us as the number one distributor in our industry. I’m pleased to
report that Rugby is now fully onboard following a very smooth integration.
Among the numerous benefits brought to us by Rugby was a strong pipeline of acquisition
opportunities and we acted on two of these in 2017. In March, we expanded our market share
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in Texas with the purchase of Eagle Plywood and Lumber (“Eagle”), a single site, wholesale
distributor based in Dallas. The Eagle operation was consolidated into our existing Rugby
distribution facility in Dallas, expanding our presence in this significant market, adding
customers and enhancing our team with additional bench strength. In July, we went on to
purchase Downes & Reader Hardwood Company Inc. (“D&R”), a distributor of hardwood
lumber in the US Northeast. D&R brought us four new locations, a comprehensive lumber
products offering, and 2,400 new customers. The D&R locations are now operating under the
Rugby brand.
These newly acquired businesses, including Rugby, contributed $224.1 million to our 2017
sales. All three acquisitions have also proved accretive to our results, and consistent with our
previous three acquisitions, their positive impact has extended beyond the financial.
HDI has now achieved a size and scale that brings significant benefit to our customers and
supply partners. We have three of the industry’s best known and most respected distribution
brands: Hardwoods, Rugby and Paxton. We’ve gained new depth in our senior management
team and we’re attracting the industry’s best people across our organization. We’ve also become
the leading choice of world-class suppliers looking for a sophisticated North America-wide
distribution engine.
Having arrived at this exciting point in our history, the question in 2017 was this: how do we
now leverage our new strengths for even greater success?
Our Vision for the Business
A common tactic for growth-oriented companies is to bring acquired businesses together under
a single name and identity. They seek scale. But HDI’s multi-year track record of success has
come only partially from size. As a selling organization, we have benefited as much from our
entrepreneurial, customer-centered approach to the business. Customers identify strongly with
our existing distribution brands, each of which has distinct qualities. And we know we are more
agile and successful when we keep decision making close to the customer. Accordingly, we are
moving forward with a business structure that retains our existing distribution brands, but
supports them with the collective strength and capabilities of HDI.
During 2017 we articulated our vision as follows: HDI is a world class distributor of
architectural buildings products operating multiple brands across North America. We are
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uncompromising in our commitment to be the preferred choice for our valued customers, the
best partner for our vendors, and a great place to work for our valued employees.
To realize this vision, we are putting our three distribution brands at the top of our organizational
chart, with HDI underpinning them. We want our brands to continue to interface directly with
customers and to retain significant autonomy. This is what has made them so successful in the
past. The opportunity the brands have now is the ability to draw on HDI’s size and strength to
access unified marketing support, sophisticated information technology solutions, professional
human resources management, and highly developed global importing and vendor management
capabilities as they work to create a world class distribution company.
Our operational strategy is shifting to support this vision. We are focused on:
• Being the market leader in our products.
• Developing and expanding our product offering with high-value solutions.
• Supporting the success of our operations and stakeholders with operational excellence.
• Continuing to pursue acquisitions that complement our strategies.
We have already begun to operationalize this strategy. We recently completed extensive research
into customer product needs and preferences in order to guide our product strategy. An upgrade
of our enterprise resource planning (ERP) system in some locations is also underway to provide
world-class technology-enabled solutions that make it easier for customers to do business with
us. In addition, we are actively exploring the robust pipeline of acquisition opportunities
identified within the highly fragmented US industry, and we are supported in this pursuit by a
very strong balance sheet that enables us to act.
As we move into 2018, we expect to continue achieving profitable growth, with market
conditions providing moderate assistance. The US residential construction market is expected
to continue its slow, uneven recovery and the US commercial market is anticipating 4% growth
in the year ahead. As always, we will strive to build on underlying market growth with our own
strategies and initiatives.
An important objective in 2018 will be to utilize our global sourcing expertise to adapt in the
wake of the United States’ imposition of duties on imported Chinese hardwood plywood.
Approximately 11% of our sales prior to the trade case were impacted, with a combined duty
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rate of over 206% now making hardwood plywood from China uncompetitive in the United
States. During 2017, we demonstrated that we could meet customer needs despite the significant
supply disruption present throughout the year and suffered no significant loss of customers or
market share. We are confident that we can continue to meet our customers’ needs in 2018,
while also working closely with our domestic and overseas vendors to establish new supply
channels. Over the past seven years, we have built expertise and a skilled team of specialists
on our path to becoming a leading one-step importer of high-quality, differentiated products.
This skillset is highly transferable and will be instrumental in helping us broaden our supply
relationships.
Our 2018 profitability will benefit from the change in the US corporate taxation rate from 35%
to 21%. As we note in the outlook provided in our Management’s Discussion and Analysis,
had these rates been in place in 2017 our Adjusted earnings per share would have been $1.58,
nearly 9% higher than the $1.46 per share we recorded for the year. This represents a decrease
in income tax expense of $2.6 million.
Overall, I am excited by our prospects and deeply proud of the growth and evolution of the
Company thus far. We are not just getting bigger, we are focused on quality, integrity and
professionalism as we create long-term value for all of our stakeholders. By striving to be a
great place to work for our employees, the best partner to our vendors, and the leading problem
solver for our customers, we are laying the foundation to deliver continued strong performance
for you, our investors. We thank you for your confidence in HDI and look forward to telling
you about our continued progress in 2018.
Sincerely,
Rob Brown
President and Chief Executive Officer
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Management’s Discussion and Analysis
March 15, 2018
This management’s discussion and analysis (“MD&A”) has been prepared by Hardwoods
Distribution Inc. (“HDI” or the “Company”) as of March 15, 2018. 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, 2017 and
2016. 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, mark-to-market adjustments, and revaluation of
deferred tax assets. "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, mark-to-market adjustments, and revaluation of deferred tax assets.
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, mark-to-market adjustments, and
revaluation of deferred tax assets. 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
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expenditure requirements, our ability to generate cash flow from operations, and as an indicator
of relative operating performance, before considering the impact of business acquisition
activities, mark-to-market adjustments, and revaluation of deferred tax assets.
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.
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Contents
1.0
Executive Summary
1.1
1.2
1.3
1.4
Overview
US Trade Case
Business Strategy
Outlook
2.0
Background
2.1
2.2
2.3
Company Overview
Recent Acquisitions
Business and Industry Overview
3.0
Results of Operations
3.1
3.2
Years Ended December 31, 2017 and December 31, 2016
Three-Month Periods Ended December 31, 2017 and December 31, 2016
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, profit, Adjusted EBITDA, and Adjusted profit records in 2017. Our financial
performance was driven by a full year of results from our accretive acquisition of Rugby
Architectural Building Products (“Rugby”), which we completed in July, 2016. Our 2017
acquisitions of Eagle Plywood and Lumber ("Eagle") and Downes & Reader Hardwood
Company ("D&R") (collectively referred to as the "Acquired Businesses") and continued
execution of our business strategies also contributed to our performance. For the year ended
December 31, 2017, our sales increased 31.4% to $1,037.0 million and profit increased 25.5%
to $30.0 million, compared to 2016. After adjusting for expenses associated with acquisitions,
mark-to-market adjustments on cash settled Long Term Incentive Plan Units ("LTIPs"), and
revaluation of deferred tax assets, Adjusted EBITDA grew 22.0% to $56.3 million and Adjusted
profit climbed 23.0% to $31.2 million.
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Our 2017 results were achieved despite some margin pressure created by the imposition of US
duties on hardwood plywood imported from China (see Section 1.2) (the "Trade Case Impact"),
and the negative foreign exchange impact of a year-over-year increase in the value of the
Canadian dollar relative to the US dollar when translating our US operations to Canadian dollars
for reporting purposes (the "Foreign Exchange Impact") (collectively, the "Impacts").
As a result of the Trade Case Impact and the Foreign Exchange Impact, Adjusted EBITDA was
reduced by an estimated $2.2 million and $0.8 million, Adjusted profit was reduced by an
estimated $1.3 million and $0.5 million, and Adjusted diluted profit per share was reduced by
an estimated $0.06 and $0.02, respectively.
For the three months ended December 31, 2017, Adjusted EBITDA was reduced by an estimated
$1.2 million and $0.5 million related to the Impacts. Adjusted profit was reduced by an estimated
$0.7 and $0.3 million related to the Impacts.
Acquisition-Based and Organic Growth
Our 2017 results include the positive impact of acquisition-based growth, including a full year
of results from Rugby (compared to five-and-a-half months in 2016), nine-and-a-half-months
from Eagle, and five-and-a-half-months financial contribution from D&R. Combined, the
Acquired Businesses contributed $224.1 million to 2017 sales and expanded our US distribution
network with 32 new distribution facilities.
Organic growth accounted for $37.1 million of the 2017 sales increase, with our US and Canadian
operations achieving 4.6% and 4.7% organic sales growth respectively. These gains were
achieved despite the negative effects of foreign exchange influences resulting from a stronger
Canadian dollar. A stronger Canadian dollar: i) decreases the value of sales and profits earned
in our US operations when translated into Canadian dollars for financial reporting purposes;
and ii) decreases the selling price of US dollar-denominated products sold to our Canadian
customers.
Profitability
Our gross profit margin grew to 18.5% in 2017, from 18.2% in 2016. This improvement primarily
reflects the positive impact of Rugby’s higher margin product lines, and was achieved despite
the Trade Case Impact, which reduced gross profit margin by an estimated 20 basis points in
2017.
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As anticipated, operating expenses were higher year-over-year, reflecting the addition of the
Acquired Businesses. Operating expenses as a percentage of revenue were also slightly higher
at 13.8% in 2017, compared to 13.3% in 2016. This was primarily driven by Rugby’s sales
model, which involves supplying more orders to more customers, but with smaller average order
sizes.
As anticipated, Adjusted EBITDA margin was slightly lower year-over-year at 5.4%, compared
to 5.8% in 2016. This primarily reflects the Impacts and the higher operating expenses as
described above. We estimate that the Trade Case Impact reduced Adjusted EBITDA margin
by 20 basis points in 2017.
Balance Sheet and Cash Flows
We continued to strengthen our balance sheet in 2017. As at December 31, 2017, our net debt-
to-Adjusted EBITDA ratio strengthened to 1.6 times, from 2.1 times as at December 31, 2016.
Our debt-to-capital ratio decreased to 27.6%, from 30.1%, and we had $66.7 million of unused
borrowing capacity at the end of 2017, as compared to $57.8 million a year earlier.
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1.2 US Trade Case
As previously announced, on November 18, 2016, a trade case was filed in the US seeking the
imposition of countervailing duties ("CVD") and antidumping duties ("AD") against imported
hardwood plywood produced in China.
On April 19, 2017 the Department of Commerce (“Commerce”) announced a preliminary CVD
of 9.89%, and on June 20, 2017 Commerce announced a preliminary AD of 57.36%. The duties
applied to most Chinese producers, including those that HDI does business with. On November
13, 2017 Commerce announced final CVD and AD rates of 22.98% and 183.36% respectively.
The concluding phase of this trade case then passed to a separate US government body, the
International Trade Commission (“ITC”), to rule on whether final CVD and AD duties
determined by Commerce would be affirmed or rejected. On December 1, 2017, the ITC voted
affirmatively that the final CVD and AD rates determined by Commerce will be implemented
(the “Final Determination”).
The trade case negatively affected our gross margin in the second half of 2017 as a result of (i)
an increase in our cost of certain import products as we increased purchasing from brokers rather
than mill direct sourcing, in order to minimize our potential exposure to retroactive CVD and
AD duties; and (ii) lower-than-expected product prices for hardwood plywood during this period
as significant supply of products imported prior to the imposition of final duties remained
available in the market.
Going forward, we believe the final combined duty rate of 206.34% will make Chinese hardwood
plywood non-competitive in the US market. Approximately 11% of our total sales prior to the
trade case were affected, and we have spent the last year planning for this potential outcome.
Through 2017, we were successful in securing the appropriate supply of products our customers
needed and we retained our market share throughout the trade case process. At the same time,
we have been working with our domestic and overseas vendor partners to develop reliable,
alternative product solutions to continue to supply our customers going forward. The trade case
disruption is expected to result in some downward pressure on our gross margin percentage
through to mid-2018. Potentially countering this impact however is our expectation that sales
will benefit from rising hardwood plywood prices in North America as we pass on price increases
to the customer. By the second half of 2018, we expect the existing surplus of imported product
in the North American market will have worked its way through the supply chain, and pricing
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and margins on hardwood plywood should begin to more accurately reflect the new supply
dynamics.
As at December 31, 2017 we had paid to customs, during periods when duties were not in effect,
approximately $3.4 million in CVD and AD duty deposits which we expect will be refunded in
2018. The $3.4 million in CVD and AD duty deposits are included within accounts and other
receivables.
1.3 Business Strategy
In 2017 we performed a comprehensive review of our business strategy with the recognition
that the key objectives we have pursued since 2010 have been realized:
• We have diversified our business with our import program and commercial business
to approximately 25% and 35% of our 2017 revenues respectively; and,
•
the six acquisitions we have completed in the last seven years have helped us expand
from 26 locations and sales of approximately $200 million in 2010, to 63 locations
and sales of over $1 billion in 2017.
Since 2010 the successful implementation of our strategies have resulted in a sales compound
annual growth rate of over 25%, and EBITDA increasing from $4.6 million in 2010 to $55.6
million in 2017. We have successfully captured the growth that followed the extended
downturn in the residential and commercial construction markets and broader economy.
Today we are North America's largest distributor in our industry. We are focused on leveraging
our size, capabilities, and strong financial position to create a world class distribution company.
Our strategies to achieve this objective are:
i) Be the market leader in our products: Our market share across North America is
different by region. We will work to become the market leader, or expand our existing
market lead, by leveraging our core product strengths, product/industry knowledge,
vendor relationships and supporting infrastructure to become the dominant market leader
in our regions.
ii) Develop and expand our product offering with high-value solutions: We will respond
to evolving customer demand and end user preferences with innovative products, both
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domestic and imported, that enhance our competitive advantage and leverage our
proprietary product development strengths.
iii) Support the success of our operations and stakeholders with operational excellence:
From employing industry-leading, technology-enabled solutions, to enhancing our
supply chain and partner management strengths, to optimizing our strategic human
resources capabilities, we will provide best-in-class systems and support to ensure our
customers, our vendors and our people succeed.
iv) Continue to pursue acquisitions that complement our strategies: We are uniquely
positioned, with our size, scale, and strong balance sheet, 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 acquisitions of Eagle
on March 13, 2017 and D&R on July 17, 2017 are examples of our ability to expand
our presence in existing markets.
1.4 Outlook
On December 21, 2017, the United States enacted H.R.1 (the "Legislation"), also known as the
Tax Cuts and Jobs Act. The Legislation includes substantial changes to the US taxation for
individuals, corporations, and unincorporated businesses in all industries. For HDI, the
significant features and impacts of this Legislation include the change in corporate tax rate from
35% to 21%, the immediate expensing of certain qualified capital investments, and limitations
on the deductibility of certain interest expense. While there is still some uncertainty about how
various states will implement the interest deductibility provisions, as a whole, we view the new
rules as a positive development. Had the new lower tax rate been in effect in 2017, our pro
forma Adjusted EPS would have been $1.58, or 8.9% higher than reported for the year. This
represents a decrease in income tax expense of $2.6 million.
In contrast, impacts resulting from the duties imposed on Chinese hardwood plywood entering
the US (see Trade Case Impacts in section 1.2) are expected to result in some downward pressure
on our gross margin percentage through to mid-2018. Potentially countering this impact however
is our expectation that sales will benefit from rising hardwood plywood prices in North America
as we pass on price increases to the customer. By the second half of 2018, we expect the existing
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surplus of imported product in the North American market will have worked its way through
the supply chain, and pricing and margins on hardwood plywood should begin to more accurately
reflect the new supply dynamics. We continue to work with domestic manufacturers and our
vendor partners overseas to develop reliable, alternative product solutions going forward.
In terms of market outlook, the unevenness and relatively slow growth experienced in the US
residential construction market in 2017 is expected to continue in 2018. Market fundamentals
remain sound however, with US job growth and income levels gaining momentum. Harvard's
Joint Center for Housing Studies 2017 report on "state of the nation’s housing" concluded that
single-family housing construction, traditionally the largest source of residential investment,
remains well below historical levels. With average housing starts at 1.3 million in 2017, there
is room for growth in this market as the long term historical average is closer to 1.5 million
annual starts. We expect it will take some years to reach the 1.5 million level, and as a result,
expect low-to-mid single digit organic market growth for our end-markets and products.
In the non-residential construction market, the American Institute of Architects predicts growth
of 4.0% in 2018, with the strongest gains anticipated for the commercial sectors that we focus
on.
Strategically, we will seek to outperform organic market growth through our strategic initiatives.
As discussed in section 1.3, our strategic priorities include:
• Being the market leader in our products.
• Developing and expanding our product offering with high-value solutions.
• Supporting the success of our operations and stakeholders with operational excellence.
• Continuing to pursue acquisitions that complement our strategies.
Our Board will continue to review our financial performance and assess dividend levels on a
regular basis. We will maintain our focus on keeping our balance sheet strong, reducing debt
and supporting future strategic acquisitions.
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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 HDI.
2.2 Recent Acquisitions
Downes & Reader Hardwood Company
On July 17, 2017, HDI purchased Downes & Reader Hardwood Company Inc. ("D&R") for a
total value of US$6.0 million. D&R is a distributor of hardwood lumber with four locations in
the US Northeast and estimated annual sales of US$25.0 million. D&R brought us a
comprehensive lumber products offering in the region and added over 2,400 new customers.
Subsequent to the acquisition, the D&R locations are operating under the Rugby brand.
Eagle Plywood and Lumber
On March 13, 2017, HDI purchased Eagle Plywood and Lumber (“Eagle”) for a total value of
US$0.4 million plus up to an additional US$0.2 million subject to future sales performance.
Eagle was a single site wholesale distributor located in Dallas, Texas with estimated annual
sales of US$5.0 million. The Eagle operations were consolidated into our existing Rugby
distribution facility in Dallas, expanding our presence in this significant market, adding
customers and enhancing our team with additional bench strength.
Rugby Architectural Building Products
On July 15, 2016, we acquired Rugby Architectural Building Products for a base purchase price
of $138.6 million (US $106.8 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 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.
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2.3 Business and Industry Overview
Serving customers for over 50 years, HDI is North America’s largest distributor of decorative
surfaces and composite panels, hardwood plywood, high-grade hardwood lumber, and other
architectural building products to the cabinet, moulding, millwork, furniture and specialty wood
products industries. As at March 15, 2018 we operated 62 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 20% of our 2017 sales were made up of decorative surfaces and composites,
such as high pressure laminates, thermally fused laminates, medium-density fiberboard, and
particleboard. Approximately 33% of our sales were of hardwood plywood, 23% of our sales
were high-grade hardwood lumber, and 25% of our sales were other architectural building
products such as doors, millwork, mouldings, and other ancillary architectural building products.
Many of our product lines are complementary, and customers typically use a number of key
products from the categories described to manufacture their own end-use products.
Our primary role in the industry is to provide the critical link between manufacturers making
large volumes of products and small-to-mid-sized industrial customers that require lesser
quantities of many different products for their own manufacturing processes. We provide a
means for hundreds of manufacturers to get their product to thousands of customers. We add
value to our suppliers by buying their product in volume and paying them promptly, by providing
access to our large North American distribution network, and by supporting their products with
strong sales and marketing support. We effectively act 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,
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, institutional
markets and manufacturing. 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
Hardwoods Distribution Inc. | 2017 | Annual Report
20
approximately half of our products are used in 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.
Our products are sourced as follows: A majority of decorative surfaces and composites are
generally supplied by large manufacturers in North America. Hardwood plywood is produced
in North America by large manufacturers using domestic hardwoods and other materials, as
well as by overseas hardwood plywood manufacturers. The majority of the high-grade hardwood
lumber we distribute 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. A majority of other architectural building products are generally sourced
from North American mills or manufacturers, of varying sizes depending on the product.
Principally third parties such as us distribute the majority of the products we carry.
Hardwoods Distribution Inc. | 2017 | Annual Report
21
3.0 Results of Operations
3.1 Years Ended December 31, 2017 and December 31, 2016
Selected Unaudited Consolidated Financial Information (in thousands of Canadian dollars)
For the year
For the year
ended December 31
ended December 31
$ Increase % Increase
2017
2016
(Decrease)
(Decrease)
$
1,037,041
$
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")
EBITDA as a % of revenue
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 $
693,826
136,038
191,875
18.5%
(142,790)
49,085
6,504
55,589
$
5.4%
(6,504)
(2,502)
(16,629)
29,954
1.40
1.39
1.30
$
$
$
$
$ 247,720
195,628
6,103
48,097
37,919
10,178
1,698
31.4 %
39.3 %
4.7 %
33.5 %
36.2 %
26.2 %
35.3 %
$
11,876
27.2 %
(1,698)
(1,037)
(3,049)
$
6,092
25.5 %
789,321
498,198
129,935
143,778
18.2%
(104,871)
38,907
4,806
43,713
5.5%
(4,806)
(1,465)
(13,580)
23,862
1.27
1.25
1.32
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
2017
2016
(Decrease)
(Decrease)
Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), per the table above
Transaction expenses
Mark-to-market adjustment on cash settled LTIPs
Adjusted EBITDA
Adjusted EBITDA as a % of revenue
Profit for the period, as reported
Revaluation of deferred tax assets due to US tax reform
Other adjustments, 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
$
$
$
$
$
$
$
$
55,589
273
450
56,312
5.4%
29,954
989
275
31,218
1.40
0.06
1.46
1.39
0.06
1.45
$
$
$
$
$
$
$
$
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
$
11,876
27.2 %
(2,163)
450
$
10,163
22.0 %
$
$
$
$
$
$
6,092
989
(1,241)
5,840
0.13
(0.02)
0.11
0.14
(0.02)
0.12
25.5 %
23.0 %
10.0 %
7.8 %
11.2 %
8.9 %
Hardwoods Distribution Inc. | 2017 | Annual Report
22
Sales
For the year ended December 31, 2017, total sales increased 31.4% to $1,037.0 million, from
$789.3 million in 2016. Of the $247.7 million year-over-year increase, $224.1 million,
representing a 28.4% increase in sales, was due to the addition of Acquired Businesses and
$37.1 million, representing a 4.7% increase in sales, was due to organic growth. These gains
were partially offset by a $13.5 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$195.6 million, or 39.3%, to US$693.8 million,
from US$498.2 million in 2016. The Acquired Businesses contributed sales of US$172.6
million. Organic growth provided a US$23.1 million, or 4.6%, increase in sales.
Sales in Canada increased by $6.1 million, or 4.7%, year-over-year. The increase in Canadian
sales was entirely organic and reflects our success in winning new business.
Gross Profit
Gross profit for the year ended December 31, 2017 increased 33.5% to $191.9 million, from
$143.8 million in 2016. This $48.1 million improvement reflects the combination of increased
sales and a higher gross profit margin. As a percentage of sales, gross profit margin increased
to 18.5% in 2017, from 18.2% in 2016, primarily reflecting Rugby's higher margin business
model, partially offset by the negative impacts of the Trade Case on gross margin as described
in Section 1.1.
Operating Expenses
For the year ended December 31, 2017, operating expenses increased to $142.8 million, from
$104.9 million in 2016. The $37.9 million increase includes $37.1 million of operating expenses
from the Acquired Businesses, amortization of $1.1 million related to customer relationships
acquired in connection with the Rugby acquisition, $3.1 million of added costs to support our
organic growth, and an increase of $0.5 million related to the mark-to-market adjustment on
LTIPs. These increases were offset by a $2.2 million year-over-year reduction in acquisition-
related expenses and a $1.7 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
Hardwoods Distribution Inc. | 2017 | Annual Report
23
increased to 13.8% from 13.3% year-over-year, primarily reflecting Rugby's higher ratio of
operating expenses as a percentage of sales and expenses from the Acquired Businesses.
Depreciation and Amortization
For the year ended December 31, 2017, amortization expense increased to $6.5 million, from
$4.8 million in 2016. The $1.7 million increase relates to amortization of Rugby property, plant
and equipment of $0.6 million, and a $1.1 million increase to amortization of intangible assets
related to customer relationships acquired in connection with the Rugby acquisition.
Adjusted EBITDA
For the year ended December 31, 2017, Adjusted EBITDA grew 22.0% to $56.3 million, from
$46.1 million in 2016. The $10.2 million improvement in Adjusted EBITDA primarily reflects
the $48.1 million increase in gross profit, partially offset by a $37.9 million increase in operating
expenses (before a decrease in transaction expenses, an increase in mark-to-market adjustments
relating to LTIPs, and an increase in depreciation and amortization).
Adjusted EBITDA was reduced by an estimated $2.2 million and $0.8 million as it relates to
the Trade Case Impact and the Foreign Exchange Impact respectively. As a percentage of
revenue, Adjusted EBITDA margin was 5.4% in 2017, compared to 5.8% in 2016.
Net Finance Income (Cost)
We recorded a net finance expense of $2.5 million in 2017 as compared to $1.5 million in 2016.
The $1.0 million year-over-year increase primarily reflects higher interest expense related to
increased borrowings to finance part of the purchase price of Rugby.
Hardwoods Distribution Inc. | 2017 | Annual Report
24
Income Tax Expense
Income tax expense increased to $16.6 million for the year ended December 31, 2017, from
$13.6 million in 2016. This increase primarily reflects higher taxable income. Also included in
income tax expense for 2017 is an increase of $1.0 million in deferred tax expense for the
revaluation of US deferred tax assets to account for the change effective January 1, 2018 in the
US corporate tax rate from 35% to 21%.
Profit for the Period
Profit for the year ended December 31, 2017 increased 25.5% to $30.0 million, from $23.9
million in 2016. The $6.1 million improvement reflects the $11.9 million year-over-year increase
in EBITDA, partially offset by the $3.0 million increase in income tax expense, the $1.0 million
increase in net finance cost, and a $1.7 million increase in depreciation and amortization. Diluted
profit per share increased to $1.39, from $1.25 in 2016.
Adjusted Profit for the Period
Adjusted Profit for the year ended December 31, 2017 was $31.2 million, and reflects profit for
the period adjusted for transaction expenses, mark-to-market adjustments on LTIPs, and the
revaluation of deferred tax assets associated with US tax reform. This compares to Adjusted
profit in 2016 of $25.4 million, and represents an increase of 23.0%. Adjusted diluted profit
per share increased to $1.45 in 2017, from $1.33 in 2016.
Adjusted Profit in 2017 was reduced by an estimated $1.3 million and $0.5 million as it relates
to the Trade Case Impact and Foreign Exchange Impact respectively.
Hardwoods Distribution Inc. | 2017 | Annual Report
25
3.2 Three-Month Periods Ended December 31, 2017 and December 31, 2016
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")
EBITDA as a % of revenue
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 $
$
2017
247,433
169,615
31,784
44,503
18.0%
(35,112)
9,391
1,608
2016
(Decrease)
(Decrease)
239,449
155,661
31,676
43,523
18.2%
(34,785)
8,738
2,125
$
7,984
13,954
108
980
327
653
3.3 %
9.0 %
0.3 %
2.3 %
0.9 %
7.5 %
(517)
(24.3)%
10,999
$
10,863
$
136
1.2 %
4.4%
(1,608)
(677)
(3,770)
4,944
0.23
0.23
1.27
$
$
$
$
4.5%
(2,125)
(668)
(1,493)
6,577
0.30
0.29
1.33
517
(9)
(2,277)
$
(1,633)
(24.8)%
Analysis of Specific Items Affecting Comparability (in thousands of Canadian dollars)
Three months
Three months
ended December 31
ended December 31
$ Increase % Increase
2017
2016
(Decrease)
(Decrease)
Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), per the table above
Transaction expenses
Mark-to-market adjustment on cash settled LTIPs
Adjusted EBITDA
Adjusted EBITDA as a % of revenue
Profit for the period, as reported
Revaluation of deferred tax assets due to US tax reform
Other adjustments, 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
$
$
$
$
$
$
$
$
10,999
—
(335)
10,664
4.3%
4,944
989
(228)
5,705
0.23
0.04
0.27
0.23
0.04
0.27
$
$
$
$
$
$
$
$
10,863
50
—
10,913
4.6%
$
$
136
(50)
(335)
(249)
1.2 %
(2.3)%
6,577
$
(1,633)
(24.8)%
—
31
6,608
0.30
—
0.30
0.29
—
0.29
989
(259)
(903)
(0.07)
0.04
(0.03)
(13.7)%
(22.8)%
(11.4)%
(0.06)
(20.1)%
0.04
(0.02)
(8.4)%
$
$
$
$
$
Hardwoods Distribution Inc. | 2017 | Annual Report
26
Sales
For the three months ended December 31, 2017, total sales increased 3.3% to $247.4 million,
from $239.4 million during the same period in 2016. Of the $8.0 million year-over-year increase,
$7.7 million, representing a 3.2% increase in sales, was due to the addition of Acquired
Businesses and $10.6 million, representing a 4.4% increase in sales, was due to organic growth.
Our sales gains were partially offset by a $10.3 million negative foreign exchange impact
resulting from a stronger Canadian dollar when translating our US sales to Canadian dollars for
reporting purposes, as compared to the same period in 2016.
Fourth quarter sales from our US operations increased by US$14.0 million, or 9.0%, to US
$169.6 million, from US$155.7 million in Q4 2016. Acquired Businesses contributed sales of
US$6.1 million and our US operations achieved organic growth of US$7.9 million, representing
a 5.1% year-over-year increase in sales.
Fourth quarter sales in Canada were relatively flat at $31.8 million, compared to $31.7 million
in the same period last year.
Gross Profit
Gross profit for the three months ended December 31, 2017 increased 2.3% to $44.5 million,
from $43.5 million in the fourth quarter of 2016. This $1.0 million improvement reflects the
higher sales, offset by a slight decrease in gross profit margin to 18.0%, from 18.2% in the
fourth quarter of 2016. The change in gross profit margin relates to the Trade Case Impacts
further described in section 1.1.
Operating Expenses
Operating expenses increased to $35.1 million in the fourth quarter of 2017, from $34.8 million
during the same period in 2016. The $0.3 million increase includes operating expenses from
Acquired Businesses of $1.7 million and $0.9 million of added costs to support organic growth.
These increases were offset by $0.3 million related to the mark-to-market adjustment on LTIPs,
a $1.4 million decrease in expenses due to the impact of a stronger Canadian dollar on translation
of US operating expenses, a $0.1 million year-over-year decrease in acquisition-related
expenses, and a decrease in amortization of $0.5 million related to customer relationships
acquired in connection with the Rugby acquisition. As a percentage of sales, operating expenses
Hardwoods Distribution Inc. | 2017 | Annual Report
27
decreased to 14.2% from 14.5% during the same period in 2016, primarily reflecting the items
noted above.
Depreciation and Amortization
For the three months ended December 31, 2017, amortization expense decreased to $1.6 million,
from $2.1 million in 2016. The $0.5 million decrease primarily reflects amortization of intangible
assets related to customer relationships acquired in connection with the Rugby acquisition.
Adjusted EBITDA
For the three months ended December 31, 2017, we generated Adjusted EBITDA of $10.7
million, a decrease of $0.2 million from Adjusted EBITDA of $10.9 million in Q4 2016. The
change in Adjusted EBITDA reflects the $1.2 million increase in operating expenses (before a
decrease in transaction expenses, mark-to-market adjustments relating to LTIPs, and
depreciation and amortization), partially offset by the $1.0 million increase in gross profit.
Fourth quarter Adjusted EBITDA was reduced by an estimated $1.2 million and $0.5 million
as it relates to the Trade Case Impact and the Foreign Exchange Impact respectively. As a
percentage of revenue, Adjusted EBITDA margin was 4.3% in the fourth quarter of 2017,
compared to 4.6% in the same quarter last year.
Income Tax Expense
Income tax expense increased to $3.8 million in the fourth quarter of 2017, from $1.5 million
in the same period in 2016. The $2.3 million increase primarily reflects adjustments to our tax
estimates in the fourth quarter of 2016 that did not repeat in the fourth quarter of 2017, and an
increase of $1.0 million in deferred tax expense for the revaluation of US deferred tax assets to
account for the change effective January 1, 2018 in the US corporate tax rate from 35% to 21%.
Profit for the Period
Profit for the three months ended December 31, 2017 was $4.9 million, compared to $6.6 in
the same period in 2016. The $1.7 million decrease reflects the $2.3 million increase in income
tax expense, partially offset by the $0.5 million decrease in depreciation and amortization and
the $0.1 million increase in EBITDA. Fourth quarter diluted profit per share was $0.23, compared
to $0.29 in the 2016 period.
Hardwoods Distribution Inc. | 2017 | Annual Report
28
Adjusted Profit for the Period
Adjusted Profit for the three months ended December 31, 2017 was $5.7 million and reflects
profit for the period adjusted for transaction expenses, mark-to-market adjustments on LTIPs,
and the revaluation of deferred tax assets related to US tax reform.
Fourth quarter Adjusted Profit was reduced by an estimated $0.7 million and $0.3 million as it
relates to the Trade Case Impact and Foreign Exchange Impact respectively.
Hardwoods Distribution Inc. | 2017 | Annual Report
29
4.0 Selected Financial Information and Seasonality
4.1 Quarterly Financial Information
(in thousands of dollars)
Q4
2017
Q3
2017
Q2
2017
Q1
2017
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Total sales
Profit
$ 247,433 $ 257,250 $ 275,260 $ 257,098 $ 239,449 $ 235,428 $ 157,031 $ 157,413
4,944
7,312
9,762
7,936
6,577
7,296
5,367
4,622
Basic profit per share
Diluted profit per share
0.23
0.23
0.34
0.34
0.46
0.45
0.32
0.32
0.31
0.29
0.35
0.35
0.32
0.32
0.28
0.27
EBITDA
10,999
13,356
17,216
14,003
10,863
13,186
10,231
9,433
Adjusted profit
5,705
8,127
9,762
7,936
6,608
8,084
6,200
4,622
Adjusted basic profit per share
Adjusted diluted profit per share
0.27
0.27
0.38
0.38
0.46
0.45
0.37
0.37
0.31
0.29
0.39
0.39
0.37
0.37
0.28
0.27
Adjusted EBITDA
10,664
14,331
17,216
14,003
10,913
14,280
11,523
9,433
The preceding table provides selected quarterly financial information for our eight most recently
completed fiscal quarters. This information is unaudited, but reflects all adjustments of a normal,
recurring nature which are, in our opinion, necessary to present a fair statement of the results of
operations for the periods presented. Quarter to quarter comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of future performance.
Historically, the first and fourth quarters have been seasonally slower periods for our business. 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 Dec 31
ended Dec 31
ended Dec 31
2017
2016
2015
$
1,037,041 $
789,321 $
571,598
29,954
23,862
20,146
1.40
1.39
1.27
1.25
1.21
1.20
372,903
371,076
190,004
1,513
55,589
1,877
43,713
696
34,804
Hardwoods Distribution Inc. | 2017 | Annual Report
30
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
2017
2016
$ change
2017
2016
$ change
Cash provided by operating activities before
changes in non-cash working capital
$
42,095 $
28,844 $
13,251
$
8,527 $
6,692 $
1,835
Changes in non-cash working capital
(24,191)
(14,172)
(10,019)
Net cash provided by operating activities
17,904
14,672
3,232
Net cash provided by (used in) investing activities
(9,960)
(138,814)
128,854
11,870
20,397
(829)
(2,172)
4,520
292
14,042
15,877
(1,121)
Net cash provided by (used in) financing activities
(8,397)
124,908
(133,305)
(19,577)
(4,721)
(14,856)
Increase (decrease) in cash
Cash, beginning of period
Cash, end of the period
(453)
766
766
—
(1,219)
766
(9)
322
91
675
$
313 $
766 $
(453)
$
313 $
766 $
(100)
(353)
(453)
Net cash used in operating activities
For the year ended December 31, 2017, net cash provided by operating activities increased to
$17.9 million, from $14.7 million in 2016. Cash provided by operating activities before changes
in non-cash working capital increased by $13.3 million year-over-year, primarily reflecting the
$11.9 million increase in EBITDA. Investment in non-cash working capital increased by $10.0
million in 2017, compared to 2016. An analysis of changes in working capital is provided in
section 5.2 of this report.
For the three months ended December 31, 2017, net cash provided by operating activities
increased to $20.4 million, from $4.5 million in the same period in 2016. Cash provided by
operating activities before changes in non-cash working capital increased by $1.8 million,
primarily reflecting a $1.5 million decrease in income taxes paid. Investment in non-cash
working capital increased by $14.0 million in the fourth quarter of 2017, compared to the fourth
quarter of 2016. An analysis of changes in working capital is provided in section 5.2 of this
report.
Net cash used in investing activities
Net cash used in investing activities decreased by $128.9 million to $10.0 million in 2017, from
$138.8 million in 2016. This decrease primarily relates to the $136.9 million paid on acquisition
of Rugby on July 15, 2016.
Hardwoods Distribution Inc. | 2017 | Annual Report
31
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, 2017 cash used in investing activities increased by
$1.1 million. This increase primarily relates to purchases of property, plant and equipment and
additions to internally generated intangible assets in the quarter.
Net cash provided by financing activities
For the year ended December 31, 2017, net cash provided by financing activities decreased by
$133.3 million as compared to 2016. This decrease primarily relates to a decrease in borrowings
on our credit facilities, as well as the issuance of common shares in 2016 to finance the purchase
of Rugby, which did not repeat in 2017.
For three months ended December 31, 2017, net cash used in financing activities increased by
$14.9 million as compared to the same period in 2016. There were no significant changes in the
composition of cash provided by and used in financing activities, with decreases in borrowings
on our credit facilities and dividends paid to shareholders being the main financing activities
during the quarter.
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 $236.0 million as at December 31, 2017, compared to
$220.8 million at December 31, 2016. The growth in our working capital is mostly attributable
to increased investment in accounts receivable and inventory to service our customers.
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. Our investment in working capital this year is also impacted by
Hardwoods Distribution Inc. | 2017 | Annual Report
32
deposits made to customs relating to certain import inventory which were not made in the prior
year (see Section 1.2), and the timing of payments to Rugby's suppliers as they were paid quicker
in order to take advantage of early pay discounts.
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. A
summary of changes in our non-cash operating working capital during the twelve and three
month periods ended December 31, 2017 and 2016 is provided below.
(in thousands of Canadian dollars)
Source (use) of funds
2017
2016
2017
2016
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
$
(6,813)
$
(956)
$
10,833
$
10,350
(8,685)
(2,737)
(5,956)
(13,772)
(1,764)
2,320
2,715
(396)
(1,282)
(6,272)
(601)
(5,648)
Increase in non-cash operating working capital
$
(24,191)
$
(14,172)
$
11,870
$
(2,172)
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.
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, 2017
December 31, 2016
$
$
$
313
91,146
90,833
238,826
329,659
27.6%
56,313
1.6
$
$
$
766
97,886
97,120
225,999
323,119
30.1%
46,149
2.1
We consider our capital to be bank indebtedness (net of cash) and shareholders’ equity. As
shown above, our net debt balance decreased by $6.3 million to $90.8 million at December 31,
2017, from $97.1 million at December 31, 2016. Overall net debt compared to total capitalization
Hardwoods Distribution Inc. | 2017 | Annual Report
33
improved to 27.6% as at December 31, 2017, from 30.1% at December 31, 2016. Our ratio of
net debt-to-Adjusted EBITDA for the previous 12 months was also lower at 1.6 times, compared
to 2.1 times at December 31, 2016. The net debt-to-Adjusted EBITDA ratio for 2017 benefited
from a full 12 months of Rugby's results, as compared to approximately 5.5 months in 2016.
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, 2017 is provided in the following
table.
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
$
$
$
$
25.0 million
August 5, 2021
20.8 million
7.3 million
13.5 million
$
$
$
$
156.8 million (US$125.0 million)
July 14, 2021
136.4 million (US$108.7 million)
83.2 million (US$66.3 million)
53.2 million (US$42.4 million)
Covenants do not apply
when the unused credit
facility available exceeds
$2.0 million, which it did at
December 31, 2017
Covenants do 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, 2017
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,
2017. 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 II Credit Facility"). The USLP II 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 II Credit Facility are limited based on a
Hardwoods Distribution Inc. | 2017 | Annual Report
34
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 II Credit Facility include, among others, a springing
fixed charge coverage ratio of 1.0x, triggered if excess availability under the USLP II Credit
Facility falls below 10% of the USLP II 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 II Credit
Facility can be prepaid at any time with no prepayment penalty.
On August 5, 2016 we renewed our Canadian credit facility with our existing lender ("the LP
Credit Facility"). The LP Credit Facility replaced the previous Canadian credit facility and
consists of a revolving credit line of $25.0 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, 2017. The LP Credit Facility can be prepaid at any time with no prepayment
penalty.
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.
Hardwoods Distribution Inc. | 2017 | Annual Report
35
5.4 Contractual Obligations
The table below sets forth our contractual obligations as at December 31, 2017. These obligations
relate to leases on various premises and automobiles and become due in the fiscal years indicated.
(in thousands of dollars)
2018
2019
2020
2021
$19,082
$17,294
$14,199
$11,297
2022
$8,129
thereafter
Total
$13,930
$83,931
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 15, 2018, the date of this MD&A, we had 21,419,985 common shares issued and
outstanding. In addition, at March 15, 2018, we had outstanding 121,506 performance shares
and 116,650 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 shares vest, to receive up to half the fair value in cash and the remainder in
Hardwoods Distribution Inc. | 2017 | Annual Report
36
common shares. We intend to issue common shares from treasury to settle the portion of the
obligation not paid to employees in cash.
5.8 Dividends
In the fourth quarter of 2017, we declared a quarterly dividend of $0.0725 per share, which was
paid on January 26, 2018 to shareholders of record as at January 15, 2018. On March 15, 2018
we declared a quarterly dividend of $0.0725 per share, payable on April 27, 2018 to shareholders
of record as at April 16, 2018. 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, 2017 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:
Goodwill impairment testing: We are required to make estimates and assumptions related to
the annual goodwill impairment test, including the cash generating unit ("CGU") to which
goodwill relates, the recoverable amount of a CGU, future cash flows and growth rates, and the
post-tax discount rate.
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
Hardwoods Distribution Inc. | 2017 | Annual Report
37
on our estimate of the potential of recovering our accounts receivable, and incorporates current
and expected collection trends.
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.
7.2 Adoption of New Accounting Policies
Effective January 1, 2017, the Company adopted Recognition of Deferred Tax Assets for
Unrealized Losses as an amendment to IAS 12, Income Taxes (Amendments) that clarify when
a deductible temporary difference exists. The adoption of this amendment did not impact the
Company's consolidated financial statements.
A number of new standards, amendments to standards and interpretations, are not yet effective
for the year ended December 31, 2017, 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 and the adoption of IFRS 9 will
not have a material impact on the consolidated financials.
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.
Hardwoods Distribution Inc. | 2017 | Annual Report
38
New estimates and judgmental thresholds have also been introduced, which may affect the
amount and/or timing of revenue recognized.
The adoption of this standard will impact the Company's revenue disclosures as the Company
will be required to disclose the judgments, and changes in judgments made in applying IFRS
15 and a reconciliation of certain balances. The Company is in the process of drafting these
required disclosures and no measurement impact is expected.
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.
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. | 2017 | Annual Report
39
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, 2017. 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, 2017.
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, 2017. 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, 2017.
There have not been any changes in our ICFR during the quarter ended December 31, 2017 that
have materially affected, or are reasonably likely to materially affect, our ICFR.
Hardwoods Distribution Inc. | 2017 | Annual Report
40
10.0 Note Regarding Forward Looking Information
Certain statements in this MD&A contain forward-looking information within the meaning of
applicable securities laws in Canada (“forward-looking information”). The words “anticipates”,
“believes”, “budgets”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “might”,
“plans”, “projects”, “schedule”, “should”, “will”, “would” and similar expressions are often
intended to identify forward-looking information, although not all forward-looking information
contains these identifying words.
The forward-looking information in this MD&A includes, but is not limited to: We believe the
final combined duty rate of 206.34% will make Chinese hardwood plywood non-competitive
in the US market; we have been working with our domestic and overseas vendor partners to
develop reliable, alternative product solutions to continue to supply our customers going
forward; the trade case disruption is expected to result in some downward pressure on our gross
margin percentage through to mid-2018; potentially countering this impact however is our
expectation that sales will benefit from rising hardwood plywood prices in North America as
we pass on price increases to the customer; by the second half of 2018, we expect the existing
surplus of imported product in the North American market will have worked its way through
the supply chain, and pricing and margins on hardwood plywood should begin to more accurately
reflect the new supply dynamics; As at December 31, 2017 we had paid to customs, during
periods when duties were not in effect, approximately $3.4 million in CVD and AD duty deposits
which we expect will be refunded in 2018; we will work to become the market leader, or expand
our existing market lead, by leveraging our core product strengths, product/industry knowledge,
vendor relationships and supporting infrastructure to become the dominant market leader in our
regions; we will respond to evolving customer demand and end user preferences with innovative
products, both domestic and imported, that enhance our competitive advantage and leverage
our proprietary product development strengths; we will provide best-in-class systems and
support to ensure our customers, our vendors and our people succeed; 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; while there is still some uncertainty
about how various states will implement the interest deductibility provisions, as a whole, we
view the new rules as a positive development; we continue to work with domestic manufacturers
and our vendor partners overseas to develop reliable, alternative product solutions going
forward; in terms of market outlook, the unevenness and relatively slow growth experienced in
the US residential construction market in 2017 is expected to continue in 2018; with average
Hardwoods Distribution Inc. | 2017 | Annual Report
41
housing starts at 1.3 million in 2017, there is room for growth in this market as the long term
historical average is closer to 1.5 million annual starts; we expect it will take some years to
reach the 1.5 million level, and as a result, expect low-to-mid single digit organic market growth
for our end-markets and products; strategically, we will seek to outperform organic market
growth through our strategic initiatives; capital expenditures in our distribution business have
historically been low and 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; 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; 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 believe our
current credit facilities are sufficient to finance our working capital needs and market expansion
strategy; and we intend to issue common shares from treasury to settle the portion of the
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.
Hardwoods Distribution Inc. | 2017 | Annual Report
42
The forward-looking information is subject to risks, uncertainties and other factors that could
cause actual results to differ materially from historical results or results anticipated by the
forward-looking information. The factors which could cause results to differ from current
expectations include, but are not limited to: exchange rate fluctuations between the Canadian
and US dollar could affect our performance; our results are dependent upon the general state of
the economy; we depend on key personnel, the loss of which could harm our business; decreases
in the supply of, demand for, or market values of hardwood lumber or sheet goods could harm
our business; we may incur losses related to credit provided to our customers; our products may
be subject to negative trade outcomes; we may not be able to sustain our level of sales or EBITDA
margins; we may be unable to grow our business long term to manage any growth; competition
in our markets may lead to reduced revenues and profitability; we may become subject to more
stringent regulations; 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. | 2017 | Annual Report
43
Independent Auditors’ Report
To the Shareholders of HDI.
We have audited the accompanying consolidated financial statements of Hardwoods Distribution Inc.,
which comprise the consolidated statements of financial position as at December 31, 2017 and 2016,
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, 2017 and 2016, 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 15, 2018
Vancouver, Canada
Hardwoods Distribution Inc. | 2017 | Annual Report
44
Consolidated Financial Statements
(Expressed in Canadian dollars)
HARDWOODS DISTRIBUTION INC.
Years ended December 31, 2017 and 2016
45
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
Note
December 31,
2017
December 31,
2016
Assets
Current assets:
Cash
Accounts and other receivables
Income taxes receivable
Inventories
Prepaid and other assets
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
Retained earnings (deficit)
Accumulated other comprehensive income
Shareholders’ equity
7
8
7
9
10
14
4
11
13(b)
12(a)
5
12(a)
13(b)
13(a)
$
$
$
$
313
97,263
1,582
172,106
5,268
276,532
1,359
20,650
17,215
5,477
51,670
96,371
766
94,534
—
162,576
4,660
262,536
1,378
20,710
20,114
11,631
54,707
108,540
372,903
$
371,076
$
91,146
38,588
—
1,281
1,549
97,886
40,978
1,949
1,055
1,332
132,564
143,200
1,068
445
1,513
905
972
1,877
134,077
145,077
113,788
105,426
9,919
9,693
238,826
112,362
104,333
(14,258)
23,562
225,999
Total liabilities and shareholders’ equity
$
372,903
$
371,076
Subsequent event (note 5)
Commitments (note 12)
Contingency (note 20)
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
46
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
Note
16
8
$
2017
1,037,041
(845,166)
$
2016
789,321
(645,543)
Sales
Cost of goods sold
Gross profit
Operating expenses:
Selling and distribution
Administration
Profit from operations
Finance expense
Finance income
Net finance expense
Profit before income taxes
Income tax expense:
Current
Deferred
Net profit
17
17
15
15
14
14
191,875
143,778
(106,402)
(36,388)
(142,790)
(77,070)
(27,801)
(104,871)
49,085
38,907
(3,018)
516
(2,502)
(1,823)
358
(1,465)
46,583
37,442
(10,781)
(5,848)
(16,629)
29,954
(13,869)
16,085
1.40
1.39
$
$
$
(13,600)
20
(13,580)
23,862
(341)
23,521
1.27
1.25
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.
47
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
Note
Share
capital
Contributed
surplus
Accumulated
other
comprehensive
income -
translation
reserve
Deficit
Total
$ 46,859
$ 105,547
$
23,903
$ (33,361)
142,948
Balance at January 1, 2016
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 pursuant to the
Rugby acquisition
13 (a)
Shares issued pursuant to LTIP 13 (b)
13 (b)
Shares reclassified to liabilities
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
Share based compensation
expense
13 (b)
Shares issued pursuant to LTIP 13 (b)
Shares reclassified to liabilities
Profit for the year
Dividends declared
Translation of foreign operations
—
1,426
—
—
—
—
2,806
(1,426)
(287)
—
—
—
—
—
—
—
—
(13,869)
—
—
—
29,954
(5,777)
—
2,806
—
(287)
29,954
(5,777)
(13,869)
Balance at December 31, 2017
$ 113,788
$ 105,426
$
9,693
$
9,919
$ 238,826
The accompanying notes are an integral part of these consolidated financial statements.
48
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
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
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:
(Decrease) increase 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 (used in) provided by financing activities
Cash flow from investing activities:
Additions to property, plant and equipment
Proceeds on disposal of property, plant and equipment
Business acquisitions
Additions to internally generated software
Payments received on non-current receivables
Net cash used in investing activities
(Decrease) increase in cash
Cash, beginning of year
Cash, end of year
Supplementary information:
Property, plant and equipment acquired
under finance leases, net of disposals
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
Note
2017
2016
$
29,954
$
23,862
9,10
9
13(b)
14
15
13(a)
5
4
10
6,504
(204)
3,287
16,629
2,502
451
(2,736)
(14,292)
42,095
(6,813)
(8,685)
(2,737)
(5,956)
(24,191)
17,904
(1,173)
(1,197)
(467)
—
(5,560)
(8,397)
(2,257)
458
(8,210)
(329)
378
(9,960)
(453)
766
$
$
313
$
$
1,689
—
287
—
632
4,806
(171)
1,130
13,580
1,465
358
(1,651)
(14,535)
28,844
(956)
(13,772)
(1,764)
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
The accompanying notes are an integral part of these consolidated financial statements.
49
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
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 “HDI.” The Company operates a network of 62 distribution centers in Canada and
the US engaged in the wholesale distribution of architectural 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.
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”). The consolidated financial statements were authorized for issue by the Board of Directors
on March 15, 2018.
(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 3(i) - the annual goodwill impairment test;
• 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.
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 and forklift 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 and forklift 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.
50
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
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.
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.
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.
51
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
3. Significant accounting policies (continued):
(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 architectural grade building 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 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) Prepaid and other assets:
Prepaid and other assets includes prepaid expenses and inventory purchases for which payment has been made but title
of the inventory has not transferred to the Company.
(g) 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.
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.
52
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
3. Significant accounting policies (continued):
(h) 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.
(i)
Intangible assets:
Intangible assets with finite lives consist of acquired customer relationships and costs capitalized for internally generated
software. The 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. Costs capitalized for internally generated software consist of costs
incurred in the development and implementation of the software and amortization will begin when the software is
substantially completed and ready for use.
Amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
(j) Goodwill:
Goodwill represents the excess, at the dates of acquisition, of the purchase price over the fair value of the net amounts
assigned to individual assets acquired and liabilities assumed relating to business acquisitions. After initial measurement
in a business combination, goodwill is recorded at cost less accumulated impairment losses.
Goodwill is allocated to the cash generating unit or group of cash generating units that are expected to receive the benefits
from the business combinations. Rugby Holdings LLC (the "Rugby operations") has been determined to be the cash
generating unit to which the goodwill relates. The Company tests goodwill for impairment on an annual basis. The Company
also performs an impairment test if events or changes in circumstances arise that suggest the carrying value of goodwill
may be impaired. An impairment loss for goodwill is not reversed.
The recoverable amount of the Rugby operations was determined based on value-in-use calculations which require
discounting of future cash flows generated from the continuing use of the operations. The calculations use cash flow
projections based on financial budgets covering a five-year period. Cash flows beyond the five-year period are extrapolated
using an estimated growth rate of 4.0%. The growth rate is consistent with past experience, market conditions and actual
operating results for the Rugby operations.
53
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
3. Significant accounting policies (continued):
(j) Goodwill (continued):
Key assumptions used are based on industry sources as well as management estimates. A post-tax discount rate of 8.77%
was used in determining the recoverable amount of the Rugby operations. The discount rate was estimated with the
assistance of industry data, past experience and the industry targeted capital structure.
The recoverable amount of the Rugby operations as at December 31, 2017, was determined to be higher than the related
carrying amount and no impairment has been recognized.
(k)
Impairment:
Non-financial assets
The carrying values of the Company’s non-financial assets are reviewed at each reporting date to assess whether there
is any indication of impairment. If any such indication is present, then the recoverable amount of the assets is estimated.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use or its fair value less costs to
sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For
the purposes of impairment testing, assets are grouped at lowest levels that generate cash inflows from continuing use
that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”).
An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated
recoverable amount. Impairment losses are recognized in profit and loss. Impairment losses recognized in prior years
are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment
charge is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would
have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
Financial assets
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired.
A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative
effect on the estimated future cash flows of that asset.
Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an
amount due to the Company on terms that the Company would not consider otherwise, or indications that a debtor or
issuer will enter bankruptcy.
The Company considers evidence of impairment for financial assets, and in particular receivables, at both a specific asset
and account balance level.
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.
54
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
3. Significant accounting policies (continued):
(l) 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.
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.
(m) 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.
55
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
3. Significant accounting policies (continued):
(m) Income taxes (continued):
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent
that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are
reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will
be realized.
(n) Leases:
Automobile and forklift leases for which the Company assumes substantially all the risks and rewards of ownership are
classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its
fair value and the present value of the minimum lease payments and a lease obligation is recorded equal to the present
value of the minimum lease payments.
Subsequent to initial recognition, the leased asset is accounted for in accordance with the accounting policies applicable
to property, plant and equipment. Minimum lease payments made under finance leases are apportioned between finance
expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease
term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Other leases are operating leases and as such the leased assets are not recognized in the Company’s statement of financial
position. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of
the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the
lease.
(o) 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.
(p) 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.
(q) 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
56
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
3. Significant accounting policies (continued):
(q) Share based compensation (continued):
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.
(r) New accounting policy:
IAS 12, Income Taxes (Amendments)
Effective January 1, 2017, the Company adopted Recognition of Deferred Tax Assets for Unrealized Losses as an
amendment to IAS 12, Income Taxes (Amendments) that clarify when a deductible temporary difference exists. The adoption
of this amendment did not impact the Company's consolidated financial statements.
(s) Future accounting pronouncements:
A number of new standards, amendments to standards and interpretations, are not yet effective for the year ended December
31, 2017, and have not been applied in preparing these consolidated financial statements. The following pronouncements
are considered by the Company to be the most significant of several pronouncements that may affect the consolidated
financial statements in future periods.
IFRS 9, Financial Instruments (“IFRS 9”)
IFRS 9 will replace 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 adoption of IFRS 9 will not 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.
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 majority of the Company's revenue is generated from the sale of architectural grade building products. The Company
has determined that the adoption of this standard will not have a material impact on the measurement of revenue generated
from the sale of its products to customers and therefore, will not have a material impact on earnings. The adoption of this
standard will impact the Company's revenue disclosures as the Company will be required to disclose the judgments, and
changes in judgments made in applying IFRS 15 and a reconciliation of certain balances. The Company is in the process
of drafting these required disclosures.
57
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
3. Significant accounting policies (continued):
(s) Future accounting pronouncements (continued):
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.
4. Business acquisitions:
(a) Rugby acquisition
On July 15, 2016 (the "Rugby 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 "Rugby Acquisition") for a base purchase price of $138.6 million (US$106.8 million) (the “Purchase Price”) plus
up to another $16.9 million (US$13.0 million) in earn-outs based on future performance. Rugby operates a network of 28
distribution centers in the US and is engaged in the wholesale distribution of 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.
The base purchase price was comprised of (i) $129.6 million (US$99.8 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 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 was outside this range at closing of the Rugby Acquisition, the purchase price would have been 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. In March 2017, the Company finalized the NAV and the estimated NAV exceeded the final NAV
by $0.2 million. The Company reduced the holdback amount for the $0.2 million NAV adjustment and the remaining amount of
the holdback was settled in the third quarter of 2017.
The Rugby Acquisition was accounted for as a business combination using the acquisition method, with the Company being
the acquirer and Rugby being the acquiree, and where the assets acquired and liabilities assumed are recorded at their fair
values at the Rugby Acquisition date.
58
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
4. Business acquisitions (continued):
(a) Rugby acquisition (continued):
Fair value of assets acquired and liabilities assumed
The fair value of Rugby's identified assets and liabilities assumed in accordance with the acquisition method are as follows:
Cash consideration
Notes payable assumed
Consideration
Assets acquired and liabilities assumed:
Accounts and other receivables
Inventories
Prepaid expenses
Non-current receivables
Property plant and equipment
Intangible assets - customer relationships
Accounts payable and accrued liabilities
Identifiable net assets acquired
Goodwill
Net assets acquired
US$
106,140
709
106,849
28,931
35,546
499
577
3,166
15,700
(18,314)
66,105
40,744
106,849
$
$
$
$
$
$
$
$
CDN$
137,717
920
138,637
37,538
46,121
647
749
4,108
20,371
(23,762)
85,772
52,865
138,637
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 assets of $20.4 million (US$15.7 million) primarily represent the value of customer relationships acquired and
are being amortized over 10 years, which is the period the Company expects to benefit from these relationships. The intangible
asset is deductible for tax purposes.
The Company financed the Rugby Acquisition through a combination of an equity offering (the "Bought Deal Financing") (note
13(a)) and a renegotiated Hardwoods USLP Credit Facility (note 11).
Had the Rugby 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, 2017 are sales of
$402.8 million (US$310.2 million) and profit before tax of $11.3 million (US$8.7 million) relating to Rugby.
(b) Eagle Plywood and Lumber acquisition
On March 13, 2017, the Company acquired through one of its wholly owned subsidiaries substantially all of the assets and
assumed certain liabilities of Eagle Plywood and Lumber ("Eagle") for a base purchase price of US$0.4 million plus up to an
additional US$0.2 million subject to future sales performance. During the fourth quarter, $0.1 million was paid related to the
amount subject to future sales performance.
Eagle is a single site wholesale distributor located in Dallas, Texas distributing architectural grade building products to customers
that supply end-products to the residential and commercial construction markets. The acquisition has been accounted for as
a business combination using the acquisition method, with the Company being the acquirer and Eagle being the acquiree, and
where the assets acquired and liabilities assumed are recorded at their fair values at the acquisition date.
59
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
4. Business acquisitions (continued):
(c) Downes & Reader Hardwood Company Inc. acquisition
On July 17, 2017, the Company acquired through one of its wholly owned subsidiaries substantially all of the assets and
assumed certain liabilities of Downs & Reader Hardwood Company Inc. ("D&R") for a total value of $7.4 million (US$5.9 million).
The fair value of D&R's identified assets and liabilities assumed in accordance with the acquisition consisted of accounts and
other receivables of $1.4 million (US$1.1 million), inventories of $7.8 million (US$6.2 million), property, plant and equipment
of $1.9 million (US$1.5 million) and accounts payable and accrued liabilities of $3.7 million (US$2.9 million).
D&R is a distributor of hardwood lumber with four locations in the US Northeast and services both the wholesale and retail
customer segments. The D&R acquisition has been accounted for as a business combination using the acquisition method,
with the Company being the acquirer and D&R being the acquiree, and where the assets acquired and liabilities assumed are
recorded at their fair values at the acquisition date.
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,
2017
December 31,
2016
$
$
(313) $
$
91,146
238,826
(766)
97,886
225,999
329,659
$
323,119
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, 2017 and December 31, 2016, 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, 2017.
On November 10, 2017, the Company declared a cash dividend of $0.0725 per common share to shareholders of record as
of January 15, 2018. The dividend was paid to shareholders on January 26, 2018. On March 15, 2018, the Company declared
a cash dividend of $0.0725 per common share to shareholders of record as of April 16, 2018, to be paid on April 27, 2018.
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.
60
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
6. Financial instruments (continued):
Fair value hierarchy
IFRS 13 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels
of the fair value hierarchy are as follows:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or
liabilities.
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly, for substantially the full contractual term.
Level 3 - Inputs for the asset or liability are not based on observable market data.
The Company has no financial assets or financial liabilities included in Level 3 of the fair value hierarchy.
Fair values of financial instruments
The carrying values of cash, accounts and other receivables, income taxes receivable, income taxes 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 $98.9 million at December 31, 2017 (December 31, 2016 - $96.7
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 2.2% (December 31, 2016 - 2.5%) of trade accounts
receivable and customer notes receivable at December 31, 2017. No one customer represents more than 1.0% of sales.
More detailed information regarding management of trade accounts receivable is found in note 7 to these consolidated
financial statements.
61
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
6. Financial instruments (continued):
Financial risk management (continued):
Employee housing loans:
Employee loans are non-interest bearing and are granted to employees who are relocated. Employee loans are secured
by a deed of trust or mortgage depending upon the jurisdiction. Employee loans are repaid in accordance with the loan
agreement. These loans are measured at their fair market value upon granting the loan and subsequently measured at
amortized cost.
Customer notes:
Customer notes are issued to certain customers to provide fixed repayment schedules for amounts owing that have been
agreed will be repaid over longer periods of time. The terms of each note are negotiated with the customer. For notes
issued the Company requires a fixed payment amount, personal guarantees, general security agreements, and security
over specific property or assets. Customer notes bear market interest rates up to 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, 2017, in Canada, a subsidiary of the Company had a revolving credit facility of up to $25.0 million, and,
in the US, a subsidiary of the Company had a revolving credit facility of up to $156.8 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
(ii) Liquidity risk (continued):
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, 2017 bank indebtedness balance of $91.1 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.
62
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
6. Financial instruments (continued):
Financial risk management (continued):
(iii) Market risk (continued):
Currency risk
As the Company conducts business in both Canada and the United States it is exposed to currency risk. Most of the
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
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, 2017, 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 (2017 - US$0.7 million,
2016 - US$0.2 million) and accounts payable to U.S. suppliers (2017 - US$0.3 million, 2016 - US$0.4 million).
Based on the Company's Canadian subsidiaries exposure to foreign denominated financial instruments, the Company
estimates a $0.05 weakening or strengthening in the Canadian dollar as compared to the U.S. dollar would not have a
material effect on net income for the years ended December 31, 2017 or December 31, 2016.
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, 2017 and December 31, 2016 and does not
take into account the effect 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.
63
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
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 (note 20)
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,
2017
December 31,
2016
$
13,458
79,880
7,263
842
101,443
14,246
81,776
2,417
1,133
99,572
4,180
5,038
97,263
$
94,534
$
257
403
1,541
2,201
842
1,359
$
424
758
1,329
2,511
1,133
1,378
December 31,
2017
December 31,
2016
$
65,635
19,075
5,204
3,424
93,338
$
70,936
17,467
4,957
2,662
96,022
$
$
$
$
$
$
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, 2017 was $4.2
million (December 31, 2016 - $5.0 million). The amount of the allowance is considered sufficient based on the past experience
of the business, current and expected collection trends, the security the Company has in place for past due accounts and
management’s regular review and assessment of customer accounts and credit risk.
64
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
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
2017
5,038 $
1,279
(1,806)
(331)
2016
4,844
1,764
(1,426)
(144)
4,180 $
5,038
$
$
Bad debt expense, net of recoveries, for the year ended December 31, 2017 was $0.1 million which equates to 0.01% of sales
(year ended December 31, 2016 - $0.8 million, being 0.1% of sales).
8.
Inventories:
Raw materials
Work in process
Goods in-transit
Finished goods:
Lumber
Sheet goods
Architectural and other
December 31,
2017
December 31,
2016
$
$
1,306
4,950
7,947
47,807
77,922
32,174
1,779
5,021
10,927
43,279
74,253
27,317
$
172,106
$
162,576
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
2017
1,909
$
808,832
36,334
845,166
$
2016
1,972
620,115
25,428
645,543
$
$
65
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
9. Property, plant and equipment:
Cost
Balance at January 1, 2016
Additions
Acquisition of Rugby (note 4(a))
Disposals
Adjustments:
Foreign currency
transaction
Balance at December 31, 2016
Additions
Acquisition of Eagle and D&R (note 4(b,c))
Disposals
Adjustments:
Foreign currency
transaction
Balance at December 31, 2017
Accumulated depreciation
Balance at January 1, 2016
Depreciation
Disposals
Adjustments:
Foreign currency
transaction
Balance at December 31, 2016
Depreciation
Disposals
Adjustments:
Foreign currency
transaction
Balance at December 31, 2017
Net book value:
December 31, 2016
December 31, 2017
Leased
vehicles and
forklifts
(note 12(a))
Buildings,
machinery
and
equipment
Land
Leasehold
improvements
Total
692 $
151
—
—
3,693 $
1,656
—
(1,452)
22,725 $
3,124
3,861
(482)
909 $
113
247
—
28,019
5,044
4,108
(1,934)
(19)
(82)
(432)
3
(530)
824
—
—
—
3,815
1,832
—
(1,185)
28,796
2,106
1,994
(721)
1,272
151
13
(95)
34,707
4,089
2,007
(2,001)
(54)
(240)
(1,798)
(42)
(2,134)
770 $
4,222 $
30,377 $
1,299 $
36,668
— $
—
—
1,626 $
1,077
(1,059)
9,458 $
2,620
(357)
735 $
125
—
11,819
3,822
(1,416)
—
—
—
—
—
(30)
(194)
1,614
1,027
(907)
11,527
3,246
(599)
(4)
856
187
(96)
(228)
13,997
4,460
(1,602)
(118)
(695)
(24)
(837)
— $
1,616 $
13,479 $
923 $
16,018
824 $
770 $
2,201 $
2,606 $
17,269 $
16,898 $
416 $
376 $
20,710
20,650
$
$
$
$
$
$
66
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
9. Property, plant and equipment (continued):
Depreciation of property, plant and equipment for the year ended December 31, 2017 was $4.5 million (2016 - $3.8 million)
and is included in the statement of comprehensive income as follows:
Cost of sales
Selling and distribution
Administration
2017
1,596 $
2,610
254
4,460 $
2016
1,477
2,195
150
3,822
$
$
Gains and losses on disposal of property, plant and equipment for the year ended December 31, 2017 was a net gain of
$204,000 (2016 - net gain of $171,000) and is included in selling and distribution in the statement of comprehensive income.
67
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
10. Intangible assets:
Cost
Balance at January 1, 2016
Acquisition of Rugby (note 4(a))
Eliminate fully amortized intangibles
Adjustments:
Foreign currency transaction
Balance at December 31, 2016
Acquired through acquisitions
Additions
Adjustments:
Foreign currency transaction
Balance at December 31, 2017
Accumulated amortization
Balance at January 1, 2016
Amortization
Eliminate fully amortized intangibles
Adjustments:
Foreign currency transaction
Balance at December 31, 2016
Amortization
Adjustments:
Foreign currency transaction
Balance at December 31, 2017
Net book value:
December 31, 2016
December 31, 2017
Internally
generated
software
Customer
relationships
— $
—
—
57 $
20,371
(57)
—
—
—
329
709
21,080
82
—
Total
57
20,371
(57)
709
21,080
82
329
(11)
(1,387)
(1,398)
318 $
19,775 $
20,093
— $
—
—
—
—
—
— $
— $
21 $
984
(57)
18
966
2,044
21
984
(57)
18
966
2,044
(132) $
(132)
2,878 $
2,878
— $
318 $
20,114 $
16,897 $
20,114
17,215
$
$
$
$
$
$
Amortization of intangible assets for the year ended December 31, 2017 was $2.0 million (2016 - $0.9 million) and is
included in selling and distribution expenses in the statement of comprehensive income.
68
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
11. Bank indebtedness:
Cheques issued in excess of funds on deposit
Credit facility, Hardwoods LP
Credit facility, Hardwoods USLP II
(December 31, 2017 - US$66,323
December 31, 2016 - US$63,398)
December 31,
2017
December 31,
2016
$
$
866
7,270
83,010
91,146
$
$
480
12,546
84,860
97,886
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 II (“Hardwoods USLP II”).
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 II is secured by a first security interest in all of the
present and after acquired property of Hardwoods Specialty Products US LP ("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 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. The LP Credit Facility matures in August 2021. 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, 2017, the LP Credit Facility has unused availability of $13.5 million, before cheques issued in excess of funds
on deposit of $0.9 million (December 31, 2016 - $6.9 million, cheques issued in excess of funds on deposit - $0.5 million).
Hardwoods USLP II Credit Facility ("USLP II Credit Facility")
In July 2016, in connection with the closing of the Rugby Acquisition, a subsidiary of the Company entered into a new USLP II
Credit Facility with its lender for US$125.0 million. The USLP II Credit Facility has a five year term and can be prepaid at any
time with no prepayment penalty. The USLP II 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 II Credit Facility include, among others, a springing fixed charge coverage ratio of 1.0
to 1, triggered if unused availability under the USLP II Credit Facility falls below US$12.5 million at any time.
69
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
11. Bank indebtedness (continued):
Hardwoods USLP II Credit Facility ("USLP II Credit Facility") (continued):
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 II Credit Facility, in 2016 the Company incurred, $0.3 million in fees, which are netted against
bank indebtedness in the consolidated statement of financial position. These fees are being amortized over the term of the
USLP II Credit Facility.
At December 31, 2017, the USLP II Credit Facility has unused availability of $53.2 million (US$42.4 million), before cheques
issued in excess of funds on deposit of nil. At December 31, 2016, the USLP II Credit Facility had unused availability of $50.9
million (US$37.9 million), before cheques issued in excess of funds on deposit of nil.
The Company has a letter of credit outstanding at December 31, 2017 totaling $1.3 million (US$1.0 million) (2016 - $0.8 million
(US$0.6 million)) against the USLP II 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, 2017 were 3.0% and
2.7% (2016 - 3.2% and 2.8%) for the LP and USLP II Credit Facilities, respectively.
12. Leases:
(a) Finance leases as lessee:
Subsidiaries of the Company lease vehicles and forklifts with terms ranging from 24 to 72 months. In Canada, the Company
guarantees the residual value under the terms of the vehicle leases, and any difference between the amount realized and
the guaranteed residual value is either paid to or paid by the Company. In the US, the vehicle 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 the Company.
These vehicle and forklift leases are considered finance leases and are recorded on the statement of financial position.
Finance lease liabilities are payable as follows:
Minimum lease payments due
December 31, 2017:
Future minimum lease payments
Interest
Present value of minimum payments
December 31, 2016:
Future minimum lease payments
Interest
Present value of minimum payments
$
$
$
$
Within one year
One to three
years
1,378 $
97
1,281 $
1,137 $
82
1,055 $
1,128 $
60
1,068 $
938 $
33
905 $
Total
2,506
157
2,349
2,075
115
1,960
The present value of the lease payments is calculated using the interest rate implicit in the lease, which range from 2.6%
- 8.0%.
70
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
12. Leases (continued):
(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, 2017
$
19,082 $
55,472 $
9,377 $
83,931
Minimum lease payments recognized as an expense during the year ended December 31, 2017 amounted to $20.8 million
(2016 - $13.5 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, 2017, the authorized share capital of the Company comprised an unlimited number of common shares
without par value (“Shares”).
A continuity of share capital is as follows:
Balance at December 31, 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(a))
Issued pursuant to long term incentive plan
Deferred income tax on share issue costs
Share adjustment
Balance at December 31, 2016
Issued pursuant to long term incentive plan
Balance at December 31, 2017
Shares
Total
16,762,071
$
46,859
3,966,350
563,542
58,607
—
2
21,350,572
69,413
54,434
9,091
1,162
816
—
112,362
1,426
21,419,985
$
113,788
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 Rugby Acquisition (note 4(a)) and issued 3,966,350 common shares as part of the financing
arrangement related to the Rugby 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).
71
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
13. Share capital (continued):
(a) Share capital (continued):
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 Rugby 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.
(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
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, 2017 the fair value of the Restricted
Shares and Performance Shares estimated to be settled in the future in cash was $1.4 million (December 31, 2016 - $1.2
million) 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.
72
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
13. Share capital (continued):
(b) Long Term Incentive Plan (“LTIP”) (continued):
A continuity of the LTIP Shares outstanding is as follows:
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
LTIP shares issued during the year
LTIP shares forfeited during the year
LTIP shares settled
Balance at December 31, 2017
Performance
Shares
Restricted
Shares
49,209
20,502
(2,763)
(8,347)
58,601
87,594
(10,975)
(13,714)
121,506
86,827
53,166
(8,292)
(58,040)
73,661
128,197
(2,119)
(83,089)
116,650
During the year ended December 31, 2017, 13,714 (December 31, 2016 - 8,347) Performance Shares and 83,089
(December 31, 2016 - 58,040) Restricted Shares became fully vested and were settled by the issuance of 69,413
(December 31, 2016 - 58,607) Shares and $0.6 million in cash (December 31, 2016 - $0.3 million). On issuance of the
Shares, the accumulated share-based compensation expense of $1.4 million (December 31, 2016 - $1.2 million) associated
with the settled Performance Shares and Restricted Shares was transferred from contributed surplus to share capital.
LTIP compensation expense of $3.3 million was recognized in the consolidated statement of comprehensive income for
the year ended December 31, 2017 (2016 - $1.1 million). The equity classified portion of the LTIP compensation expense
was $2.8 million (December 31, 2016 - $1.1 million) and the liability classified portion was $0.5 million as at December 31,
2017 (December 31, 2016 - nil).
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. The liability associated with the cash-settled awards is recorded
in accounts payable and accrued liabilities, for amounts expected to be settled within one year, and in other liabilities for
amounts to be settled in excess of one year.
73
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
13. Share capital (continued):
(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,
2017 of $30.0 million (December 31, 2016 - $23.9 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,
2017
December 31,
2016
21,350,572
16,762,071
3,594
—
—
13,322
1,817,910
258,290
21,354,166
18,851,593
119,373
166,377
Weighted average common shares - diluted
21,473,541
19,017,970
14. Income taxes:
Current tax expense
Deferred tax expense
2017
2016
$
$
(10,781) $
(5,848)
(13,600)
20
(16,629) $
(13,580)
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, 2017 is 26.4% (2016 - 26.4%) and in the
United States is 39.4% (2016 - 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.
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
Prior year tax true-ups
Change in unrecognized deferred tax assets
Other
2017
2016
$
46,583
$
37,442
39.4%
39.4%
(18,354)
3,271
(164)
222
(1,839)
235
(14,752)
1,798
(73)
—
(363)
(190)
Income tax expense
$
(16,629) $
(13,580)
74
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
14. Income taxes (continued):
The tax effect of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities is
as follows:
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,
2017
December 31,
2016
$
$
1,014 $
532
1,867
616
3,088
252
746
104
8,219
(80)
(2,662)
—
(2,742)
5,477 $
2,838
1,629
1,985
681
5,711
810
1,122
—
14,776
(325)
(2,725)
(95)
(3,145)
11,631
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. As at December 31, 2017, the US deferred tax assets reflect the new US corporate tax rate
of 21.0% compared to 35.0% in 2016. The revaluation of the US deferred tax assets to account for the change in the US
corporate tax rate from 35.0% to 21.0% resulted in an increase of $1.0 million in deferred tax expense for the year ended
December 31, 2017.
At December 31, 2017, the Company and its subsidiaries have operating loss carry forwards for income tax purposes of
approximately $0.9 million in Canada that may be utilized to offset future taxable income (December 31, 2016 - $3.1 million).
These losses, if not utilized, expire between 2027 and 2031. The Company’s US subsidiaries have no operating loss carry
forwards.
At December 31, 2017, the Company and its Canadian subsidiaries have capital losses of approximately $25.0 million
(December 31, 2016 - $23.1 million), and suspended capital losses of approximately $44.7 million (December 31, 2016 - $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 $8.6 million
(December 31, 2016 - $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.
75
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
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
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.
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
76
Note
2017
2016
11
$
7
(2,823) $
(195)
—
(3,018)
451
65
516
(1,675)
(137)
(11)
(1,823)
358
—
358
$
(2,502) $
(1,465)
2017
2016
136,038
901,003
$
129,935
659,386
1,037,041
$
789,321
December 31,
2017
December 31,
2016
$
1,616
87,919
1,552
93,979
89,535
$
95,531
$
$
$
$
2017
103,578 $
1,307
3,287
2016
73,699
1,078
1,130
108,172 $
75,907
$
$
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
17. Employee remuneration (continued):
(a) Employee benefits expense (continued):
Employee benefit expenses are included in the consolidated statement of comprehensive income as follows:
Cost of sales
Selling and distribution
Administration
(b) Pensions:
2017
21,696 $
59,864
26,612
2016
14,967
43,883
17,057
108,172 $
75,907
$
$
Hardwoods USLP, Rugby Holdings LLC, Paxton Hardwoods LLC and HMI Hardwoods LLC maintain defined contribution
401(k) retirement savings plans ("Plans"). The assets of these Plans are held and related investment transactions are
executed by the Plan's Trustees who are third parties and, accordingly, are not reflected in these consolidated financial
statements. During the year ended December 31, 2017, Hardwoods USLP, Rugby Holdings LLC and Paxton Hardwoods
LLC contributed and expensed $0.9 million (US $0.7 million) (2016 - $0.7 million (US $0.6 million)) in relation to these
Plans. There is no requirement for an employer contribution to the plan maintained by HMI Hardwood LLC 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 who is a third party, and, accordingly, are not reflected in these consolidated
financial statements. During the year ended December 31, 2017, Hardwoods LP contributed and expensed $0.4 million
(2016 - $0.3 million) in relation to the LP plan.
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
2017
2016
$
$
4,265 $
21
2,124
6,410 $
4,260
38
896
5,194
77
HARDWOODS DISTRIBUTION INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
18. Related party transactions (continued):
(b) Transactions with post-employment benefit plans:
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, 2017 or
December 31, 2016.
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, 2017.
Decommissioning
The Company and its subsidiaries are not obligated in a material way for decommissioning or site restoration.
20. Contingency:
On November 18, 2016, a trade case was filed in the United States seeking the imposition of countervailing duties ("CVD")
and antidumping duties ("AD") against imported hardwood plywood produced in China.
On April 19, 2017, the Department of Commerce ("Commerce") announced a preliminary CVD of 9.89%, and on June 20, 2017
Commerce announced a preliminary AD of 57.36%. The duties applied to most Chinese producers, including those that the
Company does business with. On November 13, 2017 Commerce announced final CVD and AD rates of 22.98% and 183.36%
respectively.
The concluding phase of this trade case then passed to a separate US government body, the International Trade Commission
(“ITC”), to rule on whether final CVD and AD duties determined by Commerce would be affirmed or rejected. On December
1, 2017, the ITC voted affirmatively that the final CVD and AD rates determined by Commerce will be implemented (the “Final
Determination”).
As at December 31, 2017, the Company had paid for approximately $3.4 million in CVD and AD duty deposits which were paid
in 2017 during periods when duties were not in effect. The Company expects these amounts will be refunded in 2018. The
$3.4 million in CVD and AD duty deposits are included within accounts and other receivables.
78
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, Omax 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
Michelle Lewis
Chief Strategy Officer, NOW Inc.
John Griffin
Vice President, Paxton
Dave Hughes
President, Rugby
Drew Dickinson
Chief Operating Officer, 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 HDI
Transfer Agent
Computershare Trust
Hardwoods Distribution Inc. | 2017 | Annual Report
79